Private equity funds with interest rate swaps or foreign exchange hedges have been wringing their hands over registration with the Commodities Futures Trading Commission. Dodd-Frank has brought those derivative instruments into the oversight of the CFTC. Shortly, they will be considered commodities. That means funds that previously did not consider themselves to be trading in commodities could be subject to CFTC registration.
The CFTC decided to provide no guidance as what would make a fund a commodity pool. In a regulatory release earlier this year, the CFTC said that even a single interest rate or foreign exchange trade could make a fund a commodity pool.
The downside to registration is that it will likely prohibit the fund from being able to take advantage of the “end-user” exemption for commodity trading. A commodity pool would be considered a financial entity and would be subject to the new clearing requirements.
The other troubling part of the CFTC regulatory framework is that it is at odds with the JOBS Act. The likely exemption for most private funds would require the fund to not engage in general solicitation or advertising. The JOBS Act started the process for lifting that ban for Regulation D offerings, the usual method for investments in private funds.
On top of that fund of funds are scrambling because of the look-through requirement. In deleting an old exemption the CFTC also delete the guidance used by fund of funds.
Let’s add some of the confused reasoning of the CFTC when it released the NAREIT guidance letter stating that REITs are not commodity pools. Rumor has it that there are some additional guidance letters in the works.
All of this confusion still exists with just a month left for compliance. The Investment Adviser Association and Managed Funds Association have thrown their hands up in the air and asked the CFTC to extend the compliance deadline.