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Commodity Funds

Mutual funds that invest in derivatives (e.g., futures contracts, options on futures contracts, and swaps) generally are considered to be “commodity pools” under the Commodity Exchange Act. CFTC regulations provide an exclusion from regulation under the Commodity Exchange Act where investment advisers comply with certain trading and other limits with respect to a fund’s investments in derivatives. Investment advisers and subadvisers to funds that invest in derivatives above these limits, however, are required to register with the CFTC as commodity pool operators and/or commodity trading advisors, and therefore are subject to dual regulation by the SEC and the CFTC.

Although CFTC regulations apply primarily to investment advisers and subadvisers, these regulations may impact the manner in which mutual funds that invest in derivatives are managed and operated. Accordingly, boards overseeing funds that invest in derivatives should be comfortable that the funds have appropriate policies and procedures in place to address CFTC regulations. For example, boards overseeing funds that seek to comply with the CFTC’s trading limits on investments in derivatives may want to consider adopting appropriate compliance policies and procedures to ensure that the funds comply with such limits. Similarly, directors overseeing funds that invest in derivatives above these limits may want to consider implementing policies and procedures to ensure the accuracy and completeness of any additional disclosures or regulatory filings that may be necessary.

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