CFTC Rule 4.7

CFTC Rule 4.7 created the regulatory foundation that allowed the modern hedge fund industry to flourish. Adopted in 1992, this rule recognizes a simple principle: financially sophisticated investors need less protection than ordinary retail investors. Therefore, fund managers can operate with much more flexibility when they serve only qualified eligible persons.

The regulation transforms how alternative investment funds operate. Instead of following extensive registration, disclosure, and operational requirements under the Commodity Exchange ActFederal law that provides the statutory framework for regulating the trading of commodity futures and options in the United States., fund managers can take a streamlined approach. They must still protect investors, but they do so through strict eligibility requirements rather than detailed regulatory oversight.

Rule 4.7's exemptions work only if every investor meets strict qualification standards. The regulation creates two categories of qualified eligible persons: some are automatically exempt from portfolio requirementsFinancial thresholds that certain investors must meet regarding their investment holdings to qualify for specific exemptions or status., while others must meet specific financial thresholds.

Updated Portfolio Requirements (Effective March 26, 2025): Individual investors who must meet portfolio requirements generally need at least $4 million in securities that they own and invest with discretionThe authority granted to an investment manager to make trading decisions on behalf of clients without obtaining prior approval for each transaction.. Alternatively, they can qualify with $400,000 in initial margin and option premiums for commodity transactions, plus proven experience in commodity trading. These thresholds doubled from the original 1992 levels of $2 million and $200,000. The increase accounts for inflation over the past three decades.

Grandfathering Provisions: Existing investors who qualified under the previous lower thresholds can continue their current investments. However, they cannot make additional investments or open new accounts unless they meet the updated requirements.

Entity investors typically need at least $5 million in total assets to qualify. Institutional investors like banks, insurance companies, investment companies, and substantial employee benefit plansRetirement, pension, or other benefit plans established by employers for their employees, often subject to ERISA regulations. may qualify under different criteria. The regulation also covers knowledgeable employeesUnder Investment Company Act Rule 3c-5(a)(4), either a senior executive or director of a private fund or its management company, or an employee who participates in investment activities for at least 12 months., qualified purchasers Qualified purchaser Qualified purchasers are investors who meet specific wealth thresholds under the Investment Company Act of 1940. These investors are required for participation in Section 3(c)(7) funds. Generally, individuals must own at least $5 million in investments, while institutions must own at least $25 million in investments. , non-U.S. persons, and family members of qualified persons.

Rule 4.7 provides broad exemptions from standard registration requirements for CPOs and CTAs who serve only qualified eligible persons. This eliminates many burdensome obligations designed for retail-focused funds, including extensive disclosure materialsA comprehensive document that provides prospective investors with material information about an investment offering., standardized performance reports, quarterly filings, and operational restrictions.

Exempt funds avoid the detailed disclosure requirements found in CFTC Regulation 4.21CFTC regulation requiring commodity pool operators to provide detailed disclosure documents to prospective investors.. Instead, they can provide flexible disclosure materialsA comprehensive document that provides prospective investors with material information about an investment offering. tailored to sophisticated investors. The rule also exempts qualifying CTAs from detailed performance reporting under CFTC Regulation 4.35CFTC regulation requiring commodity trading advisors to provide standardized performance reports to clients., which normally requires standardized monthly reports and annual updates.

The rule significantly relaxes restrictions on promotional materials directed to qualified eligible persons. Standard limitations on hypothetical performance presentations, cherry-picked performance highlights, and composite performance recordsAggregated performance data that combines results from multiple accounts or trading programs to show overall performance. are substantially reduced when materials target only these sophisticated investors.

NFA Rule 2-29(c)(6) confirms this relief, stating that "restrictions on the use of hypothetical trading results... shall not apply to promotional material directed exclusively to persons who meet the standards of a 'Qualified Eligible Person' (QEP) under CFTC Regulation 4.7." This enables more flexible performance presentations while maintaining protections against fraud.

Recent amendments created specific relief for commodity poolsInvestment vehicles that pool funds from multiple participants to trade in commodity interests, including futures, options, and swaps. that operate as fund-of-funds structures. CPOs of Rule 4.7 pools that invest primarily in other funds may now distribute account statements monthly within 45 days of month-end. This replaces the standard quarterly reporting timeline and reflects the practical challenges fund-of-funds face when they cannot get timely information from their underlying investments.

1992 Original Adoption: Rule 4.7 was first adopted to address the growing hedge fund industry. It established the foundational qualified eligible person framework with $2 million securities and $200,000 initial margin thresholds.

2003 Amendments: Significant revisions refined eligibility criteria and addressed concerns about market evolution. These changes ensured that sophistication standards kept pace with market developments.

2012 Dodd-Frank Implementation: Major amendments implemented Dodd-Frank Act requirements, particularly affecting how swaps and derivatives are treated within Rule 4.7 exempt structures. The changes integrated new swap dealer registration requirements while preserving core exemptions for operations serving only qualified eligible persons.

2024 Threshold Modernization: The most significant amendments since the rule's 1992 adoption doubled the Portfolio Requirement thresholds to $4 million for securities and $400,000 for initial margin and premiums. These changes became effective March 26, 2025. The CFTC also deferred proposed extensive disclosure requirements that would have substantially increased regulatory burden on CPOs and CTAs.

Rule 4.7 exemptions require exclusive service to qualified eligible persons. Even a single non-qualified investor eliminates the exemption entirely and triggers full registration obligations. Managers must implement robust procedures to verify and monitor QEP status, with particular attention to the updated portfolio requirements for new investors after March 26, 2025.

Despite providing extensive relief, the rule maintains anti-fraud protectionsRegulatory requirements that prohibit deceptive or misleading practices in financial communications and transactions. that require truthful and non-misleading communications. The regulation includes transition provisionsRegulatory rules that specify how entities must comply when changing from one regulatory status to another. for funds that lose exempt status, requiring compliance with full registration requirements within specified timeframes.

Rule 4.7 works alongside securities regulations, particularly Regulation D Regulation D Regulation D provides exemptions from SEC registration requirements for private placements of securities, with hedge funds typically relying on Rule 506(b) for traditional private offerings or Rule 506(c) for offerings involving general solicitation. private placement exemptions and Investment Company Act of 1940 Investment Company Act of 1940 The Investment Company Act of 1940 is a U.S. law that regulates companies whose main business involves investing in securities. Hedge funds typically use special exemptions under Sections 3(c)(1) or 3(c)(7) to avoid having to register under this law, which allows them to maintain the flexibility they need for their investment strategies and fee structures. exclusions under Sections 3(c)(1) and Sections 3(c)(7). This coordination allows hedge funds to achieve comprehensive regulatory relief across both commodity and securities regulations while serving sophisticated investors through integrated legal structures. The updated QEP thresholds particularly affect Section 3(c)(1) funds, while Section 3(c)(7) funds remain largely unaffected due to their qualified purchaser requirements.