The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") granted no-action relief to a University from Commodity Pool Operator ("CPO") and Commodity Trading Advisor ("CTA") registration requirements in relation to management of its endowment fund and certain planned giving arrangements.

As part of the endowment fund, the University commingled its assets with assets from several third-party affiliated charitable organizations that were legally separate from the University. However, DSIO determined that the interests of the organizations - which are "largely defined by their relationship to the University" - are "completely aligned" with those of the University so as to distinguish this arrangement from the usual "arms-length, business relationship" that CPOs and commodity pools generally have with participants (and the compliance regime is designed to address).

The University also solicits "planned giving donations" from donors, in which a certain amount of income is paid out to beneficiaries on a quarterly basis. Under two separate types of arrangements, the University receives benefits upon the principal asset donation that reverts to the University after certain conditions are met.

According to DSIO, the University qualifies for relief from registration as a CPO or CTA and the requirements under CFTC Rule 4.20 because of the following principle factors:

  • the alignment of interests between the University and the affiliated organizations;
  • the fact that the University does not solicit affiliated organizations for investments; and
  • the fact that the University is the only client of the University's Investments office.

Similarly, for the planned giving accounts, DSIO determined that the arrangements are distinguished from traditional CPO/CTA arrangements by aligned interests and a structure in which the university "solicit[s] donations to financially support its educational and academic goals and mission, rather than to provide any investment management or advisory services to its planned giving donors," and the donor has no expectation of receiving the donated assets back. Any ancillary benefits, whether through tax deductions or income streams resulting from such a donation, should not, according to DSIO, be deemed to "convert" such donation into an investment.

As a condition of the no-action relief, DSIO will require the University to ensure that all future affiliated organizations are (i) tax-exempt entities that are "supporting organizations" of the university or (ii) separate legal entities that have an "integral relationship" with the University, provide or receive services from the University or the University community, and could not "feasibly operate in the absence of its affiliation with [the University] without a fundamental change to its operations or purpose." DSIO will not recommend enforcement against any affiliated organizations that continue their involvement with the endowment fund.

Commentary / Bob Zwirb

The commodity pool regulatory framework is intended to protect the interests of members of the public when they are solicited to participate in funds that involve the pooling of their assets in order to share in the profits of such funds. It is not designed for, nor intended to deal with, organizational or financial structures where the objective is to invest on behalf of the commercial entity and where investor protection interests are not present.

The true nature of the University's investment vehicle neither serves nor solicits funds from outside investors. Instead, it acts more akin to a holding company that invests the commingled funds of its subsidiaries, a type of structure that also does not come, or should not come, within the definition of a commodity pool.

Despite the good outcome in this case, going forward the CFTC should consider whether it might be better not to treat investment vehicles like the one here as "commodity pools," thus avoiding the expenditure of time and resources required to obtain individualized relief. The CFTC has long accepted that certain entities do not come "within the meaning and intent of Rule 4.10(d)." It's time that the CFTC extend that position to educational institutions that create investment vehicles to invest (for obvious proprietary purposes) on behalf of their extended educational families.

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