This week the CFTC executed a welcome U-turn and adopted final rules that implement a “substituted compliance” approach for disclosure and compliance obligations of registered investment companies (RICs) that are also commodity pools. Rather than requiring that RICs comply with the sometimes inconsistent disclosure, compliance and financial reporting regulations of both the SEC and the CFTC, the CFTC said that compliance with applicable SEC regulations, with minor adjustments, would be deemed acceptable by the CFTC.
The new rules reflect a departure from the harmonization rules proposed last year by the CFTC when it adopted changes to its Rule 4.5 excluding from the definition of a commodity pool operator (CPO) only those CPOs of RICs that invest a de minimis amount of their assets in commodity interests other than for bona fide hedging purposes. Public comments received on the harmonization proposal raised concerns that it did not go far enough and that the burden on RICs to comply with two regulatory schemes would be significant without providing shareholders in RICs that are also commodity pools with any meaningful benefit. The CFTC determined that compliance with the SEC regulations would provide market participants with meaningful disclosure with regard to fees and risks and provide the CFTC with information necessary to its oversight of CPOs.
Under the substituted compliance regime, in the event that the CPO of a RIC fails to comply with SEC disclosure, compliance and financial reporting regulations, it would also be in violation of its obligations under applicable CFTC regulation and, presumably, subject to enforcement action by both regulators.
For more detailed information regarding the final rules, please read our client alert.