On January 26, the Commodity Futures Trading Commission’s Division of Clearing and Intermediary Oversight (DCIO or “Division”) released its annual guidance letter (“Letter”) regarding the preparation and filing of commodity pool financial reports. The Letter outlines regulatory and accounting changes affecting commodity pool operators’ (CPOs) financial reporting and reminds CPOs of the common deficiencies noted in past years. This advisory provides a summary of the regulatory and accounting changes, and highlights the Division’s other recommendations.
When Must the Annual Reports Be Filed?
CPO annual reports must be distributed to pool participants and filed with the National Futures Association (NFA) within 90 days of the pool’s fiscal year end. The reports must be submitted to the NFA electronically and distributed in hardcopy to pool participants, unless they have otherwise consented to receive electronic reports. Although the NFA will consider extending the due date for filing an annual report for up to 90 days, applications for extensions must be submitted to the NFA prior to the original due date. A CPO of a fund of funds may also claim a 90 day extension for filing its annual report, but initially this claim of exemption must also be filed with the NFA within 90 days of the end of the fund’s fiscal year. For each year following the year in which the notice was initially filed, the CPO may make a claim for extension at the same time as the fund of funds’ annual report.
Notably, the CFTC recently sanctioned four commodity pool operators for failing to file timely financial reports with the NFA. (See Alston & Bird Advisory, January 12, 2009, available at http://www.alston.com/Fisap_CFTC_sanctions_CPOs ). These sanctions prove the Commission’s determination to strictly enforce the filing deadlines.
Must the CPO’s Financial Statements Be Computed in Accordance with US GAAP?
Financial statements and periodic account statements must be computed in accordance with US GAAP. However, the Division may permit exceptions for offshore pools that use other accepted accounting methods, such as International Financial Reporting Standards. Exceptions will be granted on a case-by-case basis, and pools must follow certain key GAAP rules regardless of exception, including determining fair values, reporting realized and unrealized gains and losses, preparing a condensed schedule of investments and reporting special allocations of partnership equity in accordance with CFTC Interpretive Letter 94-3. To request an exception from GAAP requirements, CPOs must submit an explanation of the statements’ compliance with each of these key GAAP requirements to the Division.
What Changes Affect Complex Entities and Capital Structures?
Master Feeder Structures
Nonpublic feeder pools are now permitted to follow the disclosure and reporting provisions set by the American Institute of Certified Public Accountants (AICPA) in Statement of Position (SOP) 95-2, as amended by SOPs 01-1 and 03-4, or to present a complete set of master financial statements with each feeder financial statement.
Funds of Funds
CPOs should report the income received from, and fees paid to, investment partnerships, if their investments exceed five percent of the commodity pool’s net assets. Such information is necessary for participants to fully understand the pool’s strategy. The Letter includes an illustrative disclosure in Attachment B.
What Are the Accounting Developments?
The Financial Accounting Standards Board Statement No. 157, “Fair Value Measurements,” (FAS 157) is now applicable to all 2008 financial statements. FAS 157 changes past accounting practice by redefining fair value, by employing new methods to measure fair value and by expanding disclosures about fair value measurements. The Letter provides a list of several resources helpful in understanding FAS 157 and urges CPOs to consult their accountants.
The AICPA issued Alternative Investments Audit Considerations: A Practice Aid for Auditors. This practice aid provides guidance to auditors addressing valuations of alternative investments for which there is no readily determinable fair value. Additionally, the AICPA issued FASB Statement No. 157 Valuation Consideration for Interests in Alternative Investments, which addresses valuation of investments in funds that have prohibited withdrawals by investors.
The AICPA also issued technical guidance for the treatment of offering costs incurred by investment partnerships. Specifically, investment partnerships that “continually offer interests” (a defined term) should amortize such offering costs on a straight line basis over 12 months. CPOs, however, are reminded that organization costs are not included in this amortization and should be charged as expenses.
What Steps Should CPOs Take in Light of the Division’s Letter?
First and foremost, CPOs should bear in mind the applicable deadlines for filing. CPOs should provide the Letter to their public accountants and other parties assisting in the preparation of their pools’ financial statements. Additionally, CPOs, and their accountants, should read the Letter in conjunction with the Division’s prior annual letters, particularly the letters from 2004-2007, which are referenced and remain instructive.
Furthermore, the Division reminds CPOs that interpretations and other staff letters providing written guidance are available on the Commission’s website, www.cftc.gov.