2012-3390
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Federal Register, Volume 77 Issue 37 (Friday, February 24, 2012)[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]
[Rules and Regulations]
[Pages 11252-11344]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3390]
[[Page 11251]]
Vol. 77
Friday,
No. 37
February 24, 2012
Part III
Commodity Futures Trading Commission
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17 CFR Parts 4, 145, and 147
Commodity Pool Operators and Commodity Trading Advisors: Compliance
Obligations; Harmonization of Compliance Obligations for Registered
Investment Companies Required To Register as Commodity Pool Operators;
Final Rule and Proposed Rule
Federal Register / Vol. 77 , No. 37 / Friday, February 24, 2012 /
Rules and Regulations
[[Page 11252]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 4, 145, and 147
RIN 3038-AD30
Commodity Pool Operators and Commodity Trading Advisors:
Compliance Obligations
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission is adopting
amendments to its existing part 4 regulations and promulgating one new
regulation regarding Commodity Pool Operators and Commodity Trading
Advisors. The Commission is also adopting new data collections for CPOs
and CTAs that are consistent with a data collection required under the
Dodd-Frank Act for entities registered with both the Commission and the
Securities and Exchange Commission. The adopted amendments rescind the
exemption from registration; rescind relief from the certification
requirement for annual reports provided to operators of certain pools
offered only to qualified eligible persons (QEPs; modify the criteria
for claiming relief); and require the annual filing of notices claiming
exemptive relief under several sections of the Commission's
regulations. Finally, the adopted amendments include new risk
disclosure requirements for CPOs and CTAs regarding swap transactions.
DATES: Effective dates: This final rule is effective on April 24, 2012,
except for the amendments to Sec. 4.27, which shall become effective
on July 2, 2012.
Compliance dates: Compliance with Sec. 4.27 shall be required by
not later than September 15, 2012, for a CPO having at least $5 billion
in assets under management, and by not later than December 14, 2012,
for all other registered CPOs and all CTAs. Compliance with Sec. 4.5
for registration purposes only shall be required not later than the
later of December 31, 2012, or 60 days after the effective date of the
final rulemaking further defining the term ``swap,'' which the
Commission will publish in the Federal Register at a future date.
Entities required to register due to the amendments to Sec. 4.5 shall
be subject to the Commission's recordkeeping, reporting, and disclosure
requirements pursuant to part 4 of the Commission's regulations within
60 days following the effectiveness of a final rule implementing the
Commission's proposed harmonization effort pursuant to the concurrent
proposed rulemaking. CPOs claiming exemption under Sec. 4.13(a)(4)
shall be required to comply with the rescission of Sec. 4.13(a)(4) by
December 31, 2012; however, compliance shall be required for all other
CPOs on April 24, 2012. Compliance with all other amendments, not
otherwise specified above, shall be required by December 31, 2012.
FOR FURTHER INFORMATION CONTACT: Kevin P. Walek, Assistant Director,
Telephone: (202) 418-5463, Email: kwalek@cftc.gov, or Amanda Lesher
Olear, Special Counsel, Telephone: (202) 418-5283, Email:
aolear@cftc.gov, Michael Ehrstein, Attorney-Advisor, Telephone: 202-
418-5957, Email: mehrstein@cftc.gov, Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background on the Proposal To Amend the Registration and Compliance
Obligations for CPOs and CTAs
A. Statutory and Regulatory Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ The
legislation was enacted to reduce risk, increase transparency, and
promote market integrity within the financial system by, inter alia,
enhancing the Commodity Futures Trading Commission's (the
``Commission'' or ``CFTC'') rulemaking and enforcement authorities with
respect to all registered entities and intermediaries subject to the
Commission's oversight.
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
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The preamble of the Dodd-Frank Act explicitly states that the
purpose of the legislation is:
To promote the financial stability of the United States by
improving accountability and transparency in the financial system,
to end `too big to fail', to protect the American taxpayer by ending
bailouts, to protect consumers from abusive financial services
practices, and for other purposes.\2\
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\2\ Id.
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Pursuant to this stated objective, the Dodd-Frank Act has expanded
the scope of federal financial regulation to include instruments such
as swaps, enhanced the rulemaking authorities of existing federal
financial regulatory agencies including the Commission and the
Securities and Exchange Commission (``SEC''), and created new financial
regulatory entities.
In addition to the expansion of the Commission's jurisdiction to
include swaps under Title VII of the Dodd-Frank Act, Title I of the
Dodd-Frank Act created the Financial Stability Oversight Council
(``FSOC'').\3\ The FSOC is composed of the leaders of various state and
federal financial regulators and is charged with identifying risks to
the financial stability of the United States, promoting market
discipline, and responding to emerging threats to the stability of the
country's financial system.\4\ The Dodd-Frank Act anticipates that the
FSOC will be supported in these responsibilities by the federal
financial regulatory agencies.\5\ The Commission is among those
agencies that could be asked to provide information necessary for the
FSOC to perform its statutorily mandated duties.\6\
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\3\ See section 111 of the Dodd-Frank Act.
