As these products expanded, the NFA saw a problem. Many of these products looked, sounded and felt like public commodity pools, but because of the 2003 amendments to Rule 4.5, RIC funds were launched and operated without any oversight from the NFA or CFTC. "Legally, they are not commodity pools; structurally, they are commodity pools," says NFA General Counsel and Secretary Tom Sexton. So last summer the NFA asked the CFTC to seek comment on a petition to amend rule 4.5. The NFA recommended returning to the less broad pre-2003 exemptions.
Many commented. Some argued against the change, claiming it would create duplicative rules and potentially eliminate products that provide valuable diversification. Several entities who already offer CPO products supported the petition, arguing that the exemption put them at a regulatory disadvantage to products that were structurally very similar.
It turns out both are right. Mutual fund requirements free these products from certain disclosure rules required of CPOs, but applying them would run afoul of the SEC.
In its comment letter, Campbell & Company made two points: Investors in funds seeking exposure to managed futures should receive comparable information regardless of the registration scheme; and any operational relief offered to these RIC funds also should be granted to public commodity pools.
"We really would like to have the prospectus of both types of fund set side by side and have the financial advisor or investor be able to compare them on as close to an apples-to-apples basis as possible," Lloyd says.
David Matteson, partner at Drinker Biddle and a member of its Investment Management Practice Group, says there needs to be some meshing of the rules. He places them in two different buckets. One is simply logistical, where the two set of rules conflict, the other includes legitimate investment protection issues regarding disclosure requirements of CPOs. For instance, CPOs must come up with a breakeven analysis of their fund; there is nothing comparable at the SEC. "Harmonization is key because the CFTC is adamant to ensure investor protection through its disclosure standards," Matteson says.
Both the NFA and supporters of the rule are sensitive to the concerns of those offering RICs. The NFA stated in its letter to the CFTC, "NFA does not seek to eliminate these product offerings as long as they are subject to appropriate regulatory oversight…" adding, "NFA also encourages the commission to consider granting similar relief to public commodity pools to avoid giving one structure a competitive regulatory advantage."