Statement of Chairman Heath P. Tarbert in Support of Final Rule Preventing Bad Actors from Relying on CPO Exemptions
June 04, 2020
As Robert Louis Stevenson aptly put it, “Everybody, sooner or later, sits down to a banquet of consequences.”
Today we are focused on the consequences of bad acts that result in “statutory disqualification” under the Commodity Exchange Act (“CEA”). These acts include the most serious types of financial crimes, such as embezzlement, theft, extortion, fraud, misappropriation, and bribery. Once an individual is statutorily disqualified, the CFTC may deny or revoke his or her registration. The same is true for corporate entities.
It stands to reason that someone who has been statutorily disqualified—and thus has no right to register with the CFTC—would be precluded from managing other people’s money and positions in the derivatives markets the CFTC regulates. But currently, this is not exactly the case. As it turns out, a statutorily disqualified person who wishes to operate a fund that trades derivatives may simply claim one of the exemptions from registration as a commodity pool operator (“CPO”) under CFTC Rule 4.13. Although each of these exemptions has a number of conditions, the absence of statutory disqualification is not currently among them.
Today’s final rule closes this loophole for bad actors. Under our rule as amended, a CPO claiming a registration exemption would be required to certify that neither the CPO nor any of its principals has in its background conduct that would result in automatic statutory disqualification under the CEA. I believe this rule will enhance customer protections and public confidence in the integrity of the derivatives markets by ensuring that bad actors cannot gain access to the funds of innocent, third-party investors simply by filing an exemption claim.
In so doing, we also strike a balance between bad acts that warrant automatic disqualification and other behavior that requires the opportunity for a hearing before the subject is disqualified. Because the CEA itself makes this kind of distinction in the context of registration, the Commission believes that lesser offenses warrant different treatment than recent and more serious offenses in the context of registration exemptions. Thus, today’s prohibition on statutory disqualification does not include offenses for which the CEA itself requires a hearing prior to disqualification.
I am comfortable with this exclusion, both because it is consistent with legislative intent and because CPOs relying on a Rule 4.13 registration exemption generally do not manage the money and derivatives positions of the retail public at large. Rather, these CPOs are limited by the terms of their exemption to small pools of select participants, pools limited to sophisticated investors, pools with de minimis derivatives positions, and the like.
In addition to protecting customers from bad actors and enhancing the integrity of the derivatives profession, this rule also furthers the CFTC’s strategic goal of “being tough on those who break the rules.” No longer will financial wrongdoers be able to use registration exemptions as a loophole to avoid the full consequences of their actions. For these reasons, I am pleased we are acting to finalize this rule.
Finally, it is worth remembering that sound regulation of the U.S. derivatives markets stems from a robust federal framework that the CFTC primarily administers, complemented and strengthened by an equally robust regime of self-regulation. A central pillar of that regime is the National Futures Association (“NFA”), the main self-regulatory organization for CPOs. NFA’s strong support for this rule is just one of countless actions that demonstrate their steadfast commitment to the integrity of the derivatives community.
 While this is the popular rendering of Stevenson’s quote, it appears to be apocryphal. Stevenson apparently used the phrase “game of consequences.” See Spurious Quotations, The Robert Louis Stevenson Archive, http://www.robert-louis-stevenson.org/richard-dury-archive/nonquotes.htm. Regardless whether Stevenson referred to a banquet or a game, his point was the same: everyone must face the consequences of his or her actions. That is true for life generally, and for the derivatives markets specifically.
 The Commission has adopted a registration exemption for CPOs that meet the definition of “family office” under the Securities and Exchange Commission’s regulations governing investment advisers. 84 Fed. Reg. 67,368 (Dec. 10, 2019). Section 409 of the Dodd-Frank Act excluded family offices from the definition of “investment adviser” subject to the Investment Advisers Act. Given the clear legislative intent to remove family offices from regulation, it would be inappropriate for the CFTC to exert its own oversight over such offices. As Congress recognized in the Dodd-Frank Act, regulatory oversight over family offices would be a wasteful use of taxpayer funds, as such offices are owned and controlled by a single wealthy family. Given their affluence and familial ties, these investors generally neither desire nor need investor protections designed for the retail public at large. Consistent with this approach, today’s prohibition on statutory disqualification does not apply to CPOs that are family offices. That said, we cannot allow bad actors to operate a family office in a way that adversely affects the market as a whole—for example, by engaging in manipulative or deceptive transactions through the family office. To that end, I have asked the Division of Swap Dealer and Intermediary Oversight to conduct a special call to determine how many family office managers would be prohibited from claiming the exemption if they were covered by this rule.
 This includes offenses that are less recent (e.g., felony convictions that are more than ten years old) or are less relevant to a person’s fitness to handle customer funds (e.g., convictions for felonies that do not involve financial wrongdoing). See, e.g., CEA Section 8a(3)(D).
 The rule also excludes statutory disqualifications that were previously disclosed to the Commission in a registration application, if the Commission chose to permit registration notwithstanding the disqualification. This exclusion is relevant because a CPO may be registered with the CFTC with respect to certain pools that it manages and claim a registration exemption with respect to other pools.
 See Draft CFTC 2020-2024 Strategic Plan, 85 Fed. Reg. 29,935 (May 19, 2020), https://www.govinfo.gov/content/pkg/FR-2020-05-19/pdf/2020-10676.pdf.
 See NFA Comment Letter on Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors (Dec. 17, 2018).