CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") Director Joshua B. Sterling highlighted registration and disclosure requirements for firms involved in commodity pool offerings, including pools that trade in digital assets and related derivatives.
Registration Requirements: Mr. Sterling explained that firms involved in establishing commodity pools should determine (i) whether the pool is an "investment company" subject to registration under the Investment Company Act of 1940 (the "ICA") or falls within an exemption from ICA registration, and (ii) whether the fund manager is subject to registration as a CPO with the CFTC, or may claim an exemption from CPO registration with respect to a particular pool. Mr. Sterling also emphasized that sales of interests in commodity pools are subject to the federal securities laws regardless of whether a pool is required to register as an investment company.
Disclosure Requirements: Mr. Sterling emphasized the importance of clear disclosures in commodity pool offering documents, including:
- providing "sufficient explanatory context" to any statement that a pool "invests" in futures contracts, since futures contracts have "no intrinsic worth and will expire after a set time";
- describing "precisely" how futures contracts provide investors with opportunities for gains or losses in light of a pool's trading strategy;
- providing line-item disclosures regarding fees and expenses in connection with commodity interest trading;
- providing the educational and professional background of the "principals" of a pool's CPO, as commodity interest trading is highly specialized; and
- disclosing material information on commodity brokers and trading counterparties, as the transactions are highly leveraged.
Commentary Mark Highman
Mr. Sterling's comments emphasize the need to address both SEC and CFTC registration requirements when establishing a new pool, and to provide clear and relevant disclosures in pool offering documents. While this is true of all commodity pools, special care is necessary where a fund intends to trade novel assets, or derivatives referencing those assets, that have unique risks that need to be explained to investors. Firms that fail to do so are at risk of violating the anti-fraud provisions of both the Commodity Exchange Act and the federal securities laws.
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