USA Law and Practice Contributed by: Scott Naidech, Basil Godellas, Olga Loy and Beth Kramer, Winston & Strawn
• devices, schemes or artifices to defraud any client or prospective client; • transactions that operate as a fraud or deceit upon any client or prospective client; • when acting as principal for its own account, knowingly selling any security to or purchasing any security from a client for its own account, without disclosing to the client in writing the capacity in which it (or an affiliate) is acting and obtaining the client’s consent before the completion of the trans - action; and • any act, practice or course of business that is fraudulent, deceptive or manipulative. If a fund invests in Commodity Interests, the fund will fall within the definition of a “commodity pool”. The operator (ie, sponsor or general partner) of a commod - ity pool must be registered with the CFTC as a CPO and must become a member of the NFA unless it can avail itself of an exemption. Commodity Exchange Act Registration requirements Many managers that only invest in Commodity Inter - ests on a limited basis rely on an exemption from regis - tration as a CPO found in CFTC Regulation 4.13 (a)(3). Rule 4.13 (a)(3) provides an exemption for managers that operate pools whose interests are exempt from registration under the Securities Act of 1933, restrict participation to accredited investors, certain family trusts formed by accredited investors and “knowl - edgeable employees” and either (i) the aggregate net notional value of the fund’s commodity interest posi - tions does not exceed 100% of the liquidation value of its portfolio, or (ii) the aggregate initial futures margin and options premium needed to establish the fund’s commodity interest positions does not exceed 5% of the liquidation value of its portfolio. A registered CPO also can rely on Rule 4.13 (a)(3) for qualifying funds, which exempts the registered CPO from most of the disclosure and record-keeping obligations it otherwise would have for the fund. CFTC Rule 4.14 (a)(10), together with Section 4m(l) of the CEA, exempts any person from the requirement to register as a CTA, provided that such person has not during the prior 12 months furnished commod - ity trading advice to more than 15 persons and such
person does not hold itself out generally to the pub - lic as a CTA. For an adviser with its principal place of business outside the USA, the adviser need only count US-based clients for purposes of such 15-client limitation. In order to rely on the “de minimis” exemp - tion in CFTC Rule 4.14 (a)(10), no regulatory filing or approval is necessary. Generally, CFTC regulations require all commodity pools sponsored by registered CPOs to have a “dis - closure document” (ie, a private placement memoran - dum) that contains certain disclosures prescribed by regulation and which must be reviewed by the NFA, unless an exemption from such requirement is avail - able. If a CPO limits the investors in a fund solely to “quali - fied eligible persons” (QEPs) as defined in CFTC Rule 4.7, the CPO is exempt from the requirement that its pool have a disclosure document reviewed by the NFA, nor must any voluntary disclosure docu - ment contain required CFTC disclosures other than a required disclaimer (although the document must contain all relevant information and disclosures so as not to make the document materially misleading). Generally, QEPs are accredited investors that meet a portfolio requirement (either USD4 million in securi - ties or USD400,000 in futures margin or options on futures premium, or some proportional combination of the foregoing). Qualified purchasers, “knowledgeable employees”, certain regulated entities or investment professionals, as well as non-US investors generally, are also deemed to be QEPs. The practical impact of the definition of a QEP is that funds relying on Section 3 (c)(1) to avoid registration as an investment company typically have subscription agreements that include representations regarding QEP status, whereas funds relying on Section 3 (c)(7) can rely on the representa - tion that the investor is a qualified purchaser. US Securities Exchange Act of 1934 (the “Exchange Act”) Section 15 (a) of the Exchange Act provides that it is unlawful for any broker or dealer to make use of any means of interstate commerce in the United States to effect any transactions in, or induce the purchase or sale of, any security, unless it is registered with
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