Statement of Commissioner Dan M. Berkovitz Regarding Prohibiting Exemptions from Commodity Pool Operator Registration for Persons Subject to Certain Statutory Disqualifications
June 04, 2020
I support today’s final rule to prohibit commodity pool operators (“CPOs”) or their principals who are subject to statutory disqualification under Section 8a(2) from claiming an exemption from registration. This rule narrows a loophole in our CPO registration framework and strengthens the Commission’s regulations to protect customers and market integrity.
Section 8a(2) of the Commodity Exchange Act (“CEA”) lists the offenses for which the Commission may refuse, suspend, or condition registration without a prior hearing. These offenses include major violations of a number of laws and regulations governing financial markets, including felony convictions for embezzlement, theft, extortion, and fraud. Today’s rule will ensure that persons who are restricted under Section 8a(2) from operating in registered activities cannot escape such restrictions by engaging in activities that are exempt from registration.
Although to a large degree this rule closes an existing loophole in our regulations, it perpetuates a glaring deficiency by failing to hold CPOs of family offices or their principals to the same standards of conduct as other exempt CPOs. The risks to market integrity presented by this omission are compounded by another recent rulemaking exempting CPOs of family offices from a requirement to notify the Commission if they claim an exemption from registration. Thus, under this set of new rules completed today, CPOs of family offices are exempt from registration, exempt from providing notice that they are using an exemption, and exempt from the statutory disqualifications that generally apply to all other CPOs. This triad of exemptions for CPOs of family offices leaves the Commission uniquely unaware of the activities and integrity of these entities.
As I noted in my dissent on the final rule that exempted CPOs of family offices from notifying the Commission that they are claiming an exemption, family offices today are not “mom and pop” operations that invest small sums in commodities, but rather large and sophisticated asset management enterprises established by and for mega-millionaires and billionaires. The Commission justified these exemptions on the grounds that related family members in these “sophisticated” entities do not need the customer protections that the CFTC otherwise applies to CPO activities. However, regardless of whether this assessment is accurate, customer protection is just one of several objectives of the Commission’s CPO regulations. The regulation of CPOs facilitates the Commission’s oversight of the derivative markets, management of systemic risks, and mandate to ensure safe trading practices. There is no basis to conclude that the activities of large family office CPOs pose less of a concern in these areas than the activities of other exempt or non-exempt CPOs.
The regulatory principle here is straightforward. We are not only responsible for monitoring market participants that pose risk to customers, but also those who pose risk to the integrity of our markets. Individuals who commit felonies or other serious violations affecting the integrity of financial markets should not be permitted to trade in CFTC markets, particularly without at least some supervision and oversight. If a CPO of a family office or one of its principals has engaged in conduct serious enough to be subject to the disqualification provisions of Section 8a(2), such as fraud or misappropriation, then it should seek registration with the Commission and be subject to our oversight.
However, I am pleased that at my request, the CFTC staff will be making a special call to CPOs of family offices to determine how many, if any, are subject to statutory disqualification under Section 8a(2). The Commission currently has no information in this regard. I have consistently supported basing our regulatory decisions on the best available data. The data we will obtain from this special call will inform our judgment about whether further action is necessary to protect customers and the market.
I also am pleased that the Commission has declined to exclude registered investment advisers from the scope of this rule. The Securities and Exchange Commission has a different statutory disqualification regime. Registrants should abide by CFTC rules when they operate in our markets.
Going forward, the Commission should propose similar restrictions on the claiming of exemptions by statutorily disqualified commodity trading advisors. While this rule narrows one of the gaps in our Part 4 regulatory framework, this additional significant gap remains and should be closed.
I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for working with my office to incorporate some of our comments and proposed revisions to this rule. As a matter of course, a collaborative rulemaking process that takes into account the input from all five Commissioners will produce better regulations.
 CEA Section 8a(2)(D)(iii).
 Final Rule, Registration and Compliance Requirements for Commodity Pool Operators (CPOs) and Commodity Trading Advisors: Family Offices and Exempt CPOs, 84 FR 67355 (Dec. 10, 2019).
 Dissenting Statement of Commissioner Dan M. Berkovitz: Rulemaking to Provide Exemptive Relief for Family Office CPOs: Customer Protection Should be More Important than Relief for Billionaires, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement112519.
 See, e.g., Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 FR 11252, 11253, 11275 (Feb. 24, 2012); upheld in Investment Company Institute v. CFTC, 720 F.3d 370 (D.C. Cir. 2013). In Section 4l of the CEA, Congress declared, “the activities of commodity trading advisors and commodity pool operators are affected with a national interest in that, among other things . . . their operations are directed toward and cause the purchase and sale of commodities for future delivery . . . and the foregoing transactions occur in such volume as to affect substantially transactions in contract markets.” 7 U.S.C. 6l.