CFTC Adopts “Substituted Compliance” Approach for Registered Investment Companies that Are Commodity Pools

In a dramatic change of course, the Commodity Futures Trading Commission (CFTC) adopted final rules that apply a “substituted compliance” approach for disclosure and compliance obligations of registered investment companies (RICs) that are also commodity pools. At the same time, the Division of Investment Management of the Securities and Exchange Commission (SEC) issued guidance to facilitate compliance with SEC and CFTC disclosure and reporting requirements by funds and their advisers that are subject to regulation by both agencies.

Last year, the CFTC modified its Rule 4.5 to exclude from the definition of a commodity pool operator (CPO) only those advisers of RICs that invest a de minimis amount of their assets in commodity interests other than for bona fide hedging purposes. An adviser that does not qualify for the exemption must register as a CPO, thus requiring the RIC to comply not only with existing SEC regulations but also with CPO disclosure, compliance and financial reporting obligations under CFTC rules. At the same time, the CFTC adopted the changes to Rule 4.5, it proposed rule amendments designed to “harmonize” the myriad of inconsistent regulations that would apply to RICs that are also commodity pools.

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