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.”