COMMODITY FUNDS VS. SECURITIES FUNDS
Sometimes new fund managers have advanced strategies that invest in both commodities and securities; however, there are very different regulatory regimes for private funds investing in each asset type.
Below is a summary of the differences between the legal requirements governing commodity funds and securities funds. Note that this summary is for private investment funds, not funds registered under the Investment Company Act of 1940.
Composition of Assets
Commodity funds: Futures, such as crude oil, gold, etc. Foreign currency investments (i.e., forex). Stock indices, such as RUT, SPY, etc.
Securities funds: Publicly traded stocks, bonds, exchange traded funds, and interests in private companies.
Registrations and Licenses Required
Commodity funds: Registration as commodity pool operator with Commodity Futures Trading Commission and admission as a member with the National Futures Association. Associated person must take and pass the Series 3 exam.
Securities funds: Depends on the state in which the fund manager is located. Often, none. Sometimes, an exempt reporting adviser submission is required. Less often, registration as an investment adviser; in this case, each investment adviser representative must take and pass the Series 65 exam.
Exemptions from Registration (for the fund manager)
Commodity funds: Very few, usually focused on very small funds or funds that invest in a de minimis amount of futures.
Securities funds: Governed by state law until the fund manager has $150 million in assets under management. Above this threshold, SEC registration as an investment adviser is required.
Restrictions on Fees
Commodity funds: None.
Securities funds: Performance fees are governed by state law until the fund manager has $150 million in assets under management. No restrictions on management fees; however, some states require certain disclosures for management fees above a certain amount (for instance, above 3% in Texas).
Approval of fund offering documents
Commodity funds: Must be submitted to NFA for review and approval.
Securities funds: None.
Ongoing compliance
Commodity funds: Monthly performance statements for investors required. Audited financial statements required and must be submitted to NFA annually (a few limited exceptions apply to both of these requirements).
Securities funds: Form D must be updated annually. ERA filing must be updated annually. Registered investment advisers do not have filing requirements, but they have stringent ongoing compliance requirements.
Marketing
Commodities funds: Securities law offering exemptions apply. Investors must be provided with the disclosure document on or before the time they purchase interests in the fund.
Securities funds: Securities law offering exemptions apply.
If you are considering starting a commodity fund or securities fund, contact Whitley LLP Attorneys at Law today. We will help you navigate the legal complexity and make it easy for you to launch your fund.