\4\ See section 112(a)(1)(A) of the Dodd-Frank Act.
\5\ See sections 112(a)(2)(A) and 112(d)(1) of the Dodd-Frank
Act.
\6\ See section 112(d)(1) of the Dodd-Frank Act.
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Title IV of the Dodd-Frank Act requires advisers to large private
funds \7\ to register with the SEC.\8\ Through this registration
requirement, Congress
[[Page 11253]]
sought to make available to the SEC ``information regarding [the] size,
strategies and positions'' of large private funds, which Congress
believed ``could be crucial to regulatory attempts to deal with a
future crisis.'' \9\ In section 404 of the Dodd-Frank Act, Congress
amended section 204(b) of the Investment Advisers Act to direct the SEC
to require private fund advisers registered solely with the SEC \10\ to
file reports containing such information as is deemed necessary and
appropriate in the public interest and for investor protection or for
the assessment of systemic risk. These reports and records must include
a description of certain prescribed information, such as the amount of
assets under management, use of leverage, counterparty credit risk
exposure, and trading and investment positions for each private fund
advised by the adviser.\11\ Section 406 of the Dodd-Frank Act also
requires that the rules establishing the form and content of reports
filed by private fund advisers that are dually registered with the SEC
and the CFTC be issued jointly by both agencies after consultation with
the FSOC.\12\
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\7\ Section 202(a)(29) of the Investment Advisers Act of 1940
(``Investment Advisers Act'') defines the term ``private fund'' as
``an issuer that would be an investment company, as defined in
section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3),
but for section 3(c)(1) or 3(c)(7) of that Act.'' 15 U.S.C. 80a-
3(c)(1), 80a-3(c)(7). Section 3(c)(1) of the Investment Company Act
provides an exclusion from the definition of ``investment company''
for any ``issuer whose outstanding securities (other than short term
paper) are beneficially owned by not more than one hundred persons
and which is not making and does not presently propose to make a
public offering of its securities.'' 15 U.S.C. 80a-3(c)(1). Section
3(c)(7) of the Investment Company Act provides an exclusion from the
definition of ``investment company'' for any ``issuer, the
outstanding securities of which are owned exclusively by persons
who, at the time of acquisition of such securities, are qualified
purchasers, and which is not making and does not at that time
propose to make a public offering of such securities.'' 15 U.S.C.
80a-3(c)(7). The term ``qualified purchaser'' is defined in section
2(a)(51) of the Investment Company Act. See 15 U.S.C. 80a-2(a)(51).
\8\ The Dodd-Frank Act requires private fund adviser
registration by amending section 203(b)(3) of the Advisers Act to
repeal the exemption from registration for any adviser that during
the course of the preceding 12 months had fewer than 15 clients and
neither held itself out to the public as an investment adviser nor
advised any registered investment company or business development
company. See section 403 of the Dodd-Frank Act. There are exemptions
from this registration requirement for advisers to venture capital
funds and advisers to private funds with less than $150 million in
assets under management in the United States. There also is an
exemption for foreign advisers with less than $25 million in assets
under management from the United States and fewer than 15 U.S.
clients and private fund investors. See sections 402, 407 and 408 of
the Dodd-Frank Act.
\9\ See S. Conf. Rep. No. 111-176, at 38 (2010).
\10\ In this release, the term ``private fund adviser'' means
any investment adviser that is (i) registered or required to be
registered with the SEC (including any investment adviser that is
also registered or required to be registered with the CFTC as a CPO
or CTA) and (ii) advises one or more private funds (including any
commodity pools that satisfy the definition of ``private fund'').
\11\ See section 404 of the Dodd-Frank Act.
\12\ See section 406 of the Dodd-Frank Act.
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The Commodity Exchange Act (``CEA'') \13\ authorizes the Commission
to register Commodity Pool Operators (``CPOs'') and Commodity Trading
Advisors (``CTAs''),\14\ exclude any entity from registration as a CPO
or CTA,\15\ and require ``[e]very commodity trading advisor and
commodity pool operator registered under [the CEA to] maintain books
and records and file such reports in such form and manner as may be
prescribed by the Commission.'' \16\ The Commission also has the
authority to include within or exclude from the definitions of
``commodity pool,'' ``commodity pool operator,'' and ``commodity
trading advisor'' any entity ``if the Commission determines that the
rule or regulation will effectuate the purposes of the CEA.'' \17\ In
addition, the Commission has the authority to ``make and promulgate
such rules and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate the provisions or to accomplish any
of the purposes of [the CEA].'' \18\ The Commission's discretionary
authority to exclude or exempt persons from registration was intended
to be exercised ``to exempt from registration those persons who
otherwise meet the criteria for registration * * * if, in the opinion
of the Commission, there is no substantial public interest to be served
by the registration.'' \19\ It is pursuant to this authority that the
Commission has promulgated the various exemptions from registration as
a CPO that are enumerated in Sec. 4.13 of its regulations as well as
the exclusions from the definition of CPO that are delineated in Sec.
