CFTC harmonizes marketing restrictions for dually-registered advisers

In July 2013, the US Securities and Exchange Commission (SEC) adopted a new securities registration exemption under Regulation D of the Securities Act of 1933 (the Securities Act).

New Rule 506(c) of Regulation D ended the SEC’s decades-long prohibition against general solicitation in connection with offering securities in a private placement. Rule 506(c) permits an issuer (or investment adviser sponsor) to offer securities using general solicitation as long as all sales of securities are to purchasers who are “Accredited Investors” (as defined in the Securities Act) and the sponsor takes reasonable steps to verify that all purchasers are Accredited Investors.

Unfortunately, primarily as a result of the inclusion of swaps in certain Commodity Futures Trading Commission (CFTC) registration requirements pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, many SEC-registered investment advisers now meet the definition of a commodity pool operator (CPO) and are required to either register as a CPO with the CFTC (Dually-Registered Advisers), or to claim an exemption from CFTC registration (Exempt CPO).

Dually-Registered Advisers relying on CFTC Regulation 4.7 can request exemptive relief from certain disclosure, periodic and annual reporting, and record-keeping requirements. An investment adviser that meets the definition of a CPO and relies on CFTC Regulation 4.13(a)(3) (de minimis swaps holdings) is exempt from registration as a CPO.

However, Regulations 4.7 and 4.13(a)(3) specifically prohibit CPOs from offering securities to the U.S. public (i.e., engaging in general solicitation). Therefore, Dually-Registered Advisers and Exempt CPOs were unable to take advantage of Rule 506(c) due to the CFTC’s restrictions on general solicitation.

After a long period of uncertainty regarding the lack of harmonization between the SEC’s and CFTC’s restrictions, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued an exemptive letter in response to the previous regulatory updates by the SEC. The exemptive letter provides that Dually-Registered Advisers and Exempt CPOs that comply with the provisions of Rule 506(c) of Regulation D are allowed to generally solicit their securities offerings.

However, the exemptive relief is not self-executing, and a Dually-Registered Adviser or Exempt CPO must file a notice with the DSIO (via email) and provide certain information as outlined in the Exemptive Relief Letter. A claim for exemptive relief will be effective upon filing as long as the notice is materially complete and accurate. The notice must be signed by the CPO. Such exemptive relief will remain in effect until any final CFTC rule.

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