The Securities and Exchange Commission is seeking comment on cost-benefit aspects of its rule that authorizes investment companies to maintain assets (e.g., margin) with a futures commission merchant (as opposed to a third-party custodian) in connection with their commodity transactions. The relief is subject to the FCM complying with the customer funds segregation requirements of the Commodity Futures Trading Commission and obtaining an acknowledgement from the clearing organization where the FCM holds a fund’s assets, in accordance with CFTC requirements. The acknowledgement should state that the clearing organization also complies with CFTC customer funds segregation requirements, The relevant SEC Rule is 17f-6. (Click here to access.)
Compliance Weeds: Rule 17f-6 may be drafted inconsistently with the relevant CFTC rule. It requires that, for an FCM to cary the account of an investment company, it must obtain from a relevant clearing organization an acknowledgment “as required under rul[e] 1.20(a) … that such assets are held on behalf of the [FCM]’s customers in accordance with the provisions of the Commodity Exchange Act” (emphasis added). However, CFTC rule 1.20(a) (click here to access) expressly provides that “a written acknowledgment need notbe obtained from a derivatives clearing organization that has adopted and submitted to the [CFTC] rules that provide for the segregation of futures customer funds in accordance with all relevant provisions of the Act and the rules and orders promulgated thereunder” (emphasis added). I wish these provisions tied in better, but they can be read consistently.