4.5.\20\
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\13\ 7 U.S.C. 1, et seq.
\14\ 7 U.S.C. 6m.
\15\ 7 U.S.C. 1a(11) and 1a(12).
\16\ 7 U.S.C. 6n(3)(A). Under part 4 of the Commission's
regulations, entities registered as CPOs have reporting obligations
with respect to their operated pools. See 17 CFR. 4.22. Although
CTAs have recordkeeping obligations under part 4, the Commission has
not required reporting by CTAs, See generally, 17 CFR. part 4.
\17\ 7 U.S.C. 1a(10), 1a(11), 1a(12).
\18\ 7 U.S.C. 12a(5).
\19\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p.
20.
\20\ See 68 FR 47231 (Aug. 8, 2003).
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As stated previously in this release, and in the Proposal, Congress
enacted the Dodd-Frank Act in response to the financial crisis of 2007
and 2008.\21\ That Act requires the reporting of certain information by
investment advisers to private funds related to potential systemic risk
including, but not limited to, the amount of assets under management,
use of leverage, counterparty credit risk exposure, and trading and
investment positions for each private fund under the reporting entity's
advisement.\22\ This information facilitates oversight of the
investment activities of funds within the context of the rest of a
discrete market or the economy as a whole.
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\21\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
\22\ See section 404 of the Dodd-Frank Act.
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The sources of risk delineated in the Dodd-Frank Act with respect
to private funds are also presented by commodity pools. To provide the
Commission with similar information to address these risks, the
Commission has determined to require registration of certain previously
exempt CPOs and to further require reporting of information comparable
to that required in Form PF, which the Commission has previously
adopted jointly with the SEC. To implement this enhanced oversight, the
Commission proposed, and has now determined to adopt, the revision and
rescission of certain discretionary exemptions that it previously
granted.
B. The Proposal
Following the recent economic turmoil, and consistent with the
tenor of the provisions of the Dodd-Frank Act, the Commission
reconsidered the level of regulation that it believes is appropriate
with respect to entities participating in the commodity futures and
derivatives markets. Therefore, on January 26, 2011, the Commission
proposed amendments and additions to its existing regulatory regime for
CPOs and CTAs and the creation of two new data collection instruments,
Forms CPO-PQR and CTA-PR (``Proposal'').\23\ In a concurrent joint
proposal with the SEC, the Commission also proposed Sec. 4.27(d) and
sections 1 and 2 of Form PF.\24\
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\23\ See 76 FR 7976 (Feb. 11, 2011).
\24\ See 76 FR 8068 (Feb. 11, 2011). Because the Commission did
not adopt the remainder of proposed Sec. 4.27 at the same time as
it adopted the subsection of Sec. 4.27 implementing Form PF, the
Commission modified the designation of Sec. 4.27(d) to be the sole
text of that section. Additionally, the Commission made some
revisions to the text of Sec. 4.27 to: (1) clarify that the filing
of Form PF with the SEC will be considered substitute compliance
with certain Commission reporting obligations and (2) allow CPOs and
CTAs who are otherwise required to file Form PF the option of
submitting on Form PF data regarding commodity pools that are not
private funds as substitute compliance with certain CFTC reporting
obligations.
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In the Proposal, the Commission specifically proposed the following
amendments: (A) to require the periodic reporting of data by CPOs and
CTAs regarding their direction of commodity pool assets; (B) to
identify certain proposed filings with the Commission as being afforded
confidential treatment; (C) to revise the requirements for determining
which persons should be required to register as a CPO under Sec. 4.5;
(D) to require the filing of certified annual reports by all registered
CPOs; (E) to rescind the exemptions from registration under Sec. Sec.
4.13(a)(3) and (a)(4); (F) to require annual affirmation of claimed
exemptive relief for both CPOs and CTAs; (G) to require an additional
risk disclosure statement from CPOs and CTAs that engage in swaps
transactions; and (H) to make certain conforming amendments to the
Commission's regulations in light of the proposed amendments.
In describing the rationale for the Proposal, the Commission
stated:
[T]o ensure that necessary data is collected from CPOs and CTAs
that are not operators or advisors of private funds, the Commission
is proposing a new Sec. 4.27, which would require quarterly reports
from all CPOs and CTAs to be electronically filed with NFA. The
Commission is promulgating proposed Sec. 4.27 pursuant to the
Commission's authority to require the filing of reports by
registered CPOs and CTAs under section 4n
[[Page 11254]]
of the CEA. In an effort to eliminate duplicative filings, proposed
Sec. 4.27(d) would allow certain CPOs and/or CTAs that are also
registered as private fund advisers with the SEC pursuant to the
securities laws to satisfy certain of the Commission's systemic
reporting requirements by completing and filing the appropriate
sections of Form PF with the SEC with respect to advised private
funds.
