Commodities funds brace for regulatory 'confusion'

Mutual fund companies may be largely unaffected by the financial services reform legislation, but they are girding for other types of regulation. Specifically, commodities funds that invest in futures may soon be more stringently monitored by not only the Securities and Exchange Commission but the U.S. Commodity Futures Trading Commission. In June, the National Futures Association, an industry organization for futures investors, proposed that mutual funds that invest in futures contracts register not only with the SEC — as they do now — but with the CFTC as well. The futures industry association believes that the funds need to be dual registered to help boost disclosure to investors about what these funds invest in, according to the petition. “NFA has customer protection concerns relating to these mutual funds' use of a wholly owned and controlled subsidiary to invest in commodity futures transactions on behalf of the fund,” the organization said in its petition. “The vast majority of the regulated funds' holdings appear to be money market instruments to serve as collateral for the subsidiaries' derivatives positions; yet, the subsidiaries' daily operations, including their actual derivatives positions (including the positions' leverage amounts) and fees charged are not entirely transparent.” The proposal, if passed, could be a huge burden in terms of work and costs for mutual fund companies, said Matthew K. Kerfoot, an attorney at Dechert LLP. The CFTC has an entirely different regulatory framework than the SEC, Mr. Kerfoot said. For example, salespeople have to take numerous proficiency exams on commodities. “I spoke to a fund company that estimated the additional costs would be $900,000 to $1 million a year for legal, compliance and accounting,” Mr. Kerfoot said. Requiring firms to register with the CFTC and the SEC could also delay the registration process to launch funds, said Andrew Rogers, president of Gemini Fund Services LLC. He noted that the firm is also worried because in some instances, “the SEC rules and the CFTC rules can oppose each other.” John Hollyer, a principal at The Vanguard Group Inc., who leads the firm’s investment risk management, said he’s also concerned that the involvement of both the CFTC and the SEC could result in increased confusion. “The overlap is going to be an additional complicating factor.”