The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") granted relief to a commodity pool operator ("CPO") from certain reporting requirements under CFTC Rule 4.7. As part of a seeding arrangement, the CPO operates non-U.S. pools, in which its parent company invests from its general account assets. The funds managed by the CPO are organized under the laws of various European jurisdictions.
The DSIO agreed to provide relief from the following requirements:
Under CFTC Rule 4.7(b)(1), a CPO is required to include a certain disclaimer on the cover of an offering document or, alternately, above the signature block of each investor's subscription agreement. The CPO represented that this requirement would (i) be costly and time-consuming, as the CPO would need to receive approval from the pool's home country regulator to add such language, (ii) be unfamiliar to investors, and possibly cause confusion, placing the CPO at a competitive disadvantage, and (iii) be unlikely to enhance investor protection.
Under CFTC Rule 4.7(b)(2), a CPO must prepare and distribute account statements to investors on a quarterly basis, within 30 days from the end of a reporting period. The CPO claimed that (i) the pools' home country regulators already require substantially similar monthly reporting, (ii) the relevant regulatory frameworks do not support a quarterly certification process, and (iii) such reports may confuse investors, as European funds do not distribute statements in this manner.
CFTC Rule 4.7(b)(3) requires an audited annual report to be filed and distributed within 90 days of the end of a fiscal year. According to the CPO, (i) home country regulations already require similar annual report requirements, made available online to investors with optional mailing available via investor requests, (ii) it is uncertain whether the funds' distributors would be willing to facilitate such a large-scale distribution process, (iii) it would be disruptive to adjust the audit standard used by the CPO, and (iv) related disclosure requirements may be confusing to investors.
Commentary / Bob Zwirb
CPOs operating under CFTC Rule 4.7 are exempt from many of the disclosure, reporting and recordkeeping requirements otherwise applicable to fully regulated CPOs. That is why the Rule 4.7 scheme is referred to as a "light" regulatory regime and is well suited for pools comprised solely of "qualified eligible persons." But while many of the requirements do not apply here, some do, and those that do may overlap or conflict with those required by non-U.S. regulators. The relief sought illustrates some of the difficulties that can arise even under a lighter regulatory scheme when such cross-border overlap occurs, and even when only one U.S. investor is involved, as is the case here. In such an environment, the CFTC's conclusion that "the factors in favor of the . . . request for relief outweigh the incremental investor protections that Commission Regulation 4.7 would otherwise provide" states well the underlying reality in this case and reflects an admirable example of administrative restraint.
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