The Commodity Futures Trading Commission (“CFTC”) has proposed rules that would rescind or restrict several common exemptions from commodity pool operator (“CPO”) and commodity trading advisor (“CTA”) registration. These proposals, if adopted, would require investment managers who rely on these exemptions to register as CPOs or CTAs, as applicable, become members of the National Futures Association (“NFA”), and comply with CFTC and NFA rules. In addition, amendments to the Commodity Exchange Act (“CEA”) relating to the swaps and forex markets may require many investment managers who utilize certain swaps and forex contracts for client accounts to register as CPOs or CTAs. These rule proposals and legislative amendments may apply to a broad range of investment managers, including traditional futures managers, hedge fund managers, fund-of-fund managers, and long-only securities managers, and thus may have far-reaching implications for the investment management industry both in the United States and elsewhere.
This briefing summarizes these recent rule proposals and legislative amendments, and also discusses the primary registration and compliance obligations of CPOs and CTAs. This briefing also summarizes other recent rule proposals of interest to investment managers, including a joint Securities and Exchange Commission (“SEC”) and CFTC proposal to require registered investment advisers, CPOs, and CTAs to file certain new systemic risk reports. Many of the developments discussed in this briefing are regulatory and legislative responses to the global financial crisis that began in 2008, and culminated in the comprehensive financial services reform bill known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law by President Obama in July 2010. Given the broad application of these registration and compliance-related proposals and changes, all investment managers should familiarize themselves with them now to be ready to comply with any new requirements if and when they become effective.
The CFTC’s Proposal to Rescind the Rule 4.13(a)(3) and (a)(4) Exemptions May Require Many Fund Managers to Register as CPOs
Many investment managers that sponsor and manage hedge funds and other pooled investment vehicles that invest in futures contracts or other commodity interests, directly or indirectly (such as funds-of-funds), rely on either of the following exemptions to avoid registration as a CPO, pursuant to CFTC Rules 4.13(a)(3) and (a)(4):
Rule 4.13(a)(3). Rule 4.13(a)(3) provides that the operator of a pooled investment vehicle may claim an exemption from registration as a CPO if: (i) the pool interests are exempt from registration under the Securities Act of 1933 (the “Securities Act”); (ii) the pool’s participants are at least “qualified eligible persons,” “accredited investors,” or “knowledgeable employees,” and (iii) the pool complies with certain limits on the amount of commodity interests traded, whether for hedging or speculative purposes (the “Limited Trading Exemption”).
Rule 4.13(a)(4). Rule 4.13(a)(4) provides that the operator of a pooled investment vehicle may claim an exemption from registration as a CPO if: (i) the pool interests are exempt from registration under the Securities Act and (ii) the pool’s participants are restricted to certain highly sophisticated categories of investors (e.g., individuals who are “qualified purchasers” or “knowledgeable employees,” or entities who are “qualified eligible persons” or “accredited investors”) (the “Sophisticated Participant Exemption” and together with the Limited Trading Exemption, the “Rule 4.13 Exemptions”). The Rule 4.13 Exemptions are made by the investment manager’s filing of a claim for relief with the NFA.
Registration Release. On January 26, 2011, the CFTC proposed amendments to its rules that would rescind the Rule 4.13 Exemptions in their entirety (the “Registration Release”).1 Although not required explicitly by the Dodd-Frank Act, in the CFTC staff’s view, managers of commodity pools should be subject to a regulatory framework similar to that imposed on managers of securities-oriented “private funds” under the Dodd-Frank Act, which will require many such managers, which traditionally have relied on exemptions from registration, to register as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”).2 According to the CFTC staff, requiring most managers of commodity-trading funds to register as CPOs will give the CFTC greater oversight of market participants and a more comprehensive view of commodity market risk, which is consistent with the legislative mandate of the Dodd-Frank Act.
