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New Rule Requires Mutual Funds That Trade Commodities To Register With The CFTC

Recently, the Commodity Futures Trading Commission (“CFTC”) implemented a new rule, Rule 4.5, which requires mutual funds and their investment advisers that invest in commodities, including futures, swaps and options, to register with the CFTC. This new rule will expose mutual funds that invest in a certain threshold level of commodities to further and stricter scrutiny by regulators, and will increase costs. It is reported that most industry experts believe that this new rule is redundant of former rules imposed by the Securities and Exchange Commission, which already regulates mutual funds. Recently, the Investment Company Institute (“ICI”) and the United States Chamber of Commerce (“USCOC”) appealed a District Court Decision upholding the implementation of the new rule. David Hirschmann, President and Chief Executive of the USCOC commented, “The District Court’s decision fell far short of well-established D.C. Circuit precedent requiring agencies to adequately measure the costs imposed by capital markets regulations on businesses, investors and the economy as a whole, and to weigh them against the desired benefits.” Similarly, Paul Schott, ICI’s President and Chief Executive stated, “we brought this challenge because the CFTC failed to justify the regulatory excess and added costs of its amendments to Rule 4.5, which would impose that agency’s regulatory regime atop the comprehensive regulation already applied to registered funds by the [SEC] . . . We believe the District Court decision is deeply flawed and will clearly harm the many shareholders of registered funds that will bear the costs of overlapping regulation by two agencies.” It is believed that there is such harsh opposition to this new Rule 4.5 since investment advisers and mutual funds will be faced with significant compliance costs which will ultimately be passed along to investors. Moreover, opposition to this rule may result in investment advisers being forced to limit mutual fund exposure to commodities, and fain exposure of those commodities through more costly, and potentially risky, means.

Lax & Neville LLP has nationally represented registered investment advisory firms, as well as securities industry employees, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.