1. CPO and CTA Developments for 2020
December 12, 2019 K&L Gates - Washington, DC Cary J. Meer Stephen M. Humenik Edgar Mkrtchian

2. Overview Market Developments: Regulatory and Compliance
CFTC Amendments to Part 4 Rules for Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”)
NFA Compliance Rule 2-9
NFA Compliance Rule 2-29
Training Requirement for Swap Associated Persons (“APs”)
Annual Affirmation Requirement for CPO/CTA Exclusions and Exemptions

3. Market Developments: Regulatory and Compliance
Steve can cover this first section.

4. CFTC – NEW CHAIRMAN = NEW AGENDA
CFTC Chairman Tarbert was sworn in on July 15, 2019
Chairman Tarbert’s first public comment was that he eagerly looks forward to ensur[ing] our derivatives markets remain vibrant and the wrongdoers are held accountable
Chairman Tarbert has staffed his office and the executive leadership team with government, industry, and former law firm practitioners
CFTC action is expected in the next six months on the following:
the swap dealer capital rule
the cross-border rule for swap dealers
position limits
enforcement penalty guidance
swap data reporting
bankruptcy rules and
guidance on digital assets

5. NEW CHAIRMAN and asset managers
As we will discuss in greater detail, the CFTC recently finalized rule amendments related to CPOs and CTAs. In voting in favor of the rule amendments, Chairman Tarbert stated:
I am pleased to support both sets of final rules on today’s agenda. Both amend Part 4 of the Commission’s regulations governing commodity pool operators (CPOs) and commodity trading advisors (CTAs), significantly improving the regulatory experience for our market participants. Each rule is a step toward further harmonizing regulations for entities subject to both CFTC and SEC oversight
Each amendment is designed to simplify the rules governing CPOs and CTAs, advancing our strategic goal of encouraging innovation and enhancing the regulatory experience for market participants at home and abroad
Today’s amendments account for the low risks Family Offices pose to customers
Statement of Chairman Tarbert Before the November 25, 2019 CFTC Open Meeting

6. CFTC Thematic Reviews - CPOs and CTAs
The new Director of the Division of Swap Dealer and Intermediary Oversight (“DSIO”), Joshua Sterling, has set forth five building blocks for DSIO, including:
The Examination Program
The Reporting Framework,
The Guidance Program,
The Relationship to Enforcement, and
The Rulemaking Function

7. The EXAMINATION PROGRAM
CFTC DSIO Director Sterling:
We are designing a program of targeted thematic reviews of select large swap dealers and CPOs that will commence in the first quarter of These reviews will be carried out directly by Division staff
…swap dealers and CPOs [are]…important actors in our markets. They provide liquidity and, in doing so, transmit, amplify, convert, hedge, price, test, and monitor certain key risks…we need to take a thematic approach to understanding better how the big shops approach key compliance issues like risk management and risk reporting
Our thematic reviews will focus only on selected key issues and will not duplicate or replace NFA’s ongoing efforts
We anticipate reporting out to the market our general observations later next year, after our first round of reviews is complete
Remarks by CFTC DSIO Director Sterling at AIMA Q&A with the Regulators Event (Oct. 30, 2019)

8. The guidance program
Market participants should expect that the CFTC will “better…convey our expectations about compliance requirements and emerging issues to market participants”
DSIO will be “formalizing” its communications program for registrants, to provide more general guidance on a more frequent basis than in the past
Practical Implication: DSIO will reduce the use of no-action relief for specific parties
See e.g., Statement by the Directors of the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight Concerning the Treatment of Separate Accounts of the Same Beneficial Owner (September 13, 2019)

9. THE RELATIONSHIP TO ENFORCEMENT
DSIO is “strengthening” its relationship with the Division of Enforcement with a more focused approach to referrals, so that our coordination efforts become more programmatic
Director Sterling also stated that we are going to be more focused and programmatic in what we do if we see potential red flags in the ordinary course of our reviews. After all, Enforcement should reinforce our oversight function by holding registrants accountable, and we should support Enforcement by flagging potential problems that we encounter
CFTC DSIO Director Sterling remarks to the District of Columbia Bar Association (Sept. 25, 2019)

