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CFTC Agrees with Forum that Directors Should Not be Required to Register as CPOs

The Commodity Futures Trading Commission (CFTC) has issued a rule that requires most funds investing in commodity-related instruments to register with the CFTC.  As such, these funds will be subject to dual registration requirements by the CFTC and SEC.  Because the regulatory regimes of the CFTC and SEC directly conflict, the CFTC has also proposed amendments to its regulations regarding requirements applicable to registered investment companies that will be subject to registration with the CFTC. 

In its comment letter on the proposed rule, the Forum had been particularly concerned that the proposal could force fund directors to be designated as "commodity pool operators."  This would potentially expand director liability and subject directors to additional obligations, including passing a rigorous exam required of all individuals who purchase and sell commodities or futures products.  Citing the Forum's comment letter on this point, the CFTC concluded in the final rule release that the investment adviser, and not the fund directors, should be required to register, because requiring board members to register "would raise operational concerns for the registered investment company as it would result in piercing the limitation on liability for actions undertaken in the capacity of director."  (Adopting Release, p. 29.)

The Forum's comment letter, along with many letters from other industry participants, also argued that CFTC registration was unnecessary and would impose significant additional costs on registered funds without clearly providing investors with protections over and above those contained in the 1940 Act.  While the final rule release acknowledged that this point was made by both the Forum and the ICI, it merely asserted that "[t]he [CFTC] believes that because Congress empowered the [CFTC] to oversee the derivatives market, the [CFTC] is in the best position to oversee entities engaged in more than a limited amount of non-hedging derivatives trading."  (Adopting Release, p. 11).

The release also notes that "the final regulations will impose some significant costs on the industry," but that "proper regulation and oversight of market participants is necessary to promote fair and orderly derivatives markets."  (Adopting Release, p. 119).  Such cursory analysis prompted CFTC Commissioner Jill Sommers to write a dissent, in which she called it "unlikely" that the rules would "survive judicial scrutiny if challenged."