Should the National Futures Association (NFA) impose capital requirements on commodity pool operators (CPOs) and commodity trading advisors (CTAs)? On January 23, 2014, the NFA published a Notice to members seeking public comments on this controversial proposal. The proposal does not appear to exclude advisers of registered investment companies that are required to register as CPOs under recently amended CFTC Rule 4.5.

In addition to requesting comments on the possibility of imposing capital requirements, the NFA’s Notice requests comments on other customer protection measures, including:

  • Requiring an independent third party to review and authorize a CPO’s disbursement of any pool funds;
  • Requiring an independent third party to verify calculations related to the pool’s performance; and
  • Requiring CPOs to periodically verify pool assets.

The Notice underscores why regulatory schemes that apply to traditional commodity pools often do not apply to investment companies that are also commodity pools. For example, Section 18 of the 1940 Act limits the ability of investment companies to leverage their portfolios, so the need for capital requirements does not necessarily apply to the same extent as it may for traditional commodity pools. Moreover, registered investment companies provide investors—and the SEC—with periodic audited financial statements, thus lessening the need for third party verification of a fund’s performance calculations and its assets.

The CFTC can easily resolve these inconsistencies. It can simply extend the concept of “substitute compliance” to advisers to registered investment companies that are also deemed to be commodity pools, as it did in recent amendments to Rule 4.5 (for more information see our client alert). The Notice serves as a reminder, however, that registered funds and their advisers must be vigilant about other regulatory requirements that could inadvertently create land mines for a fund.