Qualified eligible person (QEP)

The qualified eligible person (QEP) standard allows commodity pool operators Commodity pool operator (CPO) A commodity pool operator (CPO) is a person or entity that manages an investment fund that collects money from multiple investors to trade commodity futures, options, and swaps. Most CPOs must register with the Commodity Futures Trading Commission (CFTC) unless they qualify for specific exemptions. (CPOs) to access certain regulatory exemptions when their investors meet higher sophistication requirements. This framework works similarly to other federal investor protection categoriesFederal classifications such as accredited investor, qualified client, and qualified purchaser that determine regulatory protections and investment access.. It sets higher thresholds for participating in less regulated investment vehicles, especially those involving commodity interestsFinancial instruments regulated by the CFTC, including futures contracts, options on futures, and commodity options, that derive their value from underlying commodities or financial benchmarks. like futures and options.

Under CFTC Rule 4.7 CFTC Rule 4.7 CFTC Rule 4.7 is a federal regulation that allows commodity pool operators (CPOs) and commodity trading advisors (CTAs) to avoid most registration, disclosure, and reporting requirements. This exemption only applies when these operators work exclusively with "qualified eligible persons" (QEPs)—investors who meet strict financial and sophistication standards. , individuals qualify as QEPs by meeting portfolio requirementsFinancial thresholds that certain investors must meet regarding their investment holdings to qualify for specific exemptions or status. that demonstrate substantial investment experience and financial capacity. The rule took effect on March 26, 2025, and raised the financial thresholds significantly.

Individual QEPs must now meet one of two requirements. First, they can own securities and other investments with a total market value exceeding $4,000,000. Second, they can have at least $400,000 on deposit with a futures commission merchant as initial marginThe upfront cash or collateral deposit required to establish a futures or options position. and premiums for commodity interest transactions within the past six months.

Investors can also combine these two tests to qualify. For example, an individual with $2,000,000 in securities (50% of the threshold) and $200,000 in margin deposits (50% of the threshold) would qualify as a QEP.

These updated thresholds reflect the CFTC's September 2024 final rule, which doubled the financial requirements from their original 1992 levels. The adjustment accounts for inflation over the intervening three decades. The previous thresholds of $2,000,000 in securities or $200,000 in margin remained unchanged for over thirty years before this increase.

Entities can qualify as QEPs through various pathways depending on their structure and purpose. Investment vehicles, registered investment companiesInvestment companies registered with the SEC under the Investment Company Act of 1940, such as mutual funds., business development companiesA type of closed-end investment company that invests in small and mid-sized businesses, subject to specific regulatory requirements under the Investment Company Act., bank holding companies, employee benefit plansRetirement, pension, or other benefit plans established by employers for their employees, often subject to ERISA regulations., and similar entities with total assets exceeding $5,000,000 generally meet the QEP standard. These entities must be organized and operated by sophisticated persons for investing in securities and commodity interests. These entity thresholds also increased in the September 2024 amendments from the previous $4,000,000 level.

Governmental entities, pension plansRetirement benefit plans established by employers to provide income to employees after retirement, typically qualifying as tax-exempt organizations. for state employees, and private business development companies face similar asset thresholds. For employee benefit plans covered by ERISA ERISA ERISA (Employee Retirement Income Security Act) is a 1974 U.S. federal law that sets strict rules for how employee retirement and benefit plans must be managed. This law significantly affects hedge funds that take money from pension plans, especially when these retirement plan investments make up more than 25% of the fund's ownership. , qualification occurs in two ways. The plan can have assets exceeding $5,000,000, or investment decisions can be made by qualified fiduciariesProfessional trustees who must act in the best interests of plan participants and meet specific regulatory qualifications. such as banks, insurance companies, or registered investment advisers Registered investment adviser (RIA) A registered investment adviser (RIA) is a hedge fund manager or other investment adviser that has registered with the SEC or state securities regulators. These advisers must follow comprehensive rules including fiduciary duties, compliance requirements, and regular examinations. .

Investors meeting the qualified purchaser 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. standard under the Investment Company Act 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. automatically qualify as QEPs. This creates an important regulatory hierarchy. Qualified purchaser status requires $5,000,000 in investments for individuals or $25,000,000 for entities, so these investors inherently satisfy the QEP Portfolio Requirement thresholds.

This automatic qualification simplifies compliance for fund managers structuring vehicles under both CFTC and SEC regulatory frameworks. The overlap is particularly useful for funds relying on the Section 3(c)(7) exemption from Investment Company Act registration.

Non-U.S. personsIndividuals or entities not subject to U.S. jurisdiction, often qualifying for certain regulatory exemptions or reduced disclosure requirements. qualify as QEPs without meeting specific financial thresholds. This categorical qualification reflects the CFTC's jurisdictional focus on protecting U.S. investors. The CFTC's regulatory mandate centers on domestic investor protection rather than extraterritorial applicationThe extension of a country's laws and regulations beyond its territorial borders to govern conduct or transactions occurring in other jurisdictions. of U.S. standards.

Foreign commodity poolsInvestment vehicles that pool funds from multiple participants to trade in commodity interests, including futures, options, and swaps. also qualify as QEPs under certain conditions. Less than ten percent of beneficial ownershipThe concept of identifying the natural persons who ultimately own or control a legal entity, used in compliance screening to detect indirect relationships with sanctioned parties. interests must be held by U.S. persons who are not themselves qualified eligible persons. Additionally, the pool must not have been formed principally to facilitate investment by non-qualified U.S. persons. This provision facilitates international capital formationThe process by which businesses and other entities raise funds from investors to finance their operations and growth. while maintaining appropriate investor protection standards for U.S. participants.

