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The Commodities Futures Trading Commission (CFTC) announced a 60 day comment period before voting on Rule 4.5 regarding requirements that managed futures mutual funds would be subject to the same disclosure rules as a Commodity Pool Operator (CPO).  CPOs are subject to more significant disclosure and reporting requirements than light disclosures common with mutual funds.

The second front is with the IRS, which at the urging of Michigan Senator Carl Levin, is said to be considering a crack down on what is known as private letter rulings, which essentially allow use of mutual funds to hold above ten percent of their income in commodity holdings.  The IRS has issued 70 such rulings since 2006, according to published reports.  Readers will note the managed futures mutual fund issues were reported in the November, 2011 issue of Opalesque Futures Intelligence.

Vote on Rule 4.5 Expected

At issue at the CFTC is a long awaited vote on what is known as Rule 4.5.  If this rule is passed it would subject many mutual funds to oversight from the CFTC and NFA.
Managed futures mutual funds have been on the radar of both the CFTC and the National Futures Association (NFA) for quite some time.  Essentially, these investment vehicles have not been subject to the detailed disclosure requirements of Commodity Pool (CPO) investments sold through equity channels or the direct Commodity Trading Advisor (CTA) accounts sold through Futures Commission Merchants (FCMs).

In 2003 the CFTC amended Rule 4.5, eliminating restrictions on trading certain amounts of futures and options.  Previous to 2003 mutual fund managers were required to register as CPOs if they essentially engaged in speculative futures and options trading.  The 2003 amendment eliminated speculative trading restrictions so long as they have no more than 5% direct speculative exposure to futures and options markets.  Managed futures mutual funds are currently structured so that the investments are made through wholly-owned subsidiaries, which is also subject to new proposed rules. In making their announcement [link: http://www.cftc.gov/PressRoom/PressReleases/pr6176-12] the CFTC mentioned one goal being harmonization of rules between CFTC and SEC.

IRS Private Letter Rulings

In June, 2011 the IRS suspended its review of new private rulings pending a review of its policies.

In a joint letter to the IRS, Senators Tom Coburn and Carl Levin wrote: "In addition to allowing mutual funds to use offshore shell entities to invest in commodities, IRS private letter rulings have permitted mutual funds to use commodity-linked notes to do the same.  The private letters allow mutual funds to treat those notes as ‘securities’ and deem the construction, funding, and sale of interests in those notes as securities investments, despite the fact that the notes are designed for the purpose of investing in commodities.  This approach contradicts an earlier IRS Revenue Ruling which held that Congress did not intend to allow ‘an expansive construction of the term securities’ to enable mutual funds to invest in commodities."

In testimony before Congress January 26, 2012 [link: http://www.c-span.org/Events/IRS-Commissioner-Shulman-Testifies-on-Mutual-Fund-Policies/10737427633/], Emily McMahon, Acting Assistant Treasury or Tax Policy, said it was not their agencies mandate to determine the suitability of commodities in a mutual fund structure. "The statutory language we are looking at is not very clear and because of this the IRS has been placed in a difficult position of trying to determine what the limits may or may not be on these investments," she noted.

In testimony before Congress, Senator Levin noted concerns regarding managed futures mutual funds increasing speculation in commodity markets, which may lead to artificial price inflation, he said. The issue will be determined by the IRS and the future of managed futures mutual funds remains in the balance.