It is hard to find anyone who objects to the idea of offering the portfolio diversification benefits of managed futures to retail investors through a broad mutual fund structure, but if the two main regulators don’t come to some accommodation, the brakes may be placed on the emergence of the managed futures mutual fund.
These products have been popping up in recent years based on a 2003 rule change that allowed for the creation of Registered Investment Company (RIC) products that are similar to public commodity pools but are exempt from registering as CPOs.
Altegris Investments, which has offered commodity pools for many years, launched its first RIC fund in September and it already is managing $350 million.
Altegris President and CEO Jon Sundt says these products are easier to distribute than commodity pools. "Because they are mutual funds, they are available to a broader spectrum of investors and they are much easier to implement. It is much easier to buy a mutual fund than the old commodity pools," Sundt says.
In a comment letter to the Commodity Futures Trading Commission (CFTC) last fall, the National Futures Association (NFA) noted that they were not interested in eliminating the popular managed futures mutual fund product, but that they wanted to ensure that "RICs offering exposure to actively managed futures strategies to retail investors for as little as $1,000 be within the regulatory purview of both the CFTC and NFA."
"Legally they are not commodity pools, structurally they are commodity pools," says NFA General Counsel and Secretary Tom Sexton.
There in lies the rub as some existing commodity pool operators feel they are being placed at a competitive disadvantage to the new products. Bruce Cleland, vice chairman and former president and CEO of Campbell and Company says, "It should be a level playing field."
The CFTC, in February, published a rule proposal that could stop these RIC products in their tracks by eliminating the 2003 exemption.
While the NFA appears sympathetic to industry concerns over competition, Sexton says, "Our thrust is to ensure that there is adequate customer protection in place with regard to these products."
Sexton says the main issues are the treatment of past performance, customer reporting and disclosure document acknowledgement.Harmonizing the rules will require changes from both the CFTC and Securities and Exchange Commission (SEC).
"We are going to comment on the CFTC proposed rule and we are going to encourage the CFTC to provide relief in certain areas along with the SEC. If the SEC does not provide relief, it would be very difficult for these registered investment companies to still operate," Sexton says.
"The two regulatory agencies are trying to find a way to harmonize the rules," says Sundt, "If it is truly about investor protection, we can find a solution for that."