First adopted in 2003, many fund managers rely on one or both of the Rule 4.13 Exemptions to avoid registration with the CFTC as a CPO in connection with their management of commodity pools and hedge funds, as well as other securities-oriented funds that trade commodity interests to hedge or as a complement to their funds’ securities portfolios. The CFTC’s proposal would require many fund managers to register with the CFTC as CPOs and become NFA members, or rely on another exemption from registration, if any, to the extent that the managers trade commodity interests for their funds’ accounts.3 As a registered CPO, the fund manager must comply with all applicable CFTC and NFA rules, including disclosure, reporting, and recordkeeping requirements and periodic examination by NFA staff. As proposed, registration as a CPO or CTA would be required notwithstanding that the investment manager also may be registered as an investment adviser with the SEC or a comparable non-U.S. regulatory authority. This proposal, if adopted, would thus potentially bring sweeping changes to the thousands of hedge funds, funds-offunds, and other investment funds and managers that invest in the commodities markets, directly or indirectly, both within and outside of the United States.
The Registration Release does not provide for a transition period or grandfathering relief for existing fund managers who have claimed a Rule 4.13 Exemption. However, the CFTC is soliciting comments regarding whether grandfathering relief is appropriate, as well as whether the CFTC should consider adopting a new exemption that would allow a fund manager to avoid registration if its commodity pool trades only a de minimis amount of commodity interests, among other questions.
The Registration Release also contains a proposed conforming amendment that would eliminate the exemption from registration as a CTA for firms that render commodity trading advice to commodity pools whose CPOs rely on one of the Rule 4.13 Exemptions, pursuant to CFTC Rule 4.14(a)(8)(i)(D) (the “Exempt Pool CTA Exemption”). Otherwise, the CFTC has not proposed to eliminate or amend any other existing exemption from CTA registration under CFTC Rule 4.14 or other rule, which generally are more limiting than the Rule 4.13 Exemptions for CPOs. The other exemptions from CPO registration in Rule 4.13, which have limited applicability to most fund managers, are unaffected by the CFTC’s proposal.4
The CFTC’s Proposal to Limit the Rule 4.5 CPO Exclusion for Registered Investment Companies May Affect the Manner in Which Such Entities Operate or Require Managers to Register
CFTC Rule 4.5 provides an exclusion from the definition of the term “commodity pool operator” for the fiduciaries, managers, and operators of certain regulated entities that may otherwise be considered to be commodity pools, such as employee benefit plans, registered investment companies, and insurance companies (the “Rule 4.5 Exclusion”). Provided that the requirements of the Rule 4.5 Exclusion are met and a claim for relief is filed with the NFA, the operator is not required to register as a CPO.
In the Registration Release, the CFTC proposed to restrict the availability of the Rule 4.5 Exclusion with respect to registered investment companies only (and not other entities) by reinstating for such entities the limit on commodity interest trading that used to be a requirement of the Rule 4.5 Exclusion prior to certain amendments in 2003. The proposal generally would limit the use of commodity interests by registered investment companies for non-bona fide hedging purposes to five percent of the liquidation value of the entity’s portfolio, in order for the registered investment company’s manager to claim the exclusion. Significantly, the proposed five percent restriction also would specifically include positions in swaps, in addition to commodity interests, as part of the CFTC’s expanded jurisdiction over swaps (see discussion below). Furthermore, a registered investment company claiming the Rule 4.5 Exclusion would not be able to hold itself out to the public as providing investors with exposure to commodity interests or swaps markets.
According to the CFTC, this proposal is intended to prevent the use of the Rule 4.5 Exclusion to avoid CFTC oversight by commodity-oriented mutual funds that are marketed to the public. If these rule amendments are adopted, managers of registered investment companies must register with the CFTC as a CPO, unless the entity was able to comply with the new trading and marketing limits. The CFTC is soliciting public comment on a variety of questions concerning the proposed amendments to the Rule 4.5 Exclusion, including whether the five percent test is appropriate, practices concerning the marketing of registered investment companies, and whether CFTC registration would conflict with the securities regulatory regime applicable to registered investment companies.
