Significant Changes Proposed to CFTC Rule 4.7 'Registration Lite'

For the last three decades, CFTC Regulation 4.7 has provided registered CPOs and CTAs with exemptions from certain compliance requirements under Part 4 of the Commodity Exchange Act, in their dealings with investors and clients that are “qualified eligible persons” (or “QEPs”) under that rule. The widespread reliance upon Regulation 4.7, which eliminates many of the disclosure obligations that would otherwise apply under CFTC rules, has led the CFTC to reassess whether the provisions of the rule continue to align with the purposes motivating its adoption, culminating in a proposal to implement substantial amendments to the rule.

The CFTC proposal outlines changes in four categories: (1) disclosure requirements, (2) QEP eligibility thresholds, (3) periodic pool reporting relief for funds of funds, and (4) technical changes to the rule text. The proposed amendments to the disclosure requirements would dramatically change the information that Rule 4.7 CPOs and CTAs are required to furnish to pool investors and clients. As proposed, the amendments effectively reinstate certain affirmative disclosure obligations applicable to Part 4-compliant pools, including the requirement to prepare and furnish a current “disclosure document” that includes prescribed information regarding a pool’s principal risk factors, investment program, use of proceeds, custodians, conflicts of interest and past performance. Among other things, this would obligate Rule 4.7-exempt CPOs to prepare “performance capsules” and a break-even analysis for each of their Rule 4.7 pools, which is not required under the current iteration of the rule. The proposed amendments would implement similar changes to the disclosure requirements for CTAs that rely upon Regulation 4.7 when managing accounts for QEPs. 

The proposed amendments would also double the eligibility threshold for those categories of QEPs relying on the “portfolio requirement.” In addition, the revisions would codify frequently granted relief that permits CPOs of funds-of-funds to distribute monthly account statements within 45 days of month-end (as opposed to the timeframe set out in the current rule, which requires that such statements be distributed within 30 days of quarter-end). The CFTC also plans to adopt minor technical revisions and reorganization to improve the general efficiency of the rule. 

The full text of the Notice of Proposed Rulemaking includes additional details, including how to submit comments for CFTC consideration in connection with the proposed changes. The comment period for the proposed amendments closes on November 28, 2023.