This post is the next installment of multi-part series on CFTC Regulation §1.44, as proposed by the U.S. Commodity Futures Trading Commission (the “CFTC”) on February 20, 2024 (the “Proposed Rule”).

This post will summarize information and disclosure requirements under proposed CFTC Regulation §1.44(h) that, if adopted, will apply in the separate account context.

Sub-paragraph (h) of CFTC Regulation §1.44 contains four information and disclosure requirements that, if adopted, will apply in the separate account context.

Asset Value and Parent Company Information

A futures commission merchant (“FCM”) will be required to obtain information sufficient for the FCM to:

1. Assess the value of the assets dedicated to the separate account; and
2. Identify the direct or indirect parent company of the separate account customer, if applicable.

An FCM can obtain this information from the separate account customer or, if applicable, the customer’s investment manager.

Maintain Customer Contact Information

Where a separate account customer has appointed a third party (like an investment manager) as the primary contact to the FCM, the FCM must:

1. Obtain and maintain current contact information of an authorized representative of the customer; and
2. Take reasonable steps to verify that such contact information is and remains accurate, and that the person is in fact an authorized representative of the customer.

Not every separate account customer advised by an investment manager routinely has contact with an FCM. So, this requirement may turn out to require slightly greater effort for FCMs and investment managers from a customer relationship management perspective.

Part 190 Bankruptcy Disclosure

Part 190 of the CFTC’s Regulations contains the rules that apply to the bankruptcy of an FCM. Under those rules, all separate accounts of a customer will be combined in the event of an FCM’s bankruptcy. The Proposed Rule requires an FCM to provide each separate account customer with a disclosure statement to this effect. This disclosure statement must be delivered directly to the customer via electronic means, in writing, or in such other manner as the FCM customarily delivers disclosures required by CFTC Regulations, and as permissible under the FCM’s customer documentation. It seems likely that some FCMs may include this Part 190 disclosure statement in futures customer agreements with their separate account customers, since these agreements already include provisions related to the FCM’s bankruptcy.

Generic Risk Disclosure Statement; Reinstatement of Separate Account Status

CFTC Regulation §1.55 requires an FCM to provide its customers with a generic risk disclosure statement that, pursuant to proposed CFTC Regulation §1.44(h)(4), will have to include disclosure to the effect that:

1. The FCM permits the separate treatment of accounts for the same customer under the terms and conditions of CFTC Regulation §1.44; and
2. In the event that separate account treatment for some customers were to contribute to a loss that exceeds the FCM’s ability to cover, that loss may affect the segregated funds of all of the FCM’s customers in one or more account classes.

Additionally, proposed CFTC Regulation §1.44(h)(4) prohibits an FCM from reinstating a customer’s separate account status during the 30-day period following the revocation of that customer’s status. As explained by the CFTC in the proposing release, this 30-day period is intended to “ensure that FCMs will conduct a diligent and through review to confirm that the circumstances leading to cessation of separate account treatment have been cured, and to prevent the possibility that…an FCM could toggle its separate account treatment election for purposes other than serving customers’ bona fide commercial purpose.”

The next post will be the final installment of this multi-part series and will provide an overview of proposed changes to other CFTC regulations that will be made if the Proposed Rule is adopted.

Read Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, and Part 10.