The Commodity Futures Trading Commission (“CFTC”) on August 5, 2016, issued a proposal to amend its rules governing commodity pool annual reports, which, if adopted, would permit commodity pool operators (“CPOs”) of a pool located outside the United States to use accounting standards established in certain enumerated non-U.S. jurisdictions in lieu of U.S. Generally Accepted Accounting Principles (“GAAP”) when preparing the pool’s financial statements.

The proposal would also exempt a newly formed commodity pool from the audit requirement covering the first fiscal year when the period from pool formation to the fiscal year end is three months or less, under certain conditions. A conforming amendment would be made making the relief from the auditing requirement for pools that cease operations unavailable where such an exemption has been claimed. The proposal, which generally would codify no-action relief previously granted by CFTC staff, is open to public comment until September 6, 2016, and is available here.

The proposal would expand the conditional exemption in CFTC Reg. 4.22(d)(2) from using U.S. GAAP in preparing a non-U.S. pool’s financial statements, which currently applies to the International Financial Reporting Standards (“IFRS”), to accounting standards or practices followed in the United Kingdom, Ireland, Luxembourg and Canada, provided that the jurisdiction under whose laws the pool was organized follows such standards or practices. Currently, Reg. 4.22(d)(2) is not self-executing and requires the CPO to file a notice with the National Futures Association (“NFA”), which would remain the case under the proposal.

The proposal would also amend CFTC Reg. 4.22(g)(2) to exempt from the audit requirement applicable to the Annual Report for a commodity pool’s first fiscal year when the period from pool formation to the end of the pool’s first fiscal year is three months or less. In these circumstances, the cost of an audit for the short period of time of the pool’s operation would be unduly burdensome relative to the pool’s size. To rely upon the exemption, the pool would have to have no more than 15 participants and no more than $1.5 million in capital contributions during the period from the formation of the pool to the end of the pool’s first fiscal year. For this purpose, the following persons and their capital contributions would not be counted: (i) the pool’s CPO, its commodity trading advisor, and any of their principals; (ii) a child, sibling, or parent of the participants described in (i); (iii) the spouse of any of the participants described in (i) or (ii); (iv) any relative of one of the participants described in (i) through (iii); and (v) an entity that is wholly owned by one or more of the participants described in (i) through (iv).

To rely on the exemption, a CPO would be required to obtain, prior to the date on which the annual report for the first fiscal year is due, a specified written waiver from each pool participant of the right to receive an audited annual report and include a specified legend on an unaudited annual report and the pool’s first audited annual report. The pool’s first audited annual report would be required to cover the period from the formation of the pool to the end of the pool’s first 12-month fiscal year. In addition, the CPO would be required to file a notice with the NFA along with a certification that the CPO had received the specified written waiver from each of the pool’s participants.

Finally, the proposal would make a conforming amendment to CFTC Reg. 4.22(c) making exemptive relief from the annual report audit requirement under that regulation unavailable for pools that cease operation when a CPO has not previously distributed an audited annual report or filed an audited annual report with NFA, such as the case where the CPO has claimed relief under proposed CFTC Reg. 4.22(g)(2), and the pool ceases operations before the end of its first 12-month fiscal year.

Codification of the relief provided in the proposal, which previously had been granted on a case-by-case basis through no-action letters, would appear to be a common-sense measure to provide such relief on a generalized basis.