On April 4, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DISO) granted no-action relief from registration as a commodity pool operator (CPO) to a management company and certain fund directors whose sole clients are funds established to manage the endowment of a state university (University) and certain of its affiliates.

The no-action relief pertains to a fund complex consisting of three funds: Fund Z, which invests all of its investible assets in Fund X; Fund Y, which invests a portion of its assets in Fund X; and Fund X (together with Fund Y and Fund Z, the “Funds”), which invests in a broad range of asset classes, including funds, vehicles and accounts that currently, or may in the future, invest in commodity interests. In addition, Fund X engages in a de minimis amount of direct investment in commodity interests for risk management purposes. Directors (Fund Z Directors) control the management and operational decisions of Fund Z, and a management company (Management Company) manages the daily operations and investments of Fund X and Fund Y, and provides recommendations to the Fund Z Directors with respect to Fund Z’s investments. The investors in the Funds are University affiliates, supporting organizations and foundations. Neither the Fund Z Directors nor the Management Company market the Funds to the public. The Fund Z Directors and the board of directors of the Management Company are appointed by affiliates of the University. Because of the commodity interest exposure of the Funds, the Fund Z Directors and the Management Company may, without relief, have been required to register as CPOs.

DSIO granted the relief from registration as a CPO based on several factors and subject to certain conditions. DSIO indicated relief is appropriate (1) as the Management Company, the Fund Z Directors and the Funds have a common goal, namely the prudent management of the endowment assets of the University; and (2) the investors in the Funds have control over the Management Company and the Fund Z Directors. Furthermore, DSIO noted that the Management Company and the Fund Z Directors must provide the investors with detailed disclosures relating to Fund investments, as well as periodic and annual reports to the investors and University and state officials. Further, the Funds are subject to audits and SOC audits with the assistance of independent certified accountants. DISO conditioned the relief on the requirements that (1) future participants in Fund Z be limited to certain tax-exempt entities and other entities established by the University; and (2) any commodity trading advice received by the Management Company, the Fund Z Directors or the Funds be provided only by registered commodity trading advisors or entities exempt or excluded from such registration. As Fund X and Fund Y had existing limitations on eligible participants similar to those mentioned above, DSIO did not impose additional requirements as it relates to those Funds.

The no-action letter is available here.