A Securities Law Primer for Commodity Pool Operators

Monday, January 1st, 1996 at 12:00 am by James G. Smith
James G. Smith, A Securities Law Primer for Commodity Pool Operators, 1996 Colum. Bus. L. Rev. 281

As investment managers become more creative in designing and employing methods of increasing yields and hedging risks, financial and investment vehicles are becoming increasingly more sophisticated and correspondingly more complex. Traditionally, investments could be readily identified as a security or commodity subject to the respective regulatory schemes. However, some sophisticated, complex investment vehicles are not so easily categorized and may fall within the regulatory jurisdictions of both securities and commodities. This article will examine commodities related investments in pooled investment funds commonly known as commodity pools and the various ways the securities laws impact commodity pools. A commodity pool, the commodities industry’s equivalent to the securities industry’s mutual fund, is an entity that typically limits the liability of its investors, such as a corporation, limited partnership or limited liability company (“LLC”), which pools the funds of investors for the purpose of investing in futures contracts. The pool issues participation interests to pool investors. These interests will almost always be deemed securities for purposes of the federal securities laws and, therefore, are subject to the Securities Act of 1933 (the “1933 Act”) and the Securities Exchange Act of 1934 (the “1934 Act”). Commodity pools sometime invest funds in other investment vehicles, such as securities. When a pool invests in securities, it takes on the characteristics of an investment company and becomes subject to the Investment Company Act of 1940 (the “1940 Act”), and the pool’s adviser becomes subject to the Investment Advisers Act of 1940 (the “Advisers Act”). This article analyzes the regulation of commodity pools under the 1933 and 1934 Acts. This article then focuses on the implications of the 1940 Act and the Advisers Act for commodity pools. Finally, this article reviews state regulation of commodity pools.

Author Information

Smith is an associate with the New York law firm, Hecht & Steckman, P.C.