By Kolin Tang, Esquire
On February 9, 2012, the Commodity Futures Trade Commission (“CFTC”) issued its final rule amending and adding registration and compliance obligations for commodity pool operators (“CPO”) and commodity trading advisors (“CTA”). In particular, the CFTC removed registration exemptions for accredited investors and qualified eligible persons, removed the auditor certification exemption for CPOs that offered participation only to qualified eligible persons, reinstated a trading threshold and marketing restriction for registered investment companies and required CPOs and CTAs to annually reaffirm their claimed exemptions or exclusions and add risk disclosure statements for swaps. The CFTC also created new information reporting requirements for the purpose of data collection. The rule passed 4-1, with all Democratic appointees and a Republican appointee in favor and the other Republican appointee dissenting.
These regulatory changes to the commodities trading market is only a part of the CTFC’s larger ongoing reform process to strengthen regulatory oversight as mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Huge derivatives exposures in the commodities markets had contributed to the “too big to fail” phenomena that paralyzed the financial markets during the 2008 panic. Thus, Dodd-Frank has, among other things, enlarged the CFTC’s antifraud authority, redefined the CFTC’s swap regime and added limitations on proprietary trading relating to funds and entities within the CFTC’s purview.
But despite the more than 18 months after the Congress enacted Dodd-Frank, the regulatory effort to forestall a repeat of the 2008 financial crisis looks far from over. Critics from both sides of the regulatory divide have commented on the emerging complexity and confusion caused by the new regulations and system of overlapping agency authority. Still, the recent MF Global meltdown, which was caused by the derivatives broker’s overexposure to risk and led to the subsequent discovery of missing client funds, demonstrates that regulatory oversight of the commodities markets may still face some gaps. Whether Dodd-Frank’s prescriptions will close the gap or only add to compliance costs when fully enacted remain to be seen.
Regardless, these new rules will provide additional protection for investors to enforce their rights when investing in futures contracts. Section 22 of the Commodities and Exchange Act (7 USC § 25) (“CEA”) gives investors a private right of action for violations of the CEA, so there may be additional theories of recovery for a defrauded investor if the new registration requirements are not followed.
 A commodity pool is an investment structure where investors pool their funds to trade in futures contracts, akin to a mutual fund for equity trading. But while mutual funds are open to public subscription and regulated by the Securities and Exchange Commission, commodity pools are limited to private solicitation and regulated by the CFTC.