The Division of Swap Dealer and Intermediary Oversight (DSIO Staff) of the U.S. Commodity Futures Trading Commission (CFTC) issued exemptive relief1 on September 8, 2014 to permit a registered commodity pool operator (CPO) to keep its required CPO and commodity pool records at a location other than the CPO’s “main business office” if certain conditions are met.
Historically, CFTC rules generally mandated that registered CPOs maintain required CPO and commodity pool records at the CPO’s main business address. In May 2011, the CFTC adopted rules that relieved registered CPOs of commodity exchange traded funds from certain regulations. These rules expanded the universe of alternative recordkeepers to include a CPO’s custodian and accounting/transfer agent and their subcontractors, but this relief was only extended to CPOs of commodity exchange traded funds operated under CFTC Rule 4.12. In August 2013 when the CFTC harmonized its Part 4 rules with rules of the Securities and Exchange Commission applicable to investment advisers, the CFTC permitted all registered CPOs to keep records with certain alternative entities—including a commodity pool’s administrator, distributor, custodian, bank, or registered broker or dealer acting in a similar capacity with respect to the pool.2
Although the enumerated list of permissible third-party recordkeepers covered all types of service providers that the CFTC and its staff had previously considered in rulemakings and letters, the list did not cover all types of entities which investment advisers routinely utilize in fund operations and which make and keep records in connection with their activities. Such recordkeepers include record maintenance companies, data storage companies, and sub-advisory registered investment advisers/commodity trading advisors.
Participants in both the public and private investment fund industry informed the CFTC of the shortcomings of the enumerated list of permissible alternative recordkeepers. The DSIO Staff is again expanding the universe of permitted third-party recordkeepers for purposes of compliance with the CFTC’s CPO recordkeeping rules,3 but without enumerating types of persons by promulgating an exhaustive list. Accordingly, any person can be an alternative recordkeeper if all required conditions are satisfied. CPOs may use any such third-party recordkeepers that they desire so long as:
- the CPO can produce the commodity pool records for inspection within 48 hours (if the records are held in the United States) and 72 hours (if the records are held outside of the United States) from the time the National Futures Association (NFA), CFTC, or Department of Justice makes a request for such records; and
- the CPO makes the required notice filing with the NFA, which includes an identification of each recordkeeper, contact information for the recordkeeper, and representations made by both the CPO and the recordkeeper regarding the custody of the records.
Registered CPOs using the exemptive relief should note:
- CPOs must still solicit from each third-party recordkeeper and file with the NFA certain representations from the recordkeeper. These representations include an agreement by the recordkeeper that the records will be kept in accordance with CFTC Rule 1.31. Many industry participants have expressed concerns to the DSIO Staff that Rule 1.31 is out of date and impossible to comply with in the current technological environment. The DSIO Staff acknowledged those concerns, and is undertaking to review the rule. However, the necessary representations to be made by third-party recordkeepers have not changed for now.
- The DSIO Staff reiterated that the CPO remains liable for the fulfillment of its recordkeeping obligations under the applicable CFTC rules and for timely production of records upon request, whether or not the CPO or a third party is maintaining the pool records.