In order to ensure that the Commission can adequately oversee
the commodities and derivatives markets and assess market risk
associated with pooled investment vehicles under its jurisdiction,
the Commission is re-evaluating its regulation of CPOs and CTAs.
Additionally, the Commission does not want its registration and
reporting regime for pooled investment vehicles and their operators
and/or advisors to be incongruent with the registration and
reporting regimes of other regulators, such as that of the SEC for
investment advisers under the Dodd-Frank Act. (Footnotes
omitted).\25\
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\25\ 76 FR 7976, 7977-78 (Feb. 11, 2011).
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C. Comments on the Proposal
The Commission received 61 comment letters in response to the
Proposal. The commenters represented a diversity of market
participants. Seven commenters were registered investment companies or
registered investment advisers; five commenters were registered or
exempt CPOs; and three commenters were registered investment companies
or registered investment advisers that also claimed exemption from
registration as a CPO under Sec. 4.13. The Commission also received 20
comments from law firms; 14 comments from trade organizations; two
comments from individual interested parties; a comment from a
compliance service provider; and a comment from a registered futures
association.\26\ The majority of the comments received opposed the
adoption of the proposed amendments to Sec. 4.5 and the rescission of
Sec. Sec. 4.13(a)(3) and (a)(4).
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\26\ Additionally, the Commission received six comments that
were not pertinent to the substance of the Proposal. Three concerned
position limits in silver, one consisted of a web address; one was
an advertisement; and one simply said ``nice.''
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Having considered these comments, the Commission has decided to
adopt most of the amendments to part 4 that it proposed, with some
modifications. In addition, the Commission has decided not to rescind
the exemption in Sec. 4.13(a)(3) for entities engaged in a de minimis
amount of derivatives trading. The Commission's amendments to part 4,
and the modifications to its Proposal are discussed below.
The scope of this Federal Register release generally is restricted
to the comments received in response to the Proposal and to the changes
to, and the clarifications of, the Proposal that the Commission is
making in response thereto. The Commission encourages interested
persons to read the Proposal for a fuller discussion of the purpose of
each of the amendments contained in the Proposal.
D. Significant Changes From the Proposal
The significant changes from the Proposal that the Commission is
making in the rules it is adopting today are as follows: (1) The
marketing restriction in Sec. 4.5 no longer contains the clause ``(or
otherwise seeking investment exposure to)''; (2) Sec. 4.5 will be
amended to include an alternative trading threshold test based on the
net notional value of a registered investment company's derivatives
positions; (3) annual notices for exemptions and exclusions will be
filed on an annual calendar year end basis rather than on the
anniversary of the filing date; and (4) changes have been made to the
substance of Forms CPO-PQR and CTA-PR and the filing timelines for both
forms.
II. Responses to Comments on the Proposal
A. Comments Regarding Proposed Amendments to Sec. 4.5
As part of the Proposal, the Commission proposed amendments to
Sec. 4.5(c)(2)(iii), reinstating a trading threshold and marketing
restriction for registered investment companies claiming exclusion from
the definition of CPO under that section. In support of the Proposal,
the Commission stated that it became aware that certain registered
investment companies were offering interests in de facto commodity
pools while claiming exclusion under Sec. 4.5.\27\ The Commission
further stated that it believed that registered investment companies
should not engage in such activities without Commission oversight and
that such oversight was necessary to ensure consistent treatment of
CPOs regardless of their status with respect to other regulators.\28\
The Commission also recognized that operational issues may exist
regarding the ability of registered investment companies to comply with
the Commission's compliance regime.\29\
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\27\ 76 FR 7976, 7983 (Feb. 12, 2011). The Commission determined
to propose amendments to Sec. 4.5 following the submission of a
petition for rulemaking by the National Futures Association, to
which the Commission has delegated much of its direct oversight
activities relating to CPOs, CTAs, and commodity pools. See, 75 FR
56997 (Sept. 17, 2010).
\28\ Id. at 7984.
\29\ Id.
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The Commission received numerous comments regarding the proposed
amendments to Sec. 4.5. The comments can be broadly categorized into
eight categories: (1) General comments as to the advisability of making
such a change and the Commission's justification for doing so; (2) the
trading threshold; (3) the inclusion of swaps within the trading
threshold; (4) the proposed marketing restriction; (5) harmonization of
compliance obligations with those of the SEC; (6) the appropriate
entity to register as the registered investment company's CPO; (7) the
use and permissibility of controlled foreign corporations by registered
investment companies; and (8) the timeline for implementation.
1. General Comments on Proposed Amendments to Sec. 4.5
Certain comments argued against the adoption of any change to Sec.
4.5 and questioned the Commission's justification for doing so.\30\
Most commenters generally opposed the change because they claimed that
requiring registration and compliance with the Commission's regulatory
regime would provide no tangible benefit to the Commission or investors
because registered investment companies are already subject to
comprehensive regulation by the SEC.
