Introduction to the 4.7 Exemption for CPOs and CTAs
In September 2023, the Commodity Futures Trading Commission (CFTC) published modifications to CFTC Regulation 4.7. The key changes are updates to Qualified Eligible Persons (QEP) portfolio thresholds and codifying the 45-day account statement period for commodity pools acting as fund-of-funds. Notably, the CFTC did not include proposed updates to disclosure requirements.
CPOs and CTAs have until March 26, 2025, to comply with this new requirement.
QEP Thresholds under the Portfolio Requirement
The most important change to Regulation 4.7 is the doubling of the portfolio thresholds to qualify as a QEP. The test to determine whether they are a pool participant or CTA client has not changed. The updated Portfolio Requirement means that potential pool participants and CTA clients must satisfy at least one of the two thresholds:
- Owning securities (including pool investments) of issuers not affiliated with such person and other investments with a market value of at least $4,000,000; or
- Having on deposit with a futures commission merchant (FCM) at least $400,000 in exchange-specified initial margin and option premiums, together with required minimum-security deposits for retail forex transactions
- A weighted average of the two requirements
Notably, there are no changes for investors who may qualify as QEPs outside of the Portfolio Requirement. As such, “qualified purchasers”, as defined in the ’40 Act, non-US investors and “knowledgeable employees” will remain QEPs.
Portfolio Requirement and Existing Investors
Current investors in commodity pools and trading programs who qualified under the prior thresholds ($2,000,000 in securities or $200,000 on deposit at an FCM) will remain QEPs. However, those investors may not add to their investment if they do not meet the new Portfolio Requirement.
Fund-of-Fund Account Statements
For a CPO operating a fund-of-fund structure (the pool’s only investments are in other funds), the Regulation 4.7 update formalizes the 45-day account statement period from the period end and the distribution of account statements. Previously, the CFTC allowed this practice via no-action letters. Offering documents with the smaller timeframe will have precedence over this 45-day requirement.
Regulation 4.7 Update and the 4.13(a)(3) Exemption
The updates to Regulation 4.7 are unlikely to have a significant effect on current 4.13(a)(3) exempt CPOs and individual pools. However, CPOs should review its offering documents to ensure that its QEP definition aligns with the new Portfolio Requirement.
Recommended Actions
Before March 26, 2025, Kroll’s CFTC/NFA Compliance Team recommends that CPOs and CTAs relying on the 4.7 Exemption, review its offering documents, investor questionnaires, subscription agreements and due diligence processes to ensure compliance with the updated rules.
Contact Kroll’s FSCR team to learn more about how we can assist in navigating the new CFTC Regulation 4.7.
