Fund firms want out of the pool, sue the CFTC
Industry trade group up in arms over amendment to rule that exempted mutual funds from having to register as commodity pool operators
The Investment Company Institute and the U.S. Chamber of Commerce have filed a legal challenge to the CFTC’s rule amendment that would require certain mutual funds to register both with it and the Securities and Exchange Commission.
The Commodity Futures Trading Commission announced in February that it would begin requiring mutual funds that invest in commodities through futures contracts and derivatives to register as commodity pool operators. Previously, the funds had been exempt from dual registration, as long as they were registered with the Securities and Exchange Commission.
“Mutual funds are already one of the most regulated entities in the financial industry,” said Paul Stevens, president and chief executive of ICI. “The CFTC has not justified why this extra regulatory burden is necessary. It will create additional costs with no benefits to shareholders. Ultimately, the cost will come out of shareholder pockets.”
A broad definition of derivatives also could ensnare mutual funds that use derivatives not related to commodities, such as swaps on broad indexes like the S&P 500, Mr. Stevens said. “Many funds use futures, options and the swaps market to manage risks and improve returns. Every adviser will be required to continually monitor there funds with the new rules in mind. Others may choose not to use derivatives at all — to the detriment of their investors,” he said.
At the time of the ruling, the CFTC said it is targeting a small number of “futures-only investment options” that belonged under its jurisdiction anyway. In a speech in February, CFTC commissioner Jill E. Sommers said the commission is making the change in order to “assess the risk posed by such investment vehicles in the derivatives markets and the financial system generally.”
David Gary, a spokesman for the CFTC, declined to comment about the suit. But as it stands now, the rule change will affect what a fund is required to disclose to investors. The regulators are working on harmonizing the regulations. The CFTC, for example, at this time requires commodity pool operators to disclose fees paid to brokers. The SEC does not.
The SEC also prohibits fund companies from touting the past performance of similar funds in prospectuses of new mutual funds. The CFTC, however, requires commodity pool operators to list the performance of similar products they manage when registering a new fund.
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