As we reported in our January 31, 2011 post, the CFTC recently approved rule proposals that, if adopted, could affect certain mutual funds whose portfolios may buy and sell commodities. Under current CFTC rules, registered investment companies are generally excluded from the definition of "commodity pool operator." The full text of the rule proposal is now available.
The rules proposed on January 26 would change that exemption such that registered investment companies (RICs) with greater than "de minimus" investment in commodities be required to register with the CFTC as "commodity pool operators." Under the proposed rules, those RICs who fall into the "commodity pool operator" designation would be required register with the CFTC through the National Futures Association (NFA), become a member of the NFA, and comply with extensive disclosure and periodic reporting requirements about commities trading activities. In addition, key personnel must register with the NFA and comply with continuing education and certification requirements.
For years, RICs have been considered by the CFTC to be outside the definition of a commodity pool operator because of the extensive regulation of RICs under the Investment Company Act of 1940, and their oversight by the SEC. In September, the NFA petitioned the CFTC to reexamine the exemption for registered investment companies, alleging in their petition that the regulation of RICs under the 1940 Act does not provide adequate protection for investors when RICs are heavily invested in commodities. The NFA also maintains that entities currently falling under the commodity pool operator regulatory regime may take the form of RICs to avoid the extensive CFTC requirements.
The Dechert law firm has looked a that rule proposal in detail in a recent client memorandum, and describes the proposed rules' potential effect on registered investment companies and private funds. That memorandum is available at: http://www.dechert.com/library/FS_3-02-11-Proposal_to_Rescind_CFTC_Registration.pdf
The full text of the rule proposal is available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-2437a.pdf (Warning - large file)