Reinstating requirements applicable to commodity pool operators (CPO) to apply to certain mutual fund operators, which were excluded in amendments passed in 2003, would level the playing field for investors with respect to pooled vehicles that utilize the same instruments to meet their investment objectives, CPO Steben & Co. of Rockville, MD said in comments filed at the Commodity Futures Trading Commission (CFTC) Monday.
The entities operating outside CFTC jurisdiction represent "an attempt to 'shoe horn' a commodity pool into a mutual fund package" and avoid reporting and transparency regulations applicable to registered commodity pools. Steben filed in support of a petition by the National Futures Association (NFA) that would bring the entities under the same regulation as other CPOs.
"Mutual fund/commodity pools buy and sell commodity futures and commodity options contracts, swaps, structured notes and other instruments as the principal means of obtaining returns for their investors," Steben said, and they market themselves as managed futures funds. Yet they currently are allowed to operate outside of CFTC commodity pool rules.
The new mutual fund/commodity pools bypass the CFTC's "carefully crafted regime in favor of one that places fewer restrictions on firms managing and, importantly, selling interests in such vehicles. To us, this not only undermines the CFTC's oversight of commodity futures and commodity options contracts for pooled vehicles that use these instruments to produce returns for shareholders, but it has also opened the door to less transparency and the masking of unique and important risks associated with investing in managed futures strategies.
The CFTC has called for comments on the NFA's proposed amendment to the regulations to narrow the definition of investment firms that may be excluded from CPO rules. Firms to be excluded "will (1) use commodity futures or commodity options contracts solely for bona fide hedging purposes, (2) will not have the initial margin and premiums required to establish any commodity futures or commodity options not used for bona fide hedging purposes exceeding 5% of the liquidation value of the qualifying entity's portfolio, and (3) will not be marketed to the public as a commodity pool or as a vehicle for investment in commodity futures or commodity options."
The Securities Industry and Financial Markets Association (SIFMA) objects to the proposed change, saying, "Registered investment companies are already highly regulated, and regulation as a commodity pool operator would impose duplicative and in many cases inconsistent regulatory requirements. The Investment Company Act already requires these entities to register with the Securities and Exchange Commission (SEC) and comply with extensive disclosure, custody, record keeping, reporting and other compliance requirements that, in general, are no less stringent than the CFTC's."
"The NFA's proposal would result in higher costs and regulatory burdens on registered investment companies, including the duplicative costs of registering with both the SEC and the CFTC and attendant reporting, disclosure, recordkeeping and other requirements," SIFMA said.
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