CFTC Re-Imposes Limitations on Derivative Activities by Registered Investment Companies

CFTC Re-Imposes Limitations on Derivative Activities by Registered Investment Companies

Amended Rule 4.5 will require the operators of Registered Funds to either limit such Funds' use of commodity futures, options, leverage contracts, retail forex contracts, and swaps (together, "commodity interests") or submit to dual regulation by the CFTC and the Securities and Exchange Commission ("SEC").

Excerpt:

The Commodity Futures Trading Commission ("CFTC") has adopted amendments to Rule 4.5 under the Commodity Exchange Act ("CEA") that will greatly narrow that rule's exclusion for operators of registered investment companies ("Registered Funds" or "Funds") from regulation as commodity pool operators ("CPOs"). Amended Rule 4.5 will require the operators of Registered Funds to either limit such Funds' use of commodity futures, options, leverage contracts, retail forex contracts, and swaps (together, "commodity interests") or submit to dual regulation by the CFTC and the Securities and Exchange Commission ("SEC"). Registered Funds that currently invest in commodity interests will need to evaluate and make significant changes to their investment and compliance programs before the amendments to Rule 4.5 take effect.

For persons relying on the Rule 4.5 exclusion as of the effective date of the rule amendments, April 24, 2012, the requirement to register under amended Rule 4.5 will be effective on the later of: (i) December 31, 2012; or (ii) within 60 days after the CFTC adopts final rules defining "swap" and establishes margin requirements for such instruments. However, based upon discussions with CFTC staff, any Registered Fund that does not have a Rule 4.5 notice on file prior to April 24, 2012 will be required to register at that time if it cannot come within the rule's new trading limits.

Concurrent with the adoption of the amended Rule 4.5, the CFTC proposed certain harmonization measures-for advisers to Registered Funds that will be required to register with the CFTC-to address regulatory issues these Funds will face under a dual SEC-CFTC regulatory scheme (the "Harmonization Proposal"). The compliance regime that will apply to dually-registered funds will become effective 60 days after the final rules proposed in the Harmonization Proposal are published in the Federal Register.

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