NEW RULES WILL AFFECT ALL MONEY MANAGEMENT INDUSTRY PARTICIPANTS
On February 9th, the CFTC issued final amendments to Part 4 of its rules that will impose additional compliance obligations on nearly every category of money management industry participant, including:
- Investment advisers regulated by the Securities and Exchange Commission ("SEC");
- Mutual funds and exchange-traded funds registered under the Investment Company Act of 1940 (the "1940 Act");
- Hedge funds that are exempt from registration under the 1940 Act; and
- Commodity trading advisors (CTAs) and commodity pool operators (CPOs) subject to the exclusive jurisdiction of the CFTC, including CPOs of exchange-traded vehicles that invest in commodity derivatives ("Commodity ETVs").
SUMMARY OF THE AMENDMENTS AND THEIR EFFECT ON INDUSTRY PARTICIPANTS
There are six primary amendments, as summarized below. The amended rules will become effective 60 days after their publication in the Federal Register (which, as of the date of this posting, has not yet happened) with the exception of the new reporting requirements for CPOs and CTAs under CFTC Rule 4.27, which will become effective on July 2, 2012. Although, as noted in the following summaries, there are staggered compliance dates for these rule amendments.
1) MODIFICATION TO RULE 4.5 EXCLUSION FOR MUTUAL FUNDS
The amended rules modify the criteria that must be satisfied in order for a mutual fund's investment adviser to claim relief under CFTC Rule 4.5 from regulation and registration as a "commodity pool operator". Specifically, the amended rule will impose restrictions on the use of derivatives by a mutual fund for non-hedging purposes and marketing of the fund as a vehicle for investing in derivative.
In connection with this amendment, the CFTC has proposed a rule (the "Harmonization Proposal") that, if adopted, will harmonize certain compliance and disclosure obligations for mutual funds operated by a CPO that will be subject to registration requirements under the amended CFTC Rule 4.5.
Compliance Dates - The CFTC has proposed staggered compliance dates for registration and other compliance obligations.
- CPO registration will be required by the later of December 31, 2012 or 60 days after the effective date of the final rulemaking further defining the term "swap," as will be published by the CFTC in the Federal Register at a future date.
- Entities required to register due to the amendments to Rule 4.5 will be required to comply with the CFTC's recordkeeping, reporting, and disclosure requirements within 60 days from the effectiveness of the final rule implementing the Harmonization Proposal.
2) RESCISSION OF "SOPHISTICATED INVESTOR" EXEMPTION FOR HEDGE FUNDS
The amended rules rescind an exemption from CPO registration that is widely utilized by hedge fund industry participants. In particular, the CFTC has rescinded CFTC Rule 4.13(a)(4) for operators of pools that are offered only to individuals and entities that satisfy the qualified eligible person standard in CFTC Rule 4.7 or the accredited investors standard under the SEC's Regulation D. This exemption is often referred to as the "sophisticated person" exemption.
Of note, the CFTC has not eliminated the "de minimis" or "limited trading" exemption available to hedge funds under CFTC Rule 4.13(a)(3).
Compliance Dates - The rescission will take effect on December 31, 2012 for CPO's claiming an exemption under CFTC Rule 4.13(a)(4) or, for all other CPOs, 60 days after publication of the rescission of the sophisticated investor exemption in the Federal Register.
3) NEW REPORTING REQUIREMENTS FOR CTAs and CPOs, INCLUDING COMMODITY ETVs
Amended CFTC Rule 4.27 will require CTAs and CPOs that are pooled investment vehicles other than 1940 Act registered investment companies or hedge funds, including Commodity ETVs, to report information and data to the CFTC on Forms CTA-PR and CPO-PQR, respectively. The CFTC indicated that its intention in adopting these reporting requirements was to make data collection requirements that apply to CPOs and CTAs subject to their exclusive regulatory jurisdiction consistent with data collection required under the Dodd-Frank for entities registered with both the SEC and the CFTC.
Compliance Dates - Compliance dates, as summarized in the rule's adopting release, vary by size of assets under management:
- September 15, 2012 for a CPO with $5 billion or more of assets under management attributable to commodity pools as of the last day of the firscal quarter most recently completed prior to September 15, 2012; and
- December 15, 2012 for all other registered CPOs and CTAs.
4) NEW SWAP DISCLOSURE REQUIREMENTS FOR CPOs AND CTAs
The final rule amendments mandate new risk disclosures for CPOs and CTAs regarding swap transactions.
Compliance Date - These additional risk disclosure statements will be required for all new disclosure documents and all updates filed after the effective date of this final rulemaking.
5) ANNUAL FILING OF EXEMPTIVE RELIEF NOTICES BY ALL INDUSTRY PARTICIPANTS
The amendments to Part 4 require annual notice filings to claim exemptive relief under any number of CFTC rules. These notice filings will be based upon a calendar-year end filing date, rather than the anniversary of the original filing.
Compliance Date - December 31, 2012
6) RESCISSION OF CFTC RULE 4.7(b)(3) RELIEF FROM CERTIFICATION REQUIREMENT
The rule amendments will rescind relief from the certification requirement for annual reports provided to operators of certain pools offered only to qualified eligible persons under CFTC Rule 4.7(b)(3).
Compliance Date - December 31, 2012
MORE TO COME, SO STAY TUNED
In the coming days, TSR will provide an in-depth, practical analysis of each of these new rule amendments and their effect on different industry participants. So, stay tuned - there is more to come.
Good day. Good summary? TSR