Mutual fund complexes relying on the exemption under Commodity Futures Trading Commission (“CFTC”) Regulation 4.5 from commodity pool operator (CPO) registration have to file:

(1) An initial notice of eligibility to claim that exemption; and

(2) An annual affirmation of continued reliance on the exemption within 60 days of each calendar year end.

In our experience, many mutual fund complexes “update” their Regulation 4.5 eligibility notices during the last two weeks of February.

This blog post is a reminder to clients and friends that the CFTC has recently amended its Regulation 4.5 to clarify that the registered investment adviser (the “RIA”) to a registered investment company is that company’s CPO.  This clarification will be of interest to any mutual fund complex that may have had an entity other than the RIA claim the CPO exemption with respect to the operation of a registered investment company.   

Background: The Regulation of Commodity Pools and CFTC Regulation 4.5

The definitions of the terms commodity pool and CPO are found in sections 1a(10) and 1a(11) of the CEA, respectively, and can be found here.

At the risk of over-simplifying the statutory language, an investment fund that invests in, or has the ability to invest in, commodity interests (like exchange-traded futures contracts and certain swaps) constitutes a commodity pool and the person(s) or entity that operates the fund must register with the CFTC as a CPO or qualify for an exemption from registration.

One such exemption, CFTC Regulation 4.5, specifically provides relief to the operator of a registered investment company, but requires the entity claiming the relief to file:

(1) An initial notice of eligibility to claim that exemption; and

(2) An annual affirmation of continued reliance on the exemption within 60 days of each calendar year end.

In 2012, the CFTC substantially amended CFTC Regulation 4.5.  As a result of these amendments, many mutual fund complexes had to reconsider the application of this regulatory exemption to their businesses.  One specific issue that industry participants discussed was whether the RIA to a mutual fund was its CPO or, alternately, whether some other entity was the CPO to a registered investment company.

For example, some market participants took the view that, in the case of a registered investment company with multiple portfolios or series, the CPO was the entity that was registered with the Securities and Exchange Commission and operating on behalf of one or more portfolios or series.  As previously alluded to, other market participants took the view that the RIA to a registered investment company was its CPO.

Amendments to CFTC Regulation 4.5 to Clarify That a Mutual Fund’s RIA is Its CPO

In November 2019, the CFTC approved amendments to CFTC Regulation 4.5 that clarified that the RIA to a registered investment company is its CPO.  These amendments were published in the Federal Register in December 2019 and are available here.

As a result of these amendments, it is now clear the RIA must file the notice of eligibility to claim the exemption.

Mutual fund complexes have until March 1, 2021 to come into compliance with amended Regulation 4.5.

In a subsequent post, we will explore practical implications of this rule amendment.

Good day.  Good to always keep and eye on Regulation 4.5. DR2