The CFTC’s Division of Swap Dealer and Intermediary Oversight (the “Division”) granted no-action relief (the “No-Action Relief”) in response to a request from the Investment Company Institute (the “ICI”) and the Securities Industry and Financial Markets Association (“SIFMA”) seeking relief from certain reporting obligations under Part 4 of the CFTC’s regulations as they apply to commodity pool operators (“CPOs”) of certain controlled foreign corporations (“CFCs”) used by registered investment companies (“RICs”) as vehicles for investing in commodity interests. In these structures, (1) the investment adviser of the RIC serves as CPO of the RIC and of the CFC; and (2) the CFC is a “wholly-owned subsidiary” of the parent RIC as defined in the Investment Company Act of 1940, which means that at least 95% of the CFC’s outstanding voting securities are owned by the RIC or by a subsidiary in which the RIC holds a like interest.
As described in the August 27, 2013 Financial Services Alert, the CFTC adopted rule amendments (the “Harmonization Rule”) designed to harmonize certain CFTC compliance obligations that apply to CPOs of RICs with the compliance obligations imposed on RICs by the SEC. Through the Harmonization Rule, the CFTC has, in effect, adopted a “substituted compliance” regime for CPOs of RICs that is based largely upon adherence to the SEC’s statutory and regulatory compliance regime. As part of the adopting release for the Harmonization Rule (the “Adopting Release”), the CFTC reaffirmed its view that a CFC used by a RIC may fall within the definition of a “commodity pool” depending on the CFC’s activities, and, if it does, the CFC constitutes a separate “commodity pool” apart from its parent RIC. Under these circumstances, absent an exemption or exclusion, the CPO of the CFC would be subject to compliance with Part 4 of the CFTC’s regulations with respect to the CFC. The Adopting Release did, however, provide relief for CFCs from certain aspects of the Part 4 requirements: (1) if a parent RIC provides disclosure regarding the activities of its CFC in accordance with the SEC’s rules applicable to the RIC, the CFC will not be required to prepare a separate disclosure document that complies with Part 4 of the CFTC’s regulations; and (2) if the CFC’s financial statements are consolidated into those of its parent RIC that are filed with the National Futures Association (the “NFA”), the CFTC will not require the CFC to file separate financial statements.
No-Action Relief Granted
CFTC Rule 4.27(c) – Reports on Form CPO-PQR
Subject to specified conditions, including a requirement that the CPO file a notice of its intention to claim the No-Action Relief, the Division provided relief from CFTC Rule 4.27(c), which requires a registered CPO to file Form CPO-PQR with respect to the commodity pools that it operates. Absent the No-Action Relief, a CPO that is registered with respect to its operation of a CFC and its parent RIC is required to submit a separate Form CPO-PQR filings for each entity. Under the No-Action Relief, the CPO of a RIC and its wholly-owned CFC may submit a single consolidated report for the RIC on Form CPO-PQR that includes the data for the CFC, and may do so beginning with the next applicable reporting period following October 21, 2013 (the “Compliance Date”). (Note that the ICI is seeking confirmation from the Division regarding the Compliance Date; as discussed in greater detail in the August 27, 2013 Financial Services Alert, CPOs of RICs will generally become subject to Form CPO-PQR filing requirements beginning October 21, 2013, which means that existing CPOs of RICs will be required to make their initial filings with respect to the reporting period ending December 31, 2013.) In order to rely on this relief, for the initial reporting period following the Compliance Date, the CPO must either (i) currently consolidate the wholly-owned CFC’s financial statements with those of the parent RIC’s financial statements for financial reporting purposes or (ii) be in the process of converting from separate financial reporting to consolidated financial reporting for the RIC and CFCs it operates. To the extent that a CPO seeks to comply with condition (ii) above, (a) it must also operate at least one RIC that currently consolidates its CFC for financial reporting purposes and (b) its other RICs must consolidate their CFCs for financial reporting purposes for the next applicable CPO-PQR reporting period following the Compliance Date. In addition, for all subsequent reporting periods, the CPO must either file a consolidated report consistent with the No-Action Relief or make a separate filing on behalf of the CFC pursuant to Rule 4.27(c).
This element of the No-Action Relief is only available to a CPO that is registered as such with respect to both the parent RIC and the CFC, and is not available to an investment adviser that is exempt from registration as a CPO with respect to the parent RIC (for example, in reliance on CFTC Rule 4.5).
CFTC Rule 4.22(c) – Annual Report Filing with NFA
Subject to specified conditions, including a requirement that the CPO file a notice of its intention to claim the No-Action Relief, the Division provided relief from CFTC Rule 4.22(c), which requires a registered CPO to file with the NFA a certified Annual Report containing certain specified financial information including audited financial statements and to distribute copies of the Annual Report to the pool participants within 90 calendar days of the end of the pool’s fiscal year. A CPO registered with respect to its operation of a RIC and a CFC wholly-owned by the RIC would be required to file with NFA separate Annual Reports for the parent RIC and the CFC (but under existing Rule 4.22(c)(8), would not be required to distribute a copy of the CFC’s Annual Report to the parent RIC). Under the No-Action Relief, the CPO of a RIC and a CFC wholly-owned by the RIC is not required to file with the NFA a separate Annual Report for the CFC if the Annual Report for the RIC contains consolidated audited financial statements that include, and also separately indicate, the holdings, gains and losses, and other financial statement amounts attributable to the CFC. This consolidated Annual Report must be submitted for the RIC’s next fiscal year ending after the Compliance Date, and, going forward, for all subsequent fiscal years (as applicable).
Filing a Notice of Claim
The No-Action Relief is not self-executing. To rely on the No-Action Relief, a CPO must file a notice of claim that provides specified identifying information. A notice of claim will be effective upon filing, so long as it is materially complete. A notice of claim with respect to Rule 4.27(c) must be filed by the end of the next applicable reporting period following the Compliance Date; a notice of claim with respect to Rule 4.22(c) must be filed by the RIC’s next fiscal year end following the Compliance Date.