On February 9, 2012, the CFTC adopted final rules that, among other changes, amend Rule 4.5 which had provided relief to registered investment companies (e.g. mutual funds) from registration as commodity pool operators. Rule 4.5 as amended imposes significant new conditions on claiming the exclusion. These changes will result in the need for CPO registration in situations where an investment company’s investment program has a significant commodities component or an investment company makes more than limited use of commodities and swaps other than for bona-fide hedging purposes. Specifically, registered investment companies that engage in speculative trading in futures, commodity options, swaps, and other commodity interests may rely on Rule 4.5, as amended by the final rules, if (i) the aggregate initial margin and/or premiums for the registered investment company’s speculative commodity positions do not exceed 5% of the liquidation value of the registered investment company’s portfolio, after taking into account unrealized profits and losses, or (ii) the aggregate net notional value of its speculative commodities-related trading positions does not exceed 100% of the liquidation value of the registered investment company’s portfolio, after taking into account unrealized profits and losses (excluding the in-the-money amount of an option at the time of purchase).
Recognizing that the amendment of Rule 4.5 would subject investment companies and their advisers to potentially overlapping and inconsistent disclosure and reporting requirements at the CFTC and SEC level, the CFTC also proposed the adoption of various rule amendments meant to harmonize the compliance obligations arising under the two agencies rules, specifically in the area of disclosure, periodic reports and record keeping. Compliance with amended Rule 4.5 is required by the later of Dec. 31, 2012, or 60 days after the effective date of final rule-making defining the term “swap.” Entities required to register due to the amendment of Rule 4.5 will become subject to CFTC record-keeping, reporting and disclosure requirements 60 days following the effectiveness of the proposed rule amendments relating to investment companies.
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