Q. My firm is a registered CPO/CTA and a Member of NFA. Does the firm have to designate a security futures principal and have its associated persons (APs) take the proficiency training?

A. CPOs and CTAs are not required to have a designated security futures principal. If the pool or trading program will trade security futures, APs must take the proficiency training before they solicit pool participations or clients or engage in any other security futures activities that require AP registration. Even if the CPO or CTA does not solicit business, however, the person overseeing the firm's security futures activities should take the training.

Individuals who have received a testing waiver under NFA Registration Rule 402 do not have to take the training if they continue to meet the conditions for the waiver. However, this exemption does not apply to individuals who qualify for a testing waiver under the provisions of Registration Rule 401.

Q. I operate a hedge fund but am not registered as a CPO. Do I have to register before I can trade security futures for the fund?

A. Not necessarily. A recent CFTC release provides exemptive relief for operators and advisors of hedge funds if both of the following tests are met:
1. all of the fund's participants are either accredited investors, a trust formed by an accredited investor for benefit of a family member, knowledgeable employees, or qualified eligible person as defined by 4.7(a)(2)(viii)(A); and

2. the pool's commodity trading activity meets one of two tests:

1. The aggregate initial margin and premiums do not exceed five percent of the liquidation value of the pool's portfolio; or

2. the aggregate notional value of futures and commodity options does not exceed 100 percent of the fund's liquidation value.

The hedge fund operator must also file a notice with NFA that the fund is claiming the exemptive relief and must disclose to its participants that it is not registered as a CPO. Notices should be filed with NFA at the following address:

National Futures Association
300 South Riverside Plaza, Suite 1800
Chicago, Illinois 60606
Attn: Mary McHenry, Compliance

The CFTC release provides additional information on how to calculate notional value, what information must be included in the notice filed with NFA and the CFTC, and what disclosures must be made. Similar requirements apply to the advisors for these funds. The release can be found at www.cftc.gov/files/foia/fedreg03/foi030808a.pdf.

Q. I operate a registered investment company that currently qualifies for an exclusion under CFTC Regulation 4.5. However, I may not meet the 5% test once I start trading security futures. Do I have to register as a CPO?

A. It depends on whether the investment company can meet an alternative test. The CFTC recently adopted a temporary no-action position for registered investment companies and other regulated entities covered by CFTC Regulation 4.5. Under the no-action position, CPO registration is not required if the aggregate notional value of the fund's speculative futures and options positions does not exceed the fund's liquidation value. This release can be found at www.cftc.gov/files/foia/fedreg03/foi030808a.pdf.