United States: CFTC Approves Final Rule Amendments To CPO Financial Report Regulations

Last Updated: December 9 2016
Article by Julian E. Hammar

On November 21, 2016, the U.S. Commodity Futures Trading Commission (CFTC) approved final rule amendments to its regulations that allow commodity pool operators (CPOs) to use certain additional alternative generally accepted accounting principles, practices or standards in preparing financial statements for non-U.S. commodity pools and that exempt commodity pools from the audit requirement for Annual Reports covering the "stub period," subject to conditions, and that further exempt audited financial reports for "insider" pools. The rules, which will become effective on December 27, 2016, are available here.

Alternative Accounting Standards for Non-U.S. Pools

Under the final rule amendments, a CPO will be permitted to use generally accepted accounting principles, practices or standards followed in the United Kingdom, Ireland, Luxembourg and Canada when preparing Audited Financial Reports, and, in an expansion from the rules as proposed, when preparing account statements and Form CPO-PQR reports, for commodity pools that are organized in those jurisdictions. These standards are in addition to International Financial Reporting Standards currently permitted under CFTC regulations in preparing financial statements for non-U.S. pools, and are permitted, in another modification from the proposal that only addressed distribution of Annual Reports under CFTC Reg. 4.22, in distribution of Annual Reports and account statements under CFTC Reg. 4.7 as well. CPOs intending to use one of the alternative accounting principles, practices or standards must file a notice containing certain representations with the National Futures Association (NFA) generally within 90 days of the end of the pool's first fiscal year.

"Stub Period" Relief from Audited Annual Report Requirement

In addition, the final rule amendments provide "stub period" relief from the audited Annual Report requirement where the pool's first fiscal year is short, subject to certain conditions. Specifically under the final rule amendments:

  • The pool's first fiscal year must be four months or less, measured from the date on which the CPO first received funds from a participant other than an "insider," as described below. Note that as proposed, the period was three months or less measured from the date of fund formation; the modification in the final rules thus provides more expansive relief.
  • The pool must have no more than 15 participants and no more than $3 million in gross capital contributions (increased from $1.5 million as proposed) throughout the stub period. For this purpose, "insiders" are excluded from the number of participants and $3 million cap on contributions.
  • The CPO must obtain, prior to the date when an audited Annual Report is required to be distributed, a waiver from each participant in the pool (other than the CPO, the pool's commodity trading advisor (CTA), any person controlling, controlled by, or under common control with the CPO or CTA, or any principal of the foregoing) of their right to timely receive an audited Annual Report for the pool's first fiscal year. The waiver must be substantially in the form specified in the regulations, and may be included in the pool's subscription agreement so long as it is on a separate page and is signed and dated separately by the participant.
  • The CPO must file a notice with NFA certifying that the CPO meets the conditions of the exemption and has obtained the required waivers from participants.
  • The stub period Annual Report must prominently disclose on the cover that it is unaudited in reliance upon the exemption.
  • The audited Annual Report for the pool's first full fiscal year of operation must cover the initial stub period in addition to the full fiscal year and disclose that it covers that period.

For purposes of the above requirements, an "insider" means:

  • The pool's CPO, its CTA, any person controlling, controlled by, or under common control with the CPO or CTA, and any principal of the foregoing;
  • A child, sibling, or parent of any of these participants;
  • The spouse of any participant described above;
  • Any relative of a participant specified above, their spouse or a relative of their spouse, who has the same principal residence as such participant; and
  • An entity that is wholly owned by one or more participants specified above.

Relief from Audited Annual Reports for Certain Pools

Under the final rule amendments, a CPO will not be required to distribute an audited Annual Report for a year in which a pool's participants are limited solely to one or more of the following:

  • the pool's CPO;
  • its CTA;
  • any person controlling, controlled by, or under common control with the CPO or CTA; or
  • any principal of the foregoing.

In order to rely upon this relief, the CPO must obtain written waivers from the participants of their right to receive an audited Annual Report for that fiscal year and keep those waivers as records under CFTC rules.

At Least One Audited Annual Report Required

Notwithstanding any of the relief provisions described above, a CPO will be required under the final rule amendments to distribute an audited Annual Report at least once during the life of a pool.

Case-by-Case Relief May Still Be Obtained

The final rule release notes that CPOs may continue to request relief from financial reporting requirements from the CFTC staff, although the CFTC intends that staff restrict the issuance of any such relief from the standards adopted in the final rules to exceptional circumstances involving unique situations.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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