10. Practical Impact: Increased DSIO Scrutiny
DSIO Director Sterling: [Asset management] firms are getting bigger, faster, and stronger all the time, and our oversight needs our rules to keep up with how your size, speed, and agility affect our markets
DSIO is planning to conduct on-site reviews of CPOs and CTAs during Q1 and Q2 of Director Sterling stated: “We have a design for the program, which is intended to have what I’ve called a ‘leveraging effect.’ This means that we are going to look at a discrete number of firms, try to find the information we’re interested in with respect to a particular area and then communicate guidance based on our findings to the market”
Director Sterling also noted that: if in the course of our reviews, we identify facts that suggest a potential instance of material non-compliance with our rules, that is likely something that would be referred to enforcement for consideration
In preparation for on-site reviews Director Sterling has said that a firm may wish to consider how it complies with CFTC rules in advance of a possible review by us
CFTC DSIO Director Sterling remarks to the District of Columbia Bar Association (Sept. 25, 2019) and CFTC DSIO Director Sterling remarks to the K&L Gates Chicago Investment Management Conference (Nov. 14, 2019)

11. CFTC Amendments to Part 4 Rules for CPOs and CTAs

12. Amendments not Adopted
Did not adopt proposed Regulation 4.13(a)(4) which would have codified Advisory 18-96
Did not add statutory disqualification as a condition to claiming registration exemptions

13. JOBS Act: General Solicitation Allowed
The CFTC adopted amendments to Regulation 4.7(b) and 4.13(a)(3) to harmonize regulations with the JOBS Act
A CPO will be able to claim relief under Regulation 4.7(b)(1) if it is:
a commodity pool that is exempt from registration under section 4(a)(2) of the 1933 Act, which includes certain Regulation D offerings that permit an issuer to sell securities in a “private placement” without registration;
a commodity pool that is offered and sold pursuant to Regulation S, which allows non-U.S. investors to invest in a U.S. entity; or
a commodity pool that is a collective trust fund, the securities of which are exempt under section 3(a)(2) of the 1933 Act, which exempts from registration any security issued or guaranteed by a bank
The general solicitation ban currently in Regulation 4.7(b) remains in effect for all offerings of the three types of commodity pools listed in Regulation 4.7, except for those that are offered pursuant to § (c), which permits issuers to engage in general solicitation or advertising in the offer and sale of securities under that regulation, subject to certain conditions

14. JOBS Act: General Solicitation Allowed
Relief in Regulation 4.7(b) is available with respect to the three types of commodity pools listed in Regulations 4.7(b)(1), even if participations in such pools are resold pursuant to Rule 144A
The CFTC expects that exempt CPOs wishing to use general solicitation in their existing qualifying exempt pools may do so without further action
CPOs that seek to use general solicitation with respect to qualifying exempt pools formed in the future are permitted to do so in accordance with the amendments

15. Permitting Non-U.S. Person Investors in De Minimis Exempt Pools
The CFTC amended Regulation 4.13 to include a non-U.S. person as a new category of permissible investor
Regulation 4.13(a)(3)(iii)(D) was amended to permit as participants in de minimis pools, “[a] ‘qualified eligible person,’ as that term is defined in § 4.7 of this chapter”
The CFTC noted that it believes that the amendment provides an important update to the existing exemption, which reflects the general market understanding and practice of permitting non-U.S. persons to invest in de minimis pools in a manner consistent with prior CFTC statements and staff guidance

16. Part 4 Amendments: Rics and RIAs
By a 5-0 vote, the CFTC unanimously approved amendments to Regulations 4.5 and 4.27 (Updating Exclusions and Adding Reporting Relief), to exempt certain CTAs and CPOs from certain registration requirements that previously received exemptions on an ad hoc basis through no-action letters
The amendments to Regulation 4.5 clarify that existing exclusions from the CPO definition for SEC-registered investment companies (“RICs”) should be claimed by the entity that solicits for and operates the RIC—usually its SEC-registered investment adviser (“RIA”) 
These changes harmonize the CFTC’s Part 4 registration requirements with the SEC’s statutory scheme for RICs and RIAs
The amendments to Regulation 4.27 remove filing requirements for registered CTAs that do not direct client accounts, or who are already required to report substantially similar information due to being registered in another capacity, e.g., dual CPO-CTA registration

17. Regulation 4.5: Amendments to the CPO Exclusion
The CFTC extended the exclusionary relief of Regulation 4.5 to also cover the RIAs of business development companies (“BDCs”), consistent with relief provided through a no-action letter issued by DSIO staff in 2012 (CFTC Letter No ); BDCs should file notices as soon as practicable after new regulations are effective
When the excluded CPO of an RIC is required to annually reaffirm its notice of exclusion, (i.e., within 60 days of the calendar year-end), the CFTC expects that the excluded CPO entity will simply allow the existing notice to expire, and the RIA of such RIC will file a new notice pursuant to Regulation 4.5(c), prior to the expiration of the other existing notice
To ease the compliance burden, the CFTC has stated that those RIAs affected by this amendment shall not be required to comply until March 1, 2021

