By Chris Mitseff, Regional Lead, Midwest, U.S.
In the U.S., the Commodity Futures Trading Commission (CFTC) recently approved the first major update to Regulation 4.7 in more than three decades.
Regulation 4.7 is a regulatory framework that provides commodity pool operators (CPOs) and commodity trading advisors (CTAs) with select disclosure, reporting and recordkeeping exemptions when working with qualified eligible participants (QEPs). Considered more knowledgeable than the average investor, QEPs have access to certain commodity pools that non-qualified investors do not.
The amendment to Regulation 4.7 is a long-anticipated milestone that increases the financial thresholds for QEP eligibility and codifies reporting allowances for funds of funds (FOFs). While the update imposes new standards that will make it harder for some investors to qualify as QEPs, it also omits some proposed disclosure requirements.
In this article, we’ll recap the Regulation 4.7 updates and what they mean for CPOs and CTAs.
Key changes to Regulation 4.7
The 2024 CFTC update represents the first amendment to Regulation 4.7 since 1992. Specifically, the rule has changed in four key ways:
1. Increased financial thresholds
Monetary benchmarks for QEP eligibility have doubled. Investors who must satisfy the portfolio requirement to be deemed a QEP now need a portfolio of:
- At least $4 million in non-affiliated securities
- At least $400,000 in initial margin and option premiums, or
- A combination of the above—e.g. $2 million in securities (50% of the first requirement) and $200,000 in initial margin (50% of the second)
This change aims to adjust financial thresholds for inflation and better refine the investor base to include the level of investor sophistication originally in scope for this exemption.
2. Additional reporting flexibility for funds of funds
To ease the administrative burden for FOF CPOs, the update codifies an extension allowing monthly account statements to be issued within 45 days of the month end, giving FOFs more time to collect the necessary data.
3. Technical amendments
Several technical amendments were included, aimed at making Regulation 4.7 more efficient and useful for intermediaries, their clients and the general public.
4. Updated citations
Finally, the amendment updates citations within 17 CFR Part 4 and throughout the CFTC’s rulebook to reflect the new structure.
The impact of 4.7 exemption updates
Higher thresholds will make it more challenging for CPOs and CTAs to qualify investors, effectively shrinking the pool of QEPs. While existing investors will be grandfathered into the previous monetary thresholds, future capital raises and fund launches will face stricter eligibility criteria.
While this change may spell an end to 4.7 exemption for smaller CPOs and CTAs, there is a silver lining. The CFTC’s decision not to move forward with proposed disclosure requirements—which would have mandated detailed disclosure documents similar to those required for retail investors—eliminates the specter of increased compliance costs and potential redundancy with the SEC.
Practical next steps
To ensure continued compliance and meet the updated requirements, CPOs and CTAs should:
- Evaluate marketing strategy: Review subscription documents and evaluate your target investor base to ensure they meet the revised QEP criteria, adjusting 4.7 exemption claims accordingly if needed
- Conduct investor due diligence: Review and refine onboarding processes to ensure the proper investor due diligence and onboarding processes are used. Documentation should align with the new standards, particularly for existing investors who are expanding their commitments
- Don’t neglect the timeline: This update requires compliance within six months of publication on the Federal Register
Conclusion
The CFTC’s 2024 amendments to Regulation 4.7 underscore a shift toward higher standards for qualifying sophisticated investors, while potentially onerous disclosure reporting that was considered during the consultation period did not emerge.
Have questions about Regulation 4.7 or any other CFTC or NFA regulation? Contact our expert compliance team.
About the author
Chris has over 17 years of regulatory compliance, audit and management experience. His current role is Senior Managing Director in IQ-EQ’s U.S. Compliance department as well as Regional Lead for the Midwest, based in Chicago. Chris leads teams supporting NFA/CFTC registered commodity pool operators and commodity trading advisors, as well as SEC-registered investment advisers and exempt reporting advisers. He is also the Chief Compliance Officer for one SEC-registered investment adviser.
