Electronic Code of Federal Regulations (e-CFR)

Chapter I. COMMODITY FUTURES TRADING COMMISSION

Part 4. COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

Subpart A. General Provisions, Definitions and Exemptions

Section 4.7. Exemption from certain part 4 requirements for commodity pool operators with respect to offerings to qualified eligible persons and for commodity trading advisors with respect to advising qualified eligible persons.

17 CFR 4.7 – Exemption from certain part 4 requirements for commodity pool operators with respect to offerings to qualified eligible persons and for commodity trading advisors with respect to advising qualified eligible persons.

4.7 Exemption from certain part 4 requirements forcommodity pool operatorswith respect to offerings to qualified eligiblepersonsand forcommodity trading advisorswith respect to advising qualified eligible persons.

This section is organized as follows: Paragraph (a) contains definitions for the purposes of 4.7; paragraph (b) contains the relief available tocommodity pool operatorsunder 4.7; paragraph (c) contains therelief available to commodity trading advisorsunder 4.7; paragraph (d) concerns the Notice of Claim for Exemption under 4.7; and paragraph (e) addresses the effect of an insignificant deviation from a term, condition or requirement of 4.7.

(a)Definitions.Paragraph (a)(1)of this section contains general definitions,paragraph (a)(2)of this section contains the definition of the termqualified eligible personwith respect to thosepersonswho do not need to satisfy the Portfolio Requirement andparagraph (a)(3)of this section contains the definition of the termqualified eligible personwith respect to thosepersonswho must satisfy the Portfolio Requirement. For the purposes of this section:

(i)Affiliateof, or apersonaffiliatedwith, a specifiedpersonmeans apersonthat directly or indirectly through one or more persons,controls, iscontrolledby, or is under commoncontrolwith the specifiedperson.

(ii)Exempt accountmeans the account of a qualified eligiblepersonthat isdirectedor guided by acommodity trading advisorpursuant to an effective claim for exemption under 4.7.

(iii)Exempt poolmeans a pool that is operated pursuant to an effective claim for exemption under 4.7.

(A)A naturalpersonwho is not a resident of the United States;

(B)A partnership, corporation or other entity, other than an entity organized principally for passive investment, organized under the laws of a foreign jurisdiction and which has its principal place of business in a foreign jurisdiction;

(C)An estate or trust, the income of which is not subject to United States income tax regardless of source;

(D)An entity organized principally for passive investment such as a pool,investment companyor other similar entity;Provided,That units of participation in the entity held bypersonswho do not qualify as Non-United Statespersonsor otherwise as qualified eligiblepersonsrepresent in the aggregate less than 10% of the beneficial interest in the entity, and that such entity was not formed principally for the purpose of facilitating investment bypersonswho do not qualify as Non-United Statespersonsin a pool with respect to which the operator is exempt from certain requirements of part 4 of theCommissions regulations by virtue of itsparticipantsbeing Non-UnitedStatespersons; and

(E)A pension plan for the employees, officers or principals of an entity organized and with its principal place of business outside the United States.

(A)Owns securities (including pool participations) of issuers notaffiliatedwith suchpersonand other investments with an aggregate market value of at least $2,000,000;

(B)Has had on deposit with afutures commission merchant, for its own account at any time during the six-month period preceding either the date of sale to thatpersonof a pool participation in the exempt pool or the date that thepersonopens an exempt account with thecommodity trading advisor, at least $200,000 in exchange-specifiedinitial marginand option premiums, together with required minimum security deposit for retail forex transactions (as defined in 5.1(m)of this chapter) forcommodity interesttransactions; or

(C)Owns a portfolio comprised of a combination of the funds or property specified in paragraphs (a)(1)(v)(A) and (B) of this section in which the sum of the funds or property includable under paragraph (a)(1)(v)(A), expressed as a percentage of the minimum amount required thereunder, and the amount of futures margin and optionpremiumsincludable under paragraph (a)(1)(v)(B), expressed as a percentage of the minimum amount required thereunder, equals at least one hundred percent. An example of a composite portfolio acceptable under this paragraph (a)(1)(v)(C) would consist of $1,000,000 in securities and other property (50% of paragraph (a)(1)(v)(A)) and $100,000 in exchange-specifiedinitial marginand optionpremiums(50% of paragraph (a)(1)(v)(B)).

