All Advisers to Registered Investment Companies Need to Evaluate Their Exposure to CFTC Regulation After Recent Rule Amendment


On February 9, 2012, the Commodity Futures Trading Commission adopted final amendments to its Part 4 Rules, which set out compliance obligations for commodity pool operators (CPOs) and commodity trading advisers (CTAs) and which create certain exemptions from CPO and CTA registration. Among other changes, the CFTC revised the CPO registration exemption under Rule 4.5 for registered investment companies (funds). As a result, advisers to all mutual funds, closed-end funds and exchange-traded funds registered under the Investment Company Act of 1940 (1940 Act) must evaluate their funds’ portfolios, investment strategies and marketing efforts to determine whether they will be subject to CPO or CTA registration and associated CFTC regulations.

Rule 4.5 Amendment. CFTC Rule 4.5 formerly provided a blanket exemption from CFTC registration for registered funds and their advisers. Amended Rule 4.5 is a step back to the rule as it existed before 2003, with certain modifications. If a registered fund adviser trades more than a de minimis amount of futures contracts, options on futures or swaps (Derivatives), or markets a fund as a commodity pool, the adviser will now be required to register as a CPO. Sub-advisers to such a registered fund may also need to register as CTAs. Advisers who claim the Rule 4.5 exemption must file a notice of the claim with the National Futures Association (NFA) and renew it annually thereafter.

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