CFTC: Registered Investment Company CPOs Exempted from Dual Obligations | Practical Law

CFTC: Registered Investment Company CPOs Exempted from Dual Obligations | Practical Law

The CFTC has issued a number of final CPO rules, including a rule designed to harmonize certain compliance obligations for entities that are subject to dual disclosure requirements because they are SEC registered investment companies (RICs) that are now also required to register with the CFTC as commodity pool operators (CPOs) under Dodd-Frank rules. The CFTC also issued final rules on third-party recordkeeping for CPOs, and the SEC issued guidance for RICs that enter into derivatives.

CFTC: Registered Investment Company CPOs Exempted from Dual Obligations

Practical Law Legal Update 3-537-9325 (Approx. 4 pages)

CFTC: Registered Investment Company CPOs Exempted from Dual Obligations

by Practical Law Finance
Published on 19 Aug 2013 • USA (National/Federal)
The CFTC has issued a number of final CPO rules, including a rule designed to harmonize certain compliance obligations for entities that are subject to dual disclosure requirements because they are SEC registered investment companies (RICs) that are now also required to register with the CFTC as commodity pool operators (CPOs) under Dodd-Frank rules. The CFTC also issued final rules on third-party recordkeeping for CPOs, and the SEC issued guidance for RICs that enter into derivatives.
On August 13, 2013, the CFTC issued a number of new final commodity pool operator (CPO) rules, including a rule designed to harmonize certain compliance obligations for entities that are subject to the disclosure requirements of both the CFTC and the SEC because they are:
The rule allows RICs that are now required to register as CPOs due to changes to section 4.5 of the CFTC's regulations (see Practice Note, The Dodd-Frank Act: Expanded "Commodity Pool" Definition and CPO/CTA Rules: CPO Registration Exemptions Rescinded) to comply with substantially all of Part 4 of the CFTC's regulations, governing the operations and activities of CPOs and commodity trading advisors, by means of substituted compliance with the SEC's statutory and regulatory compliance regime for RICs. Additionally, the rule amends certain provisions of Part 4 of the CFTC's regulations that are applicable to all CPOs.
In February 2012, the CFTC amended section 4.5 of its regulations to modify the exclusion from the definition of "commodity pool operator" for those entities that are RICs. Because of those modifications, certain advisors of RICs must register as CPOs with the CFTC and adhere to its CPO rules. This rule was issued in response to comments that the CFTC was imposing duplicative, inconsistent and possibly conflicting disclosure and reporting requirements for these entities.
Additionally, the rule amends certain provisions of Part 4 of the CFTC's regulations that are applicable to all CPOs. Specifically, the final rule:
  • Allows operators of RICs to comply with sections 4.21, 4.22(a)-(b), 4.24, 4.25 and 4.26 of the CFTC's regulations by complying with applicable SEC RIC rules and certain other conditions.
  • Allows all CPOs to use third-party service providers to maintain their books and records as long as they file for an additional exemption through the National Futures Association (NFA) within 30 days following the publication of this final rule in the Federal Register. Eligible third party recordkeepers include:
    • a pool's administrator, distributor or custodian;
    • a bank; or
    • a registered broker or dealer acting in a similar capacity with respect to the pool.
  • Rescinds the signed acknowledgement requirement for all CPOs.
  • Extends the time period that CPOs and commodity trading advisors (CTAs) are permitted to update their disclosure documents under sections 4.26 and 4.36 of the CFTC's regulations from nine months to twelve months.
For more information, see the accompanying fact sheet and Q&A.
Also on August 13, 2013, the SEC's Division of Investment Management issued guidance which contains a clarification of certain disclosure, compliance and risk management obligations and legend requirements for RICs that invest in commodity interests. Specifically, the SEC:
  • Indicated that it would "expect" the RIC to disclose certain related account performance information of other funds and private accounts managed by the investment advisor that have similar investment objectives, policies and strategies.
  • Reiterated that RICs need to adequately, accurately and clearly disclose risks associated with investing in commodity interests using Forms N-1A and N-2.
  • Clarified that RICs should regularly assess the completeness of their derivative-related disclosures in light of actual operations.
  • Permits a RIC that invests in commodity interests to indicate in their mandatory legend that the CFTC has not approved or disapproved of the security, or passed upon the accuracy or adequacy of the disclosure in the prospectus.
  • Expects RICs and investment advisers to adopt compliance policies which address the accuracy of disclosures about derivative use.
  • Reminds RICs of the requirement to disclose the extent of the board's role in oversight of the fund (including derivative risk).