401(k) Plans—Potential Commodity Pool Issues in the United States

by Dechert LLP
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Under the rules of the Commodity Futures Trading Commission (“CFTC”), certain collective investment vehicles and other entities that, directly or indirectly, invest in “commodity interests”1 may be “commodity pools” whose sponsors or operators may be “commodity pool operators” (“CPOs”) subject to CFTC registration and regulation. “401(k)” and other similar retirement plans under which investments are made at the direction of participants and beneficiaries (“Participant-Directed Plans”) could, under certain circumstances, be considered to be commodity pools whose trustees, named or designated fiduciaries, or employer sponsors could be deemed to be CPOs subject to registration as such,2 unless (i) a notice of eligibility under CFTC Rule 4.5 is filed and then subsequently reaffirmed annually with the National Futures Association (“NFA”) claiming an exclusion from the definition of CPO and (ii) disclosure is made to plan participants and beneficiaries that such plan is being operated by a person claiming such exclusion. 

While a number of Participant-Directed Plans are the subject of exclusion notices that have been filed with the NFA by trustees, named or designated fiduciaries, or employers, many such plans – and indeed maybe the overwhelming majority of such plans – are not the subject of NFA exclusion filings. We have become aware that there recently has been increased concern by some that those in charge of Participant-Directed Plans should consider whether to file an NFA notice (and make related disclosure to plan participants and beneficiaries).

Dechert’s perspective regarding this matter is that, before any action is taken, the issue should be reviewed carefully and thoughtfully. In this regard, the specific facts and circumstances surrounding any particular Participant-Directed Plan may have a substantial impact on the applicable legal analysis. Further, there may be a variety of practical considerations that could factor into the approach that those in charge of Participant-Directed Plans may ultimately desire to take. 

Dechert would be pleased to discuss the manner in which we view these issues, and our extensive experience with how the issues are being analyzed and addressed in the market.

Footnotes

1. Commodity interests include: (i) exchange-traded futures contracts, options on futures contracts, and commodity options; (ii) security futures products; (iii) leveraged transactions; (iv) retail foreign currency contracts; (v) most exchange-traded and over-the-counter derivatives (such as swap, forward, and option contracts), other than swaps (including credit default swaps) referencing single securities or loans or baskets of nine or fewer securities (i.e., narrow-based security index), forward contracts on non-financial items, and certain limited currency swaps and forwards providing for physical delivery of two currencies; and (vi) indirect exposure to commodity interests through collective investment vehicles that themselves invest directly in commodity interests. 

2. A Participant-Directed Plan could, for example, indirectly invest in commodity interests by virtue of investing, at the direction of a participant or beneficiary, in a mutual fund or exchange-traded fund (or, possibly, in a hedge fund or private equity fund) which is itself a commodity pool. Other possibilities include more direct investment in commodity interests through a separately managed account made available as an investment option under the Participant-Directed Plan.

 

 

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