CFTC Requires Registration by Mutual Funds With Commodities
The five-member commission voted 4-1 to approve the rule in a private voting process, the agency said today.
“This rule enhances transparency in a number of ways and increases customer protections,” CFTC Chairman Gary Gensler said in a statement.
The rule rescinds exemptions, first enacted in 2003, from CFTC registration for mutual funds that use futures and swaps tied to commodities. The National Futures Association, a Chicago-based nonprofit regulator financed by the industry, sought the change to improve protection of retail investors.
Investment companies have “increased significantly” their use of commodity futures, swaps and options markets since 2003, Gensler said. “It is critical to bring the pools that have been in the dark since 2003 back into the light so their customers can benefit from the CFTC’s oversight.”
The Investment Company Institute, a Washington-based trade association that represents mutual funds, opposed the change and said the firms are already subject to regulation by the Securities and Exchange Commission. The CFTC unanimously approved a proposal seeking comment on efforts to coordinate the two agencies’ record-keeping and registration procedures.
Karrie McMillan, general counsel at ICI, said in an e-mail that the association is concerned by the “unnecessary operational and compliance burdens it appears to impose on many mutual fund advisers.”
Scott O’Malia, a Republican commissioner, said the rule would remove a “major loophole” that has allowed funds to market products to retail investors while remaining outside CFTC oversight. Funds have obtained private-letter rulings from the Internal Revenue Service allowing greater investments in commodities through the use of foreign corporations.
The IRS has issued more than 70 such rulings since 2006, according to Senator Carl Levin, a Michigan Democrat who leads the Senate’s Permanent Subcommittee on Investigations, and Senator Tom Coburn, of Oklahoma, the committee’s top Republican. Levin said last month that the IRS should permanently ban the practice and revoke the existing rulings.
Jill E. Sommers, a Republican commissioner, said the rationale for the rule, which wasn’t required by the 2010 Dodd- Frank Act, is “sorely lacking.” Sommers said in a dissent that the agency’s analysis of the costs and benefits of the rule may not survive a court challenge.
Under the rule, funds will be required to file reports to the CFTC about their use of leverage, exposure to risk from trading counterparties and other investment trading data.
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