Tag Archives: cpo annual audit

CFTC Notice to CPOs re: Annual Reporting Requirement

As we discussed in our post on NFA annual compliance obligations, commodity pool operators will need to submit annual audited reports to the NFA by March 31 of this year.  This requirement applies generally to all CPOs unless the CPO requests exemptive relief from the annual audit requirement.

The CFTC has provided the following notice to remind CPOs about this annual requirement and to also provide some resources to managers regarding the technical aspects of the audit requirement.  The CFTC is recommending that managers provide their audit firms with the notice below so the firm can appropriate prepare the audited finacial statements.

The full notice is reprinted in full below.


U.S. Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5430
Facsimile: (202) 418-5536

February 2, 2011

To: All Commodity Pool Operators
Attention: Chief Financial Officer
Subject: Annual Reporting for Commodity Pools

The Division of Clearing and Intermediary Oversight (“DCIO” or “Division”) of the Commodity Futures Trading Commission (“CFTC” or “Commission”) is issuing this letter to assist commodity pool operators (“CPOs”) with the preparation and filing of commodity pool annual financial reports required under the Commodity Exchange Act (“Act”) and Commission regulations.1  This letter highlights current regulatory changes affecting CPOs with respect to financial filings and provides reminders of regulatory requirements in response to common deficiencies observed in prior years’ annual reports.  CPOs, including those that operate in non-U.S. jurisdictions, are encouraged to provide this letter to their public accountants and others assisting in the preparation of commodity pool annual financial statements.

The Division has issued similar guidance letters in prior years, which are available at the Commission’s website.2  Those letters should be consulted as they contain information relevant for many commodity pools, including the following topics:

In addition, CFTC interpretations and other staff letters that provide written guidance concerning the Act and the Commission’s regulations are available on the Commission’s website.  In particular, an illustrative example regarding Regulation 4.22(e)(2) is available in CFTC Interpretative Letter 94-3 (http://www.cftc.gov/tm/tm94-03.htm), Special Allocations of Investment Partnership Equity.

I. Recent Regulatory Activity

The CFTC issued final forex rules, which became effective on October 18, 2010.   Any firm acting as a counterparty to certain off-exchange forex transactions involving retail persons is required to register as a Retail Foreign Exchange Dealer. In addition, any individual acting as a forex solicitor, account manager and/or pool operator is required to register with the Commission as an Introducing Broker, Commodity Trading Advisor (CTA) or CPO, as appropriate, and to become a member of the National Futures Association (NFA).

NFA also adopted compliance rules applicable to CPOs as follows:

  • Rule 2-45 prohibits a CPO from permitting a commodity pool to use any means to make a direct or indirect loan or advance of pool assets to the CPO or any person or entity affiliated with the CPO.
  • Rule 2-46 requires each CPO that is a member of NFA to file, on a quarterly basis, with NFA, the following information for each pool the CPO operates that is subject to a reporting requirement under Regulation 4.22 (which includes exempt pools under Commission Regulation 4.7):
    • the identity of the pool’s administrator, carry broker(s), trading manager(s) and custodian(s);
    • a statement of changes in net asset value for the quarterly reporting period;
    • monthly performance for the three months comprising the quarterly reporting period; and
    • a schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.

Such information must be filed with NFA within 45 days of the end of the quarterly reporting period, and must be filed using NFA Easyfile electronic filing system.

NFA also updated the Self Examination Checklist for CPOs and CTAs as of September 2010. NFA Compliance Rule 2-9 (Supervision) requires members to review their operations on a yearly basis using the NFA self-examination checklist

II. Filing Deadlines and Procedures for Commodity Pool Annual Reports

Commission regulations establish the dates by which commodity pool annual reports must be provided to pool participants and received by the NFA.