18. Regulation 4.27: Amendments to the “Reporting Person” Definition
The CFTC amended Regulation 4.27(b) by excluding certain registered CPOs and CTAs from the “Reporting Person” definition, consistent with exemptive relief provided by DSIO through CFTC Letter Nos and 15-47
CFTC Letter No provides exemptive relief from the obligation to file Form CPO-PQR to CPOs that operate only pools for which the CPO has claimed either a definitional exclusion under Regulation 4.5, or an exemption from CPO registration under Regulation 4.13
CFTC Letter No provides exemptive relief from the obligation to file Form CTA-PR to CTAs that are registered as such, yet do not direct client accounts
The CFTC has further determined to extend this relief to registered CTAs that only advise commodity pools, for which the CTA is also the commodity pool’s CPO

19. Part 4 Amendments – FAMILY OFFICES
On November 25, 2019, by a 4-1 vote, the CFTC approved amendments to Regulations 4.7, 4.13, and 4.14:
The amendments adopt exemptions from CPO and CTA registration for entities that qualify as “Family Offices” under SEC rules, consistent with past CFTC staff no-action relief
The amendments provide certain exemptions in Part 4 to permit general solicitation in these dually regulated offerings, as contemplated by the Jumpstart Our Business Startups (JOBS) Act of 2012 and applicable SEC regulations
Commissioner Berkovitz dissented and sharply criticized the Commission for providing relief to “billionaires” that operate family offices by not requiring notice of exemption from registration to the CFTC
The amendments were published in the Federal Register on December 10, 2019 and will be effective on January 9, 2020

20. Exemption from Registration for Family Office CPOs and CTAs
The CFTC adopted amendments to Regulations 4.13 and 4.14 that would establish CPO and CTA registration exemptions for persons meeting the definition of a “family office” consistent with the regulatory exclusion from the definition of “investment adviser,” for Family Offices as adopted by the SEC in 2012
The CFTC noted that the rule amendments are substantively similar to no-action relief from CPO and CTA registration currently provided through CFTC No-Action Letters (CTA Family Office No-Action Letter) and (CPO Family Office No-Action Letter)
To that end, the CFTC noted that the rule amendments are intended to supersede the no-action relief previously provided by these No-Action Letters
Family Offices qualifying for these exemptions should instead, as soon as practicable after the amendments go into effect, create and maintain an internal record documenting the relevant exemption they wish to claim, as well as their qualifications for that exemption, similar to the requirements to claim other self-executing exemptions in Part 4

21. Exemption from Registration for Family Office CPOs
Regulation 4.13 has been amended to add new paragraph (a)(6) to provide an exemption from CPO registration to a person with respect to a qualifying commodity pool, if:
interests in the pool are exempt from registration under the Securities Act of 1933, and such interests are sold only to “family clients;”
the person qualifies as a “family office;” and
the person reasonably believes, at the time of investment, or in the case of an existing pool, at the time of conversion for an existing pool, that each person who participates in the pool is a “family client” of the “family office”
No notice required
CPO registration relief provided by the new exemption is available on a self-executing basis for qualifying Family Offices
Exempt Family Offices will still be subject to the same recordkeeping requirements and special call authority as all other exempt CPOs

22. Exemption from Registration for Family Office CPOs and CTAs
The CFTC also confirmed that the amendments do not supersede prior staff letters providing that a particular entity is “not a pool,” provided that a Family Office has determined its own situation to be substantively identical to the outlined facts and circumstances precipitating the letter relief
Regulation 4.14(a) has been amended to add a new exemption from CTA registration where “the person’s commodity trading advice is solely directed to, and is for the sole use of, ‘family clients’” See Regulation 4.14(a)(11)
This exemption is self-executing and no notice is required