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\30\ Comment letter from the Investment Company Institute (April
12, 2011) (``ICI Letter''); comment letter from the Mutual Fund
Directors Forum (April 12, 2011) (``MFDF Letter'').
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The Commission believes that registration with the Commission
provides two significant benefits. First, registration allows the
Commission to ensure that all entities operating collective investment
vehicles participating in the derivatives markets meet minimum
standards of fitness and competency.\31\ Second, registration provides
the Commission and members of the public with a clear means of
addressing wrongful conduct by individuals and entities participating
in the derivatives markets. The Commission has clear authority to take
punitive and/or remedial action against registered entities for
violations of the CEA or of the Commission's regulations. Moreover, the
Commission has the ability to deny or revoke registration, thereby
expelling an individual or entity from serving as an intermediary in
the industry. Members of the public also may access the Commission's
reparations program or National Futures Association's (``NFA'')
arbitration program to seek redress for wrongful conduct by a
Commission registrant
[[Page 11255]]
and/or NFA member. Therefore, the Commission continues to believe that
its registration requirements further critical regulatory objectives
and serve important public policy goals.
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\31\ See H.R. Rep. No. 565 (Part 1), 97th Cong., 2d Sess. 48
(1982), S. Rep. No. 384, 97th Cong., 2d Sess. 111 (1982). See also,
48 FR 14933 (Apr. 6, 1983).
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A number of commenters who expressed general opposition also
acknowledged that if the Commission determined to proceed with its
proposed changes to Sec. 4.5, certain areas of harmonization with SEC
requirements should be addressed. To that end, concurrently with the
issuance of this rule, the Commission plans to issue a notice of
proposed rulemaking detailing its proposed modifications to part 4 of
its regulations to harmonize the compliance obligations that apply to
dually registered investment companies. Commenters did not question,
however, that the Commission has a regulatory interest in overseeing
entities engaging in derivatives trading. Rather, they argued that the
SEC currently provides adequate oversight of their activities.
The Commission disagrees with the arguments presented by those
commenters who argued against the adoption of any change to Sec. 4.5.
The Commission continues to believe that entities operating collective
investment vehicles that engage in more than a de minimis amount of
derivatives trading should be required to register with the Commission.
The Commission believes that because Congress empowered the Commission
to oversee the derivatives market, the Commission is in the best
position to oversee entities engaged in more than a limited amount of
non-hedging derivatives trading.
Several commenters also asserted that modifying Sec. 4.5 would
result in a significant burden to entities required to register with
the Commission without any meaningful benefit to the Commission.\32\
The Commission believes, as discussed throughout this release, that
entities that are offering services substantially identical to those of
a registered CPO should be subject to substantially identical
regulatory obligations. The Commission also recognizes that
modification to Sec. 4.5 may result in costs for registered investment
companies. For that reason, as stated above, in conjunction with
finalizing the proposed amendments to Sec. 4.5, the Commission has
proposed to adopt a harmonized compliance regime for registered
investment companies whose activities require oversight by the
Commission. Although the Commission believes the modifications to Sec.
4.5 enhance the Commission's ability to effectively oversee derivatives
markets, it is not the Commission's intention to burden registered
investment companies beyond what is required to provide the Commission
with adequate information it finds necessary to effectively oversee the
registered investment company's derivatives trading activities. Through
this harmonization, the Commission intends to minimize the burden of
the amendments to Sec. 4.5.
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\32\ See ICI Letter; comment letter from Vanguard (April 12,
2011) (``Vanguard Letter''); comment letter from Reed Smith LLP
(April 12, 2011) (``Reed Smith Letter''); comment letter from
AllianceBernstein Mutual Funds (April 12, 2011) (``AllianceBernstein
Letter''); comment letter from United States Automobile Association
(April 12, 2011) (``USAA Letter''); comment letter from Principal
Management Corporation (April 12, 2011) (``PMC Letter''); comment
letter from Investment Adviser Association (April 12, 2011) (``IAA
Letter''); comment letter from Dechert LLP and clients (April 12,
2011) (``Dechert II Letter''); comment letter from Janus Capital
Management LLC (April 12, 2011) (``Janus Letter''); comment letter
from Security Traders Association (April 12, 2011) (``STA Letter'');
comment letter from Invesco Advisers, Inc. (April 12, 2011)
(``Invesco Letter''); and comment letter from Equinox Fund
Management, LLC (July 28, 2011) (``Equinox Letter'').
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Second, the Commission disagrees with the commenters' assertion
that the Commission would not receive any meaningful benefit from a
modification to Sec. 4.5. As stated above, the Commission disagrees
that such registration and oversight is redundant, and emphasizes that
it is in the best position to adequately oversee the derivatives
trading activities of entities in which the Commission has a regulatory
interest. As discussed above, the Commission is charged with
administering the Commodity Exchange Act to protect market users and
the public from fraud, manipulation, abusive practices and systemic
risk related to derivatives that are subject to the Act, and to foster
open, competitive, and financially sound markets. The Commission's
programs are structured and its resources deployed in service of that
mission.
