CFTC Permits Substituted Compliance with SEC Rules for CPOs of Registered Funds

August 16, 2013


On August 12, 2013, the U.S. Commodity Futures Trading Commission adopted final regulations with respect to commodity pool operators (“CPOs”) of registered investment companies (“RICs”).1 The CFTC’s action will permit CPOs to RICs to satisfy the disclosure, reporting, and recordkeeping requirements that would otherwise apply to them under Part 4 of the CFTC’s regulations by continuing to comply with the requirements applicable to RICs under the federal securities laws (“SEC Requirements”). CPOs to RICs will have to file certain notices with the CFTC and the National Futures Association (the “NFA”) to claim the disclosure and recordkeeping relief. As discussed below, the CFTC also adopted certain rule changes that apply to CPOs of RICs and private funds.

In approving a substituted compliance regime for RICs, the CFTC appears to have heeded industry comments indicating that different disclosure, reporting, and recordkeeping requirements would create additional costs without providing tangible benefits. This approach appears likely to shield the CFTC from further legal challenges to its regulation of CPOs to RICs under the Part 4 rules on administrative law grounds.2 Thus, while CFTC regulation of the registered fund industry is a settled matter for now, firms should generally experience fewer disruptions and related costs than had been anticipated based on the CFTC’s initial proposal to harmonize its Part 4 rules with the SEC Requirements.

Background – CPO Registration Requirement and Harmonization Proposal

On February 9, 2012, the CFTC adopted final rule amendments that limited the exclusion from the definition of CPO upon which RICs had commonly relied.3 As a result, CPOs of RICs that could no longer qualify for that exclusion have been required to register as CPOs. The CFTC also adopted a requirement for CPOs to report information on new Form CPO-PQR, but it deferred compliance with that requirement for CPOs to RICs.

When it adopted these rule changes, the CFTC issued a separate proposal to harmonize its disclosure, reporting, and recordkeeping requirements with the SEC Requirements.4 The CFTC regulations at issue fell into the following categories:

  • Disclosure — CFTC Regulations 4.21, 4.24, 4.25, and 4.26
  • Account Statements and Annual Reports — CFTC Regulation 4.22
  • Recordkeeping — CFTC Regulation 4.23

Please see our earlier alert for a discussion of these actions by the CFTC. The NFA also allowed CPOs to RICs to defer compliance with its CPO rule requirements pending the CFTC’s adoption of amendments to those requirements.5

As explained below, the CFTC’s final rules abandon the concept of “harmonizing” CFTC and SEC Requirements as had been proposed, in favor of a substituted compliance regime under which CPOs to RICs may adhere to the SEC Requirements without separately needing to comply with the Part 4 rules. The CFTC noted, however, that a failure to comply with an SEC Requirement that corresponds to a CFTC rule could constitute a violation of both rulebooks.

Final Rule – Substituted Compliance with SEC Requirements

As noted earlier, the CFTC will permit a CPO to a RIC to satisfy the disclosure requirements that would otherwise apply under CFTC Regulations 4.21, 4.24, 4.25, and 4.26 by continuing to comply with the SEC Requirements.6 Similarly, a CPO can address the reporting requirements that would otherwise apply under CFTC Regulation 4.22 by making the RIC’s current net asset value per share available to investors, furnishing the RIC’s semi-annual and annual reports to investors, and filing the RIC’s periodic reports with the SEC. The CFTC also provided relief from the requirement to make a CPO’s books and records available to participants for inspection and copying on request.

The following conditions apply to this relief:

  • The CPO of a RIC will be required to file a notice of its use of the substituted compliance regime. The notice requirements are outlined in CFTC Regulation 4.12. The notice must be filed with the NFA.
  • As to the disclosure requirement, the RIC must disclose the performance of all accounts and pools managed by the CPO that have investment objectives, policies and strategies substantially similar to those of the RIC, if the RIC has less than three years operating history.
      • In a related development, the SEC Division of Investment Management issued an update addressing disclosure and compliance matters for RICs that invest in CFTC-regulated instruments. This document summarizes existing guidance concerning disclosure of derivatives strategies and risks, and provides further clarification on the requirements associated with presenting related performance for other funds and accounts in a RIC’s prospectus for funds and other accounts with similar investment objectives and strategies. A copy of this guidance is available here.
  • As to the account statement and annual report requirements, the CPO of a RIC will be required to file the financial statements with the NFA that it prepares pursuant to its obligations with respect to the SEC.

In addition, the CFTC will permit a CPO relief from the requirement under CFTC Regulation 4.23 to maintain its books and records at its main business office. (This relief applies to CPOs of RICs and other types of pools.) Instead, the CFTC will allow a CPO to use a third-party service provider for recordkeeping purposes. In order to do so, the CPO will be required to file a notice with the NFA. In addition, at the time that the CPO registers with the CFTC, or delegates its recordkeeping obligations, whichever is later, the CPO will be required to file a statement with the CFTC describing the delegated record keeper and to maintain timely access to those records in such manner as set forth by the CFTC.

Other Notable Changes to the CFTC Part 4 Rules

Acknowledgement of Disclosure Documents. The CFTC has rescinded, for all CPOs, the requirement to obtain a signed acknowledgement that a prospective pool participant has received a disclosure document for the pool.

