May 26, 2020

Potential CPO (Commodity Pool Operator) and CTA (Commodity Trading Advisor) Registration Relief for Registered Investment Companies

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.

© 2020 Vedder Price


About this Author

Joseph Mannon, Investment Lawyer, Vedder Price Law Firm

Joseph M. Mannon is a member of Vedder Price P.C.’s Investment Services group.

Mr. Mannon focuses his practice on legal and compliance matters for investment advisers, mutual funds, closed-end funds and unregistered vehicles such as hedge funds, hedge fund of funds and other investment entities.  With regard to unregistered vehicles, he frequently counsels clients on fund formation and structuring matters for funds organized both in the United States and abroad.  He also counsels clients on issues relating to commodity trading advisers and...

Nicole M. Kuchera, Investment Services Attorney, Vedder Price law firm

Nicole M. Kuchera is an Associate at Vedder Price and a member of the Investment Services group in the firm’s Chicago office.

Ms. Kuchera counsels commodities, securities and derivatives professionals, such as hedge funds, investment advisers, commodity pool operators (CPOs), commodity trading advisors (CTAs), futures commission merchants (FCMs), retail foreign exchange dealers (RFEDs), introducing brokers (IBs), swap dealers (SDs), forex (FX) firms, proprietary trading firms, binary options trading firms and broker-dealers (BDs), in day-to-day legal matters. She also drafts private disclosure documents, subscription materials, compliance manuals, corporate documents, contracts/trade agreements and advertising materials; conducts and oversees blue sky due diligence, filings and rescissions; and provides guidance concerning master-feeder structures, domestic and foreign funds, and international offerings.