One commenter questioned the Commission's reasoning for choosing to
impose additional requirements on registered investment companies but
not proposing to impose such requirements on other categories of
entities.\33\ This commenter also stated that the Commission was
required to detail its reasoning under the Administrative Procedure
Act.\34\ As stated in the Proposal, the Commission remains concerned
that registered investment companies are offering managed futures
strategies, either in whole or in part, without Commission oversight
and without making the disclosures to both the Commission and investors
regarding the pertinent facts associated with the investment in the
registered investment company. The Commission is focused on registered
investment companies because it is aware of increased trading activity
in the derivatives area by such entities that may not be appropriately
addressed in the existing regulatory protections, including risk
management and recordkeeping and reporting requirements. The SEC has
also noted this increased trading activity and is reviewing the use of
derivatives by investment companies.\35\ In its recent concept release
regarding the use of derivatives by registered investment companies,
the SEC noted that although its staff had addressed issues related to
derivatives on a case-by-case basis, it had not developed a
``comprehensive and systematic approach to derivatives related
issues.'' \36\ As aptly noted by the Chairman of the SEC, ``The
controls in place to address fund management in traditional securities
can lose their effectiveness when applied to derivatives. This is
particularly the case because a relatively small investment in a
derivative instrument can expose a fund to potentially substantial gain
or loss--or outsized exposure to an individual counterparty.'' \37\
Despite the commenter's assertion, the Commission is unaware of other
classes of entities that are excluded from the definition of CPO
engaging in significant derivatives trading. Of course, if the
Commission becomes aware of any other categories of excluded entities
engaging in similar levels of derivatives trading, it will consider
appropriate action to ensure that such entities and their derivatives
[[Page 11256]]
trading activities are brought under the Commission's regulatory
oversight. As stated previously, the Commission continues to believe
that entities that are offering services substantially identical to
those of a registered CPO should be subject to substantially identical
regulatory obligations.
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\33\ See ICI Letter.
\34\ Id.
\35\ For example, the SEC recently issued a concept release
seeking comment on use of derivatives by investment companies,
noting: ``The dramatic growth in the volume and complexity of
derivatives investments over the past two decades, and funds'
increased use of derivatives, have led the [Securities and Exchange]
Commission and its staff to initiate a review of funds' use of
derivatives under the Investment Company Act. (footnotes omitted)''
76 FR 55237, 55238 (Sep. 7, 2011).
\36\ 76 FR 55237, 55239 (Sept. 7, 2011). See, Press Release,
Securities and Exchange Commission, SEC Seeks Public Comment on Use
of Derivatives by Mutual Funds and Other Investment Companies (Aug.
31, 2011), available at http://www.sec.gov/news/press/2011/2011-175.htm (`` `The derivatives markets have undergone significant
changes in recent years, and the Commission is taking this
opportunity to seek public comment and ensure that our regulatory
approach and interpretations under the Investment Company Act remain
current, relevant, and consistent with investor protection,' '' said
SEC Chairman Mary Shapiro.'').
\37\ Chairman Mary Shapiro, Opening Statement at SEC Open
Meeting Item 1--Use of Derivatives by Funds (Aug. 31, 2011),
available at http://www.sec.gov/news/speech/2011/spch083111mls-item1.htm (``The current derivatives review gives us the opportunity
to re-think our approach to regulating funds' use of derivatives. We
are engaging in this review with a holistic perspective, in the wake
of the financial crisis, and in light of the new comprehensive
regulatory regime for swaps being developed under the Dodd-Frank
Act.'').
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2. Comments on the Proposed Trading Threshold
The Commission also received numerous comments on the proposed
addition of a trading threshold to the exclusion under Sec. 4.5.\38\
The proposed trading threshold provided that derivatives trading could
not exceed five percent of the liquidation value of an entity's
portfolio, without registration with the Commission. The Proposal
excluded activity conducted for ``bona fide hedging'' purposes.\39\
Most commenters stated that a five percent threshold was far too low in
light of the Commission's determination to include swaps within the
measured activities and the limited scope of the Commission's bona fide
hedging definition, but no data was provided to support this assertion.
The Commission, in its adoption of the exemption under Sec.
