Tag Archives: managed futures mutual funds

CFTC Rescinds 4.13(a)(4) CPO Registration Exemption

Increases Other Compliance Obligations for CPOs and CTAs 

The CFTC recently adopted final rules amending regulations applicable to both CPOs and CTAs. The CFTC also proposed rules with respect to Regulation 4.5 that would require managers to managed futures mutual funds to register as CPOs. Some of the other changes included:

  • CPOs subject to “lite-touch” regulation under the 4.7 exemption must now provide annual audited returns to investors in their funds
  • Changes the 4.5 exemption from CPO registration for managers to managed futures mutual funds
  • Requires CTAs and CPOs who file exemptions under 4.5, 4.13 and 4.14 to reconfirm the exemption on a yearly basis
  • Adds new Regulation 4.27 requiring CTAs and CPOs to file Form PFForm CPO-PQR and From CTA-PR
  • Requires CTAs and CPOs to provide investors with new disclosures regarding swap transactions, if applicable

Additionally, the CFTC has proposed regulations with respect to harmonizing CFTC regulations and SEC regulations with respect to managed futures mutual funds.  We will be providing additional information on these proposals in the coming days and weeks.

The full CFTC notice can be found here.

The final CFTC regulations can be found here: CPO & CTA Compliance Final Rules

Fact sheet: CTA & CPO Compliance Fact Sheet

Proposed Regulations for Managed Futures Mutual Funds: Proposed CPO Registration Requirement for Mutual Fund Managers

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Cole-Frieman & Mallon LLP provides legal services to the managed futures industry.  Bart Mallon can be reached directly at 415-868-5345.

CFTC May Consider Vote on CPO Registration for Mutual Fund Managers

Three days ago, reports came out that the CFTC could be putting to a private vote the requirement that managed futures mutual funds be subject to marketing and registration rules when they use derivatives tied to commodities, which include commodity futures, options and swaps.  According to individuals who spoke on anonymity, the proposed regulation has been circulated for a vote by the CFTC’s five commissioners.  The commissioners could end up voting on the proposed regulation or deciding to hold a public vote.  If the proposal passes as adopted, managers to managed futures mutual funds would be required to register as commodity pool operators (CPOs) with the CFTC.

Background on CFTC Rule 4.5

As previously discussed in an earlier article on CFTC Rule 4.5, the issue of requiring mutual funds to register with the CFTC has been on the Commission’s radar for a long time.  In part because of pressure from the NFA, the CFTC proposed changes to Rule 4.5 in February of 2011 which would require CPO registration for most managers to managed futures mutual funds. While the current rule exempts managers from the registration requirements, prior to 2003 mutual fund managers were required to register as CPOs unless they:

  1. restricted their commodities and futures marketing activity,
  2. limited commodity futures or options activity to bona fide hedging transactions, and
  3. limited the aggregate futures margins and/or options premiums for non-hedging positions to 5% of the liquidating value of the entity’s portfolio (after taking into account unrealized profits and losses).

When the CFTC amended Rule 4.5 in 2003, it eliminated the trading and marketing restrictions and as a result managed futures mutual funds currently market participation in their funds as managed futures funds and have more than 5% direct exposure to managed futures for speculative purposes.  The February proposal seeks to reinstate the pre-2003 language in Rule 4.5.

Wholly-Owned Subsidiaries

It is important to note that the 5% limit in the proposed Rule 4.5 would apply to the entity filing for the Rule 4.5 exemption, not subsidiaries. Managed futures mutual funds are currently structured so that the managed futures investments are made through wholly-owned subsidiaries.  Wholly-owned subsidiaries would not qualify for the 4.5 exemption unless each subsidiary independently met all the requirements set forth in the proposed amendment. Therefore, mutual funds (i) with an investment objective to provide exposure to physical commodities as an asset class and (ii) that do so by investing in commodity futures, options, and swaps via wholly-owned subsidiaries, must make sure that those subsidiaries qualify for Rule 4.5 as well.

Conclusion

If the CFTC approves the proposed regulation, it would subject many mutual funds to CFTC registration and oversight by the NFA.

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Cole-Frieman & Mallon LLP provides advice to managers in the managed futures industry.  The firm also has a robust alternative mutual fund practice led by Aisha Hunt.  Bart Mallon can be reached directly at 415-868-5345.  Aisha Hunt can be reached directly at 415-762-2854.