As we explained in an earlier post, the CFTC has recently amended its Regulation 4.5 to clarify that the commodity pool operator (“CPO”) of a registered investment company is the entity that serves as the registered investment adviser (“RIA”) to that company.
In this post, we will explore practical implications of this recent rule amendment.
Refresher: Basic Mechanics of CFTC Regulation 4.5
A mutual fund that invests, or has the ability to invest, in certain derivatives will constitute a commodity pool and the entity that operates the fund must register with the CFTC as a CPO or qualify for the exemption from registration available under CFTC Regulation 4.5.
In order to rely this exemption, the CPO must 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.
These filings are made through the National Futures Association’s electronic filing system for exemptions and exclusions.
The CPO to a Mutual Fund is (Now) Its RIA
As we first mentioned in our prior post on this topic, market practices have varied with respect to the designation of the CPO to a registered investment company –
some mutual fund complexes identified the RIA as the CPO, while other complexes took the view that the entity that was registered with the Securities and Exchange Commission as an investment company (the “SEC Registrant“) was the CPO.
Under this latter approach, the SEC Registrant would claim the exemption on behalf of one or more of its portfolios or series with each such portfolio or series constituting the commodity pool.
In December 2019, the CFTC amended Regulation 4.5 in order to clarify that the CPO of a registered investment company is the entity that serves as the RIA to that company. Mutual fund complexes have until March 1, 2021, to come into compliance with amended Regulation 4.5.
As a practical matter, what does compliance “look like” for a mutual fund complex that has historically designated the SEC Registrant, instead of an RIA, as the CPO of a registered investment company?
Fortunately, the answer to this question is a relatively straightforward and involves two-steps:
1) The RIA to a registered investment company will submit that RIA’s initial notice of eligibility filing with the National Futures Association to claim the exemption under Regulation 4.5 that identifies the pools for which it is exempt (the “Identified Pools”); and
2) The SEC Registrant for the Identified Pools will not submit the annual affirmation of continued reliance on the exemption within 60 days of each calendar year end in respect of those same pools.
In other words, the SEC Registrant’s prior Regulation 4.5 exemption claim in respect of the Identified Pools will lapse, because it will not have been affirmed by the SEC Registrant within 60 calendar days after the end of the year. But, as a result, it is necessary for the RIA’s notice of eligibility to be filed prior to the expiration of the SEC Registrant’s prior Regulation 4.5 exemption filings.
Compliance Deadline is March 1, 2021
Fund complexes have until March 1, 2021 to come into compliance with amended Regulation 4.5.
The CFTC implemented this deferred compliance schedule in recognition of the fact that the final amendments to Regulation 4.5 were adopted in late November 2019 and would not be published in the Federal Register until December 2019. As a practical matter, that implementation timeline for the amendments did not leave mutual fund complexes with a lot of time to implement changes that may be required in respect of their filings with the NFA, particularly if a complex had historically designated the SEC Registrant as the exempt CPO to a registered investment company.
Reminder: Double Check Registration Statement Disclosures
As a related matter, all fund complexes should review derivatives-related disclosures in fund registration statements and make any amendments that may be needed in light of these recement amendments to CFTC Regulation 4.5. In addition to making sure that any disclosures reflect the approach under amended Regulation 4.5, a fund complex will have to make a determination as to the materiality of any changes to its disclosures. While every materiality determination is, by necessity, a facts and circumstances analysis, the CFTC has indicated that the recent amendments to Regulation 4.5 were not substantive changes with respect to a registered investment company’s posture under Regulation 4.5.
Good day. Good strength for Regulation 4.5 compliance efforts! DR2