4.13(a)(3),\40\ previously determined that five percent is an
appropriate threshold to determine whether an entity warrants oversight
by the Commission.\41\
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\38\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith
Letter; AllianceBernstein Letter; AII Letter; STA Letter; Janus
Letter; PMC Letter; USAA Letter; comment letter from Fidelity
Management and Research Co. (April 12, 2011) (``Fidelity Letter'');
comment letter from Securities Industry and Financial Markets
Association (April 12, 2011) (``SIFMA Letter''); comment letter from
Dechert LLP (July 26, 2011) (``Dechert III Letter''); comment letter
from Rydex/SGI Morgan, Lewis & Bockius LLP (April 12, 2011) (``Rydex
Letter''); comment letter from the United States Chamber of Commerce
(April 12, 2011) (``USCC Letter''); comment letter from Sidley
Austin LLP (April 12, 2011) (``Sidley Letter''); comment letter from
the National Futures Association (April 12, 2011) (``NFA Letter'');
comment letter from Campbell & Company, Inc. (April 12, 2011)
(``Campbell Letter''); comment letter from AQR Capital Management,
LLC (April 12, 2011) (``AQR Letter''); comment letter from Steben &
Company, Inc. (April 12, 2011) (``Steben Letter''); comment letter
from the Investment Company Institute (July 28, 2011) (``ICI II
Letter''); and comment from the Association of Institutional
Investors (April 12, 2011) (``AII Letter'').
\39\ 76 FR 7976, 7989 (Feb. 11, 2011).
\40\ 17 CFR 4.13(a)(3).
\41\ 68 FR 47221, 47225 (Aug. 8, 2003).
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Despite the views of some commenters, the Commission believes that
the five percent threshold continues to be the appropriate percentage
for exemption or exclusion based upon an entity's limited derivatives
trading. Five percent remains the average required for futures margins,
although the Commission acknowledges that margin levels for securities
product futures are significantly higher and the levels for swaps
margining may be as well. The Commission believes, however, that
trading exceeding five percent of the liquidation value of a portfolio
evidences a significant exposure to the derivatives markets. The
Commission believes that such exposure should subject an entity to the
Commission's oversight. Moreover, the Commission believes that its
adoption of an alternative net notional test to determine eligibility
for exclusion from the definition of CPO, as discussed infra, provides
flexibility to registered investment companies in consideration of the
fact that initial margin for certain commodity interest products may
not permit compliance with the five percent threshold.
Commenters also recommended that the Commission exclude from the
threshold calculation various instruments including broad-based stock
index futures, security futures generally, or financial futures
contracts as a whole.\42\ The Commission does not believe that
exempting any of these instruments from the threshold calculation is
appropriate. The Commission does not believe that there is a meaningful
distinction between those security or financial futures and other
categories of futures. The Commission believes that its oversight of
the use of security or financial futures is just as essential as its
oversight of physical commodity futures. Congress granted the
Commission authority over all futures in Sec. 2 of the CEA.\43\ The
Commission believes that it is in the best position to assess investor
and market risks posed by entities trading in derivatives regardless of
type. Therefore, the Commission has decided not to modify the scope of
the threshold from what was proposed in order to exclude security
futures or financial futures from the trading threshold.
---------------------------------------------------------------------------
\42\ See Rydex Letter; Invesco Letter; ICI Letter.
\43\ 7 U.S.C. 2.
---------------------------------------------------------------------------
Commenters requested that the Commission expand its definition of
bona fide hedging as it appears in Sec. 1.3(z) to include risk
management as a recognized bona fide hedging activity for purposes of
Sec. 4.5.\44\ The Proposal excluded activity conducted for ``bona fide
hedging'' purposes as that term was defined in Sec. 1.3 as it existed
at the time of the proposal.\45\ Further, the Proposal noted that the
Commission anticipated that the definition of ``bona fide hedging''
would be modified through future rulemakings,\46\ which were open for
comments from the public.
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\44\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith
Letter; AllianceBernstein Letter; IAA Letter; Janus Letter; and STA
Letter.
\45\ 76 FR 7976, 7989 (Feb. 11, 2011).
\46\ 76 FR 7976, 7984 (Feb. 11, 2011).
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The Commission recently adopted final rules regarding position
limits and, through that rulemaking, implemented a new statutory
definition of bona fide hedging transactions for exempt and excluded
commodity transactions as part of new Sec. 151.5.\47\ This statutory
definition limits the scope of bona fide hedging transactions for
exempt and agricultural commodities, and does not provide for a risk
management exemption for position limits purposes.\48\ With regard to
position limits and bona fide hedging transactions for excluded
commodities, the Commission amended the pre-Dodd-Frank definition of
bona fide hedging in Sec. 1.3(z) to only apply to excluded
commodities. Further, the Commission allowed DCMs and SEFs that are
trading facilities to provide for a risk management exemption from
position limits for excluded commodity transactions.
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\47\ 7 U.S.C. 6a(c); 76 FR 71626, 71643 (Nov. 18, 2011).
\48\ 76 FR 71626, 71644 (Nov. 18, 2011).
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The Commission does not believe that it is appropriate to exclude
risk management transactions from the trading threshold. The Commission
believes that an important distinction between bona fide hedging
transactions and those undertaken for risk management purposes is that
bona fide hedging transactions are unlikely to present the same level
of market risk as they are offset by exposure in the physical markets.
