The Commodity Futures Trading Commission (“Commission” or CFTC) recently proposed amendments to the regulations governing the periodic and annual financial reporting requirements for commodity pool operators (CPOs). The proposed amendments specify information that must be included in the reports, clarify reporting formats for pools with multiple series, lengthen annual report filing extensions, address reporting requirements for pools ceasing operation and codify certain longstanding Commission interpretations regarding proper accounting practices. This advisory summarizes these proposed amendments.  

What Are the Proposed Changes to the Regulations Governing Periodic and Annual Reporting?

Periodic Account Statements for Exempt Pools with Qualified Eligible Persons

Under the current regulations, CPOs operating pools under the rule 4.7 exemption for pools offered solely to qualified eligible persons (QEPs) must distribute periodic account statements to pool participants on a quarterly basis. The Commission is proposing to amend the regulations to clarify that these periodic account statements must disclose either the net asset value per outstanding participation unit, or they may provide the total value of the participant’s interest in the commodity pool as of the end of the reporting period.  

Reporting by Series Pools and Pools with Multiple Classes of Ownership Interests

The Commission is responding to requests for clarification by amending the rules applicable to reporting by series and multi-class pools to clarify that (i) series funds that limit liability among the different series may include only the information for the series being reported in the periodic and annual reports, but (ii) for other series funds and for multi-class funds, the information must be presented for both the pool as a whole, as well as for each series or class of ownership interest.  

Extending the Filing and Distribution Deadlines

Currently, a fund of funds may claim a 60-day extension for distributing and filing its annual report or, if an exempt CPO with QEPs, 90 days. Applications for extensions must be submitted to the National Futures Association (NFA) prior to the original due date, but in each subsequent year after the initial extension request, CPOs may claim the extension at the same time as filing the fund of fund’s annual report. CPOs are also permitted to request additional extensions, and many are doing so.  

The Commission is proposing to extend the amount of additional time that a CPO of a fund of funds may claim, from 60 to 90 days. The annual financial reports for funds of funds would be distributed and filed a maximum of 180 days from the end of the pool’s fiscal year. The Commission is also proposing to extend this timeframe to CPOs that operate 4.7 exempt commodity pools.  

Additionally, the Commission is proposing to remove the requirement that a CPO restate its representations for an extension in subsequent years. The original notice would remain in effect so long as the pool operates as a fund of funds.  

Streamlined Filing Procedures for Liquidating Pools

Currently, when a pool ceases operation, CPOs are required to distribute a final annual report to pool participants and file a copy with the NFA. This must be done within 90 days of the pool’s cessation of trading, or no longer than 90 days after funds are returned to pool participants. To alleviate the confusion of two possible timeframes, the Commission proposes to amend the regulations to specify that the final annual report be filed no later than 90 days after the pool ceases trading. Additionally, the Commission proposes simplifying the final report by requiring that it provide a Statement of Operations, a Statement of Changes in Net Assets since the last fiscal year-end annual report, an explanation of the winding down of the pool’s operations and a written disclosure that all interests in, and assets of, the pool have been redeemed, distributed or transferred on behalf of the participants. In addition, the annual report may be unaudited if the CPO obtains written waivers from all participants, and files these waivers with the NFA.  

Special Allocations of Ownership Equity

The Commission is proposing to codify the requirements of CFTC Interpretive Letter No. 94-3, which outlines the procedures for reporting special allocations of partnership equity from limited partners to the general partner.1 Such allocations must be (i) recorded in the financial statements in the same reporting period as the net income, interest income or other basis of computation of the special allocation; (ii) classified in the Statement of Operations; (iii) separately reported in the Statement of Partnership Equity; and (iv) deducted in the computation of the GAAP required disclosures.  

Unrealized Gains and Losses

The Commission is proposing to amend the regulations to codify its previous interpretations permitting realized and unrealized gains and losses on regulated commodities transactions presented in the Statement of Operations to be combined with the realized or unrealized gains and losses from non-commodity interest trading, provided that the combined gains and losses are part of a related trading strategy.2 Likewise, gains and losses from foreign currency translations and conversions also may be included with the related trading strategy, or reported separately.

Investee Funds’ Income and Expenses

CPOs are required to itemize in the Statement of Operations brokerage commissions, management fees, advisory fees, incentive fees, interest income and expense, total realized net gain or loss from commodity interest trading and change in unrealized net gain or loss on commodity interest positions during the pool’s fiscal year. Additionally, the Commission has encouraged CPOs to disclose income received from, and fees paid to, investee funds, particularly where the pool’s investment in the investee fund exceeded five percent of the pool’s net asset value.

The Commission is proposing to codify this practice for disclosure in annual reports. Under the proposed amendments, CPOs would be required to disclose the amounts of income and the expenses related to investee funds. Additionally, CPOs would be required to identify by name any investee fund in which the CPO’s investment exceeds five percent of their pool’s net assets.  

Use of GAPP

IFRS Exception  

CPOs audited and unaudited financial statements, as well as periodic account statements, must be presented and computed in accordance with US GAAP. The Commission, however, has allowed pools organized under the laws of a foreign jurisdiction to use International Financial Reporting Standards (IFRS).3 Exceptions are granted on a case-by-case basis, and pools must follow certain key GAAP rules, 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.

The Commission’s proposed amendments seek to codify these exemption requirements. CPOs would be permitted to use IFRS if they filed a notice that includes representations regarding the operations of their offshore pools, the preparation of the pool’s financial statements in accordance with IFRS and the additional information that will be included in the reports in order for the financial statements to be consistent with U.S. GAAP. The notice would be filed with the NFA prior to the due date for the report, and the CPO could continue to prepare annual reports under IFRS in future years, as long as all the representations in the notice remain constant. Furthermore, a single notice would be filed for more than one pool operated by a single CPO, as long as all the representations apply to each of the pools.

Voluntary Annual Reports Need Not Comply with GAAP

Current regulations mandate that, if an exempt fund distributes an annual report to pool participants, such report must be presented and computed in accordance with GAAP. The proposed amendments would eliminate this requirement, and exempt CPOs that distribute voluntary annual reports need only comply with the pool’s operating documents.

Updating Reference to Financial Schedules

The Commission is proposing to update the periodic and annual reporting provisions to conform with current accounting practices. Specifically, the definitions in various financial schedules would be changed as follows: references to the Statement of Changes in Financial Positions would be deleted; the Statement of Income (Loss) would be renamed the Statement of Operations; and the Statement of Change in Net Asset Value would be changed to the Statement of Changes in Net Assets.

How to Participate in the Rulemaking Process

The Commission will receive comments on any aspect of the proposed rules. Comments may be submitted electronically to All comments will be posted on the CFTC’s website, Comments must be received on or before March 26, 2009.