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For investment professionals who deal with commodity ETFs, “2012 promises to bring a host of new regulatory requirements and issues.”
The statement, contained in a legal alert from the law firm Sutherland Asbill & Brennan, is hardly surprising, given the level of scrutiny for nearly every investing vehicle these days, but it’s sure to worry advisors everywhere that are registered with the Commodity Futures Trading Commission and those who use commodity ETFs for their clients.
The firm has helpfully put together five areas of concern for “members of the commodity ETF industry” in 2012.
“They are in no particular order of importance, but these are the most interesting issues that will most likely be dealt with this year,” says Daphne Frydman, a partner with Sutherland. “In the first half of the year, we’ll see a definition for [OTC] swaps. Registration issues as they pertain to hedge fund managers and investment advisors that are commodity pool operators (CPOs) and commodity trading advisors (CTAs) will also be dealt with, as will their reporting requirements.”
As for the others, Frydman says to “stay tuned.”
“One of the biggest issues I see is the limits on the positions and contracts that commodity ETFs are allowed to take by the CFTC,” adds AdvisorOne contributor Ron DeLegge (left), editor of ETFGuide.com. “Like mutual funds, the larger commodity ETFs grow, the more difficult to are to manage. As they grow, they have to constantly take new positions and the CFTC acts as a regulatory check on that growth.”
Events like the recent collapse of MF Global certainly don’t help, one reason it’s listed prominently by Sutherland Asbill & Brennan in their release, taking the No. 1 spot of the following five concerns:
1. MF Global’s collapse calls the safety of customer collateral into question—According to the firm, “In response to the unfolding developments from MF Global, the CFTC is expected to review and may revise its regulations pertaining to how customer collateral for futures transactions can be held.”
2. Implementation of the Dodd-Frank Act—Title VII of the Dodd-Frank Act imposes a new regulatory regime for over-the-counter (OTC) swaps. The alert believes “it is unlikely that compliance with Title VII’s mandates will be required before the second quarter of 2012, at the earliest.”
In addition to imposing a new regulatory regime on OTC swaps, the Dodd-Frank Act substantially “expanded the reach of the Commodity Exchange Act (CEA), and the persons who are subject to CFTC oversight there under, by amending the definitions of the terms CPO and CTA,” according to Sutherland Asbill & Brennan.
3. New and revised compliance obligations—The CFTC and the Securities and Exchange Commission have “revised or adopted a number of regulations that will be applicable to CPOs and CTAs and, therefore, will impact the commodity ETF industry; among them new SEC and CFTC reporting forms, amended risk disclosure statements and new CFTC regulations pertaining to the privacy of consumer information.”
4. Obtaining relief from certain document delivery and recordkeeping requirements—One bright spot, according to the firm, is that “some of the new rules will help commodity ETFs and their sponsors by decreasing the time and effort required to obtain certain standard exemptive relief.”
5. Practice points—Sutherland Asbill & Brennan warns that “members of the commodity ETF industry should note that the NFA showed increased attention to the following requirements in 2011 and is likely to continue to do so in 2012.” They include:
Pursuant to CFTC Regulations 4.26(a)(2) and 4.36(a)(2), a CPO’s or CTA’s disclosure document, respectively, cannot be used more than nine months after the date thereof.
The NFA has interpreted CFTC Regulations 4.20(a)(1) and 4.21 as requiring CPOs to use a single disclosure document for all commodity pools that are series of a trust, instead of separate disclosure documents for each commodity pool/series.
The alert concludes by noting that on Feb. 8, the CFTC proposed rules that would harmonize CFTC regulations with SEC regulations, to the extent that they apply to certain entities that are subject to oversight by both agencies. The proposed rules will be subject to a 60-day public comment period once published in the Federal Register.
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