The CFTC is cracking down on mutual funds that invest heavily in oil, natural gas and other commodities — and it could lead to higher costs for investors.
The Commodity Futures Trading Commission said in February that it will put the kibosh on a rule exclusion that allows mutual funds that invest in commodities through futures contracts and other derivatives to bypass having to register with it as a commodities pool operator. Such funds — like all mutual funds — are overseen by the Securities and Exchange Commission.
The change to the so-called Rule 4.5 exclusion, which will take effect Jan. 1, also will affect managed-futures mutual funds.
In amending Rule 4.5, the CFTC said that it is going after a small number of “futures-only investment options” that it contends should have been under its regulation from the start.
The CFTC is making the change in order to “assess the risk posed by such investment vehicles in the derivatives markets and the financial system generally,” the regulator's commissioner, Jill E. Sommers, said in a speech in February.
Dennis Holden, a spokesman for the CFTC, declined to comment further.
Predictably, the mutual fund industry is up in arms about the rule change.
Karrie McMillan, general counsel for the Investment Company Institute, last month characterized the CFTC's actions as a “regulatory land grab.”
“There's only one explanation for the Rule 4.5 amendments that makes sense to me,” she said at a gathering of mutual fund executives in Phoenix.
“The CFTC decided that the turmoil following Dodd-Frank created a perfect opening for a regulatory land grab. The result will either vastly expand the CFTC's jurisdiction — or drive mutual funds out of the markets for futures, options and swaps,” Ms. McMillan said.
“Either way, investors lose.”
Ms. McMillan wasn't available to comment further last week.
About 50 mutual funds, holding $60 billion in assets, will be affected by the policy change, according to Morningstar Inc., Chicago.
The change comes as broad-basket commodities funds and managed-futures funds are gaining popularity with investors, thanks mainly to the inflation protection offered by commodities and managed futures' non-correlation to the stock markets. Over the 12-month period ended Feb. 29, broad-basket commodities funds and managed-futures funds experienced $6 billion and $3.3 billion in net inflows, respectively.