Plan Fiduciaries Might Need to File a Notice to Avoid Registration Requirements as Commodity Pool Operators

Several changes to the definition of commodity pool operator could require fiduciaries of retirement plans to file for an exemption from treatment as a commodity pool operator, or be subject to comprehensive registration and compliance requirements.  A commodity pool operator is generally a manager of a pooled investment vehicle that invests in commodity interests.  The Dodd-Frank Act amended the Commodity Exchange Act to include swaps within the commodity interests that will establish a commodity pool.  Investment in futures and options on futures also will cause a pooled investment vehicle to be considered a commodity pool.  A plan fiduciary could therefore be treated as a commodity pool operator if the plan invests in swaps, futures or options on futures, or invests in a fund that, directly or indirectly, invests in those commodity interests.  Several exemptions may apply.  However, some exemptions require a filing with the National Futures Association, and recent guidance from the Commodity Futures Trading Commission (CFTC) requires the exemption filing in more circumstances than before.

A retirement plan is automatically exempt from being treated as a commodity pool if the plan does not include any voluntary contributions from employees.  Contributory defined benefit plans are also not considered commodity pools if voluntary employee contributions by employees are not committed as margin or premiums for futures or options contracts.  The fiduciaries of most other ERISA-covered retirement plans that invest in swaps are exempt from treatment as commodity pool operators only if the fiduciaries file a notice of eligibility for the exemption with the National Futures Association and inform plan participants that the fiduciaries claimed the exemption.  The plan fiduciaries must also reaffirm the notice each year and submit to the examination by the CFTC to confirm that the filing and disclosure requirements have been met.  There is no fee associated with the filing.

Even if the plan does not invest directly in swaps, an exemption filing may be required if the retirement plan invests in a fund that invests in swaps.  In some cases, funds in which a plan invests and which invest in swaps may be exempt from the registration requirements.  Previous CFTC guidance provided that, if a fund manager is exempt from registration as a commodity pool operator, the manager of an investor fund in the fund (such as a plan investment fiduciary) would not be a commodity pool operator.  However, the CFTC has withdrawn this guidance, leaving uncertain the extent to which a retirement plan fiduciary would be considered to be a commodity pool operator by investing plan assets in a fund that invests in swaps and is exempt from registration requirements.  Furthermore, recent CFTC guidance narrows the exemptions from registration so that funds that were previously exempt are no longer exempt.  Plan fiduciaries may wish to file for the exemption even when it is uncertain whether the plan fiduciary would otherwise be considered a commodity pool operator.

The filing requirements took effect at the end of last year.  A notice of an exemption (if needed to obtain an exemption) must be filed before the plan invests in commodity interests.  Those plans that filed for the exemption in previous years have until March 1 to file the annual affirmation.

Even if a plan fiduciary makes the exemption filing or is otherwise exempt as a commodity pool operator, the fiduciary might need to register as a major swap participant if the plan uses swaps and the primary purpose of the swaps investment is not hedging or mitigating any risk directly associated with the operation of the plan.  Accordingly, plan fiduciaries might wish to ensure that the plans investment managers, and managers of funds in which the plan invests, do not use swaps for purposes other than hedging or mitigating risks.

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