CFTC OK's Compliance with Equivalent SEC Rules for Investment Companies Whose Advisors Must Register as CPOs; Some Changes Benefit All CPOs and CTAs

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Published Date : August 14, 2013

The Commodity Futures Trading Commission yesterday adopted final regulations regarding certain compliance obligations applicable to investment companies registered under the Investment Company Act of 1940 whose advisors are now required to register as commodity pool operators, as a result of the February 2012 amendments to CFTC Regulation §4.5. In general, the CFTC will permit such entities -- under the doctrine of substituted compliance -- to comply with applicable Securities Exchange Commission disclosure, reporting and recordkeeping requirements in order to satisfy their obligation to comply with comparable CFTC requirements.

In doing so, however, the CFTC also amended certain provisions of CFTC Rules applicable to all CPOs and commodity trading advisors, namely certain rules related to (1) record retention, (2) the time cycle to update disclosure documents, and (3) signed acknowledgements to evidence receipt of disclosure documents.

As a result, all CTAs and CPOs should review these new requirements, let alone registered investment companies (RIC) whose advisors are required to register as CPOs.
Some of the new requirements will become effective upon publication of the new rules in the Federal Register, while others, 30 days afterwards. Compliance dates may be different than effective dates, and in some cases are triggered by specific events (e.g., when a registered investment company updates its prospectus and files it with the SEC).

Under the CFTC's new rules, a CPO of a RIC may comply with applicable SEC rules in order to comply with a number of CFTC equivalent requirements, including the CFTC's requirements related to the:

However, failure to comply with such SEC regime may subject the CPO of a RIC to a CFTC enforcement action, in addition to one by the SEC.

CPOs of RICs electing to comply through substituted compliance will be required to file appropriate notice with the NFA. Also, CPOs of RICs (1) with less than three years operating experience must disclose the performance of all accounts and pools that are managed by the CPO and have investment objectives, policies and strategies substantially similar to those of the offered pool; (2) must file financial statements with the NFA that it prepares pursuant to its SEC obligations; and (3) must file an appropriate notice with the NFA if they use or intend to use third-party service providers for record keeping purposes.
In addition, for all CPOs and CTAs generally,

CPOs determining to use a third party record keeping service must also file an appropriate notice with the NFA.

As background, as a result of the February 2012 amendments to CFTC Regulation §4.5, commodity pool operators of registered investment companies that (1) commit more than a de minimis portion of their assets to commodity interest transactions that do not fall within the definition of bona fide hedging or (2) market themselves as a CPO, are no longer excluded from the definition of CPO under applicable CFTC Rules and must register with the CFTC as such (and comply now with applicable requirements for registered CPOs). This amendment was challenged in a federal court, but the lawsuit was dismissed during December 2012.

For more information, see:

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of August 14, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.


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