The Commodities Futures Trading Commission has rescinded an important exemption for family offices trading in commodities, according to law firm Handler Thayer.  The CFTC overhauled the definitions of a Commodity Trading Adviser (CTA) and Commodity Pool Operator (CPO) and the available exemptions from registration as a CTA and/or CPO for family offices.

Rescinding the “Family Office Exemption” under the CEA

Similar to an operator of a hedge fund or a mutual fund, a CPO is defined as an individual or entity which operates an enterprise in which funds were contributed by multiple investors to trade in OTC derivatives, futures, options, or retail off-exchange forex contracts or to invest in another CPO. Prior to February 9, 2012, family offices, which typically fall under this broad definition, could rely on several exemptions to avoid CPO registration. In particular, family offices relied upon Rule 4.13(a)(4) of the CEA, which exempted pools in which all the investors were “knowledgeable employees” and “qualified purchasers.” However, the CFTC has rescinded this exemption, leaving family offices scrambling for a new exemption. Nevertheless, several exemptions still exist that provide some relief. Under Rule 4.13(a)(1) of the CEA, an entity is exempted from registration as a CPO if: (i) The CPO only operates a single pool; (ii) The CPO does not receive compensation; and, (iii) The CPO is not otherwise required to register with the CFTC (i.e. as a CTA).

Family offices may also be able to rely on Rule 4.13(a)(2) of the CEA, which exempts a CPO from registration, if its pools have: (i) aggregate contributions of $400,000 or less, and (ii) less than fifteen participants in the pools. While this seems restrictive, the contribution and participant limits do not factor in: (i) the CPO; (ii) its principals; or (iii) the principals’ immediate family members or any other relative living in the same household. It should be noted, however that, these exemptions are not self-executing and notice must be filed electronically with the NFA.

Alternatively, family offices may seek a no-action letter from the CFTC in order to obtain exemptive relief. The CFTC has provided at least 34 no-action letters to family offices regarding exemptions and has repeatedly affirmed that it does not intend to regulate family offices. As discussed above, the rules and regulations under the CEA are likely to continue to change as the CFTC attempts to harmonize its rulemaking with the rulemaking of the SEC. It is likely that the CFTC will conduct new rulemaking to provide an exemption similar to the “Family Office Exemption” under the IAA, but there is no assurance at this time that the CFTC will create this exemption.

About Handler Thayer, LLP

Handler Thayer, LLP is one of the premier private client law firms in the United States. Its national and international practice, based out of Chicago, Illinois and Washington, D.C., utilizes interdisciplinary teams of advanced planning attorneys. The firm has been recognized by U.S. News & World Report on its lists of Best Lawyers and Best Law Firms in America and in 2012 was named the Best Overall Law Firm in the U.S. serving ultra-high net worth families, privately-held businesses and family offices by Private Asset Management Magazine. Handler Thayer is dedicated to providing distinctive, technologically-current and responsive legal services which are comprehensive and efficient. Its practice is concentrated in Corporate, Real Estate & Securities Law, Sports & Entertainment Law, Federal, State & International Taxation, Trusts & Estates and Financial & Estate Planning. Firm clientele include foundations, multinational corporations, professional athletes, prominent entrepreneurs, celebrities and family offices. See WWW.HANDLERTHAYER.COM .

CONTACT: Thomas J. Handler, +1-312-641-2100, www.handlerthayer.com

SOURCE Handler Thayer, LLP

 

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