23. NFA Compliance Rule 2-9

24. NFA Compliance Rule 2-9
NFA Compliance Rule 2-9 provides that CPOs diligently supervise its employees and agents in all aspects of their commodity interest activities. The most recent amendment became effective on September 30, 2019
Per NFA Interpretive Notice 9074 (CPO Internal Controls System), NFA requires that a CPO “implement an internal controls system that is designed to deter fraudulent activity by employees, management, and third parties in order to address the safety of customer funds and provide reasonable assurance that a CPO’s commodity pool’s financial reports are reliable and that the Member is in compliance with all CFTC and NFA requirements”
A CPO must demonstrate compliance with NFA Compliance Rule 2-9 and NFA Interpretive Notice 9074 through its internal controls system
Means of compliance include the CPO’s policies and procedures and providing related training to its employees
A CPO’s ongoing compliance program should be designed to detect and remediate issues of noncompliance, in order to demonstrate compliance with applicable policies and procedures

25. INTERNAL CONTROLS - PRINCIPLES
A CPO’s internal controls framework must demonstrate compliance with the following principles set forth in NFA Interpretive Notice 9074, as follows:
Separation of Duties
Avoid a scenario where a single employee is in a position to carry out and conceal errors or fraud or have control over any two phases of a transaction or operation
Risk Assessment
Control objectives relate, in part, to compliance with the requirements related to pool subscriptions, redemptions and pool transfers and provides an examination of the controls in place to safeguard participant and pool assets
Recordkeeping
Maintain an internal controls report and other documentation that demonstrate compliance with the internal controls systems
Need to inventory existing procedures to determine what is missing

26. NFA Compliance Rule 2-29

27. NFA Compliance Rule 2-29
NFA Compliance Rule 2-29 establishes standards for “promotional material” of CPOs and CTAs
Promotional material includes: “(i) Any text of a standardized oral presentation, or any communication for publication in any newspaper, magazine or similar medium, or for broadcast over television, radio, or other electronic medium, which is disseminated or directed to the public concerning a futures account, agreement or transaction; (ii) any standardized form of report, letter, circular, memorandum or publication which is disseminated or directed to the public; and (iii) any other written material disseminated or directed to the public for the purpose of soliciting a futures account, agreement or transaction”
NFA Board amended the definition of promotional material to clarify that promotional material includes any standardized materials concerning a commodity interest account, agreement, or transaction
Rule 2-29 was expanded to include all commodity interest activities (i.e. swaps) and not just futures-related activities
Inconsistent with SEC staff interpretations of Advisers Act rule 206(4)-1

28. NFA Compliance Rule 2-29 Amendments
NFA recently proposed updates to codify staff positions on net performance. These updates will be effective January 1, 2020
Amended Rule 2-29 generally requires that any performance-related claims be presented net of all commissions, fees, and expenses
However, NFA will continue its current practice of permitting presentation of gross performance in a manner similar to that allowed by SEC staff in certain circumstances, including the:
Presentation of gross and net performance with equal prominence in a format designed to facilitate the ease of comparison between the gross and net performance and that contains sufficient disclosure that gross-of-fee performance does not reflect the payment of advisory fees and other expenses, and
Exclusion of custodial and fund administrative expenses from the calculation of CTA net returns as long as those fees are not a requirement of the CTA to trade the program

29. Training Requirement for Swap Associated Persons

30. NFA Swaps Proficiency Training requirement
Individuals who are currently approved as a Swap AP at a futures commission merchant, introducing broker, CPO, CTA or act as an AP at a swap dealer and intend to continue acting in this capacity have until January 31, 2021, to satisfy the NFA Swaps Proficiency Requirements
Individuals can begin satisfying the Swaps Proficiency Requirements on January 31, 2020 and the compliance deadline is January 31, There is no grandfathering of persons already registered
The NFA Swaps Proficiency Requirements will be administered via the Internet and consist of both a training and a testing component. For Swap APs at a CPO or CTA, the training will take approximately four hours to complete and will consist of the following modules:
swaps products and applications
regulation of the swaps market
supervision and intermediary compliance and
anti-fraud and other regulatory requirements

31. NFA Swaps Proficiency Training requirement
Each NFA Member with APs required to satisfy Swaps Proficiency Requirements must designate at least one Swaps Proficiency Requirements Administrator (“SPR Admin”), who must also be an Online Registration System Security Manager, to coordinate enrollment and track progress
An NFA Member may designate an SPR Admin(s) on or after November 1, 2019

32. Annual Affirmation Requirement for CPO/CTA Exclusions and Exemptions

33. CFTC Annual Affirmation Process
The CFTC requires any person that claims an exemption from CPO registration under Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under Regulation 4.5 or an exemption from CTA registration under 4.14(a)(8) to annually affirm the applicable notice of exemption within 60 days of the calendar year end, which is February 29, 2020 for this affirmation cycle
Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 1, 2020
For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to Part 4 Requirements regardless of whether the entity otherwise remains eligible for the exemption

