CFTC Adopts Final Rule Amendments Harmonizing Compliance Obligations for Dually-Registered CPOs and Modifying Regulatory Requirements for CPOs and CTAs: CFTC’s Final Rule Permits CPOs of Registered Investment Companies to Fulfill Certain CFTC Compliance Obligations Through Substituted Compliance with the SEC Regime and Amends Certain Disclosure and Reporting Requirements for all CPOs and CTAs; SEC Simultaneously Issues Guidance on Use of Commodity Interests by Registered Investment Companies

Sullivan & Cromwell LLP - August 19, 2013

On August 13, 2013, the CFTC adopted final rule amendments to accept compliance with the disclosure, reporting and recordkeeping regime administered by the SEC as substituted compliance for substantially all of part 4 of the CFTC’s regulations that are applicable to CPOs of funds registered under the Investment Company Act of 1940. The adopting release broadens the approach set forth in the harmonization proposals issued by the CFTC in February 2012 and provides, among other things, that if the CPO of registered funds satisfies all applicable SEC rules for such funds as well as certain other conditions, it will be deemed in compliance with the CFTC’s rules regarding:

  • delivery of disclosure documents to each prospective participant in any pool that a CPO operates (Section 4.21);
  • distribution of account statements to each participant in any pool that a CPO operates (Sections 4.22(a) and (b));
  • provision of information that must appear in a CPO’s disclosure documents (Section 4.24), including performance disclosures (Section 4.25); and
  • the use, amendment and filing of disclosure documents (Section 4.26).

Additionally, the CFTC’s final rule amendments modify certain CFTC disclosure and reporting requirements that are applicable to all CPOs and CTAs:

  • All CPOs will be permitted to use third-party service providers to maintain their books and records;
  • The requirement that a CPO receive a signed acknowledgement of receipt of a disclosure document from each pool participant is being rescinded for all CPOs; and
  • CPOs and CTAs will be required to update their disclosure documents under Sections 4.26 and 4.36 on a 12-month basis instead of a nine-month basis.

Simultaneously, the SEC’s Division of Investment Management issued guidance summarizing its views regarding certain disclosure and compliance matters relevant to registered funds that use derivatives that are commodity interests under the CFTC rules. Both agencies have expressed an intent to harmonize the disclosure and reporting requirements of the CFTC and the SEC in a manner that would result in the provision of material information to investors without imposing duplicative, inconsistent and burdensome requirements on CPOs of registered funds.
Certain rule amendments, including the removal of the requirement to obtain a signed acknowledgment of delivery of disclosure documents, will become effective upon publication in the Federal Register. All other amendments, including those related to substituted compliance for CPOs of registered funds, will become effective 30 days after they are published in the Federal Register. The timeline for compliance with the substituted compliance regime and the revised rules, as discussed below, varies by rule and according to the type of the registered entity.