Recent Amendments to the CEA May Require Many Investment Managers That Trade Certain Swap and Forex Contracts to Register as CPOs or CTAs
Recent amendments to the CEA have given the CFTC direct regulatory authority over certain swap and forex transactions and market participants trading in such instruments. These legislative amendments may require many investment managers that utilize swap and forex contracts for client accounts to register as CPOs or CTAs, or rely on an exemption from registration, as applicable. While many fund managers that trade these instruments may be able to avoid registration by relying on the Rule 4.13 Exemptions for the time being, if the proposed CFTC rules discussed above are adopted, those managers would no longer be able to rely on the Rule 4.13 Exemptions. Thus, many investment managers who do not trade futures or traditional commodity interests for their client portfolios and who accordingly are not registered, may be required to register as CPOs or CTAs, as applicable, and become NFA members, solely as a result of their swap and/or forex trading, and regardless of amount or whether for speculative or hedging purposes. As a result, once they become registered, such managers must comply with all applicable CFTC and NFA rules, in addition to being registered with the SEC as an investment adviser or with a non-U.S. regulatory authority, to the extent such securities registrations are required.
New regulatory oversight. The Dodd-Frank Act imposes a comprehensive and far-reaching regulatory regime on over-thecounter derivatives transactions and market participants, which historically have largely been unregulated. A discussion of this new regulatory regime is beyond the scope of this briefing. However, as part of these changes, the Dodd-Frank Act amends the definition of the terms “commodity pool operator” and “commodity trading advisor” in the CEA, to include persons who are engaged in the business of operating pooled investment vehicles and managing commodity trading accounts that invest and trade in swaps.5 The Dodd-Frank Act also added a parallel definition of the term “commodity pool” in the CEA to include a pooled investment vehicle that is operated for the purpose of trading commodity interests, including swaps.6 “Swaps” are defined in the CEA broadly to include many types of derivatives across various asset classes, but exclude, among other things, “security-based swaps” as defined in the Securities Exchange Act of 1934.7 Under the new regulatory regime imposed by the Dodd- Frank Act, as a general matter, swaps are regulated by the CFTC under the CEA, while security-based swaps are regulated by the SEC under the securities laws. Investment managers should analyze their swaps transactions to ascertain whether they would be classified as “swaps,” “security-based swaps,” or other noncovered derivatives in order to determine whether or not they may be required to register as CPOs or CTAs, as applicable.
Implications for investment managers that trade swaps. The amended definitions of the terms “commodity pool operator” and “commodity trading advisor” will go into effect on the applicable effective date provided for in the Dodd-Frank Act (expected to be on or about July 15, 2011).8 The most immediate consequence of the foregoing amendments is that investment managers that utilize “swaps,” as defined, will be treated, for CFTC registration purposes, in essentially the same manner as managers that utilize futures or other commodity interests. Therefore, investment managers that trade swaps for their funds and other client accounts may be required to register as CPOs or CTAs and become NFA members, unless an exemption is available, such as the Rule 4.13 Exemptions or the Exempt Pool CTA Exemption (for so long as such exemptions remain available). In addition, the CFTC may impose new regulatory requirements that specifically apply to swaps managers. For example, the CFTC has proposed a swap execution standards rule that would apply to all CFTC registrants executing customer orders for swaps that are made available for trading on a swap execution facility to ensure fair dealing and protect against fraud and other abusive practices.9 In addition, the CFTC has also proposed conforming amendments to the Part 4 disclosure, reporting, and recordkeeping requirements of registered CPOs and CTAs to reflect their swap activities.10
New regulatory oversight. As with swaps, the over-the-counter foreign currency (collectively, “forex”) markets have historically been largely unregulated. However, in response to various instances of fraud or abusive practices involving firms offering forex trading accounts to members of the retail public, there have been various incremental changes in the regulation of the retail forex markets over the last ten years, in an attempt to subject the retail forex marketplace to regulatory oversight. Most recently, amendments to the CEA as a result of the Dodd-Frank Act give the CFTC broad regulatory authority over retail forex transactions and market participants.11 As a result, the CFTC has adopted new rules that require the registration of retail forex dealers, managers and other intermediaries. These rules are contained in a new Part 5 of the CFTC’s rules (the “Retail Forex Rules”).12 Although this new regulatory regime is intended to deter fraud and abuse that has largely been limited to the retail market, it has broad application and may have the effect of regulating many investment managers whose investors and clients are sophisticated high net worth individuals and institutions.
