U.S. District Court Rebuffs ICI Challenge To CFTC Rule 4.5 Amendments

by Pepper Hamilton LLP

On December 12, 2012, the U.S. District Court for the District of Columbia released its decision in Investment Company Institute v. U.S. Commodity Futures Trading Commission, rebuffing the Investment Company Institute (ICI)’s and U.S. Chamber of Commerce (Chamber)’s efforts to overturn recently adopted Commodity Futures Trading Commission (CFTC) amendments to CFTC Rules 4.5 (exclusion from definition of commodity pool operator) (CPO) and 4.27 (CPO and CTA reporting requirements) (the Amended Rules).

The Amended Rules substantially narrowed certain CPO registration and reporting exclusions available to registered investment companies (RICs) and their investment advisers (Advisers). The Amended Rules were adopted in response to the aftermath of the 2008 financial crisis and at the behest of the National Futures Association (NFA), which had asserted that certain mutual funds were effectively operating commodity pools beyond the regulatory reach of the CFTC. Rule 4.5, as amended, reinstated the requirements for a RIC to qualify for exclusion from the definition of CPO to pre-2003 standards, and added further requirements, including a ban on advertising.

The ICI and Chamber asserted that the Amended Rules, among other things, (i) failed to adequately consider factors mandated by the Commodity Exchange Act (CEA), (ii) failed to adequately harmonize the Amended Rules with those of the Securities and Exchange Commission (SEC), and (iii) imposed unwarranted burdens on already highly regulated RICs. The theories underlying the challenge were similar to those that have had a tried-and-true record of recent success before the court in setting aside other controversial rules adopted by other administrative agencies, including the SEC. Here, however, the court was not persuaded by the ICI’s and Chamber’s arguments and concluded that the CFTC’s administrative rule-making process was distinguishable from the other cases.

The court found that the CFTC had adequately acknowledged potential overlap in regulatory regimes and took steps to explore possible harmonization of the regimes, including the suspension of compliance with the reporting obligations in Part 4 of its regulations for RICs until after the release of the final harmonization rule that was proposed at the time of adoption of Amended Rule 4.5.1 The court noted that RICs that do not qualify for the exclusion under Amended Rule 4.5 will be required to register with the CFTC pursuant to Amended Rule 4.5 as of December 31, 2012; however, RICs will not have to comply with recordkeeping, reporting, and disclosure requirements of the Amended Rules, including the Amended Rule 4.27 reporting requirement, until 60 days following the effectiveness of a final harmonization rule. As of the date of this Alert, it is not clear when the final harmonization rules will be adopted.

RICs unable to meet the amended Rule 4.5 exemption from CPO registration must register with the CFTC by December 31, 2012.

Pepper Points

(1) Determine whether you need to register or whether you will be exempt from registration. Also, you should inquire whether any CFTC no-action relief with respect to the implementation of the Amended Rules is applicable. (For instance the CFTC issued no-action relief on November 29, 2012 with respect to certain fund of funds arrangements).

(2) Determine what entity will register as a CPO (the fund or its investment adviser).

(3) If you need to register, evaluate your current disclosure, policies and procedures and update your compliance manual as necessary.

(4) Begin preparations for Rule 4.27 compliance. Emboldened by the victory in the litigation, the CFTC may move quickly to finalize adoption of the proposed harmonization rules and comprehensive disclosure and reporting scheme for RICs.


1 On February 24, 2012, the CFTC issued a proposed rule on harmonization. The CFTC addressed the following in the proposed rule: (1) the timing of the delivery of disclosure requirements; (2) the requirement that a sponsor receive a signed acknowledgement of such disclosure requirements; (3) the frequency of required updates for such disclosure requirement; (4) the timing of financial reporting to participants; (5) the requirement that a CPO maintain its books and records on site; (6) the required disclosure of fees; (7) the required disclosure of past performance; (8) the inclusion of mandatory certification language; and (9) the SEC-permitted use of a summary prospectus.

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.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.