Changes to rule 4.5 will force certain investment companies registered as 40 Act funds to register as CPOs. The problem is some of its rules are in conflict with Securities and Exchange Commission (SEC) rules. The Commission has received many comments pointing out that their new rules create “duplicative, inconsistent, and possibly conflicting disclosure and reporting requirements” on such funds. The amendments attempt to facilitate compliance by offering some relief in its reporting processes according to the CFTC.
“Did you ever try to clap with one hand?” asks David Matteson, partner with Drinker Biddle, rhetorically. “It is not a very loud clap, is it? You’ve got the CFTC that is one hand and you got the SEC, that is the other hand. The CFTC is doing its part to harmonize, we’ll see if the SEC decides to join them.”
The bottom line is that both agencies will need to act so that the so-called “managed futures mutual funds” can operate without running afoul of one set of regulations.
The rules for previously 4.13(a)(4)exempt funds are clearer, it no longer exists. They will fall under the 4.7 exemption and now must register.
If you can’t beat em…
Speaking of retail access to managed futures, a year ago when we were discussing this trend we spoke to Tim Pickering from Calgary-based Auspice Capital about it. Pickering has been one of the more outspoken proponents of offering the diversity of managed futures products to retail investors, but while most of these products have been offered in 40 Act mutual funds structures, Pickering preferred the exchange traded fund (ETF) structure.
To some extent, he still does having created several such products through a partnership with Claymore Investments. In February, however, Auspice began offering two indexes tied to its programs through a 40 Act structure in partnership with Direxion. The Direxion Commodity Index Mutual Fund will offer exposure to its long-only commodity index and the Direxion Managed Futures Index Mutual Fund offers exposure to its trend-following index.
The Commodity Index can be long or flat a basket of diversified commodities and takes advantage of Auspice’s proprietary roll optimization that manages the risk/reward of contango and backwardation.
Pickering says the benefit of the new products is that it is offering the ease of the mutual fund structure with the advantageous free structure of an ETF. The fees on both funds will be limited to 100 basis points, he says.