Applies to “retail forex transactions” only. Similar to swaps, the Dodd-Frank Act amended the definitions in the CEA of the terms “commodity pool operator” and “commodity trading adviser” to include persons who are engaged in the business of operating pooled investment vehicles and managing commodity trading accounts that invest and trade in forex.13 However, under this new regulatory regime, not all forex transactions are subject to CFTC regulation under the CEA. Instead, only forex transactions that are entered into for the account of a fund or other client that does not qualify as an eligible contract participant (“ECP”), as defined, are subject to CFTC regulation (such non-ECP pools and clients, “retail clients” and such transactions “retail forex transactions”).14 If the forex transaction is entered into on behalf of a pool or client that is an ECP, the transaction generally is not subject to CFTC regulation. Further, foreign currency spot contracts that result in actual delivery within two days generally remain outside the jurisdiction of the CFTC under the CEA, while all other over-thecounter foreign currency contracts, such as forward, option and “rolling spot” contracts, are subject to the CFTC’s jurisdiction.15
Amendment to ECP definition as applied to commodity pools. Recent amendments to the definition of the term “eligible contract participant” in the CEA for purposes of whether the transaction is considered to be a “retail forex transaction,” may make it more difficult for many investment funds that are considered to be “commodity pools” under the broad definition of that term, to qualify as ECPs. As a result, more fund managers may be required to register as a CPO, to the extent that such managers utilize forex contracts for their non-ECP pools.
Prior to the Dodd-Frank Act, the CEA defined the term “eligible contract participant” to include an individual with at least $10 million in total assets. In addition, an ECP included an entity with at least $10 million in total assets, or a commodity pool with at least $5 million in total assets that was formed by a person subject to CFTC or similar foreign regulation, in either case, without regard to whether the owners of the entity or participants in the pool were themselves ECPs.
The amended ECP definition for purposes of retail forex regulation now includes a “look through” requirement for commodity pools (but not other entities generally), which provides that in order for a commodity pool to be an ECP, each of its pool participants must qualify as an ECP.16 In addition, the amended definition provides that for an individual to be an ECP (whether as a participant in a pool or an owner of a separate account), the individual must have at least $10 million invested on a discretionary basis (subject to reduction to $5 million in certain limited circumstances), as opposed to $10 million in total assets. Further, the CFTC has proposed a rule that would prevent a commodity pool from relying on the $10 million entity test.17 Under the proposed rule, the only way for a commodity pool to qualify as an ECP under the amended definition would be if all of its participants are themselves ECPs. There is no grandfathering provision that exists or that has been proposed that would exempt existing pool participants in currently operating pools from having to qualify as ECPs.
Implications for investment managers that trade “retail forex”. Investment managers that utilize forex for funds and other clients that do not qualify as ECPs will be required to register as CPOs or CTAs and become NFA members under the Retail Forex Rules, or else rely on an exemption, such as the Rule 4.13 Exemptions or the Exempt Pool CTA Exemption (for so long as such exemptions remain available). Such newly registered managers, or existing registered managers, will be required to notify the NFA that they engage in retail forex transactions for their retail accounts, and will be designated as “Forex CPOs” or “Forex CTAs” by the NFA for registration purposes. The registration and compliance requirements applicable to Forex CPOs and CTAs in the new Part 5 of the CFTC’s rules generally mirror the requirements applicable to CPOs and CTAs generally in Part 4 of the CFTC’s rules, with certain exceptions. In addition, under the Retail Forex Rules and the CEA, the investment manager must cause its retail client account to trade forex with a counterparty that is registered with the CFTC as a “retail forex exchange dealer” or “futures commission merchant” and is a member of the NFA.
