On June 25, 2013, the Washington, D.C. Circuit Court rejected a legal challenge to the CFTC’s amendments to certain CFTC regulations affecting registered investment companies, affirming the federal district court’s grant of summary judgment in favor of the CFTC. The district court had found that the CFTC had “fulfilled its obligation under the CEA to consider the costs and benefits of its proposed rule” and that the CFTC had “acted well within its discretion, and that there was nothing arbitrary or capricious about the CFTC’s actions . . . .” The plaintiffs have not yet announced any intention to appeal the decision to the U.S. Supreme Court.
The lawsuit was originally filed in April 2012 by the Investment Company Institute (ICI) and the U.S. Chamber of Commerce, challenging the CFTC’s amendments to CFTC Regulations 4.5 and 4.27, which had meaningful implications to registered investment companies that were investing in commodity futures interests (including certain swaps).
The CFTC amended Regulation 4.5 in order to reinstate, with some modifications, a trading threshold for commodity futures interest (and certain swaps) and marketing restrictions for investment advisers to registered investment companies who would otherwise claim an exclusion from the definition of commodity pool operator (CPO). New Regulation 4.27 requires CPOs, including advisers to registered investment companies that are no longer exempted from registration under the amended Regulation 4.5, to file quarterly reports on Form CPO-PQR. Advisers to registered investment companies required to register as CPOs will also have to comply with certain disclosure, reporting and recordkeeping requirements that are unfamiliar to investment companies and only previously applicable to commodity pools, pending final adoption of rules harmonizing CFTC and SEC requirements.
As of December 31, 2012, investment advisers to registered investment companies that trade commodity futures interests (and certain swaps) and are not able to satisfy the requirements of amended Regulation 4.5 or are not eligible for another exemption from the CFTC’s registration requirements were required to register as CPOs. The related disclosure, reporting and recordkeeping requirements will not apply to registered investment company advisers until 60 days following the effectiveness of the harmonization rules proposed by the CFTC, which have not yet been finalized. We will publish another advisory regarding the final harmonization rules when adopted.
In the meantime, registered investment companies unable to rely upon an exemption should continue to focus their attention and commit necessary resources to complying with those CFTC regulations that are currently in effect, and preparing for the additional requirements that will be imposed once the harmonization rules have been finalized.