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CFTC Proposes Softer Rules for CPO Annual Reports
Practical Law Legal Update w-002-9628 (Approx. 4 pages)
CFTC Proposes Softer Rules for CPO Annual Reports
by Practical Law Finance
| Published on 11 Aug 2016 • USA (National/Federal) |
The CFTC has proposed several amendments that would ease requirements for audited annual reports of commodity pool operators (CPOs).
On August 5, 2016, the CFTC proposed several amendments to Part 4 of CFTC regulations governing the operation and reporting for commodity pools by commodity pool operators (CPOs).
Under Regulation 4.22, registered CPOs are required to provide a CPO annual report to both pool participants and the National Futures Association (NFA). The CPO annual report must be provided within 90 calendar days of the pool's fiscal year-end and must be audited by an independent accountant and prepared in accordance with generally accepted accounting principles (GAAP), subject to certain exceptions.
The proposed amendments would codify past CFTC practices of granting exemptions and exceptions related to the Regulation 4.22 audited CPO annual reports on a case-by-case basis. The proposed amendments to Part 4 include revisions that would:
- Expand the acceptance of non-US accounting principles in CPO annual reports for non-US pools.
- Allow certain CPOs to submit unaudited CPO annual reports.
- Limit exceptions for audited CPO annual reports to pools that have ceased operations.
Proposed Amendment to Regulation 4.22(d)(2) to Allow Use of Alternative Accounting Methods in CPO Annual reports
Under the current Regulation 4.22(d), financial information included within the CPO annual report must be calculated and presented under GAAP. Regulation 4.22(d)(2) provides an exception which permits the use of International Financial Reporting Standards (IFRS) in place of GAAP. Currently, CPOs seeking to utilize the IFRS exception must file with the NFA a signed representation stating that:
- The pool is organized under the laws of a foreign jurisdiction.
- The CPO annual report will contain a schedule of investments (condensed unless IFRS calls for a full schedule).
- The use of IFRS in preparing the CPO annual report is consistent with disclosures made to pool participants.
- Special allocations of ownership equity will be reported in accordance with Regulation 4.22(e)
- In situations where the IFRS requires consolidated financial statements for the pool, all applicable US GAAP disclosures will be complied with.
- Currently, the CTFC grants relief on a case-by-case basis allowing CPOs that operate pools outside of the US to use alternative accounting standards in certain jurisdictions where those pools operate. CPOs availing themselves to such relief must continually apply for relief.
- The proposed amendments to Regulation 4.22(d)(2) would grant permanent relief to these CPOs, permitting them to use accounting principles, standards, or practices followed in the UK, Ireland, Luxembourg, and Canada for pools established in these jurisdictions, as applicable. CPOs that choose to use these alternative accounting methods would need to file notice with the NFA and follow the same requirements for the IFRS exceptions, above.
Proposed Amendment to Regulation 4.22(g)(2) to Allow Unaudited CPO Annual Reports in Certain Situations
In connection with the duties of a CPO at fiscal year-end, Regulation 4.22(c) and Regulation 4.22(d) require that the CPO annual report be distributed to pool participants within 90 days of the pool's fiscal year-end and be audited by an independent accountant, respectively.
Under Regulation 4.22(g), pools formed two months before their elected fiscal year-end must submit an audited CPO annual report covering those two months. In these situations, pools could potentially incur a considerable expense for the audit relative to the size of the pool in its infancy. The CFTC has historically issued exemptions to the audited CPO annual report requirement in these situations
The proposed amendment to Regulation 4.22(g)(2) would provide an exemption to the audited CPO annual report requirement for pools in their first fiscal year where the period from the formation of the pool to the pool's first fiscal year-end is a short amount of time. Pools claiming the proposed relief would need to meet the following criteria:
- The elapsed time between pool formation and the first fiscal year-end is three months or less.
- The pool has had no more than 15 participants from formation to the end of the first fiscal year-end.
- The total gross capital contributions received by the CPO for units of participation in the pool do not exceed $1,500,000 from the formation of the pool to the end of the first fiscal year-end.
In determining eligibility for relief, the following persons and their capital contributions would not be counted toward the threshold:
- The pool's CPO, commodity trading advisor (CTA), and any principal thereof.
- A child, sibling, or parent of the pool's CPO, CTA, and any principal thereof.
- The spouse of any of the participants in the above two categories.
- Any relative of the participants in the above three categories.
- Any entity that is wholly owned by one of more of the participants in the above four categories.
In order to obtain relief proposed in the amendment to Regulation 4.22(g)(2), a CPO would be required to obtain a written waiver of the right to receive the CPO annual report for that fiscal year from each pool participant prior to the day on which the CPO annual report would be due. (The written waivers would be retained in accordance with Regulation 4.23). Lastly, on or before the date on which the CPO annual report for the fiscal year is due, the CPO would be required to file a notice of claim with the NFA along with a certification that the CPO had received written waivers from all pool participants.
Finally, the CPO would be required to include a statement on the cover of its CPO annual report that provided information on whether the CPO annual report was audited or unaudited and the time period that the CPO annual report covered.
Proposed Amendment to Regulation 4.22(c)(7) to Exclude Pools That Have Ceased Operations from the Audited CPO Annual Report Requirement in Certain Circumstances
Regulation 4.22(c)(7) includes several exceptions to the CPO annual report requirement for pools that have ceased operations prior to, or at the end of, their fiscal year-end. In certain situations, an audited CPO annual report would not be required for pools that meet certain conditions.
Under the proposed amendment to Regulation 4.22(c)(7)(iii), audited CPO annual report relief would not be available to pools that had not previously distributed an audited CPO annual report to pool participants or submitted an audited CPO annual report to the NFA. The point of the amendment is to ensure that an audit is conducted at least once in the life of a pool. It is designed to capture pools that were formed but ceased operation before the end of their first twelve-month fiscal year.
Comment Period
The CFTC is requesting public comment on the proposed amendments generally, and specific comments on:
- What information is required to be included in the CPO annual report in accordance with US GAAP but would not be included in generally accepted accounting principles, standards, or practices in the UK, Ireland, Luxembourg, or Canada, and how such information, if any, should be separately reported in a CPO annual report.
- In relation to the amendment to Regulation 4.22(g)(2), whether the CFTC should adopt an additional amendment under which the CPO could claim relief from providing an audited CPO annual report in situations where the only pool participants are the CPO and one or more "insiders," regardless of the amount of capital contributed to the pool.
- Suggestions for additional proposed amendments that the CFTC should consider.
The CFTC invited written comments by mail, the CFTC website, or through the federal eRulemaking Portal. All comments must be received on or before September 6, 2016.