Recently, the Commodity Futures Trading Commission (“CFTC”) adopted final rules (the “Harmonization Rules”) amending the compliance requirements for operators of investment companies (“RICs”) registered with the Securities and Exchange Commissions (“SEC”), who are also subject to registration as commodity pool operators (“CPOs”) with the CFTC. These rule changes follow the CFTC’s adoption in 2012 of amendments to CFTC Regulation 4.5 that require operators of RICs to either limit their use of commodity interests (such as speculative trading in futures, commodity options, swaps and other commodity interests) to statutorily defined “de minimis” amounts, or register as a CPO with the CFTC. The result of the 2012 rule change was that several such operators were subject to registration with both regulatory bodies, each of whom have their own rules governing compliance matters. As such, the goal of these Harmonization Rules is to harmonize the compliance requirements between the SEC and the CFTC for operators subject to dual registration. The Harmonization Rules basically state that the CFTC will (subject to notice filing with the CFTC and other specified conditions) accept compliance with the disclosure, reporting and recordkeeping regimes administered by the SEC as “substituted” compliance for substantially all of Part 4 of the CFTC’s regulations. Some of the more notable “substituted” compliance matters include:
- Delivery of disclosure documents to each prospective participant in any pool that a CPO operates;
- Distribution of account statements to each participant in any pool that a CPO operates;
- Provision information that must appear in a CPO’s disclosure documents, including performance disclosures; and
- The use, amendment and filing of disclosure documents.
Additionally, the Harmonization Rules provide relief for all CPOs and Commodity Trading Advisors (“CTAs”) (not just those who are dually registered) in allowing CPOs and CTAs to utilize a third-party service provider to maintain their books and records – so long as the CPOs and/or CTAs file a notice with the CFTC and the records remain readily accessible.
While the Harmonization Rules will certainly be a relief for dually registered operators, it is important to bear in mind that failure to adhere to SEC regulations will be considered a violation by not only the SEC, but the CFTC as well. As such, it is vital that operators in this position understand and strictly adhere with all relevant regulations, and ensure that their firms remain compliant.
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