(vi)United Statesmeans the UnitedStates, itsstates, territories or possessions, or an enclave of the UnitedStatesgovernment, its agencies or instrumentalities.

(2)Persons who do not need to satisfy the Portfolio Requirement to be qualified eligible persons. Qualified eligible personmeans anyperson, acting for its own account or for the account of a qualified eligibleperson, who thecommodity pool operatorreasonably believes, at the time of the sale to thatpersonof a pool participation in the exempt pool, or who thecommodity trading advisorreasonably believes, at the time thatpersonopens an exempt account, is:

(A)Afutures commission merchantregistered pursuant to section 4d of the Act, or a principal thereof;

(B)A retail foreign exchange dealer registered pursuant to section 2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;

(C)Aswap dealerregistered pursuant to section 4s(a)(1) of the Act, or a principal thereof;

(ii)A broker or dealer registered pursuant to section 15 of theSecurities Exchange Act of 1934, or a principal thereof;

(iii)Acommodity pool operatorregistered pursuant to section 4m of the Act, or a principal thereof;Provided,That the pool operator:

(A)Has been registered and active as such for two years; or

(B)Operates pools which, in the aggregate, have total assets in excess of $5,000,000;

(iv)Acommodity trading advisorregistered pursuant to section 4m of the Act, or a principal thereof;Provided,That the trading advisor:

(A)Has been registered and active as such for two years; or

(B)Providescommodity interesttrading advice tocommodityaccounts which, in the aggregate, have total assets in excess of $5,000,000 deposited at one or more futurescommissionmerchants;

(v)Aninvestment adviserregistered pursuant to section 203 of theInvestment Advisers Act of 1940(Investment Advisers Act) or pursuant to the laws of anystate, or a principal thereof;Provided,That the investment adviser:

(A)Has been registered and active as such for two years; or

(B)Providessecurities investment advice to securities accounts which, in the aggregate, have total assets in excess of $5,000,000 deposited at one or more registered securities brokers;

(vi)A qualified purchaser as defined in section 2(a)(51)(A) of theInvestment Company Act of 1940(the InvestmentCompanyAct);

(vii)A knowledgeable employee as defined in 270.3c-5of this title;

(1)Thecommodity pool operatorcommodity trading advisororinvestment adviserof the exempt pool offered or sold, or anaffiliateof any of the foregoing;

(2)A principal of the exempt pool or thecommodity pool operatorcommodity trading advisororinvestment adviserof the exempt pool, or of anaffiliateof any of the foregoing;

(3)An employee of the exempt pool or thecommodity pool operatorcommodity trading advisororinvestment adviserof the exempt pool, or of anaffiliateof any of the foregoing (other than an employee performing solely clerical, secretarial or administrative functions with regard to suchpersonor its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of the exempt pool, othercommoditypools operated by the pool operator of the exempt pool or other accounts advised by the trading advisor or theinvestment adviserof the exempt pool, or by theaffiliate;Provided,That such employee has been performing such functions and duties for or on behalf of the exempt pool, pool operator, trading advisor,investment adviseroraffiliate, or substantially similar functions or duties for or on behalf of anotherpersonengaged in providingcommodity interest, securities or other financial services, for at least 12 months;

(4)Any other employee of, or an agent engaged to perform legal, accounting, auditing or otherfinancial servicesfor, the exempt pool or thecommodity pool operatorcommodity trading advisororinvestment adviserof the exempt pool, or any other employee of, or agent so engaged by, anaffiliateof any of the foregoing (other than an employee or agent performing solely clerical, secretarial or administrative functions with regard to suchpersonor its investments);Provided,That such employee or agent:

