The Commodity Futures Trading Commission today adopted final rules to harmonize compliance obligations for commodity pool operators of registered investment companies with those of the Securities and Exchange Commission. In a coordinated action, the SEC's Division of Investment Management has issued guidance to facilitate compliance with SEC and CFTC disclosure and reporting requirements by funds and their sponsors that are subject to regulation by both agencies. IM Guidance Update 2013-05 (Aug. 2013).
A "commodity pool" generally is any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, such as commodity options, futures, and swaps, and a "commodity pool operator" is a person engaged in a business that is of the nature of a commodity pool. The CFTC from 2003 to 2012 had a broad exemption from CPO status for operators of commodity pools that are registered investment companies, but in 2012 it narrowed that exemption sharply. It is now available only for CPOs of RICs that commit no more than a de minimis portion of their assets to the trading of commodity interests (other than for bona fide hedging) and that do not market themselves as a commodity pool or other commodity investment. CPOs of RICs (normally the RIC's investment adviser) were required to comply with registration requirements by December 31, 2012, but compliance with the CFTC's recordkeeping, reporting, and disclosure requirements was deferred pending adoption of this harmonization effort. The Investment Company Institute and the U.S. Chamber of Commerce brought suit to challenge the rule changes, but the U.S. Court of Appeals for the D.C. Circuit in June rejected that challenge.
The CFTC's harmonization is grounded in the concept of substituted compliance, meaning that compliance with SEC rules generally will also comply with CFTC rules (which might otherwise apply inconsistent requirements) and, conversely, the failure to comply with SEC requirements will also violate CFTC rules. In addition, the CPO of a RIC will be subject to the following requirements:
*The CPO of a RIC must file notice of its use of the substituted compliance regime with the National Futures Association.
*The CPO of a RIC with less than three years operating history must disclose the performance of all accounts and pools that are managed by the CPO and that have investment objectives, policies, and strategies substantially similar to those of the offered pool.
*The CPO of a RIC must file the RIC's SEC-required financial statements with the NFA.
*If the CPO of a RIC uses or intends to use third-party service providers for recordkeeping purposes, it must file notice with the NFA.
The CFTC also extended two rule changes to CPOs generally. All CPOs will be permitted to use third-party service providers to maintain their books and records, and the requirement to obtain from investors a signed acknowledgement of receipt of disclosure documents is being rescinded for all CPOs.
The CFTC rule amendments generally will be effective upon publication in the Federal Register. This is different from the representation made by CFTC counsel to the district court in October 2012 that the rule amendments would be effective 60 days after publication in the Federal Register. The requirement to disclose related fund performance for a RIC with less than three years operating history will be effective 30 days after publication in the Federal Register, and compliance generally will be required with the next initial registration statement or annual update filed after that time. The adoption of the harmonization rules also triggers the requirement for CPOs and commodity trading advisors of RICs to begin to file forms CPO-PQR and CTA-PR. Initial reporting on those forms will begin 60 days after the rules' effectiveness (i.e., 60 days after publication in the Federal Register).
The related SEC staff guidance summarizes views of the Division of Investment Management regarding certain disclosure and compliance matters relevant to funds that invest in commodity interests. The guidance discusses disclosure of the investment strategies and risks associated with derivatives, and it explains how a fund can disclose related funds' performance on a nondiscriminatory basis. It also states that the staff expects that each fund would have in place policies and procedures that are sufficient to address the accuracy of disclosures made about the fund's use of derivatives, including commodity interests, and associated risks, as well as consistency of the fund's investments in these derivatives with the fund's investment objectives.
The CFTC's adopting release is available online at
For the SEC staff guidance, see
My February 2012 post on the narrowing of the RIC exemption is at
For my post on the D.C. Circuit ruling upholding the rule change, see
John M. Baker <JBaker@...
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