The Retail Forex Rules went into effect October 18, 2010.18 The amended ECP definition, including the new look-through requirement, will go into effect on the applicable effective date provided for in the Dodd-Frank Act (expected to be on or about July 15, 2011).19 Until such effective date, the pre-amendment definition of ECP, which does not require a look-though, technically is still in effect. While may pooled investment vehicles may qualify as ECPs under the pre-amendment definition, it may be the case that many funds do not qualify as ECPs once the lookthrough requirement takes effect, given that many funds require investors to be accredited investors, qualified eligible persons, and/ or qualified purchasers, each of which typically require less assets or investments than does the ECP standard. As a result, unless funds limit themselves only to investors that are ECPs, going forward many fund managers may need to register as CPOs to the extent that they trade forex for their funds’ accounts, regardless of amount and whether for speculative or hedging purposes.
The Primary Compliance Obligations of a Registered CPO or CTA
Registered CPOs and CTAs generally, including Forex CPOs and CTAs, as well as CPOs and CTAs that utilize “swaps,” as defined, are subject to various registration and compliance requirements, including those summarized below.20 Investment managers that will be required to register as CPOs or CTAs should familiarize themselves with the following requirements.
Registration of firm and personnel. In addition to registration of the firm as a CPO or CTA and membership in the NFA, all firm directors, executive officers, and 10 percent or greater owners must be disclosed on the firm’s registration forms as “principals,” and all firm salespersons and their supervisors must be registered as “associated persons,” which includes passing the National
Commodity Futures Examination (Series 3) and becoming associate members of the NFA. In addition, a person required to register as an associated person of a Forex CPO or CTA who was not registered as an associated person as of May 22, 2008, will be required to pass the Series 3 exam and the Retail Off-Exchange Forex Examination (Series 34).21 Firms that are already registered as CPOs or CTAs and that render advice regarding forex for retail customers will be required to amend their registration to reflect their new status as a Forex CPO or CTA, as applicable.
Disclosure documents. Registered CPOs and CTAs must solicit prospective investors and clients only with a “disclosure document” that contains disclosures required by the CFTC rules, including but not limited to, a mandated “risk disclosure statement;” business background of the firm; its personnel, risks, and conflicts of interest; fees and costs; investment performance; and a “break-even” expense analysis. In the case of a fund manager, the fund’s private offering document or prospectus may be used as the disclosure document, provided that it contains the CFTC-required disclosures. Disclosure documents must be reviewed by the NFA prior to their first use or amendment, and expire every nine months, after which time the document must be updated and re-submitted to the NFA.
Recordkeeping. Registered CPOs and CTAs are required to maintain certain records, generally for a minimum of five years.
Reporting. Registered CPOs are required to provide reports to the participants in their pool containing certain required information no less than monthly, and also to prepare a certified annual report (i.e., financial statements audited by an independent accounting firm) of the pool on an annual basis. The pool’s annual report must be filed with the NFA and delivered to all pool participants. In addition, registered CPOs are required to submit certain information regarding their pools to the NFA on a quarterly basis. Further, if adopted, all registered CPOs and CTAs would be required to file new systemic risk rebports with the CFTC (see discussion below).
Other requirements. In addition, as a CFTC registrant and NFA member, the firm will be required to comply with any additional applicable CFTC or NFA rules, including the supervision of personnel, promotional material standards, ethics training of associated persons, and maintenance of disaster recovery/business continuity plans, among other things. In addition, registered CPOs and CTAs are subject to periodic compliance examinations by NFA staff.