(i)Is an accredited investor as defined in 230.501(a)(5) or (6) of this title; and

(ii)Has been employed or engaged by the exempt pool,commodity pool operatorcommodity trading advisorinvestment adviseroraffiliate, or by anotherpersonengaged in providingcommodity interest, securities or other financial services, for at least 24 months;

(5)The spouse, child, sibling or parent of apersonwho satisfies the criteria of paragraph (a)(2)(viii)(A)(1), (2), (3) or (4) of this section;Provided,That:

(i)An investment in the exempt pool by any such familymemberis made with the knowledge and at the direction of theperson; and

(ii)The familymemberis not a qualified eligiblepersonfor the purposes ofparagraph (a)(3)(xi)of this section;

(6)(i) Anypersonwho acquires a participation in the exempt pool by gift, bequest or pursuant to an agreement relating to a legal separation or divorce from apersonlisted in paragraph (a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section;

(ii)The estate of anypersonlisted in paragraph (a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section; or

(iii)Acompanyestablished by anypersonlisted in paragraph (a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section exclusively for the benefit of (or owned exclusively by) thatpersonand anypersonlisted in paragraph (a)(2)(viii)(A)(6)(i) or (ii) of this section;

(1)Anaffiliateof thecommodity trading advisorof the exempt account;

(2)A principal of thecommodity trading advisorof the exempt account or of anaffiliateof the trading advisor;

(3)An employee of thecommodity trading advisorof the exempt account or of anaffiliateof the trading advisor (other than an employee performing solely clerical, secretarial or administrative functions with regard to suchpersonor its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of the trading advisor or theaffiliate;Provided,That such employee has been performing such functions and duties for or on behalf of the trading advisor or theaffiliate, or substantially similar functions or duties for or on behalf of anotherpersonengaged in providingcommodity interest, securities or other financial services, for at least 12 months;

(4)Any other employee of, or an agent engaged to perform legal, accounting, auditing or otherfinancial servicesfor, thecommodity trading advisorof the exempt account or any other employee of, or agent so engaged by, anaffiliateof the trading advisor (other than an employee or agent performing solely clerical, secretarial or administrative functions with regard to suchpersonor its investments);Provided,That such employee or agent:

(i)Is an accredited investor as defined in 230.501(a)(5) or (a)(6) of this title; and

(ii)Has been employed or engaged by thecommodity trading advisoror theaffiliate, or by anotherpersonengaged in providingcommodity interest, securities or other financial services, for at least 24 months; or

(5)The spouse, child, sibling or parent of thecommodity trading advisorof the exempt account or of apersonwho satisfies the criteria of paragraph (a)(2)(viii)(B)(1), (2), (3) or (4) of this section;Provided,That:

(i)The establishment of an exempt account by any such familymemberis made with the knowledge and at the direction of theperson; and

(ii)The familymemberis not a qualified eligiblepersonfor the purposes ofparagraph (a)(3)(xi)of this section;

(6)(i) Anypersonwho acquires an interest in an exempt account by gift, bequest or pursuant to an agreement relating to a legal separation or divorce from apersonlisted in paragraph (a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section;

(ii)The estate of anypersonlisted in paragraph (a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section; or

(iii)Acompanyestablished by anypersonlisted in paragraph (a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section exclusively for the benefit of (or owned exclusively by) thatpersonand anypersonlisted in paragraph (a)(2)(viii)(B)(6)(i) or (ii) of this section;

(A)The trust was not formed for the specific purpose of either participating in the exempt pool or opening an exempt account; and

(B)The trustee or otherpersonauthorized to make investment decisions with respect to the trust, and each settlor or otherpersonwho has contributed assets to the trust, is a qualified eligibleperson;

(x)An organization described in section 501(c)(3) of theInternal Revenue Code(the IRC);Provided,That the trustee or otherpersonauthorized to make investment decisions with respect to the organization, and thepersonwho has established the organization, is a qualified eligibleperson;

(A)An entity in which all of the unit owners or participants, other than thecommodity trading advisorclaiming relief under this section, are qualified eligible persons;

(C)Notwithstandingparagraph (a)(3)of this section, an entity as to which a notice of eligibility has been filed pursuant to 4.5 which is operated in accordance with such rule and in which all unit owners or participants, other than thecommodity trading advisorclaiming relief under this section, are qualified eligible persons.

