Alert July 02, 2013

DC Court of Appeals Upholds CFTC Amendments to Regulation 4.5 CPO Exclusion Relating to Registered Funds

On Tuesday, June 25, 2013, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the decision of the United States District Court for the District of Columbia to dismiss a lawsuit brought by the U.S. Chamber of Commerce (the “Chamber”) and Investment Company Institute (“ICI”) against the CFTC challenging amendments to CFTC Regulations 4.5 and 4.27 adopted in 2012 (the “Amendments”).  The Amendments, which were described in the February 14, 2012 Financial Services Alert (the “February 2012 Alert”), imposed (1) additional trading and marketing limitations as conditions of the exclusion from the definition of commodity pool operator (“CPO”) available with respect to registered investment companies (“RICs”) under CFTC Regulation 4.5, and (2) quarterly reporting requirements for CPOs under CFTC Regulation 4.27.   The Chamber and ICI alleged, among other things, that the Amendments did not meet the requirements of the Commodity Exchange Act (“CEA”) relating to cost-benefit analysis and were arbitrary and capricious under the Administrative Procedure Act.  In dismissing the lawsuit brought by the Chamber and ICI, the Court of Appeals upheld the District Court’s finding that the CFTC’s amendments to Regulation 4.5 and 4.27 were not arbitrary and capricious.

The Amendments were not stayed pending the resolution of the suit brought by Chamber and ICI.  Compliance with the changes to Regulation 4.5 was generally required beginning January 1, 2013.  CPOs that were already registered were required to comply with Regulation 4.27 by September 15, 2012 or December 15, 2012, depending upon their assets under management.  CPOs required to register because of the changes to Regulation 4.5 are not yet subject to recordkeeping, reporting, and disclosure requirements pursuant to part 4 of the CFTC’s regulations, including Regulation 4.27, but will be 60 days following the effectiveness of a final rule adopted as result of the CFTC’s ongoing rulemaking initiative to harmonize CFTC and SEC compliance requirements for RICs, as discussed below.

CFTC Harmonization Proposal for RICs.  When it adopted the Amendments, the CFTC also proposed a number of amendments to its regulations (the “Harmonization Proposal”) that are designed to harmonize CFTC compliance obligations for CPOs of RICs with those imposed on RICs by the SEC.  The Harmonization Proposal focuses on three principal areas: (a) delivery of disclosure documents and periodic reports; (b) recordkeeping; and (c) disclosure content.  See the February 2012 Alert for additional detail on the Harmonization Proposal.  The comment period for the Harmonization Proposal closed on April 24, 2012.  It is anticipated that the CFTC will vote on adoption of the Harmonization Proposal later this year.