34. Questions?

35. Ms. Meer has been structuring private funds as limited liability companies, limited partnerships, offshore corporations, common trust funds and business trusts, and preparing disclosure documents and organizational documents for such entities since the mid-1990s. Her clients include hedge fund and private equity fund sponsors, as well as sponsors of funds-of-funds and funds-of-one. Some of these manager are stand-alone entities and some are part of large financial institutions. She also advises investment advisers, private fund managers, and investment companies on compliance issues, including under the Investment Advisers Act of 1940, whether their commodity interest-related trading or advice would require them to register as commodity pool operators or commodity trading advisors and regarding lobbyist registration and related matters. She also advises institutional investors in connection with their investment in third-party private funds.
Cary J. Meer
Partner
K&L Gates, Washington, D.C. and New York City T F
klgates.com

36. Stephen M. Humenik is a partner at the firm’s Washington, D. C
Stephen M. Humenik is a partner at the firm’s Washington, D.C. and Chicago offices. He is a member of the investment management and derivatives and structured products practices. He has over twenty years of experience on cross-border regulatory, compliance and enforcement matters involving the U.S. Commodity Futures Trading Commission (CFTC) and global markets for derivatives, physical and financial commodities. Mr. Humenik applies his business, operational, and government experience to the implementation of CFTC regulations, including the trading, registration, clearing and other compliance obligations of the Dodd-Frank Act and other global regulatory reforms. Mr. Humenik counsels a diverse range of clients, including asset managers, hedge funds, swap dealers, financial institutions, trading platforms, commodity end-users, agricultural producers and manufacturers, energy companies, corporate end-users, trade associations, and cryptocurrency and FinTech companies.
Prior to joining the firm, Mr. Humenik served as of counsel at an international law firm where he led the futures and derivatives practice. Mr. Humenik was previously general counsel and chief regulatory officer of an interest rate swap derivatives market, where he oversaw the legal and regulatory affairs of the exchange, including the exchange’s designation as a contract market, and ongoing compliance with CFTC regulations, and the exchange’s connectivity to its clearing house.
Mr. Humenik previously served at the CFTC as a special counsel and policy advisor to former CFTC Commissioner Scott O’Malia during the passage of the Dodd-Frank Act. He began his career in the CFTC’s Division of Enforcement where he investigated and prosecuted matters involving complex market manipulation and fraud, including during the aftermath of Enron and the surge in oil prices during the 2007 to time period.
Stephen M. Humenik
Partner
Washington, D.C. Chicago
T T
F F

37. Edgar Mkrtchian Associate New York T 212.536.3917 F 212.536.3901
Edgar Mkrtchian is an associate at the firm’s New York office. He is a member of the investment management, hedge funds and alternative investments practices. He has previously worked on financial regulatory matters in government service and in private practice. Mr. Mkrtchian has previously served at the Financial Industry Regulatory Authority, the Commodity Futures Trading Commission, the United States Department of the Treasury and the United States Department of Commerce. In private practice, Mr. Mkrtchian has counselled global financial conglomerates, domestic and international private funds, and the commercial end users of financial products.
Mr. Mkrtchian applies his business and government experience to the implementation of financial regulations, including the trading, registration, clearing and other compliance obligations arising under the Investment Company Act, the Dodd-Frank Act, and the Securities Act. Mr. Mkrtchian has also developed innovative technology solutions to help financial services firms meet their legal obligations.
Mr. Mkrtchian first developed an interest in derivatives and financial products while he was studying law at the University of Oxford and working for an international law firm in Asia. While reviewing impaired bank loans and assessing systemic risk, he developed the concept of government-backed synthetic collateralized debt obligations as a policy response. Mr. Mkrtchian published an academic article on this concept at Oxford and was invited to brief the central bank leadership of a European sovereign.
Mr. Mkrtchian worked as a summer associate at K&L Gates and, prior to rejoining the firm, served in government policymaking and regulatory roles in the area of financial services. Mr. Mkrtchian has helped to enforce financial regulations against global financial institutions allegedly engaged in illicit activity, and also helped to develop financial services regulatory policy while in government service. This breadth of expertise enables Mr. Mkrtchian to counsel clients from a variety of perspectives.
Edgar Mkrtchian
Associate
New York T F