Qualifying Registered CPOs and CTAs May Still Claim Limited Relief Under Rule 4.7
The CFTC’s proposals in the Registration Release do not rescind the limited regulatory relief for registered CPOs or CTAs that is available pursuant to Rule 4.7. CFTC Rule 4.7 provides registered CPOs and CTAs relief from certain of the foregoing disclosure, recordkeeping, and reporting requirements, upon the filing of a claim of exemption with the NFA, if all of the participants in the CPO’s pool or the CTA’s advisory clients qualify as “qualified eligible persons” as defined in CFTC Rule 4.7.22 Specifically, a registered CPO or CTA that claims relief under Rule 4.7 is not required to solicit investors or clients with an NFA-reviewed disclosure document that complies with the CFTC’s disclosure requirements, nor is such CPO or CTA required to comply with the specific recordkeeping obligations applicable to registered CPOs or CTAs generally. With regard to reporting, a CPO may provide reports to its pool participants on a quarterly, as opposed to monthly, basis and such reports need not contain all of the specific information required by CPO reports generally. In addition, a CPO may file with the NFA and deliver to its pool participants an uncertified annual report for its pool, as opposed to a certified annual report (i.e., audited financial statements). However, the CFTC has proposed to require a Rule 4.7-exempt CPO to file certified annual reports for its pools, as opposed to uncertified (see discussion below).
Investment managers that are required to register as CPOs or CTAs, including Forex CPOs and CTAs and CPOs and CTAs that utilize “swaps,” as defined, for their client portfolios, may wish to consider claiming the limited relief available pursuant to Rule 4.7 for certain or all of their pools and accounts, to the extent applicable.
Other Recent CFTC Rule Proposals That Would Affect Investment Managers
In addition to the rescission of the Rule 4.13 Exemptions and the limitation of the Rule 4.5 Exclusion, in the Registration Release the CFTC has proposed the following registration-related changes:
Annual report relief under Rule 4.7. The CFTC has proposed to eliminate the ability of a Rule 4.7-exempt CPO to file and deliver an uncertified annual report for its pool; if adopted, the amended rule would require all annual reports to be certified by an independent accounting firm.
Annual re-certification of exemptions. The CFTC has proposed to require that an investment manager claiming exemptive relief under another exemption pursuant to CFTC Rules 4.13 or 4.14, confirm their notice of exemption on an annual basis by making a new filing with the NFA on an annual basis. Similarly, the CFTC would require that an investment manager claiming exclusionary relief pursuant to the Rule 4.5 Exclusion confirm their notice of exclusion on an annual basis by making a new filing with the NFA on an annual basis.
Swaps disclosure. Consistent with the CFTC’s new regulatory authority over swap transactions, the CFTC has proposed to amend the “risk disclosure statement” required to be included in CPO and CTA disclosure documents to include a discussion of certain risks specific to swap transactions.
QEP definition. The CFTC has proposed to modify the definition of “qualified eligible person” as it relates to accredited investors so as to incorporate by reference the amendment to the definition of accredited investor enacted by the Dodd-Frank Act which, among other things, excludes from an individual’s net worth, the value of his or her primary residence.
Comment Period for Registration Release Proposals
Comments to any aspect of the Registration Release should be submitted to the CFTC within 60 days of the publication of the Registration Release in the Federal Register, or April 12, 2011.
The SEC and CFTC Proposed to Require Investment Managers to File New Systemic Risk Reports
Another recent development is the CFTC’s and SEC’s joint proposal to require registered investment advisers to file reports on new Form PF with the SEC regarding the “private funds” that they advise (the “Joint Release”).23 The Joint Release would also require registered CPOs and CTAs that are also registered investment advisers (“dual registrants”) to file Form PF with the SEC, which would also be deemed a filing with the CFTC.24 In addition, in a separate rulemaking, the CFTC has proposed that registered CPOs and CTAs that are not dual registrants file reports on new Forms CPO-PQR and CTA-PR regarding the commodity pools they advise (the “CFTC Reporting Release”).25 Forms CPO-PQR and CTA-PR are intended to collect substantially the same information as the SEC’s Form PF, albeit with respect to commodity pools as opposed to private funds.
