CFTC Grants CPOs Relief from U.S. GAAP Reporting
Commentary by Bob Zwirb
The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") released two letters (Letter No. 15-70 (2015) and Letter No. 16-89 (2016)) exempting two separate commodity pool operators ("CPOs") from requirements to prepare and deliver to pool participants periodic account statements and an annual report computed and presented pursuant to U.S. generally accepted accounting principles ("U.S. GAAP") (CFTC Rules 4.7 and 4.22). Both CPOs operated internationally as part of a "master-feeder" structure. In lieu of the U.S. GAAP reporting requirements, under CFTC Rule 4.22(d)(2)(i), a CPO may compute and present statements in accordance with International Financial Reporting Standards ("IFRS") provided it meets several requirements. One such requirement mandates that the CPO is organized under the laws of the foreign jurisdiction.
The two CPOs that were subjects of the recently released no-action letters were organized under Delaware law, and so did not meet the "foreign jurisdiction" requirement. However, the DSIO determined that the CPOs met all other necessary requirements. In addition, the DSIO determined that obligating the CPOs to adhere to U.S. GAAP requirements rather than IFRS for the relevant jurisdictions would (i) be inconsistent with the expectation of pool participants that they would receive statements in accordance with IFRS and (ii) incur additional expenses for the CPOs to recalculate and certify the financial statements.
Commentary
A CFTC staff exemptive letter often serves as an important safety valve from the application of a rule or requirement where such application would not make sense. That appears to be the case here, where requiring financial statements to be prepared under US standards because the pool does not meet one criterion for an exemption would impose a financial hardship on the pool and its participants. So the outcome here is clearly good.
While such letters bind the Commission and its staff with respect to the specific fact situation and persons addressed by the letters, third parties may not rely upon them. What that means is that identical or virtually identical factual situations are handled on a case-by-case basis. To avoid requiring market participants to seek individualized relief in such cases, the CFTC has sometimes codified by rule the relief provided in a series of identical letters. See CFTC Exemptive Letters 09-11, 09-12, 09-13, 09-15, 09-18, 09-26, 09-28, 09-29, and 09-30 (providing relief to distribute annual financial statements to pool participants prepared in accordance with IFRS in lieu of U.S. GAAP), codified by amendment to CFTC Rule 4.22(d)(2) (permitting the use of generally accepted accounting standards followed in the United Kingdom, Ireland, Luxembourg and Canada when preparing annual financial statements, account statements, and Form CPO-PQR reports for pools established in those countries). In light of the serial nature of relief granted here, see CFTC Exemptive Letters 15-70, 15-71, 16-89, and 16-90, perhaps further codification of such relief would be beneficial for the contexts addressed in these letters.