If It Walks Like A Duck And Quacks Like A Duck...

Commodity related mutual funds (including exchange-traded funds) have become very popular.  These funds provide a easy way to gain exposure to specific commodities (e.g. gold) or broad baskets (e.g. the energy complex) with a small capital commitment, liquidity, and professional administration and management.  The funds are touted as priding diversification through non-correlated performance and/or inflation protection.

Many of these fund gain exposure to the commodities through futures contracts.  The market is active and deep, providing an efficient means to participate in the price movement of the selected commodity.

Now the Commodities Futures Exchange Commission (CFTC) is asserting its regulatory authority over these funds, according to a story in Investment News.  The funds have relied on a rule exclusion that had allowed the funds to avoid registering with the CFTC. Effective January 1, those funds that invest primarily through the futures markets will be required to register as commodities pools and the fund managers to register as commodities pool operators.

Naturally, the funds are opposed, citing the regulatory oversight by the Securities and Exchange Commission (SEC).  Other negative affects of the move by the CFTC would be the potential application of conflicting regulations, and increased costs.  All of these costs would be to the ultimate detriment of the investor.

Nevertheless, the move is appropriate.  Futures contracts and the exchanges on which they are traded are fundamentally different from stocks and bonds and their respective markets.  In their composition and operation, these funds are clearly more like commodity pools than your typical mutual fund.  So, the additional regulation is relevant, along with SEC oversight of the mutual fund vehicle.

Of course, this will bring up another regulatory question: Who is qualified to recommend the purchase of one of these funds?  Will broker/dealers require advisors to acquire a FINRA Series 3 or 31 registration?  If the B/D is going to be held responsible for CFTC compliance with regard to these products, I would expect it to adopt the requirement.  Of course, since there is no such requirement for an unaffiliated Registered Investment Advisor, it would another nudge down the path of diminishing independent B/D competitiveness.