The asset management industry is working toward complying with new regulations and determining how much extra compliance costs will be needed following last year's unsuccessful court challenge brought by the Investment Company Institute against the U.S. Commodity Futures Trading Commission.
The U.S. Court of Appeals last July upheld a lower court ruling that allows a new CFTC rule, requiring certain investment companies to register as commodity pool operators. The ICI had argued that the CFTC proposal would lead to added costs atop regulatory pressures fund companies face with the Securities and Exchange Commission. However, the finalized rules allowed the CFTC and SEC requirements to be harmonized as a way of helping to minimize the compliance burdens for companies.
The Washington D.C-based law firm Dechert LLP has been advising fund manager clients on addressing the new CFTC rules. Brendan Fox, a partner at Dechert, says despite the CTFC harmonizing most of its rules to allow funds to follow the SEC's approach, funds regulated as commodity pools do face some new requirements. This includes a mandate that funds with less than three years of operations disclose the performance of similar commodity pools managed by the fund's advisor.
Fox emphasizes that despite facing some new responsibilities, fund companies have not been impacted by the court setback as initially feared.
"Compared to what was originally proposed, the industry dodged a big bullet," says Fox, who served special counsel in the SEC's office of chief counsel, division of investment management, from 1997 to 2000. "I don't think the compliance costs are quite what they could have been."
Lynn Bowley, senior compliance officer with Northern Lights Compliance Services, says the harmonizing that the CTFC allowed was "a welcome alternative" for asset managers and has a made a big difference in cutting down on extra paperwork.
"The acceptance by the CFTC of SEC gathered information that is already being collected helps keep the advisors cost of duplicate disclosures, reporting and recordkeeping to a minimum,' says Bowley, who is responsible for oversight and compliance procedures for several mutual funds. "When an advisor can keep expenses low, that's not only good for the advisor but also ultimately is good for the mutual fund's shareholders by avoiding increases in the advisor's management fee if the expenses were to increase."
Industry Outreach
In the 10 months since the CTFC won its court case, the ICI, which challenged the new CTFC rules known as 4.5 along with the U.S. Chamber of Commerce, is working with its members that comprise 98% of the mutual fund/ETF industry to make sure they are up to speed on what is now expected.
"We are focused on assisting our members who are affected by the CFTC's amendments to Rule 4.5 by seeking the clarification and relief from the CFTC and its staff necessary for these members to satisfy their new CFTC compliance obligations,' says Sarah Bessin, ICI's senior counsel.
In addition to support offered by the ICI, other industry organizations including some service providers have helped members comply with the CFTC and filing dates, according to Bowley.
"I expect that as the use of alternative strategies in mutual funds continues to grow, more industry organizations will offer programs to assist advisors with complying with these rules," says Bowley.
Proactive Compliance
Bob Keck, CEO of Princeton, N.J.-based 6800 Capital LLC, says the CTFC rules have not impacted his firm as much as expected since their funds are more mature and that ramping up compliance efforts in recent years has made a big difference.
"While there are increased reporting requirements, we have been able to absorb that without too much more in compliance costs." says Keck, who prior to joining 6800 Capital in 1994 was co-founder and principal of the Princeton Futures Group. "It hasn't been unearthing in any way."
Keck says 6800 became proactive in 2009 as the regulatory climate began to heighten by hiring an outside compliance specialist who will conduct a yearly mock audit "pretending they are the SEC." In addition to the mock audits making the firm more prepared for compliance measures from the CTFC and SEC, Keck says the practice also serves as a marketing exercise since as firms do due diligence they will see their most recent audit letters.
"As a result of the kind of rigor that we go through, our systems are ready to accomplish what the CFTC wants without a major hiccup," says Keck. "As the regulations get more complex it's better to have an independent person."
When it comes to new disclosure rules on funds with less than three years of operations, Bowley urges fund managers to make certain there is "sufficient documentation" when organizing the necessary data since not doing so can lead to major headaches down the road.
"While it is important to provide prospective mutual fund shareholders with comparative information, it may be difficult and subjective for the advisor to determine if the information is comparative,' says Bolwey. "If the documentation on the determination of comparability and the performance disclosure information is lacking or not available, it may be time consuming and costly to gather and validate the appropriate required additional information to enable the advisor to prepare the performance disclosure."
