CFTC Implements Substituted Compliance Approach for Commodity Pool Operators of Registered Investment Companies

On August 13, the Commodity Futures Trading Commission ("CFTC") issued a release relating to the harmonization of compliance obligations for registered investment companies ("RICs") required to register as commodity pool operators ("Registered CPOs"). The final rules (the "Rules") became effective on August 22, with the exception of amendments to certain CFTC rules pertaining to recordkeeping, the 12-month use of the disclosure documents, and the disclosure required of open-end RICs with less than three years' operating history, all of which will become effective on September 23.

Last year, the CFTC modified its Regulation 4.5 to exclude advisers to RICs that invest a de minimis amount of assets in commodity interests other than for bona fide hedging purposes from the definition of "commodity pool operator" ("CPO"). An adviser that did not qualify for the exemption would have been forced to register as a CPO, thus subjecting the RIC to CPO disclosure, compliance, and financial reporting obligations under applicable CFTC rules. Because the CFTC rules imposed a number of regulations on RICs that were inconsistent with existing Securities and Exchange Commission ("SEC") regulations, the CFTC also proposed at that time rule amendments that were intended to address the inconsistencies.

The Rules reflect the CFTC's decision to harmonize certain CFTC and SEC regulations by adopting a substituted compliance regime for Registered CPOs of RICs. This approach is premised upon such entities' adherence to SEC disclosure, reporting, and recordkeeping rules for RICs in satisfaction of, and in substitution for, compliance with such rules in Part 4 of the CFTC regulations. In order to adopt the substituted compliance approach, a Registered CPO of a RIC must satisfy the following requirements:

  • The Registered CPO must file notice of its use of the substituted compliance regime with the National Futures Association ("NFA");
  • The Registered CPO of a RIC with less than three years' operating history must disclose the performance of all accounts and pools that are managed by the CPO and that have investment objectives, policies, and strategies substantially similar to those of the offered pool;
  • The Registered CPO must file with the NFA the financial statements that it prepares pursuant to its obligations to the SEC; and
  • If the Registered CPO uses or intends to use third-party service providers for recordkeeping purposes, it will be required to file a notice of that fact with the NFA.

In adopting the Rules, the CFTC acknowledged that permitting Registered CPOs to maintain books and records with third-party providers would be consistent with market practice and SEC requirements and would allow the Registered CPO to avail itself of lower costs and increased record security.

In addition, the CFTC agreed with various commenters that permitting the use of third-party recordkeeping services should also be extended to all Registered CPOs, not just those that act for RICs. In all cases, the Rules require timely access to a Registered CPO's books and records, regardless of where they are held and, if the Registered CPO decides to delegate its recordkeeping responsibilities, the filing of a notice by the Registered CPO with the NFA describing the delegated recordkeeper.

The Rules also permit all Registered CPOs and commodity trading advisors to use disclosure documents for up to 12 months from the date of the document. For Registered CPOs of open-end RICs, the CFTC determined that the applicable timeframes under the SEC RIC rules would be deemed by the CFTC to satisfy the timing requirements under applicable CFTC regulations. Similarly, the CFTC agreed that existing securities law obligations imposed on RICs regarding the correcting of material misstatements or omissions would satisfy CFTC interim updating requirements for Registered CPOs of RICs. The Rules further eliminate the need for a Registered CPO of a RIC to file its disclosure documents with the NFA according to the schedule prescribed in CFTC regulations, even though the disclosures would still need to be made available to the NFA to enable it to discharge its duty to monitor and examine CFTC registrants during an examination. In addition to providing an exemption for Registered CPOs of RICs from certain CFTC disclosure requirements, the Rules also eliminate the requirement previously imposed on all Registered CPOs to obtain a signed acknowledgement from prospective pool participants affirming receipt of disclosure documents.

Finally, the Rules provide relief to Registered CPOs of RICs from the CFTC's requirement to send monthly statements to pool participants, provided that (i) the RIC's current net asset value per share is available to investors, (ii) the RIC furnishes semi-annual and annual reports to investors, and (iii) the RIC files annual reports with the SEC as required by the SEC.

A copy of the Rules may be accessed here.

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at

Alice Yurke
New York

Michael R. Butowsky
New York

Anthony L. Perricone
New York

Joel S. Telpner
New York

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our web site at The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.