MFA proposes ‘harmonised primary regulator approach’ to SEC and CFTC regulation of dual registrants
The Managed Funds Association (MFA) has written to both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) proposing a ‘harmonized approach to the regulation of firms that are SEC-registered investment advisers (RIAs) and also CFTC-registered commodity pool operators (CPOs).’
The MFA says these dually registered firms are currently subject to a range of duplicative and overlapping regulatory requirements and that both commissions could create ‘significant efficiencies’ by taking a more coordinated approach to their regulation by adopting a ‘primary regulator safe harbour’.
THE MFA’s proposal would see eligible dual registrants establish either the CFTC or the SEC as their primary regulator and comply with a specified set of requirements of the primary regulator, as ‘an alternative to, and in satisfaction of, the analogous requirements of the non-primary regulator’.
The MFA writes that: “Under this safe harbour, dual registrants would be subject to regular full examination by the primary regulator and only supplemental, targeted or issue-specific examination by the non-primary regulator. MFA is proposing that the safe harbour cover adviser/CPO regulations, systemic risk reporting, examination, and certain other requirements that apply to the adviser and CPO. As such, this framework would apply with respect to regulations under the Investment Advisers Act of 1940 (Advisers Act), CFTC Part 4 regulations, and certain National Futures Association (NFA) regulations. Registrants would continue to be subject to the antifraud and trading regulations of each regulator. Moreover, even for in-scope regulations, the non-primary regulator would continue to retain the authority to conduct investigations, and, as appropriate, initiate enforcement actions.”
To determine a registrant’s primary regulator, the MFA proposes a ‘bright line’ test based on assets under management under the safe harbour and to permit dual registrants to submit an electronic notice to both regulators.
“We propose that if a registrant’s assets under management across all funds consist of a majority of investments in securities (ie, 50.1 per cent), then the SEC would be its primary regulator; likewise, where a registrant’s assets under management across all funds consist of a majority of investments in derivatives the CFTC would be its primary regulator.”
The MFA proposes that a registrant would evaluate its assets under management and investments using the same regulatory assets under management (RAUM) approach and valuation standard that dual registrants currently use to complete Form PF and Form ADV. Alternatively, the MFA proposes that registrants perform the investments evaluation using the valuation methods required under Form CPO-PQR.
Upon making its primary regulator calculation, a dual registrant would file a single notice with both regulators reflecting that determination. Absent objection from either regulator within a specified period, the notice would become effective. Once the notice became effective, the primary regulator framework would apply to the dual registrant for the next five years, absent significant and material changes in the business profile and operations of the adviser/CPO.
The MFA writes: “A safe harbour mechanism that allows dual registrants to simplify and streamline their compliance programs by satisfying certain non-primary regulator regulations by complying with their primary regulator’s regulations will greatly reduce regulatory burden and legal and compliance costs for registrants and their investors. Moreover, reducing the regulatory duplication between the Commissions will conserve valuable government resources, reduce waste, promote good governance, and greatly enhance regulatory efficiency and effectiveness. Accordingly, MFA respectfully urges the Commissions to work together to implement a harmonised approach to dual regulation of investment advisers and CPOs, among others.”