The CFTC approved amendments to Part 4 of the CFTC Rules that (i) allow commodity pool operators ("CPOs") to use alternative accounting standards in preparing financial statements for non-U.S. pools, and (ii) adopt exemptions from the audit requirements for a pool's Annual Reports. These changes codify relief that the CFTC granted previously on a case-by-case basis through exemptive and no-action letters. Specifically, the amendments include:
1. Use of Alternative Accounting Standards. A CPO will be permitted to use generally accepted accounting standards followed in the United Kingdom, Ireland, Luxembourg and Canada when preparing audited Annual Reports, account statements and Form CPO-PQR reports for pools established in those countries. This amendment expands CFTC Rule 4.22(d)(2), which permits CPOs to use International Financial Reporting Standards currently in preparing financial statements for non-U.S. pools' Annual Reports. CPOs that use one of the alternative accounting standards each will be required to file a notice with the NFA within 90 days of the end of a pool's first fiscal year, including specified representations regarding the use of the alternative accounting standards.
2. "Stub-Period" Exemption from Audited Annual Reports. A CPO will be exempt from the requirement to distribute audited Annual Reports for a pool's first fiscal year of operation (the "stub period"), as long as the pool and its CPO meet the following conditions:
- The pool's first fiscal year must be four months or less, and measured from the date on which the CPO first received funds from an investor other than an "insider," as defined below.
- The pool must have no more than 15 investors during the initial stub period, and those investors must have made no more than $3 million aggregate gross capital contributions to the pool. "Insiders" are excluded for purpose of calculating the 15-investor maximum and $3 million cap on capital contributions.
- The CPO must obtain a waiver from investors (other than "insiders") of their right to receive an audited Annual Report for a pool's first fiscal year. This waiver must be substantially in a form specified by the CFTC, and may be included in the pool's subscription agreement as long as it is on a separate page that is signed and dated separately by the investor.
- The CPO must file a notice with the NFA certifying that the CPO meets the conditions of the exemption and has obtained the required waivers from investors.
- The Annual Report for the stub period must disclose that it is unaudited in reliance on the exemption.
- The audited Annual Report for the pool's first full fiscal year of operation must cover both the initial stub period and the subsequent full fiscal year.
- For purposes of this exemption, an "insider" includes a pool's CPO, commodity trading advisor ("CTA"), any person controlling, controlled by, or under common control with the CPO or CTA, and a principal of any of these entities.
3. Exemption from Audited Annual Reports for Insider Pools. A CPO will not be required to distribute an audited Annual Report for a year in which a pool's investors are limited to "insiders," as defined above, who provide waivers of their right to receive an audited Annual Report.
4. Requirement for at Least One Audited Annual Report. A CPO will be required to distribute an audited Annual Report at least once during the life of a pool, notwithstanding any of the above exemptions.
The exemptive relief is a positive step for the CFTC and the industry as a whole. The exemptive relief will be a time- and cost-saving measure, not only for the CFTC but also for relevant CPOs. Additionally, it provides clarity concerning when seed-capital pools would be subject to audit requirements, which will assist CPOs during the planning stages of launching pools.
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