(3)Persons who must satisfy the Portfolio Requirement to be qualified eligible persons. Qualified eligible personmeans anypersonwho thecommodity pool operatorreasonably believes, at the time of the sale to thatpersonof a pool participation in the exempt pool, or anypersonwho thecommodity trading advisorreasonably believes, at the time thatpersonopens an exempt account, satisfies the Portfolio Requirement and is:

(i)Aninvestment companyregistered under theInvestment CompanyAct or a business developmentcompanyas defined in section 2(a)(48) of such Act not formed for the specific purpose of either investing in the exempt pool or opening an exempt account;

(ii)A bank as defined in section 3(a)(2) of theSecurities Act of 1933(the Securities Act) or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Securities Act acting for its own account or for the account of a qualified eligibleperson;

(iii)Anas defined in section 2(13) of the Securities Act acting for its own account or for the account of a qualified eligibleperson;

(iv)A plan established and maintained by astate, its political subdivisions, or any agency or instrumentality of astateor its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000;

(v)An employee benefit plan within the meaning of theEmployee Retirement Income Security Act of 1974;Provided,That the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is a bank, savings and loan association,, or registeredinvestment adviser; or that the employee benefit plan has total assets in excess of $5,000,000; or, if the plan is self-directed, that investment decisions are made solely bypersonsthat are qualified eligiblepersons;

(vi)A private business developmentcompanyas defined in section 202(a)(22) of theInvestment AdvisersAct;

(vii)An organization described in section 501(c)(3) of the IRC, with total assets in excess of $5,000,000;

(viii)A corporation, Massachusetts or similar business trust, or partnership, limited liabilitycompanyor similar business venture, other than a pool, which has total assets in excess of $5,000,000, and is not formed for the specific purpose of either participating in the exempt pool or opening an exempt account;

(ix)A naturalpersonwhose individual net worth, or joint net worth with thatpersons spouse at the time of either his purchase in the exempt pool or his opening of an exempt account would qualify him as an accredited investor as defined in 230.501(a)(5)of this title;

(x)A naturalpersonwho would qualify as an accredited investor as defined in 203.501(a)(6)of this title;

(xi)A pool, trust,separate account or bank collective trust, with total assets in excess of $5,000,000, not formed for the specific purpose of either participating in the exempt pool or opening an exempt account, and whose participation in the exempt pool or investment in the exempt account isdirectedby a qualified eligibleperson; or

(xii)Except asprovidedfor the governmental entities referenced inparagraph (a)(3)(iv)of this section, if otherwise authorized by law to engage in such transactions, a governmental entity (including the United States, astate, or a foreign government) or political subdivision thereof, or a multinational or supranational entity or an instrumentality, agency, or department of any of the foregoing.

(b)Relief available to commodity pool operators.Upon filing the notice required byparagraph (d)of this section, and subject to compliance with the conditions specified inparagraph (d)of this section, any registeredcommodity pool operatorwho offers or sells participations in a pool solely to qualified eligiblepersonsin an offering which qualifies for exemption from the registration requirements of the Securities Act pursuant to section 4(2) of that Act or pursuant to Regulation S,17 CFR 230.901et seq.,and any bank registered as acommodity pool operatorin connection with a pool that is a collective trust fund whose securities are exempt from registration under the Securities Act pursuant to section 3(a)(2) of that Act and are offered or sold, without marketing to the public, solely to qualified eligible persons, may claim any or all of the following relief with respect to such pool:

