CFTC Adopts Final Harmonization Rules For Registered Investment Companies Dually Registered As Commodity Pool Operators


Eighteen months after amending CFTC Regulation 4.5 to narrow the registered investment company (RIC) exclusion from the definition of commodity pool operator (CPO) and issuing a companion release proposing to amend certain provisions of Part 4 of its regulations to apply to RICs, on August 13, 2013, the Commodity Futures Trading Commission (CFTC) adopted final rules delineating the harmonization of compliance obligations for RICs that are also required to register as CPOs.

Rule 4.5, as amended, modified the exclusion from the definition of CPO for RICs registered as such with the Securities and Exchange Commission (SEC) pursuant to the Investment Company Act of 1940, as amended. The amendments limited the exclusion to only those RICs that do not exceed certain de minimus trading levels and who do not market themselves as a commodity pool or other commodity investment. CFTC’s rule amendments were not without opposition.1 However, all SEC-registered CPOs that did not meet this narrowed exclusion became subject to registration with the CFTC as of December 31, 2012.

After taking into consideration the substantial comments received from a wide range of entities, including trade and public interest organizations and currently registered CPOs and RICs, the CFTC determined that certain of its disclosure, reporting and recordkeeping proposals may impose undue burdens on CPOs required to dually register with the SEC and the CFTC, or that such requirements are similar to, or conflict with, one another. Accordingly, the CFTC has adopted a “substituted compliance regime” for so-called dually registered RICs, under which the CFTC will accept compliance by such CPOs with the disclosure, reporting and recordkeeping regime required by the SEC as substituted compliance with Part 4 of the CFTC’s regulations. If, however, any such CPO of a RIC is not in compliance with SEC-imposed requirements, it will also be deemed to be in violation of its obligations under Part 4 of the CFTC’s regulations and subject to enforcement action by the CFTC.

Notably, the substituted compliance regime allows for the following:

  • dually registered RICs will be deemed to be in compliance with disclosure, reporting and recordkeeping requirements of §§ 4.21, 4.22(a) and (b), 4.24, 4.25, and 4.26 if they satisfy all SEC rules applicable to RICs as well as certain other conditions
  • dually registered RICs will be permitted to use third-party service providers to maintain their books and records
  • rescission of the signed acknowledgement requirement of § 4.21(b) for dually registered RICs (mandated that prior to accepting or receiving any funds, a CPO must first receive from the prospective participant a signed acknowledgment indicating receipt of a Disclosure Document), and
  • dually registered RICs will be permitted to use a Disclosure Document for up to 12 months.

Dually registered RICs may comply with CFTC Part 4 requirements applicable to all CPOs or elect to comply through substituted compliance, subject to the conditions specified in amended §4.12(c). A dually registered RIC must meet all such conditions when an updated prospectus is next filed with the SEC. When a dually registered RIC chooses to rely on substituted compliance, it will be subject to the following requirements:

  • to file notice of its use of the substituted compliance regime outlined in § 4.12 with the National Futures Association (NFA)
  • to disclose the performance of all accounts and pools that are managed by the CPO and that have investment objectives, policies, and strategies substantially similar to those of the offered pool, if the offered pool has less than three years operating history
  • to file financial statements with the NFA that it prepares pursuant to SEC requirements, and
  • to file a notice with NFA of use or intent to use third-party service providers for recordkeeping purposes.

Dually registered RICs must also comply with amended § 4.27 reporting requirements 60 days following the effectiveness of this final rule.

Pepper Points

(1) It appears that the CFTC has taken a reasonably measured and balanced approach to the harmonization process and has recognized the efficacy of the SEC’s current disclosure regime. The harmonized rules are not likely to add substantial additional burden on registered investment companies that are now registered as commodity pool operators beyond requiring routine notice filings.

(2) Dually registered RICs that rely on substituted compliance should make sure that they are fully compliant with all SEC disclosure, reporting and recordkeeping requirements, as failure to meet all SEC obligations would appear to result in dual enforcement actions by both the SEC and the CFTC.

(3) In contrast to the SEC’s performance history requirements, which does not mandate the disclosure of performance of other funds and accounts, a dually registered RIC with less than three years of performance history will now have to disclose the performance of all substantially similar accounts and pools that are managed by the CPO of an offered pool. RICs should expect that this performance disclosure will be scrutinized by the SEC in any review of the RIC’s registration statement.


1 See Pepper Hamilton Client Alert, "U.S. District Court Rebuffs ICI Challenge to CFTC Rule 4.5 Amendments," available at

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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