Commodity Trading Advisor Regulation
|FINAL RULE: The SEC Final Rule: Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF was issued at its October 26, 2011 open meeting. The Commodity Futures Trading Commission (CFTC) approved the joint final rule on October 31, 2011.|
|FINAL RULE: The CFTC final rule on conforming amendments to include swaps in CPO/CTA rules was approved August 23, 2012.|
|Final Rule Issue||Effective Date||Compliance Date|
|February 9, 2012||July 2, 2012||by December 2012*|
|Proposal Date||Final Rule Issue||Effective Date|
|March 3, 2011||September 5, 2012||November 5 2012|
|Final Rule Issue||Effective Date||Compliance Date|
|November 16, 2011||March 31 2012||June 15, 2012*|
Among the provisions of the Dodd-Frank Act are several requirements affecting commodity trading advisors (CTAs), commodity pool operators (CPOs) and investment advisors to private funds. The Securities and Exchange Commission submitted a proposed rule on systemic risk reporting requirements for private fund advisers including hedge funds, CPOs and CTAs in February 2011; the rules became finalized in October 2011.
The Commodity Futures Trading Commission participated in the joint rulemaking with the SEC on the reporting requirements, and also proposed its own rules on certain compliance aspects for CPOs and CTAs. These rules were finalized in February 2012.
A summary of the rulemakings, advisories and other information regarding CTAs can be found below.
- 1 NFA Request for Comments: CPO/CTA Capital Requirement and Customer Protection Measures, January 2014
- 2 CFTC Staff Advisory: Commodity Trading Advisors and Swaps, December 2013
- 3 CFTC Final Rule: Dual and Multiple Associations of Persons Associated With Swap Dealers, Major Swap Participants and Other Commission Registrants
- 4 Private Fund Systemic Risk Reporting, October 2011
- 5 Final Rules, Conforming Amendments, August 2012
- 6 CFTC Final Rule: Registration and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors
- 7 CFTC Guidance to Off-Exchange Forex CTAs/CPOs, February 27, 2012
- 8 CFTC Staff Roundtable on Changes to Registration and Compliance Requirements for CTAs and CPOs, July 6, 2011
- 9 References
NFA Request for Comments: CPO/CTA Capital Requirement and Customer Protection Measures, January 2014
On January 23, 2014, the National Futures Association (NFA) issued a request for comment from its members on the possibility of adding capital requirements and other customer protection measures. The deadline for comment is April 15, 2014.
NFA regularly reviews the continued effectiveness of its regulatory requirements. Over the past three years, NFA has issued 26 Member Responsibility Actions (MRAs), and 92% of those MRAs were against CPO and/or CTA Members. Most of these matters involved misuse of customer funds (including one CPO that improperly used pool funds because it had insufficient assets to operate as a going concern) and/or misstating net asset values and/or performance information. In light of these actions, NFA is reviewing the current regulatory structure applicable to CPO and CTA operations. In particular, NFA is looking at ways to strengthen the regulatory structure governing CPO operations to provide greater protection for customer funds. Additionally, NFA is exploring ways to ensure that CPOs and CTAs have sufficient assets to operate as a going concern. NFA's Executive Committee approved the issuance of this request for comments to solicit CPO and CTA Member input on the concept of imposing a capital requirement on CPO/CTA Members and other customer protection measures. For more information, click HERE.
On December 23, 2013, the CFTC Division of Swap Dealer and Intermediary Oversight issued an advisory on the new obligations of previously exempt CTAs now subject to commission regulations, specifically, as related to swap activities.
CFTC Final Rule: Dual and Multiple Associations of Persons Associated With Swap Dealers, Major Swap Participants and Other Commission Registrants
On April 8, 2013, a CFTC final rule was published in the Federal Register that clarifies certain supervisory responsibilities of swap dealers and major swap participants. Under the rule, each swap dealer (SD), major swap participant (MSP), and other Commission registrant with whom an associated person (AP) is associated (such as CTAs, CPOs and introducing brokers) is required to supervise the AP and is jointly and severally responsible for the activities of the AP with respect to customers common to it and any other SD, MSP or other Commission registrant.