Applicability. The reporting requirements in the Joint Release and the CFTC Reporting Release (collectively, the “Reporting Releases”) only apply to investment managers that are registered, or required to be registered, with the SEC and/or the CFTC (“registered managers”), and not unregistered managers. The Reporting Releases are in response to the Dodd-Frank Act, which authorizes the SEC and other regulatory agencies to gather information concerning private funds to assist the newly created Financial Stability Oversight Council (the “FSOC”) in monitoring “systemic risk” posed by financial institutions.
It should be noted that the Reporting Releases would impose reporting requirements that are in addition to enhanced disclosure and reporting requirements already proposed by the SEC.26 This earlier SEC proposal would require registered investment advisers to provide additional disclosure on Form ADV regarding the private funds that the adviser manages. In addition, this proposal would create a new reporting regime for investment advisers that are relying on the exemption from registration applicable to smaller private fund advisers (i.e., those with less $150 million assets under management (“AUM”)) and advisers to “venture capital funds,” as defined (collectively, “exempt reporting advisers”). Pursuant to this proposal, exempt reporting advisers would be required to report on Form ADV certain identifying information about the adviser and the funds they advise.
Specifics of reports. Forms PF, CPO-PQR, and CTA-PR (collectively, the “Reports”) would require a description of certain information about the registered manager and its private funds and commodity pools, as applicable. The quantity and frequency of information generally would depend on the AUM of the registered manager and its private funds and commodity pools and, in the case of Form PF, the type of funds so advised (e.g., “hedge funds,” “private equity funds,” and “liquidity funds” as defined in the Joint Release).
All registered managers would be required to file certain basic identifying information regarding themselves, their private funds, and commodity pools. Larger private fund advisers (i.e., those with aggregate AUM over $1 billion, in the case of managers to private funds required to file Form PF (“large private fund advisers”) and those with AUM over $150 million and $1 billion, in the case of commodity pool operators and trading advisers required to file Forms CPO-PQR or CTA-PR) would be required to file more detailed information regarding their investments, counterparty risk, and leverage, among other information. Generally, Form PF would be filed annually, or for large private fund advisors, quarterly, while Forms CPO-PQR and CTA-PR would be filed quarterly (with one exception for mid-sized CPOs filing Schedule B to Form CPO-PQR, which would be filed annually). The CFTC has proposed that Forms CPO-PQR and CTA-PR be filed with the NFA through its “EasyFile” system, and in the Joint Release, the SEC indicated that it expects to develop a system to accept Form PF filings but did not provide any further detail.
Confidentiality. The SEC and the CFTC would make information from the Reports available to the FSOC, and information on Form PF obtained by the SEC would be shared with the CFTC in the case of a dual registrant. Pursuant to the Dodd-Frank Act, the information contained in the Reports generally would be exempt from disclosure to the public under the Freedom of Information Act. Report information would be made available if requested by court order, another federal government agency or self-regulatory authority, or if requested by Congress.
Effective date. Comments on the Reporting Releases are due by April 12, 2011. The anticipated compliance date for filing Form PF is December 15, 2011. If this proposed compliance date is adopted in the final rules, large private fund advisers would be required to file their first Form PF within 15 days after December 31, 2011, or by January 15, 2012. All other investment advisers would be required to file their first Form PF within 90 days after the end of their first fiscal year occurring on or after the compliance date (e.g., for advisers whose fiscal year is December 31, by March 31, 2012). The anticipated effective date for Forms CPO-PQR and CTA-PR would be six months after the adoption of the proposed forms.
Investment Managers Should Prepare Now
Investment managers are encouraged to familiarize themselves with the proposed rules and other recent changes discussed in this briefing, and analyze whether these new proposals and requirements are applicable to their business. Investment managers that are required to register with the CFTC or claim an exemption from registration (to the extent those remain available), or make other changes to their disclosure or business practices, should begin preparing now, in advance of any applicable compliance dates.