On April 12, 2011, the Forum filed its comments on a CFTC rule proposals that, if adopted, could affect certain mutual funds whose portfolios may buy and sell commodities. Under current CFTC rules, registered investment companies are generally excluded from the definition of "commodity pool operator." The rules proposed on January 26 would change that exemption such that registered investment companies (RICs) with greater than "de minimus" investment in commodities be required to register with the CFTC as "commodity pool operators."
Under the proposed rules, those RICs who fall into the "commodity pool operator" designation would be required register with the CFTC through the National Futures Association (NFA), become a member of the NFA, and comply with extensive disclosure and periodic reporting requirements about commities trading activities. In addition, key personnel must register with the NFA and comply with continuing education and certification requirements.
For years, RICs have been considered by the CFTC to be outside the definition of a commodity pool operator because of the extensive regulation of RICs under the Investment Company Act of 1940, and their oversight by the SEC. In September, the NFA petitioned the CFTC to reexamine the exemption for registered investment companies, alleging in their petition that the regulation of RICs under the 1940 Act does not provide adequate protection for investors when RICs are heavily invested in commodities. The NFA also maintains that entities currently falling under the commodity pool operator regulatory regime may take the form of RICs to avoid the extensive CFTC requirements.
In general, the Forum's comment letter urges the CFTC to avoid imposing the dual system of regulation contemplated by the proposal on the grounds that it is unnecessary and potentially incompatible with mutual funds' current regulatory scheme.
The CPO Proposal would cause a significant number of Registered Funds to be subject to CFTC regulationregister as CPOs. Doing so will impose significant additional costs on Registered Funds – costs that likely will be passed on to their shareholders – without clearly providing fund investors with protections over and above those of the 1940 Act. We, therefore, question whether the Commission has adequately justified imposing these new requirements and encourage the Commission to reconsider carefully the need for these rules. In addition, if adopted, the rule proposal would subject those Registered Funds that register as CPOs (“CPO Funds”)with the CFTC to dual regulatory regimes under the authority of the SEC and CFTC which will entail numerous inconsistencies and uncertainties. Subjecting Registered Funds to inconsistent requirements is not in the interest of the Funds and their shareholders and may ultimately serve only to eliminate the range of investment strategies available to those who invest in Registered Funds. Should the Commission go forward with any form of this proposal, we believe that it must eliminate as many of these inconsistencies as possible.
The Forum's comment letter focuses more specifically on how the CFTC's proposal, if adopted, may affect fund independent directors. In particular, the Forum opposes any rule change that would designate fund independent directors as "commodity pool operators," or as "principals" or "asociated persons" of a CPO. Such designations, according to the Forum, ignore the present regulatory scheme for mutual funds, the fiduciary duties performed by fund independent directors, and are not rational or sensible given the important and unique role of independent directors. Therefore, the Forum's letter urges the CFTC to make material changes to any final rules.
The CPO Proposal, which would affect a significant number of Registered Funds, does not entail rational or sensible recognition of the important and unique role of their Independent Directors. The Commission needs to make material changes in the way it would address the role of the Directors of Registered Funds, and particularly the Independent Directors. As we have outlined above, at a practical level, the special role of Independent Directors as independent fiduciaries who are charged with significant oversight responsibilities must be a key consideration. Rulemaking and guidance that recognizes this will, in the end, permit Independent Directors to continue to serve effectively serve the best interests of Fund shareholders.
The full text of the Forum's April 12 comment letter to the CFTC is available at: http://www.mfdf.org/images/uploads/newsroom/MFDF_Comment_RIN_No_3038-AD30.pdf