A few weeks ago, the Commodity Futures Trading Commission (“CFTC”) issued amendments to regulations covering periodic account statements and annual reports that Commodity Pool Operators (“CPOs”) need to prepare and distribute for the commodity pools the CPOs operate. Several of the amendments will impact the reporting that is presently prepared and distributed by CPOs that operate pools in accordance with CFTC Regulation 4.7 (“4.7 Pools”). Furthermore, one of the amendments impacts the annual reports prepared and distributed by those claiming exemptions from registration in accordance with CFTC Regulations 4.13(a)(3) or 4.13(a)(4). These amendments will become effective today and changes that affect annual financial reports will apply to annual reports distributed for fiscal years ending December 31, 2009 and later.
This post only summarizes the amendment provisions. You can view the final rule release here.
Periodic Account Statements for 4.7 Pools:
Regulation 4.7(b)(2) requires the CPO of a 4.7 Pool to provide each participant in the pool with periodic account statements that must indicate: (1) the NAV of the exempt pool as of the end of the reporting period; (2) the change in NAV of the exempt pool from the end of the previous reporting period; and (3) the NAV per outstanding unit of participation in the exempt pool as of the end of the reporting period. The CFTC’s amendment impacts (3) above and clarifies that the periodic account statement provided to each pool participant must disclose either the NAV per outstanding participation unit, or the total value of the participant’s interest or share in the commodity pool as of the end of the reporting period. The CFTC’s release indicates that the intent is to ensure that pool participants receive sufficient information to determine the value of their investments in the 4.7 Pool from the periodic account statement, particularly for non-unitized pools.
Series Pools and Pools With Multiple Classes of Ownership Interests:
In order to address issues raised with series funds and to address the proper accounting treatment under GAAP, the CFTC’s amendment specifies that, for series funds structured with a limitation on liability among the different series (i.e., no cross-class liability), the periodic account statement may include only the information for the series being reported, although additional information on other series may be provided. The CFTC’s amendment goes on to clarify that that for multi-class funds and for series funds that are not structured with a limitation on liability among the different series or classes (i.e., there is potential for cross-class liability), NAV and other information required by the regulations must be presented for both the pool as a whole as well as for each series or class of ownership interest.
Changes to Fund-of-Funds Extension Provisions (Additional 30 Days):
Under current Regulations, a CPO must provide to each participant in each commodity pool that the CPO operates an annual report for the commodity pool within 90 calendar days of the end of the pool’s fiscal year. The CPO is further required to submit a copy of the annual report electronically to the NFA. Regulation 4.22(f)(2) permits a CPO of a commodity pool that invests in other funds (referred to as a ‘‘fund of funds’’) to claim up to an additional 60 days to distribute the pool’s annual report to pool participants and to file a copy with NFA. A CPO claims the Regulation 4.22(f)(2) fund of funds/60-day extension by filing with the NFA an initial notice, containing specified representations, in advance of the annual report’s due date for the first year the extension is claimed.
In subsequent years, the CPO has needed to confirm that the circumstances necessitating the relief continue to apply by restating certain representations in a statement filed at the same time as the pool’s annual report. Because so many fund-of-funds have had difficulty meeting the 150 day reporting deadline, the CFTC’s amendment extends from 60 to 90 days the maximum period of additional time that a CPO that operates a fund-of-funds commodity pool may claim (for a total 180 days). Finally, the process of filing for the extension is being streamlined by eliminating the requirement that a CPO who filed a claim of extension for a particular pool restate the representations in a statement filed with the pools annual reports in subsequent years. Going forward, the CPO will be presumed to operate the pool as a fund of funds and otherwise continue to qualify for the automatic extension. However, the CPO will need to provide NFA with notice if the pool no longer operates as a fund of funds and would then be required to distribute the pool’s annual report to pool participants and file a copy with NFA within 90 days of the pool’s fiscal year-end, as required by Regulation 4.22(c).
Procedures for Preparation and Filing of Reports for Liquidating Pools:
The CFTC’s amendment seeks to eliminate the confusion that has been created by the reference in Regulation 4.22(c) to two possible timeframes for filing a final annual report by amending the regulation to specify that the final annual report must be filed no later than 90 days after the pool ceases trading. If a CPO has not distributed all funds to participants by the date that the report is issued, the CPO must provide information about the return of funds to pool participants, including an estimate of the value of funds remaining to be distributed and the anticipated timeframe of when those funds are expected to be returned. When the remaining funds are returned to participants, the CPO should send a notice to all participants and to the NFA. Finally, the amendment also permits CPOs to prepare unaudited final reports as long as the CPO obtains from all participants, and files with the NFA, written waivers of their right to receive an audited report.
Codifying Existing Policies Regarding Special Allocations of Ownership Equity, Unrealized Gains and Losses, and Investee (i.e., underlying) Fund Income and Expenses:
The CFTC’s amendment codifies, among other things, staff interpretations regarding disclosure (in the notes to the financial statements) of the amounts of management and incentive fees and expenses indirectly incurred as a result of investing in any fund where the investment in the fund exceeded five percent of the pool’s net asset value. In response to comments received, the CFTC’s amendment recognizes that, in situations where the CPO of a fund-of-funds is not be able to obtain the specific fee or expense information from a particular underlying pool, the CPO may instead disclose the percentage amounts and computational basis for each such fee and include a statement that the CPO is not able to obtain the specific fee amounts for the given investee fund.
Use of International Financial Reporting Standards (“IFRS”) in Preparation of Pool Annual Financial Reports:
Regulation 4.22(d) requires that audited and unaudited financial statements of commodity pools, as well as periodic account statements, be presented and computed in accordance with GAAP. This provision consistently has been interpreted by CFTC staff to mean GAAP as established in the United States (‘‘U.S. GAAP’’). The CFTC has amended Regulation 4.22(d) to permit CPOs that operate commodity pools organized under the laws of a foreign jurisdiction to prepare financial statements for such pools using IFRS as issued by the International Accounting Standards Board in lieu of U.S. GAAP. The proposal specifies that the IFRS financial statements must contain specific conditions as set forth in prior exemptive letters and as detailed ion the CFTC’s final release (see link above). In addition, it is stated that the use of accounting standards other than U.S. GAAP must not conflict with any representations made in offering memoranda or any other operative document provided to participants or potential participants in the pool. The amendment further requires that a CPO claim the above relief by filing a notice with NFA within 90 days of the end of the commodity pool’s fiscal year.
GAAP Requirements in Rule 4.13:
As pertaining to hedge funds, Regulation 4.13 provides an exemption from registration for CPOs of pools whose participants are SEC ‘‘accredited investors’’ and that limit the pool’s trading of commodity interests to a de minimis amount, or that limit participation in the pool to certain highly sophisticated investors. Although Regulation 4.13 does not require the distribution of annual reports, Regulation 4.13(c) specifies that if a CPO (that has claimed an exemption from registration under Regulation 4.13) does elect to distribute an annual report to pool participants, then: (i) the annual report must be presented and computed in accordance with GAAP; and, (ii) if the pool in question is audited by an independent public accountant, the report must certified in accordance with Regulation 1.16. The CFTC’s amendment removes the requirements that such reports must be presented and computed in accordance with GAAP and, if audited by an independent public accountant, certified in accordance with Regulation 1.16. The CFTC noted that the annual reports are not required by CFTC regulations to be prepared, distributed, or filed, and therefore the CFTC does not need to prescribe the form of such reports (if the CPO in question elects to distribute annual reports).
Remember, this post only SUMMARIZES the amendments and is not intended to list every provision contained in them. Readers are encouraged to review the CFTC’s full release.