The U.S. House of Representatives on June 24, 2014, passed a version of the CFTC reauthorization bill, H.R. 4413, that would exclude investment advisers to registered investment companies (RICs) from the definitions of commodity pool operator (CPO) and commodity trading advisor (CTA) if they limit their advice and trading activity to “financial commodity interests.”
H.R. 4413 (the Customer Protection and End User Relief Act) included an amendment introduced by Representative Garrett of New Jersey. The Garrett Amendment, as included in the bill, defines financial commodity interests as futures contracts, options on futures contracts, and swaps involving non-traditional commodities (exempt commodities, such as natural resources and agricultural commodities, are excluded from the definition).
If enacted, the bill will exempt most investment advisers to RICs from CPO and CTA registration and other requirements, including the CFTC’s substituted compliance regime. Substituted compliance generally permits investment advisers to RICs to comply with SEC regulatory requirements in place of comparable CFTC requirements (see our related client alert). While intended to relieve some of the burdens imposed by duplicative CFTC and SEC regulations, substituted compliance was viewed by many as insufficient, since it did not cover requirements imposed by the National Futures Association or the CFTC’s rules governing commodity interest trading activities.
The Garrett Amendment will not alter the SEC’s regulatory oversight or enforcement authority over RICs, nor will it affect the CFTC’s jurisdiction over RICs that trade in physical commodities.
It is too early to predict whether the Senate will approve the bill that includes the Garrett Amendment.
Alexis K. Paddock