NFA Petitions for Rulemaking to Amend Regulation Excluding Registered Investment Companies from CFTC Regulation

The National Futures Association ("NFA")1 has petitioned the U.S. Commodity Futures Trading Commission ("CFTC") to amend CFTC Regulation 4.5, which currently excludes (among others) registered investment companies ("RICs") from the "commodity pool operator" ("CPO") definition under the U.S. Commodity Exchange Act, as amended ("CEA").2 The NFA has requested that the CFTC place limitations on the blanket exclusion, thereby requiring RICs with greater than de minimus investments in commodities to register and be regulated as CPOs. Limitations similar to those the NFA has requested were in place prior to 2003. The NFA considers these requested changes necessary to protect investors in RICs that provide meaningful exposure to the commodity markets.

Background on CPO Registration and Regulation

A CPO is a person that sponsors, solicits participation in, or operates a collective investment vehicle ("pool") that trades exchange-traded futures contracts or options thereon ("commodity interests").3 Unless excluded from the CPO definition or exempted from some or all of the CPO regulatory requirements, a CPO must (among other things): (1) register with the CFTC through the NFA; (2) become a member of the NFA; (3) include specified disclosures (regarding risks, conflicts, fees and costs, and performance) in its pool offering documentation; (4) comply with certain advertising and promotional material requirements; (5) distribute periodic account statements and reports; (6) distribute audited financial reports; and (7) maintain, retain, and make accessible certain books and records.4 In addition, natural person associates of the CPO and their supervisors must register with the NFA and satisfy certain proficiency requirements that include taking and passing the National Commodity Futures Examination, known as the "Series 3 Exam".5

Available CPO Exemptions and Exclusions

Several exemptions from certain of the CPO registration and regulation requirements are currently available, including (among others) where investors in a privately offered pool are deemed not in need of regulatory protection due to: (1) their financial or investment sophistication or regulatory status;6 (2) the relatively small size of the pool;7 and/or (3) the limited amount of commodity interest trading in the pool.8 A RIC that would otherwise constitute a pool is currently excluded from the definition of CPO (rather than exempt from CPO registration and regulation) because the CFTC has considered the extensive operational regulation of such entities by the U.S. Securities and Exchange Commission ("SEC") under the U.S. Investment Company Act of 1940, as amended ("1940 Act"), to afford sufficient investor protection without additional regulation by the CFTC.9

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