ADVANCED

CFTC Amends Regulations Regarding CPO Financial Reports

Published on: Dec 1st, 2016

The U.S. Commodity Futures Trading Commission (“CFTC”) has approved amendments to regulations related to the financial reports that registered commodity pool operators (“CPOs”) must provide about the commodity pools that they operate. The amendments are effective December 27, 2016.

As amended, the CFTC Regulations will permit CPOs of pools organized under the laws of a non-U.S. jurisdiction (“non-U.S. pools”) to use International Financial Reporting Standards (“IFRS”) or additional alternative generally accepted accounting principles, standards or practices used in the United Kingdom, Ireland, Luxembourg or Canada (“Additional Alternative Accounting Principles”) in Annual Reports, periodic Account Statements (both for CFTC Regulation 4.7 pools and pools subject to CFTC Regulation 4.22) and Form CPO-PQR (collectively, the “Financial Reports”). In order to do so, the CPOs must meet the requirements described below.

In addition, the amendments provide optional relief from the requirement that Annual Reports be audited for “stub period” Annual Reports and for “insider pool” Annual Reports, provided that the CPOs meet the requirements discussed below. Finally, the amendments clarify that, notwithstanding any exemption that may be available, CPOs must distribute and submit an audited Annual Report at least once during the life of a pool. The Final Rule Release may be found here.

Use of Additional Alternative Accounting Principles for Financial Reports. Prior to these amendments, CPOs of pools organized outside of the U.S. were permitted to use International Financial Reporting Standards (“IFRS”) for Annual Reports and Account Statements if they met certain criteria; the amendments will permit these CPOs to use IFRS for the Form CPO-PQR as well.

As amended, the CFTC Regulations will permit CPOs in jurisdictions using the Additional Alternative Accounting Principles to use the Additional Alternative Accounting Principles followed in the jurisdiction in which the non-U.S. pool was organized for the pool’s Financial Reports, provided that they meet the following 4.22(d)(2)(i) requirements, namely that:

  • the Annual Report must (i) include a condensed schedule of investments, or, if required by the applicable Additional Alternative Accounting Principles, a full schedule of investments; and (ii) report special allocations of ownership equity as required by 4.22(e)(2);
  • the disclosure document or offering memorandum must identify which Additional Alternative Accounting Principles will be used for the Annual Report;
  • if the applicable Additional Alternative Accounting Principles require consolidated financial statements for the pool (e.g., a feeder fund consolidating with its master fund), the CPO must include all applicable disclosures required by U.S. GAAP for the feeder fund with the reporting pool’s consolidated financial statement; and
  • the CPOs must make a notice filing with the NFA within 90 calendar days after the end of the pool’s first fiscal year. The notice filing must include identifying information about the CPO and relevant pool as specified by the regulation, which Alternative Accounting Principles will be used for the Annual Report and a representation that the CPO complies with each of the relevant requirements under 4.22(d)(2)(i).

The above requirements will also apply to CPOs using IFRS.

Relief from audit requirement for Annual Reports. The amendments provide optional relief from the Annual Report audit requirement in the following situations:

  • “Stub period” relief. The CPO will be eligible to rely on relief from the Annual Report audit requirement with respect to a pool’s first fiscal year in cases where:
    • the pool’s first fiscal year is four months or less, measured from the date on which the CPO first receives funds, securities or other property from a participant who is not an insider, as defined below; and
    • during that first fiscal year, there are 15 or fewer participants in the pool who are not insiders and such non-insiders have aggregate gross capital contributions (i.e., all capital contributed, notwithstanding any withdrawals) of no more than $3 million.
      • Insiders.” For purposes of determining the start date of the stub period and the number of participants only, “insiders” include the CPO, the pool’s commodity trading advisor (“CTA”), any person controlling, controlled by or under common control with the CPO or CTA, and any principal of any of these entities; as well as a child, sibling, or parent of any of these participants; the spouse of any of the aforementioned participants; any relative of any of the foregoing participants, their spouse or a relative of their spouse, who has the same principal residence as such participant; and an entity that is wholly-owned by one or more of the foregoing participants.
  • The CPO must meet the following additional requirements to rely on this relief:

(i) Written waivers. The CPO must obtain written waivers from all participants other than the CPO, the pool’s CTA, any person controlling, controlled by or under common control with the CPO or CTA, and any principal of any of these entities (“insiders” for all purposes other than determining the stub period and number of participants) of the right to receive an audited Annual Report for the pool’s first fiscal year. The waivers should substantially follow the language set forth in 4.22(g)(2)(ii), must be obtained prior to the date on which the CPO would be required to distribute the audited Annual Report for the pool’s first fiscal year, and may be included in the pool’s subscription agreement or other agreement between the pool and the participant. To ensure that the waivers are not overlooked by the participant, the waivers must appear on a page separate from any other text in the agreement and be separately signed and dated by the participant.

(ii) Notice. On or before the date the CPO is required to distribute and submit the first fiscal year’s Annual Report, the CPO must file a notice with the National Futures Association (“NFA”) including the identifying information and representations required by the regulation, must certify to the NFA that it has received the required waivers, must maintain the waivers in accordance with the CFTC Regulation 4.23 recordkeeping requirement, and must make them available to the CFTC or the NFA on request.

(iii) Annual Reports. The CPO must distribute an unaudited Annual Report for the stub period and an audited Annual Report covering the stub period and the following twelve-month fiscal year. The unaudited Annual Report and the audited Annual Report must include the disclosures required by CFTC Regulation 4.22(g)(2)(ii)(D) prominently on their cover pages.

  • Insider pool relief. Pools are exempt from the audit requirement with respect to fiscal years when all participants are insiders; provided that the CPO obtains written waivers from each of the participants, maintains the waivers in accordance with the Regulation 4.23 recordkeeping requirements and provides them to the CFTC or NFA upon request. No notice filing is required to rely on this relief.
  • Final report on liquidation relief. The amendments provide that a CPO seeking relief under CFTC Regulation 4.22(c)(7) from the audit requirement for the final report on liquidation of a pool is only required to obtain written waivers from non-insider participants (i.e., participants other than the CPO, the pool’s CTA, any person controlling, controlled by or under common control with the CPO or CTA, and any principal of any of these entitites).

Requirement to have at least one Audited Annual Report. Notwithstanding any exemptions that may be available or for which the CPO has qualified previously, a CPO must distribute an audited Annual Report at least once during the life of the pool.

Takeaway. The amendments reflect relief that previously has been available through exemptive or no-action letters and are meant to alleviate the expense of converting non-U.S. financial statements to U.S. generally accepted accounting principles and the expense of obtaining an audit for a relatively short period of time or in certain other circumstances where pool participants may not require the protection of an audit. The CFTC notes that the staff intends to restrict the issuance of any further exemptive relief from financial reporting requirements to “exceptional circumstances involving unique situations.”

CPOs of non-U.S. pools should review the criteria set out above if they wish to use IFRS or one of the Alternative Accounting Principles for their Financial Reports. CPOs of pools with a December 31st fiscal year end which first received funds, securities or other property from any non-insider on or after September 1, 2016 may choose to rely on the stub period relief from the audit requirement by following the steps described above. Insider pools intending to opt out of the audit requirement for this fiscal year should obtain written waivers from the participants. All CPOs should take note that they must distribute an audited Annual Report at least once during the life of each pool.

If you would like to know more about how Cordium can assist your firm or to discuss any matters contained within this Regulatory Update, please contact us or your regular Cordium consultant.

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