Brian Vito


While the topic of financial regulation has recently experienced a resurgence in interest, one area that historically has received little attention and continues to exist in relative obscurity is the application of the Investment Company Act of 1940 (the “Company Act”) to commodity pools, as opposed to mutual funds, hedge funds and private equity funds. The purpose of this article is to distinguish the boundary between an investment company, as that term is defined in the Company Act, and a commodity pool, as the term is used to refer to an investment pool not within the auspices of the Company Act, not because of an exemption from the definition of investment company, but because it either is fully outside the definition of investment company or satisfies one of the exceptions (as opposed to exemptions) from the definition. An investment pool that trades primarily or exclusively in securities, including many private equity funds, most hedge funds and all mutual funds, is an investment company for purposes of the Company Act and, thus, must comply with the provisions thereof (in the case of a mutual fund) or operate within the scope of an exemption (in the case of a private equity fund or a hedge fund). Commodity pools, which are investment pools that trade primarily or exclusively in commodity contracts (e.g., futures contracts and options on futures contracts), that engage in no trading of securities, except for cash management purposes, are outside the reach of the Company Act and are regulated exclusively by the Commodity Futures Trading Commission, as opposed to being subject to the authority of the Securities and Exchange Commission, except with respect to the public registration of the offering of interests in such pools under the Securities Act of 1933 (if suchinterests are publicly offered). A commodity pool that trades in securities in addition to commodities contracts may, however, fall within the realm of the Company Act and thus either be subject to the Company Act’s regulations (which, for a variety of reasons, is impossible for a commodity pool) or comply with one of the exemptions from regulation thereunder (which primarily include Section 3(c)(1) and Section 3(c)(7)). These exemptions, however, require the commodity pool to observe certain restrictions, including those on the pool’s marketing activities (such as limiting the number of investors in the pool or limiting the pool’s investors to wealthy individuals and entities), which can make them unattractive to commodity pool operators. Recent financial events have resulted in the proposal of various regulatory reforms, ranging from minor adjustments to the current structure to sweeping overhauls of the financial regulatory regime. However, before considering such proposals for reform, it is important to understand the current financial industry regulations as they now exist. Unfortunately, an important element of the current regulatory structure, namely, the applicability of the Company Act to commodity pools, has garnered little attention and there is little guidance in legislation, regulation or the legal discourse on this. This article focuses specifically on the point at which a commodity pool engages in the trading of securities such that it is an investment company under the Company Act. In response to this gap in the legal discourse, this article attempts to address this topic, which is particularly important in light of recent market events and proposals for regulatory change, by providing a complete and systematic explication of (i) the definition of an investment company under the Company Act; (ii) the definition of a security under the Company Act (which is necessary to determine whether an investment pool is an investment company under the definition of investment company); and (iii) the applicability of these definitions to the activities of commodity pools.



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