On October 26, 2011, the Securities and Exchange Commission (SEC) finalized rules requiring advisers to hedge funds and other private funds, including commodity pool operators and commodity trading advisors, to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the U.S. financial system. The Commodity Futures Trading Commission (CFTC) approved the joint final rule on October 31, 2011.
Under the rules, larger private fund advisers managing hedge funds, "liquidity funds" (i.e., unregistered money market funds), and private equity funds would be subject to heightened reporting requirements. Large private fund advisers would include any adviser with $1 billion or more in hedge fund, liquidity fund, or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers and would be subject to lesser reporting requirements. Information reported on Form PF would remain confidential, unlike Form ADV which is available to the public.
The systemic risk reporting rule was done in accordance with Title I (Financial Stability Oversight Council) and Title IV (Investment Advisers) of the Dodd-Frank Act. According to Dodd-Frank, private funds who may have previously sidestepped registration and reporting would be required to periodically report certain information to regulators, depending upon:
- the amount of assets under management,
- use of leverage,
- counterparty credit risk exposure,
- trading and investment positions, and
- the proposed registration, reporting, and compliance requirements.
Final Rules, Conforming Amendments, August 2012
On August 23, 2012, the CFTC issued a final rule that amends Part 4 of its regulations to reflect changes made to the CEA by the Dodd-Frank Act. Dodd-Frank redefined the terms “commodity pool” “commodity pool operator” and“commodity trading advisor” to include involvement with swaps activities and transactions.
CFTC Final Rule: Registration and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors
On February 9, 2012, the CFTC issued its final rulemaking regarding CPO/CTA compliance obligations. The final rule rescinds the registration exemption for "qualified eligible persons," modifies the criteria for claiming relief under section 4.5, requires the annual filing of notices claiming exemptive relief, and adopts amendments that include new risk disclosure requirements for CPOs and CTAs regarding swap transactions. For more information, see the CFTC Final Rule: Registration and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors page.
For more on the compliance rules as proposed in 2011, click HERE.
CFTC Guidance to Off-Exchange Forex CTAs/CPOs, February 27, 2012
On February 27, 2012, the CFTC Division od Swap Dealer and Intermediary Oversight issued a letter of guidance to the National Futures Association (NFA) regarding the CFTC Retail Forex rules and performance disclosure by CPOs and CTAs. According to the letter:
"It is the Division’s view...that a Forex CTA is required to disclose past performance for the period beginning October 18, 2010, or, if later, the date on which the Forex CTA first began exercising discretionary trading authority over accounts engaged in retail forex transactions. From and after October 18, 2015, the period of time described in Regulation 4.35(a)(5) (five most recent calendar years and year-to-date or life of the trading program, if shorter) would apply.
"If a Forex CTA elects to include in its Disclosure Document past performance information for any time prior to October 18, 2010, we believe that in order to avoid “cherry picking” the presentation of such information should encompass the entire period set forth in Regulation 4.35(a)(5) and should include all of the accounts over which the Forex CTA exercised discretionary trading authority during that period."
The full text of the letter can be found HERE.
CFTC Staff Roundtable on Changes to Registration and Compliance Requirements for CTAs and CPOs, July 6, 2011
On July 6, 2011, the CFTC held a public roundtable to discuss issues related to registration and compliance regime for commodity pool operators and commodity trading advisors. Issues addressed:
- The scope of changes to Commission Regulation 4.5 - thresholds, marketing restrictions, and alternatives to the proposal;
- Harmonization with Securities and Exchange Commission Requirements - disclosure and reporting requirements; foreign-domiciled entities;
- De Minimis Exemption; and
- Alternative exemptions, such as family offices.
For more information, including a summary of the roundtable and video of the event, click HERE.
- SEC Approves Confidential Private Fund Risk Reporting. SEC. Retrieved on October 26, 2011.
- CFTC and SEC Approve Confidential Private Fund Risk Reporting. CFTC. Retrieved on October 31, 2011.
- CFTC Staff Roundtable Discussion on Proposed Changes to Registration and Compliance Regime for Commodity Pool Operators and Commodity Trading Advisors. CFTC. Retrieved on July 29, 2011.