Proposed Exemption from Commodity Pool Operator Status for Certain Advisers to Registered Investment Companies

Investment Management Update

Date: July 21, 2014


On June 24, 2014, the U.S. House of Representatives adopted the Commodity Futures Trading Commission Reauthorization Bill (H.R. 4413), which includes amendments sponsored by Rep. Scott Garrett (R-NJ) (Garrett Amendment).1 The Garrett Amendment proposes to exclude from the definitions of commodity pool operator (CPO) and commodity trading advisor (CTA) under the Commodity Exchange Act investment advisers to registered investment companies that invest in only “financial commodities,” e.g., S&P 500 swaps and other securities-like derivatives, and that do not invest in traditional commodities, such as natural resource and agricultural commodities.


In February 2012, the Commodity Futures Trading Commission (CFTC) adopted modifications to the exclusions from the definition of CPO in Rule 4.5 under the Commodity Exchange Act.2 Specifically, the CFTC amended Rule 4.5 to narrow the exclusion from the definition of “commodity pool operator” for those entities that are investment companies registered as such with the Securities and Exchange Commission (SEC) pursuant to the Investment Company Act of 1940 (1940 Act). Consequently, certain investment advisers to investment companies registered under the 1940 Act (RICs) were subject to registration as CPOs with the CFTC. Subsequently, in August 2013, the CFTC issued a final “harmonization” rule with respect to certain compliance obligations for CPOs of RICs that are required to register due to the recent changes to CFTC Rule 4.5.3 While harmonized regulations eased certain disclosure, reporting and recordkeeping requirements for “dually registered entities” (i.e., a RIC and its CPO), the burdens remain significant.

Rationale & Public Policy Reasons for Garrett Amendment Exclusions

As a result of the changes to Rule 4.5, a significant number of investment advisers to mutual funds have had to register with the CFTC as CPOs. This second layer of regulation by the CFTC has increased costs for mutual funds and their shareholders. In a letter4 addressed to both the Speaker of the House and the House Minority Leader, the president of the Investment Company Institute points out that:

  • Registered funds and their investment advisers are comprehensively regulated by the SEC
  • Additional regulation by the CFTC is unnecessary (particularly for those funds that do not resemble or compete with traditional commodity pools)
  • The Garrett Amendment would reduce the unnecessary regulation and costs created by the CFTC without undermining investor protection
  • CFTC rules would continue to govern registered funds whenever they trade in traditional commodity interests as the Garrett Amendment would not alter the CFTC’s existing authority over all commodity interests

Generally, the rationale for the Garrett Amendment is that financial derivative-focused mutual funds and their investment advisers are comprehensively regulated by the SEC and that further CFTC regulation is an unnecessary burden on shareholders.

Outlook & Guidance

CFTC reauthorization is now with the Senate where it has been referred to the Committee on Agriculture, Nutrition, and Forestry.5 The proposed bill is subject to change and survival of the Garrett Amendment is uncertain at best. Authority for the CFTC lapsed in 2013, but it may continue to operate without congressional action under so-called “unauthorized appropriations” as it did from 2005 to 2008, when the CFTC was last re-authorized.


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1 “Customer Protection and End-User Relief Act,” H.R. 4413,amendment No. 8 printed in House Report 113-476, Bill Summary & Status, 113th Congress (2013–2014).

2 17 CFR 4.5. See 77 FR 11252 (Feb. 24, 2012); correction 77 FR 17328 (March 26, 2012). Prior to this amendment, all RICs and the principals and employees thereof were excluded from the definition of “commodity pool operator” by virtue of the RIC’s registration under the Investment Company Act of 1940. The 2012 amendment to Section 4.5 maintained this exclusion for those RICs that engage in a de minimis amount of non-bona fide hedging commodity interest transactions. Specifically, the amendment to Section 4.5 retained this exclusion for RICs whose non-bona fide hedging commodity interest transactions require aggregate initial margin and premiums that do not exceed 5 percent of the liquidation value of the qualifying pool’s portfolio, or whose non-bona fide hedging commodity interest transactions’ aggregate net notional value does not exceed 100 percent of the liquidation value of the pool’s portfolio.

4 Investment Company Institute Memorandum No. 28200 (June 19, 2014), “Re: Garrett Amendment to H.R. 4413, the Customer Protection and End User Relief Act.”

5 Bill Summary & Status 113th Congress (2013–2014), Re: “Customer Protection and End-User Relief Act,”