Specifically, Commission regulations provide that:

  • Commodity pool annual reports must be distributed to pool participants and filed with NFA within 90 calendar days of the pool’s fiscal year end.  The filing date for annual reports with a year end of December 31, 2010 is March 31, 2011.  Copies of the annual reports must be filed with the NFA.  A CPO should not file copies of the annual reports with the Commission.
  • CPOs must submit annual reports to NFA electronically in accordance with NFA’s EasyFile electronic filing system (http://www.nfa.futures.org/NFA-electronic-filings/easyFile-Pool-filers.HTML) and procedures.
  • An annual report may be distributed in hardcopy or electronically to pool participants.  The CPO, however, must obtain a participant’s prior consent to distribute an annual report in electronic format.
  • Applications for an extension of time to file an annual report must be submitted to NFA prior to the annual report due date and must include the information required by Regulation 4.22(f)(1).  Any request for an extension of time that exceeds 90 days from the original due date must be submitted to the Commission, and a copy filed with NFA.  The Commission generally does not grant extensions that would exceed 90 days from the original due date.
  • CPOs of commodity pools that invest in other collective investment vehicles may obtain an “automatic” 90-day extension of the distribution and filing due date by submitting the information specified by Regulation 4.22(f)(2) to NFA prior to the original due date.  In subsequent years, the CPO will be presumed to operate the pool as a fund of funds and continue to qualify for the automatic extension.  However, the CPO is obligated to inform the NFA if those circumstances change and to begin filing within the standard 90-day time frame.  In addition, this extension of time has been made available to Regulation 4.7 exempt pools, even if the report is not audited by a certified public accountant.
  • Draft financial statements.  Some CPOs have filed incomplete, or “draft,” unaudited financial statements for pools exempt under Regulation 4.7 to meet the due dates for such filings.  CPOs are reminded that although Regulation 4.7 provides exemption from certain requirements, including the requirement that financial statements be subject to an audit by a certified public accountant, annual reports filed with NFA and distributed to pool participants must include all required information and be in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) or, in some instances, International Financial Reporting Standards (“IFRS”) to be considered timely filed.  Draft unaudited financial statements do not satisfy the filing requirements.

III. Master/Feeder and Fund of Funds

Master/Feeder Structures. FASB ASC 946-205-45-6 permits nonpublic feeder pools either to follow the disclosure and reporting provisions of FASB ASC 946-210, or to present a complete set of master financial statements with each feeder financial statement.

Fund of Funds. Year end  pool financial statements must disclose specific income and fee information for investee pools as specified in Regulation 4.22(c)(5).  CPOs must disclose amounts of income and fees associated with investments in investment partnerships that exceed five percent of the commodity pool’s net assets.  Illustrative disclosures are in Attachment B to this letter.

If a commodity pool’s annual financial statements are found deficient with respect to compliance with GAAP, the CPO may be required to revise the commodity pool’s financial statements, distribute the revised statements to participants, and re-file the statements with NFA.

IV. Requests for Limited Relief from U.S. GAAP Compliance for Certain Offshore Commodity Pools

Regulation 4.22(d)(2), applicable to year end  annual reports,  permits CPOs that operate commodity pools organized under the laws of a non-U.S. jurisdiction to prepare financial statements for such pools using IFRS, provided that:

  • The use of IFRS does not conflict with any representations made in the pool’s offering memorandum or other operative document;
  • The IFRS financial statements contain a condensed schedule of investments as required by U.S. GAAP (FASB ASC 946-210-50), or, if required, a full schedule of investments;
  • The IFRS financial statements report any special allocations of partnership equity in accordance with Commission Regulation 4.22(e)(2); and
  • If IFRS would require that the pool consolidate its financial statements with another entity, such as a feeder fund consolidating with its master fund, all applicable disclosures required by U.S. GAAP for the feeder fund must be presented with the reporting pool’s consolidated financial statements.

