Section 361 of the proposed 2014 CFTC Reauthorization Act (the Proposed Act) could dramatically affect many registered investment companies (RICs) and their advisers. In particular, Section 361 proposes to amend the definitions of CPO and commodity trading advisor (CTA) as contained in the Commodity Exchange Act (CEA), as amended, with respect to RICs. The Proposed Act has been passed by the House and awaits Senate approval.

Under the Proposed Act, the revised definition of a CPO will exclude an investment adviser to a RIC or a subsidiary of such a company, if the investment company or subsidiary invests, reinvests, owns holds or trades in commodity interests limited to only "financial commodity interests." "Financial commodity interests" are thereafter defined in the Proposed Act to mean:

a futures contract, an option on a futures contract, or a swap, involving a commodity that is not an exempt commodity or an agricultural commodity, including any index of financial commodity interests, whether cash settled or involving physical delivery.

The term "financial commodity interest" would thus include, for instance, a futures contract, option on a futures contract or swap on interest rates, treasuries, foreign exchange, stock indices, and indices based on prices or rates. It would not extend, however, to futures or swaps on agricultural or exempt commodities (e.g., energy metals, chemicals and emission allowances).

Although many RICs and their investment advisers currently operate under a different regulatory environment than other CPO registrants (assuming they utilize CFTC Rules 4.5 or 4.12(c)(3)), the Proposed Act would eliminate any further CFTC regulatory oversight for those RICs and their advisers that trade only in "financial commodity interests." De-registration as a CPO for such entities would thus be warranted if the Proposed Act were adopted as proposed.

Similarly, under the Proposed Act, the revised definition of a CTA would exclude a person who serves as an investment adviser to a RIC or a subsidiary of such a company if the commodity trading advice relates only to a "financial commodity interest," as defined above. For example, a sub-adviser that only provides advice in relation to "financial commodity interests" would no longer need to be registered as a CTA if the Proposed Act were adopted as proposed.