(i)Exemption from the specific requirements of 4.21, 4.24, 4.25 and 4.26 with respect to each exempt pool;Provided,That if an offering memorandum is distributed in connection with soliciting prospectiveparticipantsin the exempt pool, such offering memorandum must include all disclosures necessary to make the information contained therein, in the context in which it is furnished, not misleading; and that the following statement is prominently disclosed on the cover page of the offering memorandum, or, if none isprovided, immediately above the signature line on the subscription agreement or other document that the prospectiveparticipantmust execute to become aparticipantin the pool:

PURSUANT TO AN EXEMPTION FROM THECOMMODITY FUTURES TRADING COMMISSIONIN CONNECTION WITH POOLS WHOSEPARTICIPANTSARE LIMITED TO QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THECOMMISSION. THECOMMODITY FUTURES TRADING COMMISSIONDOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THECOMMODITY FUTURES TRADING COMMISSIONHAS NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR THIS POOL.

(ii)Exemption from disclosing the past performance of exempt pools in the Disclosure Document of non-exempt pools except to the extent that such past performance is material to the non-exempt pool being offered;Provided,That a pool operator that has claimed exemption hereunder and elects not to disclose any such performance in the Disclosure Document of non-exempt pools shallstatein a footnote to the performance disclosure therein that the operator is operating or has operated exempt pools whose performance is not disclosed in this Disclosure Document.

(2)Periodic reporting relief.Exemption from the specific requirements of 4.22(a) and (b);Provided,That a statement signed and affirmed in accordance with 4.22(h)is prepared and distributed to poolparticipantsno less frequently than quarterly within 30 calendar days after the end of the reporting period. This statement must be presented and computed in accordance with generally accepted accounting principles and indicate:

(i)Thenet asset valueof the exempt pool as of the end of the reporting period;

(ii)The change innet asset valuefrom the end of the previous reporting period; and

(iii)Thenet asset valueper outstanding unit of participation in the exempt pool as of the end of the reporting period.

(A)Either thenet asset valueper outstanding participation unit in the exempt pool as of the end of the reporting period, or

(B)The total value of theparticipants interest or share in the exempt pool as of the end of the reporting period.

(iv)Where the pool is comprised of more than one ownership class or series, thenet asset valueof the series or class on which the account statement is reporting, and thenet asset valueper unit or value of theparticipants share, also must be included in the statement required by this paragraph (b)(2); except that, for a pool that is a series fund structured with a limitation on liability among the different series, the account statement required by this paragraph (b)(2) is not required to include the consolidatednet asset valueof all series of the pool.

(v)Acommodity pool operatorof a pool that meets the conditions specified in 4.22(d)(2)(i)to present and compute thecommoditypools financial statements contained in the Annual Report other than in accordance with generally accepted accounting principles and has filed notice pursuant to 4.22(d)(2)(iii)may also use the alternative accounting principles, standards or practices identified in the notice with respect to the computation and presentation of the account statement.

(i)Exemption from the specific requirements of 4.22(c)of this part;Provided,that within 90 calendar days after the end of the exempt pools fiscal year or the permanent cessation of trading, whichever is earlier, thecommodity pool operatorelectronically files with the National Futures Association and distributes to eachparticipantin lieu of the financial information and statements specified by that section, an annual report for the exempt pool, affirmed in accordance with 4.22(h)which contains, at a minimum:

(A)A Statement of Financial Condition as of the close of the exempt pools fiscal year (elected in accordance with 4.22(g));

(C)Appropriate footnote disclosure and such further material information as may be necessary to make the required statements not misleading. For a pool that invests in other funds, this information must include, but is not limited to, separately disclosing the amounts of income, management and incentive fees associated with each investment in an investee fund that exceeds five percent of the pools net assets. The income, management and incentive fees associated with an investment in an investee fund that is less than five percent of the pools net assets may be combined and reported in the aggregate with the income, management and incentive fees of other investee funds that, individually, represent an investment of less than five percent of the pools net assets. If thecommodity pool operatoris not able to obtain the specific amounts of management and incentive fees charged by an investee fund, thecommodity pool operatormust disclose the percentage amounts and computational basis for each such fee and include a statement that the CPO is not able to obtain the specific fee amounts for this fund;

(D)Where the pool is comprised of more than one ownership class or series, information for the series or class on which the financial statements are reporting should be presented in addition to the information presented for the pool as a whole; except that, for a pool that is a series fund structured with a limitation on liability among the different series, the financial statements are not required to include consolidated information for all series.