To claim the relief to use IFRS accounting standards, the CPO must file a notice with NFA within 90 days after the end of the pool’s fiscal year.  Furthermore, Regulations 4.22(a)(5) and 4.7(b)(2) permit a CPO to present a pool’s periodic account statements and other disclosure documents on the same basis as that of its annual report.

In addition, Division staff has, on a case-by-case basis, provided limited relief to CPOs that operate offshore pools by allowing such commodity pools to prepare and to present their financial statements in accordance with another comprehensive basis of accounting other than IFRS, such as United Kingdom or Irish accounting standards, instead of U.S. GAAP.  In each case, the Division’s relief to use accounting standards other than U.S. GAAP was conditioned upon the offshore pool following the additional elements now required by Regulation 4.22(d)(2)(i).

CPOs seeking to prepare and present their offshore pools’ financial statements on another comprehensive basis of accounting other than IFRS may request relief from the U.S. GAAP requirement by submitting their requests, enumerating compliance with each of the elements specified in Regulation 4.22(d)(2), to the undersigned at the address shown on this letterhead.  If you have any further questions, contact Ronald Carletta, Branch Chief, or Al Goll, Auditor, at the phone numbers or addresses listed in Attachment A.

V. Reports of Liquidating Pools

Commission Regulation 4.22(c)(7) provides for the filing and distribution of a final annual report within 90 days of a pool’s permanent cessation of trading.  Alternatively, the CPO of a liquidating pool may provide the following information within 90 days of the permanent cessation of trading in lieu of an otherwise required final annual report:

  • Statements of Operations and Changes in Net Assets for the relevant period as contained in the regulation; and,
  • An explanation of the winding down of the pool’s operations with written disclosure that all interests in, and assets of, the pool have been redeemed, distributed, or transferred on behalf of participants; or
  • In the event that all interests in, and assets of, the pool have not been distributed, redeemed, or transferred to participants by the time the final report is issued, the CPO must disclose the value of assets remaining to be distributed and an approximate timeframe for when the CPO expects distribution to occur.  If the CPO is unable to complete distribution within the estimated timeframe, the CPO must update the above detailed information to both NFA and the pool’s participants in writing.

If the CPO is not able to liquidate the pool’s assets within time to prepare, file, and distribute the final annual report as prescribed by the regulation, Commission Regulation 4.22(c)(7) requires the CPO to provide written notice to each participant and NFA, disclosing the following:

  • The value of assets remaining to be liquidated, the timeframe within which liquidation is expected to occur, any impediments to liquidation and any fees or expenses that will be charged to the pool prior to final distribution;
  • Which financial reports the CPO will continue to provide to participants from the time of the cessation of trading until the final annual report is distributed, and the frequency of such reports, pursuant to the pool’s constitutive documents; and
  • The timing of the final annual report.

Additionally, a CPO who is availing itself of the alternative filing in lieu of a final annual report may file unaudited information provided that the CPO obtains waivers from all participants and certifies the same to NFA when the final report is filed.

This relief also is applicable for pools that have claimed an exemption under Regulations 4.7 or 4.12.

VI. Accounting Resources

A. FASB Accounting Standards Codification

On July 1, 2009 the Financial Accounting Standards Board (FASB) launched the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental U.S. GAAP.  Although the FASB does not provide guidance in how specific requirements of GAAP are referred to in footnotes of financial statements, it notes that prior to the issuance of the Codification it was not unusual for footnotes to refer to specific standard numbers (for example, “as required by Statement 133”). Because these references are no longer the source of GAAP, such references will change. The FASB encourages the use of plain English to describe broad Topic references in the future. For example, to refer to the requirements of the Derivatives and Hedging Topic, they suggest a reference similar to “as required by the Derivatives and Hedging Topic of the FASB Accounting Standards Codification” and not use the specific numeric reference.

