CFTC Denies Request by CPO for Reporting Relief

Bob Zwirb Commentary by Bob Zwirb

The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") denied a request by a commodity pool operator ("CPO") for no-action relief from filing an annual report containing audited financial statements.

CFTC Rules 4.7(b)(3) and 4.22(d)(1) require a CPO to file with the National Futures Association an annual report with financial statements that have been audited by an independent public accountant. The annual report must be filed within 90 days of the earlier of (i) the end of a pool's fiscal year and (ii) the date on which the pool ceases trading. The CPO represented that it operated three pools, all of which suffered significant losses and ultimately ceased trading on February 8, 2018. The CPO requested approval to distribute annual reports containing only unaudited financial statements for the purpose of maximizing final distributions for participants. According to the CPO, the pool participants agreed to waive their rights to receive audited financial statements.

In denying the request for relief, the DSIO emphasized the importance of disclosure and reporting, and suggested that granting an exemption may not be in line with the best interests of the pool participants. As such, the CPO will be required to file (i) an annual report with audited financial statements for fiscal year 2017 and (ii) a liquidation report covering the period from January 1, 2018 through February 8, 2018 (which may use unaudited financial statements, provided the CPO obtains waivers from pool participants).

Commentary

Bob Zwirb
Bob Zwirb

The DSIO insists that granting the request here "could be detrimental to the interests of the Pools' participants, notwithstanding their desire to maximize any funds returned to them" (emphasis added). Having suffered "almost total losses," and having waived their Part 4 right to receive an audited statement, it would seem that the interests of the pool participants at this point in time would be in retrieving as much as they can from their investment rather than in subsidizing a CPA to prepare a more formal post mortem of their unfortunate experience. No doubt such a report would help "educate and inform" the participants as to what went wrong following the "sudden and massive losses" they experienced only last month, as the DSIO puts it. But they likely already know, given the publicity that accompanied the volatility event in February that wiped out their funds. Besides, if the participants have knowingly waived their right to receive a final audited financial statement, perhaps their interests lie somewhere other than where the DSIO thinks they should be.

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