Existing pool participants and advisory clients who qualified under the previous lower thresholds continue to maintain their QEP status under the original standards. However, these grandfathered participantsExisting investors or clients who are permitted to maintain their status under previous regulatory standards when new, more stringent requirements are implemented. may not make additional investments in Rule 4.7 pools or open new exempt accounts after the March 26, 2025 compliance date unless they meet the updated Portfolio Requirement. This grandfathering approach protects existing relationships while ensuring that new capital commitments meet current sophistication standards.

Qualified eligible person status becomes particularly relevant for hedge funds seeking exemptions under CFTC Rule 4.7. This rule provides relief from extensive disclosure and reporting requirements for commodity pool operators whose participants are limited to qualified eligible persons.

Before commencing operations under this exemption, commodity pool operators must file a notice of claim for exemptionA formal filing submitted to the NFA by commodity pool operators to establish their eligibility for and intention to rely upon regulatory exemptions under CFTC rules. with the National Futures Association. The timing of this filing depends on the relief claimed. Operators seeking only periodic reporting relief must file before the pool's first commodity interest transaction. Those claiming disclosure relief must file before offering or selling any pool participations.

Funds claiming this exemption must prominently display prescribed disclosure language on offering documentLegal documents provided to prospective investors that describe the terms, risks, and other material information about an investment opportunity. cover pages or subscription agreement signature lines. This language notifies investors that the pool operates under reduced regulatory requirements. The mandatory legend specifies that the offering memorandum has not been filed with the CFTC and that the Commission has not reviewed or approved the offering.

The exemption eliminates requirements for detailed disclosure documentsA comprehensive document that provides prospective investors with material information about an investment offering., certified annual reports with full audited financial statements, and monthly account statements that would otherwise apply to commodity pools. Instead, Rule 4.7 pools must provide only quarterly account statements showing net asset valueThe total value of a fund's assets minus its liabilities, divided by the number of outstanding shares or units., changes in net asset value, and per-unit values. They must also provide annual reports containing basic financial statements.

This regulatory relief allows managers to focus resources on investment activities rather than extensive compliance obligationsLegal and regulatory requirements that organizations must meet to ensure adherence to applicable laws and industry standards., provided their investor base maintains the enhanced sophistication thresholds throughout the pool's operations.

Commodity pool operators relying on Rule 4.7 exemptions may also access related relief from NFA marketing requirements. Under NFA Compliance Rule 2-29 and related interpretive guidance, CPOs whose pools are limited to qualified eligible persons can engage in advertising and promotional activities without obtaining prior NFA approval of marketing materials, provided all actual participants meet QEP standards. This coordination between CFTC exemptive reliefRegulatory permission that allows entities to operate under different rules or requirements than would normally apply, often granted when standard regulations are inappropriate for specific situations. and NFA self-regulatory requirementsRules and standards established and enforced by industry organizations like the NFA that supplement government regulations and govern member conduct. creates an integrated framework reducing regulatory burden for managers serving sophisticated investors.

For hedge fund managers operating as commodity pool operators, the qualified eligible person standard provides a pathway to simplified regulatory compliance while maintaining access to sophisticated investor capital. Managers must implement appropriate investor verification proceduresSystematic processes used by investment managers to confirm that investors meet required qualification standards such as accredited investor, qualified client, or qualified eligible person status. to confirm QEP status at subscription. This includes obtaining representations regarding portfolio holdings, margin deposits, or alternative qualification bases such as qualified purchaser status or non-U.S. person classification.

Ongoing monitoring of investor eligibility remains important to preserve exemption claims. While grandfathered participants who met previous thresholds retain their QEP status, managers should track whether the pool maintains sufficient qualified participation to support continued reliance on Rule 4.7 relief. Loss of QEP status by a significant portion of investors could necessitate transition to full Part 4 complianceFull adherence to CFTC regulations under 17 CFR Part 4, which governs commodity pool operators and commodity trading advisors, including comprehensive disclosure, reporting, and recordkeeping requirements. unless remaining participants satisfy the exemption requirements.

The exemption framework recognizes that sophisticated investors with substantial portfolios possess the resources and experience to evaluate complex investment strategies involving commodity interests. These investors do not need the full spectrum of regulatory protections designed for retail participants. This risk-based approach balances investor protection with market efficiency and innovation in alternative investment strategies.

The qualified eligible person framework represents part of a broader federal approach to investor protection. The system recognizes varying levels of investor sophistication and risk tolerance. By establishing higher thresholds for participation in less regulated investment vehicles, the regulatory system attempts to balance investor protection with market efficiency and innovation in investment strategies.

The coordination between CFTC qualified eligible person standards, SEC accredited investor Accredited investor An accredited investor refers to an individual or entity that meets specific financial thresholds set by securities regulations, qualifying them to invest in unregistered securities offerings such as hedge funds, with standards including minimum income or net worth requirements. definitions, and Investment Company Act qualified purchaser requirements creates a tiered regulatory structure. This structure scales oversight intensity with investor sophistication and financial capacity.

The September 2024 threshold increases maintain this calibration. The adjustments ensure that inflation erosion does not inadvertently expand access to lightly regulated vehicles beyond the population of truly sophisticated investors originally contemplated when Rule 4.7 was adopted in 1992.