CFTC Eases CPO Annual Report Requirements | Practical Law

CFTC Eases CPO Annual Report Requirements | Practical Law

The CFTC has adopted final rules that ease requirements for audited annual reports of commodity pool operators (CPOs).

CFTC Eases CPO Annual Report Requirements

Practical Law Legal Update w-004-7678 (Approx. 4 pages)

CFTC Eases CPO Annual Report Requirements

by Practical Law Finance
Published on 01 Dec 2016 • USA (National/Federal)
The CFTC has adopted final rules that ease requirements for audited annual reports of commodity pool operators (CPOs).
On November 25, 2016, the CFTC adopted final rules amending Part 4 of CFTC regulations governing the operation and financial reporting for commodity pools by commodity pool operators (CPOs). The final rules were originally proposed on August 5, 2016 (see Legal Update, CFTC Proposes Softer Rules for CPO Annual Reports) and adopted with slight variations based on comments received by the CFTC.

Amendment to Regulation 4.22(c)(7) to Exclude Pools That Have Ceased Operations from Annual Report Requirements in Certain Circumstances

Under the final rule's amendment to CFTC Regulation 4.22(c)(7)(iii), audited CPO annual report relief is not available to pools that have not previously distributed an audited CPO annual report to pool participants or submitted an audited CPO annual report to the NFA.
In response to public comments received, the CFTC has also amended CFTC Regulation 4.22(c)(7) to allow a CPO seeking relief from the requirement to audit a final report upon liquidation of a pool to clarify that the CPO does not need to obtain waivers from the pool's CPO, CTA, any person controlling, controlled by, or under common control with the pool's CPO or CTA, or any principle thereof.

Amendment to Regulation 4.22(d)(2) to Allow Use of Alternative Accounting Methods in CPO Annual Reports and Other Required Financial Reports

The CFTC received comments urging that alternatives to US GAAP be available for other CPO financial reports such as account statements covered under Regulation 4.7(b)(2) and Form CPO-PQR (CPO quarterly reports).
  • The final rules expand provisions in Regulation 4.22(d)(2), which now permit the CPO of a pool organized outside the US to use International Financial Reporting Standards (IFRS) in place of US GAAP. Under the amendment, the CPO of a pool organized in the United Kingdom, Ireland, Luxembourg, or Canada is permitted to prepare and present financial statements in the annual report for a pool in accordance with the accounting principles, standards, or practices of the pool's home jurisdiction.
The final rule amends CFTC Regulation 4.7(b)(2)(v) to permit the use of additional alternatives to US GAAP for financial statements for a pool where the CPO has claimed relief under CFTC Regulation 4.7(b). The final rule also amends CFTC Regulations 4.27(c)(2) to allow CPOs that elect to use alternatives to US GAAP for the pool's annual report may also use alternatives to US GAAP when preparing Form CPO-PQR.
Without this amendment, a CPO claiming relief under Regulation 4.7 that elected to use an alternative to US GAAP would have to prepare the pool's annual report in accordance with the alternative measure and the periodic statement in accordance with US GAAP or IFRS.
  • CPOs that elect to use alternative accounting methods must file a signed representation with the National Futures Association (NFA) stating that:
  • The pool is organized under the laws of a foreign jurisdiction.
  • The CPO annual report will include a schedule of investments (condensed unless IFRS calls for a full schedule).
  • The use of IFRS in preparing the CPO annual report is consistent with disclosures made to pool participants.
  • Special allocations of ownership equity will be reported in accordance with Regulation 4.22(e)
  • In situations where the IFRS requires consolidated financial statements for the pool, all applicable US GAAP disclosures will be complied with.

Amendment to Regulation 4.22(g)(2) to Allow Unaudited CPO Annual Reports in Certain Situations

The final rule amends CFTC Regulation 4.22(g)(2) to provide an exemption to the requirement that CPO annual reports be audited for pools in their first fiscal year where the period from the formation of the pool to the pool's first fiscal year-end is a short amount of time (see below).
Pools claiming the proposed relief must meet the following criteria:
  • The elapsed time between pool formation and the first fiscal year-end is four months from the day on which the CPO receives funds, securities, or other property from a person other than a pool insider.
  • The pool has had no more than 15 participants.
  • The total gross capital contributions received by the CPO from non-insiders does not exceed $3,000,000. In determining eligibility for relief, the following persons and their capital contributions are not counted toward the $3,000,000 threshold:
    • the pool's CPO, commodity trading advisor (CTA), and any principal thereof;
    • a child, sibling, or parent of the pool's CPO, CTA, and any principal thereof;
    • the spouse of any of the participants in the above two categories;
    • any relative of the participants in the above three categories;
    • any entity that is wholly owned by one of more of the participants in the above four categories; and
    • any person controlling, controlled by, or under common control with the pool's CPO or CTA, and any principal thereof.
  • In order to obtain the relief from Regulation 4.22(g)(2), a CPO must obtain a written waiver of the right to receive the CPO annual report for that fiscal year from each pool participant prior to the day on which the CPO annual report would be due.
  • Waivers can be obtained ahead of time by including them in the subscription agreement for the pool or other agreement with the participant, so long as the waiver is on a separate page from any other text in the agreement and the participant signs and dates it separately.
  • Waivers do not need to be obtained from the pool's CPO, CTA, any person controlling, controlled by, or under common control with the pool's CPO or CTA, or any principle thereof.
  • Written waivers must be retained in accordance with CFTC Regulation 4.23
  • On or before the date on which the CPO annual report for the fiscal year is due, the CPO is required to file a notice of claim with the NFA along with a certification that the CPO received written waivers from all pool participants.
  • A statement must be included on the cover of its CPO annual report that provides information on whether the CPO annual report was audited or unaudited and the time period that the CPO annual report covered.

Amendment to Regulation 4.22(d)(1) to Provide Certain Limits to the Audited Annual Report

The final rule amends CFTC Regulation 4.22(d)(1) to exclude from the audited annual report requirement pools whose only participants are the pool's CPO, CTA, any person controlling, controlled by, or under common control with the pool's CPO or CTA, or any principal thereof.
In order to avail the pool of this exemption, the CPO must:
  • Obtain waivers from the participants of their right to receive an audited annual report for that fiscal year.
  • Keep waivers as records in accordance with Regulation 4.23.
  • Distribute at least one audited annual report during the life of the pool.

Request for Public Comment on Proposed Amendment to CFTC Form CPO-PQR Instructions

The CFTC is also requesting public comment on a proposed amendment to the instructions to CFTC Form CPO-PQR, which would permit a CPO to use alternative accounting principles, standards, or practices when calculating and presenting financial information on Form CPO-PQR (discussed above).
Public comment may be submitted by mail, the CFTC website, or through the federal eRulemaking Portal. All comments must be received on or before January 24, 2017.