B. AICPA Commodities Audit Practice Aid

The AICPA Audit Practice Aid, Audits of Futures Commission Merchants, Introducing Brokers, and Commodity Pools Second Edition (product number 006639), is a useful tool for auditors and accountants of commodity entities.  It can be purchased at the AICPA website: http://www.CPA2biz.com.  CPOs and public accountants should also ensure that they monitor the Commission for recent developments which may not be reflected in the Audit Practice Aid.

C. AICPA Audit Risk Alert

The AICPA 2010 Audit Risk Alert (“ARA”) Financial Institutions Industry Developments, Including Depository and Lending Institutions and Brokers and Dealers in Securities contains sections on the commodities industry.  The ARA can be purchased at the AICPA website: http://www.CPA2biz.com.

D. FASB ASC Topic 820 (Formerly FAS 157, Fair Value Measurements)

Resources that may be helpful in understanding and applying FASB ASC Topic 820 are:

  • Measurements of Fair Value in Illiquid (or Less Liquid) Markets, issued by the AICPA Center for Audit Quality available at http://www.thecaq.org/resources/pdfs/MeasurementsIlliquidMarkets.pdf.
  • ASC 275-10-50, Risks and Uncertainties (AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, when auditing financial statements that contain complex fair value measurements);
  • ASC 820-10, Fair Value Measurements and Disclosure: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) –  (guidance that generally the net asset value reported by investee investment companies will continue to be an acceptable fair value indicator, with certain exceptions.)

E. AICPA Technical Guidance

Beginning at paragraph 8.23, the AICPA Audit and Accounting Guide, Investment Companies (May 1, 2010 edition) discusses organization and offering costs.  The AICPA issued technical guidance regarding accounting treatment of offering costs incurred by investment partnerships.3  This guidance:

  • Provides that investment partnerships that continually offer interests should defer offering costs incurred prior to commencement of operations and then amortize such costs, generally on straight-line basis, over the time period that it continually offers interests, up to a maximum of 12 months; and
  • Defines the phrase “continually offer interests.”

Registrants are reminded that organization costs are not affected by this guidance and must be charged to expense as incurred as required by FASB Codification Section 720-15-25-1 (AICPA SOP No. 98-5,

Reporting on the Costs of Start-up Activities.)  However, if appropriately disclosed to investors and potential investors, net asset value used to compute investment entrance and exit values, may be adjusted to amortize such costs differently, but generally not to exceed a period of 60 months.

IX. DCIO and NFA Contact Information

If a CPO, a public accountant, or other member of the public has any questions on the foregoing, please feel free to contact the DCIO staff or NFA staff listed in Attachment A to this letter.

Very truly yours,

Thomas J. Smith
Director and
Chief Accountant


1 The Act is codified at 7 U.S.C. paragraph 1 et seq.  The Commission’s regulations are found in Title 17 of the Code of Federal Regulations.  The Commission’s internet website, www.cftc.gov, provides links to both the Act and Commission regulations.

2 Prior letters from 1998 forward are available at the Commission’s website at http://www.cftc.gov/industryoversight/intermediaries/guidancecporeports.html.

3 See paragraph 8.33 of the AICPA Audit and Accounting Guide, Investment Companies (May 1, 2010 edition).



Regional Office Locations
Eastern Region
140 Broadway, 19th Floor
New York, NY 10005-1146

Ronald A. Carletta
Phone: (646)-746-9726
E-Mail: [email protected]

Al Goll
Phone: (646)-746-9723
E-Mail: [email protected]

Fax: (646)-746-9937

Location of CPO’s Principal Office
All states east of the Mississippi River, except Illinois, Indiana, Michigan, Ohio, and Wisconsin. Any location outside of the United States

Regional Office Locations
Central Region
525 West Monroe Street
Suite 1100
Chicago, IL 60661

Lisa M. Marlow
Phone: 312-596-0566
Fax: 312-596-0711
E-Mail: [email protected]

Location of CPO’s Principal Office
Illinois, Indiana, Michigan, Ohio, and Wisconsin

