Client Alert – Commodity Futures Trading Commission Issues Final Rule to Prohibit Persons Subject to Statutory Disqualification from Claiming Rule 4.13 Exemptions

Jun 16, 2020
  • FisherBroyles News

On June 4, 2020, the Commodity Futures Trading Commission (“CFTC”) adopted a final rule (“Final Rule”) to amend Regulation 4.13, which contains exemptions from registration for commodity pool operators (“CPOs”).[1]  The Final Rule generally prohibits persons who have, or whose principals have, in their backgrounds any of the statutory disqualifications listed in section 8a(2) of the Commodity Exchange Act (“CEA”),[2] from seeking to claim a CPO registration exemption under Regulation 4.13. Specifically, the Final Rule will require any person filing a notice claiming such exemption to represent that, subject to certain exceptions, neither the claimant nor any of its principals has in their backgrounds a CEA section 8a(2) disqualification that would require disclosure, if the claimant sought registration with the CFTC.  A voting draft of the Final Rule is available here

Statutory Disqualifications under Section 8a(2) of the CEA include, among other things, serious types of financial crimes, such as theft, fraud, bribery, misappropriation and embezzlement, and findings or settlements consenting to findings that a person has violated a U.S. investment-related statute and/or rules and regulations. The prohibition on Statutory Disqualifications in the Final Rule does not include offenses enumerated in CEA Section 8a(3),[3] which would require a hearing prior to disqualification, as opposed to CEA Section 8a(2), which does not require a pre-disqualification hearing.

CEA Section 8a(2) differs materially from the disqualification provisions applicable to registered investment advisers (“RIAs”) under Section 203(e) of the Investment Advisers Act of 1940 (“Advisers Act”).[4] Accordingly, RIAs relying on a CPO exemption under Rule 4.13 as amended by the Final Rule will need to assess statutory disqualifications under both the CEA and Advisers Act.

The Final Rule excludes Statutory Disqualifications that were previously disclosed to the CFTC in a registration application if the CFTC chose to permit the registration despite the disqualification.  Some CPOs register with the CFTC with respect to some of their pools that they manage, but claim a registration exemption with respect to other pools.  These CPOs may take advantage of this exclusion.

The Final Rules also do not apply to family offices that are exempt from registering under Rule 4.13(a)(6).[5]

Persons having a Statutory Disqualification may seek exemptive letter relief from making the representation individually or on a firm-by-firm basis. Such persons would have to demonstrate that such relief is consistent with public interest and customer protection. The CFTC has stated that it expects to grant the relief infrequently and only when strongly supported by the facts and the law.[6]

The CFTC also advised that if exemptive relief is not granted, the CPO may apply for CPO registration, in which the CPO would have to disclose all of its Statutory Disqualifications.  Under existing registration procedures, the CFTC could then assess whether any conditions or restrictions might sufficiently mitigate customer protection risks posed by persons or principals with Statutory Disqualifications.[7]

The rules become effective 60 days after publication in the Federal Register.  For exempt CPOs currently relying upon a 4.13 exemption, the compliance date is March 1, 2021, which coincides with the deadline for persons filing annual reaffirmation notices under Regulation 4.13(b)(1) in the upcoming 2021 filing cycle (new claimants of a 4.13 exemption must comply on the rules’ effective date, i.e., no compliance delay).[8]

Many fund operators rely upon the 4.13(a)(3) CPO registration exemption for “de minimis” commodity interest trading.  For such operators that are not also registered as CPOs, they will need to identify their principals as defined in CFTC regulations; some categories of principal may require a factual and legal analysis.  They will also need to determine whether they or their principals have CEA Section 8a(2) disqualifications, which will involve a careful review of CEA Section 8a(2) and relevant disciplinary histories, in time for the 2021 filing cycle.


For additional information, please contact Julian Hammar at [email protected]


[1] See 17 CFR §4.13.

[2] 7 U.S.C. §12a(2).

[3] 7 U.S.C. §12a(3).

[4] 15 U.S.C. §80b-3Ie).

[5] See Final Rule at 26.

[6] See Final Rule at 33.

[7] See Final Rule at 34.

[8] See Final Rule at 35-36.

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