Given their strict regulatory regime, the use of commodities has long been a sticky subject for mutual funds. At the same time, however, the competitive environment for returns amongst mutual funds has made use of derivatives and commodity interests by registered investment companies much more common, with even funds that previously eschewed these instruments finding them useful and necessary. Over the past five or so years, and particularly so since the financial crisis, regulators have become more and more concerned about the accompanying risk and leverage that derivatives and commodities bring to mutual funds, as well as the ways funds are disclosing - or not disclosing - to shareholders the risks they are taking by using them.  Last week, the Division of Investment Management issued long awaited guidance on the use of commodities by registered investment companies. Entitled, "Disclosure and Compliance Matters for Investment Company Registrants that Invest in Commodity Interests," the guidance is intended to assist those funds in preparing disclosure filings and in their consideration of compliance issues.

The guidance addresses the following topics for funds:

1. Disclosure of Derivatives and Associated Risks;
2. Performance Presentations;
3. Legend Requirement; and
4. Compliance and Risk Management.

The Division also stated that it is continuing its ongoing review of funds’ use of derivatives, including commodity interests, and the associated regulatory issues.

Along those same lines, the CFTC last week adopted rules for mutual funds using commodities. Because mutual funds are already heavily regulated under the Investment Company Act of 1940 and SEC regulations, the CFTC has adopted a "substituted compliance" approach. That is, for entities that are registered with both the CFTC and SEC, the CFTC will accept the SEC’s disclosure, reporting, and recordkeeping regime as substituted compliance for substantially all of the CFTC’s regulations, so long as they comply with comparable requirements under the SEC’s statutory and regulatory compliance regime. Thus, the final rule allows dually registered entities to meet certain CFTC regulatory requirements for commodity pool operators by complying with SEC rules to which they are already subject.