On August 13, the Commodity Futures Trading Commission
("CFTC") issued a release relating to the harmonization
of compliance obligations for registered investment companies
("RICs") required to register as commodity pool operators
("Registered CPOs"). The final rules (the
"Rules") became effective on August 22, with the
exception of amendments to certain CFTC rules pertaining to
recordkeeping, the 12-month use of the disclosure documents, and
the disclosure required of open-end RICs with less than three
years' operating history, all of which will become effective on
September 23.
Last year, the CFTC modified its Regulation 4.5 to exclude
advisers to RICs that invest a de minimis amount of assets in
commodity interests other than for bona fide hedging purposes from
the definition of "commodity pool operator"
("CPO"). An adviser that did not qualify for the
exemption would have been forced to register as a CPO, thus
subjecting the RIC to CPO disclosure, compliance, and financial
reporting obligations under applicable CFTC rules. Because the CFTC
rules imposed a number of regulations on RICs that were
inconsistent with existing Securities and Exchange Commission
("SEC") regulations, the CFTC also proposed at that time
rule amendments that were intended to address the
inconsistencies.
The Rules reflect the CFTC's decision to harmonize certain
CFTC and SEC regulations by adopting a substituted compliance
regime for Registered CPOs of RICs. This approach is premised upon
such entities' adherence to SEC disclosure, reporting, and
recordkeeping rules for RICs in satisfaction of, and in
substitution for, compliance with such rules in Part 4 of the CFTC
regulations. In order to adopt the substituted compliance approach,
a Registered CPO of a RIC must satisfy the following
requirements:
- The Registered CPO must file notice of its use of the substituted compliance regime with the National Futures Association ("NFA");
- The Registered CPO of a RIC with less than three years' operating history must disclose the performance of all accounts and pools that are managed by the CPO and that have investment objectives, policies, and strategies substantially similar to those of the offered pool;
- The Registered CPO must file with the NFA the financial statements that it prepares pursuant to its obligations to the SEC; and
- If the Registered CPO uses or intends to use third-party service providers for recordkeeping purposes, it will be required to file a notice of that fact with the NFA.
In adopting the Rules, the CFTC acknowledged that permitting
Registered CPOs to maintain books and records with third-party
providers would be consistent with market practice and SEC
requirements and would allow the Registered CPO to avail itself of
lower costs and increased record security.
In addition, the CFTC agreed with various commenters that
permitting the use of third-party recordkeeping services should
also be extended to all Registered CPOs, not just those that act
for RICs. In all cases, the Rules require timely access to a
Registered CPO's books and records, regardless of where they
are held and, if the Registered CPO decides to delegate its
recordkeeping responsibilities, the filing of a notice by the
Registered CPO with the NFA describing the delegated
recordkeeper.
The Rules also permit all Registered CPOs and commodity trading
advisors to use disclosure documents for up to 12 months from the
date of the document. For Registered CPOs of open-end RICs, the
CFTC determined that the applicable timeframes under the SEC RIC
rules would be deemed by the CFTC to satisfy the timing
requirements under applicable CFTC regulations. Similarly, the CFTC
agreed that existing securities law obligations imposed on RICs
regarding the correcting of material misstatements or omissions
would satisfy CFTC interim updating requirements for Registered
CPOs of RICs. The Rules further eliminate the need for a Registered
CPO of a RIC to file its disclosure documents with the NFA
according to the schedule prescribed in CFTC regulations, even
though the disclosures would still need to be made available to the
NFA to enable it to discharge its duty to monitor and examine CFTC
registrants during an examination. In addition to providing an
exemption for Registered CPOs of RICs from certain CFTC disclosure
requirements, the Rules also eliminate the requirement previously
imposed on all Registered CPOs to obtain a signed acknowledgement
from prospective pool participants affirming receipt of disclosure
documents.
Finally, the Rules provide relief to Registered CPOs of RICs from
the CFTC's requirement to send monthly statements to pool
participants, provided that (i) the RIC's current net asset
value per share is available to investors, (ii) the RIC furnishes
semi-annual and annual reports to investors, and (iii) the RIC
files annual reports with the SEC as required by the SEC.
A copy of the Rules may be accessed here.
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