While it would be fair to say that generally, commodity trading advisors (CTAs) and commodity pool operators (CPOs) have not been the cause of most of the market upheavals over the last few years, it would also be accurate to point out that it really doesn’t matter. Just as they say a rising tide lifts all boats, a rising tide of regulatory oversight puts all managers under a sharper microscope.
With that in mind, National Futures Association held a CPO/CTA regulatory seminar in April to provide guidance to managers, so they understand what is expected of them and can prepare when the regulators come to check them out.
While CTAs and CPOs are not the target of new legislation, many who trade over-the-counter swaps would be affected, says Jon Grady, general counsel of Steben & Company.
CPO participants who engage in swaps would have to be registered as investment advisors, says Grady.
In the past, some of these CPOs may have utilized exemptions to Commodity Futures Trading Commission (CFTC) registration but would probably prefer coming under the CFTC/NFA jurisdiction than the Securities and Exchange Commission. Grady says it is unclear whether or not there would be an exemption from dual registration for those CPOs.
One area that has been ripe for abuse involves what has been termed “pool loans.”
NFA Executive Vice President and COO Dan Driscoll says, “pool loans are a euphemism for stealing money.”
Driscoll pointed out that the term “pool loan” often had come after the fact when several CPOs were caught using pool capital for their own purposes. While there may have been some actual occurrences of funds loaning money from the pool to principals for some valid purpose, that has been the exception. Regina Thoele, NFA senior vice president of compliance, says that some general partners were using pool funds as a piggybank in fraud cases and added that the NFA found no compelling reason for allowing the practice.
“We found that there are very few outstanding loans,” Driscoll says of the practice that is now prohibited.
NFA has adapted rules to make quarterly filings easier to comply to. This has been a problem particularly with fund of funds that have to get all of the reports from the individual programs before they can complete their report. This has made it difficult to report in a timely way and NFA has expanded the time to file and also made it easier to file. This is important as several CTAs have pointed out that particularly the CFTC has made a point of late filings.