Regional Office Locations
Southwestern Region
Two Emanuel Cleaver II Boulevard, Suite 300
Kansas City, MO 64112

Kurt Harms
Phone: 816-960-7711
Fax: 816-960-7750
E-Mail: [email protected]

Location of CPO’s Principal Office
All states west of the Mississippi River

National Futures Association Contact Information

National Futures Association
300 South Riverside Plaza,
Suite 1800
Chicago, IL 60606

Tracy Hunt, Senior Manager, Compliance
Phone: 312-781-1284
Fax: 312-559-3453


Cole-Frieman & Mallon LLP provides comprehensive compliance and regulatory support for CTAs and CPOs.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Exemptive Relief from CPO Annual Audit Requirement

Managers starting a commodity fund at the end of the year may seek relief from annual audit requirement

CFTC Regulations 4.22(c) and (d) require that each registered CPO file a certified annual report with the CFTC and distribute copies to pool participants within 90 calendar days after the pool’s fiscal year (“audit requirement”).  The principal purpose of these requirements is to ensure that pool participants (fund investors) receive accurate, fair, and timely information on the overall trading performance and financial condition of the pool.  In a situation where a futures/commodities hedge fund was established only a few months or so before the end of the fiscal year, conducting a certified audit at the end of the fiscal year may not be desirable due to costs.  Relief may be available to managers in this situation.  The CPO can request an exemption from the audit requirement from the CFTC.

This article explains how a manager can go about requesting and obtaining an exemption.

Exemptions on a Case-by-Case Basis

The CFTC’s Division of Clearing and Intermediary Oversight (“DCIO”) will grant or deny exemptive relief from the audit requirement on a case-by-case basis, based on each individual CPO’s factual circumstances.  When we spoke informally to a staff member at DCIO, he said that there is no prescriptive list of conditions that will automatically result in exemptive relief but the main factors they seem to take into account are:

  1. the pool has only a handful of participants,
  2. the pool has only a nominal amount of capital contributed and a nominal amount of total net assets, and
  3. each of the participants in the pool has provided a written waiver consenting to the CPO’s exemption from the audit requirement.

In many cases where the exemption was granted, DCIO still placed the following conditions on the CPO:

  1. the CPO must distribute unaudited annual reports to each of the pool’s participants (these unaudited annual reports must otherwise comply with the provisions of CFTC Regulations 4.22(c) and (d)–reprinted in full below), and
  2. at the close of the following fiscal year, the CPO must file an audited annual report that includes the previous unaudited period.

Requesting the Exemption by Email or Letter

DCIO seems to grant exemptions from the audit requirement in response to email or letter  requests from CPOs.  In a 2009 DCIO letter granting exemptive relief, the CPO sent an email to DCIO requesting the exemption.  DCIO found that granting relief in the CPO’s situation was not contrary to Regulation 4.22 nor the public interest.  In particular, it focused on the following facts:

  • the pool began operations in September of 2008,
  • the pool only had 8 participants,
  • the pool had total capital contributions between $300,000-$400,000 as of December of 2008,
  • the pool’s net asset value was between $60,000-$70,000, and
  • the CPO attached waivers from the 8 participants indicating their consent to the exemption.

In a 2010 DCIO letter, DCIO granted the exemption after a CPO sent DCIO a letter requesting the relief and attaching the client waivers.  DCIO reviewed the facts and found granting the exemption was not contrary to Regulation 4.22 nor the public interest.

It is important to note that exemptive letters bind DCIO only with respect to the specific fact situation and persons addressed by the letter and third parties may not rely upon it.  For a full explanation of the CFTC’s exemptive letters, visit the CFTC’s discussion on this topic.  If you are interested in filing for such exemptive relief with respect to your commodity pool, please contact Mallon P.C.


Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides comprehensive hedge fund start up and regulatory support for commodity pool operators.  Bart Mallon, Esq. can be reached directly at 415-868-5345.