Timing of Disclosure Updates. The CFTC will permit CPOs and commodity trading advisors (“CTAs”) to use disclosure documents for up to twelve months. The CFTC amended CFTC Regulations 4.26 and 4.36, which previously required CPOs and CTAs, respectively, to update disclosure documents every nine months.

Mandatory Disclaimer. With respect to the mandatory disclaimer required under CFTC Regulation 4.24(a), the CFTC will permit CPOs to RICs to use the cautionary statement prescribed in SEC Rule 481 under the Securities Act of 1933, with a modification to add a reference to the CFTC.7

Effective Dates; Next Steps

The rule changes under CFTC Regulation 4.12 that establish the substituted compliance regime, except for the requirement to comply with certain conditions under CFTC Regulation 4.12(c)(3)(i), will take effect upon publication in the Federal Register. The conditions under CFTC Regulation 4.12(c)(3)(i), which require CPOs to RICs using substituted compliance to file certain notices and statements with the NFA and to provide certain performance information if the RIC has less than three years operating history, will go into effect 30 days after publication. After the 30-day period, a CPO will be required to meet these conditions when:

  • A RIC files a new registration statement;
  • An existing open-end RIC files its first post-effective amendment that is an annual update to an effective registration statement; or
  • A closed-end RIC files its first required update to its registration statement.

The amendments to the recordkeeping requirements and the new rules allowing 12-month use of disclosure documents will also take effect 30 days after publication.

The CPO-PQR reporting requirement will take effect 60 days after publication (i.e., in the fourth quarter of 2013). Firms should note that the NFA requires its own PQR reporting, although both requirements are met through filing a single report through the NFA’s electronic EasyFile system. CPOs to RICs and private funds may also be able to address their PQR reporting obligations in part by reporting information about their RICs on SEC Form PF. The NFA has not yet announced the effective date by which CPOs to RICs must comply with NFA rules applicable to CPOs. A copy of our earlier chart that summarizes the PQR and related CTA reporting requirements is available here.

In light of this latest development, firms should prepare to file the required NFA and CFTC notices and to make the necessary changes to their prospectus disclosure concerning related performance. In addition, firms may wish to monitor communications from the NFA and begin preparations to meet PQR reporting requirements, as mandated by both the CFTC and the NFA.

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Please feel free to reach out to your regular contacts at the Firm if you have any questions about the matters addressed in this Alert. In addition, you are welcome to contact the members of the Investment Management Group set forth above.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:


1 Harmonization of Compliance Obligations for Registered Investment Companies Required to Register as Commodity Pool Operators (Aug. 12, 2013), available at

2 On April 17, 2012, the Investment Company Institute and the U.S. Chamber of Commerce filed a complaint in the U.S. District Court for the District of Columbia that challenged the CFTC’s amendments to Regulation 4.5, arguing that the CFTC failed to satisfy certain procedural requirements. The District Court granted the CFTC’s motion for summary judgment, and, on June 25, 2013, the United States Court of Appeals for the District of Columbia Circuit affirmed the District Court’s decision.

3 Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations, 77 FR 11252 (Feb. 24, 2012); correction 77 FR 17328 (Mar. 26, 2012).

4 Harmonization of Compliance Obligations for Registered Investment Companies Required to Register as Commodity Pool Operators, 77 FR 11345 (proposed Feb. 24, 2012).

5 Memorandum from the Investment Company Institute to the National Futures Association, NFA Regulations as Applied to Registered Investment Companies and Their Advisers (Dec. 28, 2012), available at

6 In the final rule release, the CFTC affirmed an earlier position articulated by its staff, taking the view that a legal entity “organized as [a] series entit[y] with inter-series limitation of liability” is the “commodity pool” for purposes of its regulations, rather than each separate series of that entity. The CFTC raised this point in the context of discussing substituted compliance with its own disclosure rules, which is the same context in which the CFTC staff addressed the issue in its earlier letter. See CFTC Letter No. 10-29 (June 30, 2010). It remains unclear the extent to which this position would affect series investment companies under other provisions of the CFTC’s regulations, including with respect to applying the exclusion from CPO status provided by Regulation 4.5. At least on this last question, however, there is earlier CFTC guidance indicating that a series-by-series analysis of the exclusion is appropriate. See 50 Fed. Reg. 15868, 15782 (Apr. 2, 1985) (“The Commission is aware that, in the course of issuing ‘no-action’ positions under proposed § 4.5, its staff has had occasion to consider under what circumstances relief from regulation as a CPO should be afforded to such series investment companies. Specifically, the staff issued such a ‘no-action’ position where each portfolio that intended to trade interests met the operating criteria of the proposal and where there was separate ownership in and identities of each of the company’s portfolios – regardless of whether any (other) such portfolio intended to trade commodity interests. The Commission believes that this approach is a sound one and, accordingly, intends that § 4.5 as adopted be so applied to a registered series investment company.”).

7 The CFTC will permit CPOs to RICs to use either of the following cautionary statements:

The Securities and Exchange Commission and the Commodity Futures Trading Commission have not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.


The Securities and Exchange Commission and the Commodity Futures Trading Commission have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This article was originally published by Bingham McCutchen LLP.