Update on Liquidation Statement Requirements for Registered Fund CPOs and Recent NFA Notices Applicable to Registered Fund CPOs and CTAs
Registered Fund CPO Advisory Committee RE: Update on Liquidation Statement Requirements for Registered Fund CPOs and Recent NFA Notices Applicable to Registered Fund CPOs and CTAs
This memorandum provides a brief summary of several items of interest to registered fund commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”).
Update on Liquidation Statement Requirements for Registered Fund CPOs
As you may know, under certain circumstances in the past, a registered fund CPO was not required to file with the National Futures Association (“NFA”) a liquidation statement that complied with Regulation 4.22(c)(7) under the Commodity Exchange Act for a fund that had liquidated. We previously informed you that the staff of the Commodity Futures Trading Commission (“CFTC”) was actively reviewing the issue of how registered fund CPOs should satisfy the Regulation 4.22(c)(7) requirement, and may issue written guidance on this subject. During the pendency of the CFTC staff’s review, we were told that the NFA was not waiving the liquidation statement requirement under Regulation 4.22(c)(7).
Since we last updated you on this matter, we have met with the CFTC staff and continue to have ongoing discussions with them. The staff is still considering this issue. In the meantime, it is our understanding that NFA is continuing its policy of not waiving the liquidation statement requirement under Regulation 4.22(c)(7), and that NFA generally is requesting from registered fund CPOs audited financial statements.
Effective Date of NFA Amendment to Compliance Rule 2-46 and Related Interpretive Notice
NFA recently issued a Notice to Members (“NTM”)[1] announcing that the CFTC has approved NFA’s amendment to NFA Compliance Rule 2-46 and a related Interpretive Notice.[2] As ICI previously reported, the amendment and Interpretive Notice require CPOs and CTAs to report two financial ratios regarding a CPO’s or CTA’s financial condition on the quarterly Forms PQR and PR. The amendment and Interpretive Notice will be effective for Forms PQR and PR as of the quarter ending June 30, 2017.
The NTM and Interpretive Notice explain calculation of the two ratios required by the new rules: the Current Assets/Current Liabilities (CA/CL) Ratio and the Total Revenue/Total Expenses (TR/TE) Ratio. The Interpretive Notice provides that a CPO or CTA that has a fiscal year end that does not align with the Form PQR or PR reporting quarters may report the ratios as of the firm’s most recently ended fiscal quarter. It also provides that CPOs and CTAs that are part of a holding company/subsidiary structure may elect to report the ratios at the parent level, as long as they notify NFA that they are part of a holding company structure and indicate on Form PQR or PR at which level they are reporting. The NTM and Interpretive Notice remind CPOs and CTAs that they must be able to demonstrate to NFA how they calculated the required financial condition ratios, and make these financial records available to NFA during an examination or upon request.
The NTM also mentions several educational initiatives NFA is undertaking relating to the new reporting requirements, including:
- Producing a webinar early next year;
- Adding help text to Forms PQR and PR to provide additional guidance on how to complete the new data fields; and
- Working with members during examinations to ensure that the firm is calculating the ratios correctly.
NFA Guidance on the Annual Affirmation Requirement for Entities Currently Operating Under an Exemption from CPO or CTA Registration
As in years past, NFA has issued an NTM[3] to provide guidance to NFA members that rely on an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under CFTC Regulation 4.5 or an exemption from CTA registration under 4.14(a)(8). The NTM reminds these CPO and CTA members that they must annually affirm their notice of exemption within 60 days of the calendar year end, which is March 1, 2017 for this affirmation cycle.
The NTM highlights that failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 1, 2017. For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to the requirements of Part 4 of the Commodity Exchange Act regardless of whether the entity otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the person or entity to enforcement action by the CFTC.
The NTM explains how CPOs and CTAs should complete the affirmation process, and includes a number of frequently asked questions regarding the process.
If you have questions about any of these matters, please feel free to contact Sarah Bessin at sarah.bessin@ici.org or (202) 326-5835 or Rachel Graham at rgraham@ici.org or (202) 326-5819.
Sarah A. Bessin
Associate General Counsel
Rachel H. Graham
Associate General Counsel
endnotes
[1] Effective Date of Interpretive Notice to NFA Compliance Rule 2-46: Reporting Financial Information on NFA Forms PQR and PR, NFA Notice to Member I-16-31 (Dec. 19, 2016), available at https://www. https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4772.
[2] Interpretive Notice 9071, NFA Compliance Rule 2-46: Reporting Financial Information on NFA Forms PQR and PR, available at http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=9071&Section=9.
[3] Guidance on the annual affirmation requirement for entities currently operating under an exemption from CPO or CTA registration, NFA Notice to Members I-16-29 (Dec 1, 2016), available at https://www.https:// https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4767.