Legal Alert: CFTC Finalizes Harmonization Rules: Advisers to RICs Benefit From “Substituted Compliance” for Many Obligations


On August 13, 2013, the Commodity Futures Trading Commission (CFTC) adopted final rules to harmonize certain disclosure, reporting and recordkeeping obligations of commodity pool operators (CPOs) that are investment advisers to registered investment companies (RICs) with applicable federal securities laws. The approach taken by the CFTC in the Harmonization Rules provides welcome relief to CPOs of RICs that would otherwise be facing major changes to operations and substantial administrative burdens in order to comply with all of the CPO compliance obligations and requirements under applicable CFTC and National Futures Association (NFA) rules. Pursuant to the Harmonization Rules, the CFTC afforded relief to CPOs of RICs in the following key areas: (i) disclosure document requirements, (ii) reporting and (iii) recordkeeping. CPOs of RICs may elect to avail themselves of the relief afforded by the Harmonization Rule or comply with CPO obligations. If the former, a CPO of a RIC must claim the relief by filing a notice with the NFA. Notwithstanding the relief provided by the Harmonization Rules, advisers to RICs that are CPOs will still have to ramp-up quickly to comply with the requirements of the CPO regime that remain applicable.

1. Relief to CPOs Generally -

In addition to the changes benefiting CPOs of RICs, the Harmonization Rules provide that all CPOs may use third-party service providers to maintain their books and records so long as the CPOs file a notice with the CFTC and the records remainreadily accessible. According to the CFTC, this relief was issued in recognition of the technological advances in recordkeeping and the ability of market participants to make records readily available. In addition, (i) CPOs are no longer required to obtain a signed acknowledgment of receipt of a disclosure document from prospective investors in a commodity pool (e.g., prospective investors in a RIC that engages in commodity interest trading) and (ii) disclosure documents, going forward, will have to be updated by CPOs and CTAs every 12 months, rather than every nine months. Both of these changes are intended to reconcile CFTC requirements with other regulatory regimes to which many CPOs are subject. These changes have been well received by market participants because they significantly decrease operational and administrative burdens.

2. Relief Afforded to CPOs of RICs -

a. Background -

The Harmonization Rules were precipitated by changes made by the CFTC to the CPO and CTA regulatory regimes including, among other things, the significant narrowing of a previously broad exclusion from CPO registration under CFTC Rule 4.5 that many advisers to RICs relied upon. Because of the changes to CFTC Rule 4.5, many advisers to RICs that were previously excluded from registration and regulation as CPOs have been required to register as CPOs if the RICs that they advise engage in more than a de minimis level of speculative futures, options or swaps (i.e., commodity interest) trading.

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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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