NFA Submits Proposed Amendments to Compliance Rule 2-45 (with Lofchie Comment)

The National Futures Association ("NFA") submitted its proposed amendment to Rule 2-45, as well as an interpretive notice to the CFTC. Prior to the proposed amendment, Rule 2-45 prohibited a commodity pool operator ("CPO") from permitting a commodity pool to make a direct or indirect loan or advance of pool assets to the CPO or its affiliates. As amended, Rule 2-45 will allow the following types of loans to CPOs made in the normal course of business:

• A pool which is selling a security short may borrow the security from a pool operated by the same CPO, provided the pool which is lending the security has received collateral equal to the value of the security borrowed by the close of business on the day of the short sale;
• A pool may raise cash by lending securities to an affiliate as part of a prime brokerage service, if the transaction is governed by a master securities lending agreement and the affiliated prime broker is an SEC-registered broker dealer and member of FINRA, the Deposit Trust Company, and the National Securities Clearing Corporation;
• A pool may make a debt or equity investment in a subsidiary or affiliated entity for tax or regulatory purposes, provided the pool is not liable for an amount that is greater than its proportional investment;
• Affiliated pools may enter into repurchase agreements with one another; and
• Pools may make tax-related loans, advances or distributions to CPOs, provided (i) they comply with the pool's organizational documents, (ii) they relate solely to the CPO's taxable income arising from the pool, and (iii) the CPO promptly repays a distribution in excess of its taxes.

The amendment will also permit transactions by a pool that is also a registered investment company or business development company where those transactions are permissible under the Investment Company Act ("ICA"), exemptive rules under the ICA, or exemptive orders issued by the SEC pursuant to Sections 17 or Section 57 of the ICA.

Lofchie Comment: Advisers that are subject to the Investment Advisers Act also should be mindful ofSection 206(3) of that statute. That said, many of the transactions described herein may be effected in compliance with that Section and do present the opportunity for operating a group of funds more efficiently. On the other hand, investment advisers should be very mindful of the conflicts of interests that are present in the transactions described herein and thus should be able to demonstrate, among other things, that all transactions which they sanction between advised accounts are properly priced and collateralized.

View proposed amendment in full here (links externally to NFA website).See also: NFA Rule 2-45.