(ii)Legend.If a claim for exemption has been made pursuant to this section, thecommodity pool operatormust make a statement to that effect on the cover page of each annual report.

(4)Recordkeeping relief.Exemption from the specific requirements of 4,23;Provided, That thecommodity pool operatormust maintain the reports referred to in paragraphs (b)(2) and (3) of this section and all books and records prepared in connection with his activities as the pool operator of the exempt pool (including, without limitation, records relating to the qualifications of qualified eligiblepersonsand substantiating any performance representations). Books and records that are not maintained at the pool operators main business office shall be maintained by one or more of the following: the pools administrator, distributor or custodian, or a bank or registered broker or dealer acting in a similar capacity with respect to the pool. Such books and records must be made available to any representative of theCommission, the National Futures Association and the United StatesDepartment of Justicein accordance with the provisions of 1.31.

(5)If the pool operator does not maintain its books and records at its main business office, the pool operator shall:

(i)At the time it registers with theCommissionor delegates its recordkeeping obligations, whichever is later, file a statement that:

(A)Identifies the name, main business address, and main business telephone number of the person(s) who will be keeping required books and records in lieu of the pool operator;

(B)Sets forth the name and telephone number of a contact for eachpersonwho will be keeping required books and records in lieu of the pool operator;

(C)Specifies, by reference to the respective paragraph of this section, the books and records that suchpersonwill be keeping; and

(D)Contains representations from the pool operator that:

(1)It will promptly amend the statement if the contact information or location of any of the books and records required to be kept by this section changes, by identifying in such amendment the new location and any other information that has changed;

(2)It remains responsible for ensuring that all books and records required by this section are kept in accordance with 1.31;

(3)Within 48 hours after a request by a representative of theCommission, it will obtain the original books and records from the location at which they are maintained, and provide them for inspection at the pool operators main business office;Provided, however,that if the original books and records are permitted to be, and are maintained, at a location outside the United States, its territories or possessions, the pool operator will obtain and provide such original books and records for inspection at the pool operators main business office within 72 hours of such a request; and

(4)It will disclose in the pools Disclosure Document the location of its books and records that are required under this section.

(ii)The pool operator shall also file electronically with the National Futures Association a statement from eachpersonwho will be keeping required books and records in lieu of the pool operator wherein such person:

(A)Acknowledges that the pool operator intends that thepersonkeep and maintain required pool books and records;

(B)Agrees to keep and maintain such records required in accordance with 1.31of this chapter; and

(C)Agrees to keep such required books and records open to inspection by any representative of theCommission, the National Futures Association, or the United StatesDepartment of Justicein accordance with 1.31of this chapter.

(c)Relief available to commodity trading advisors.Upon filing the notice required byparagraph (d)of this section, and subject to compliance with the conditions specified inparagraph (d)of this section, any registeredcommodity trading advisorwho anticipatesdirectingor guiding thecommodity interestaccounts of qualified eligiblepersonsmay claim any or all of the following relief with respect to the accounts of qualified eligiblepersonswho have given due consent to their account being an exempt account under 4.7:

(i)Exemption from the specific requirements of 4.31, 4.34, 4.35 and 4.36;Provided,That if thecommodity trading advisordelivers a brochure or other disclosure statement to such qualified eligible persons, such brochure or statement shall include all additional disclosures necessary to make the information contained therein, in the context in which it is furnished, not misleading; and that the following statement is prominently displayed on the cover page of the brochure or statement or, if none isprovided, immediately above the signature line of the agreement that theclientmust execute before it opens an account with thecommoditytrading advisor:

PURSUANT