Additionally, the Commission is concerned that in the context of
exclusion under Sec. 4.5, a risk management exclusion would permit
registered investment companies to engage in a greater volume of
derivatives trading than other entities which are engaged in similar
activities, but which are otherwise required to register as CPOs. This
could result in disparate treatment among similarly situated entities.
Moreover, there was no consensus among the commenters as to the
appropriate definition of risk management transactions. Thus, the
Commission believes that it may be difficult in this context to
properly limit the scope of such exclusion as objective criteria are
not universally recognized, which would make such exclusion onerous to
enforce.\49\
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\49\ The Commission notes that Sec. 4.5 references the
definition of bona fide hedging for exempt and agricultural
commodities under Sec. 151.5 as well as the definition of bona fide
hedging for excluded commodities under Sec. 1.3(z). Market
participants should not construe either Sec. 151.5 or Sec. 1.3(z)
as permitting a risk management exemption for purposes of
determining compliance with the trading threshold in Sec. 4.5.
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[[Page 11257]]
During numerous meetings with commenters, the commenters noted that
most registered investment companies use derivatives for risk
management purposes, namely to offset the risk inherent in positions
taken in the securities or bond markets, or to equitize cash
efficiently. Although the Commission recognizes the importance of the
use of derivatives for risk management purposes, it does not believe
that transactions that are not within the bona fide hedging definition
should be excluded from the determination of whether an entity meets
the trading threshold for registration and oversight. Therefore, the
Commission has decided not to exclude risk management activities by
registered investment companies from the trading threshold for purposes
of Sec. 4.5.
Several panelists at the Commission's staff roundtable held on July
6, 2011\50\ (``Roundtable'') suggested that, instead of a trading
threshold that is based on a percentage of margin, the Commission
should focus solely on entities that offer ``actively managed futures''
strategies.\51\ The panelist defined ``actively managed futures''
strategies as those in which the entity or its investment adviser made
its own decisions as to which derivatives to take positions in, as
compared to the ``passive'' use of an index, wherein the entity's
investments simply track those held by an index.\52\
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\50\ See Notice of CFTC Staff Roundtable Discussion on Proposed
Changes to Registration and Compliance Regime for Commodity Pool
Operators and Commodity Trading Advisors, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.
\51\ See Transcript of CFTC Staff Roundtable Discussion on
Proposed Changes to Registration and Compliance Regime for Commodity
Pool Operators and Commodity Trading Advisors (``Roundtable
Transcript''), at 19, 25, 30, 76-77, 87-90, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.
\52\ Id.
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The Commission does not believe that it is proper to exclude from
the Commission's oversight those entities that are using an index or
other so-called ``passive'' means to track the value of other
derivatives. Establishing ``active'' versus ``passive'' use of
derivatives as a criterion for entitlement to the exclusion would
introduce an element of subjectivity to an otherwise objective standard
and make the threshold more difficult to interpret, apply, and enforce.
It also could have the undesirable effect of encouraging funds to
structure their investment activities to avoid regulation. Moreover,
the use of an index or other passive investment vehicle by a large
number of investment companies can amplify the market assumptions built
into an index or other vehicle. Thus, the Commission has decided not to
adopt the panelist's suggestion that the Commission focus on whether an
entity offers an actively managed futures strategy.
One commenter suggested that the Commission should consider the
adoption of an alternative test that would be identical to the
aggregate net notional value test that is currently available under
Sec. 4.13(a)(3)(ii)(B).\53\ Section 4.13(a)(3)(ii)(B) provides that an
entity can claim exemption from registration if the net notional value
of its fund's derivatives trading does not exceed one hundred percent
of the liquidation value of the fund's portfolio.\54\
---------------------------------------------------------------------------
\53\ Dechert III Letter.
\54\ 17 CFR 4.13(a)(3)(ii)(B).
---------------------------------------------------------------------------
Conversely, several panelists at the Roundtable opposed such a
test, stating that it was not a reliable means to measure an entity's
exposure in the market.\55\ Specifically, certain panelists asserted
that the net notional value of positions may not provide a reliable
measure of the risk posed by certain entities in the market.\56\
---------------------------------------------------------------------------
\55\ See Roundtable Transcript at 69-71.
\56\ See Roundtable Transcript at 70.
---------------------------------------------------------------------------
The Commission first considered the addition of an alternative net
notional trading threshold when it proposed to amend Sec. 4.5 in
2002.\57\ In support of its proposal, the Commission stated that the
alternative test provided otherwise regulated entities that use certain
classes of futures with higher initial margin requirements with an
opportunity to also receive exclusionary relief from the definition of
CPO.\58\ The Commission further stated that the inclusion of an
alternative test enabled entities seeking exclusion to rely on
whichever test was less restrictive based on their futures
positions.\59\ In 2003, the Commission proposed and adopted final rules
amending Sec. 4.5, which eliminated the five percent trading threshold
and did not adopt the alternative net notional test.\60\ In stating its
rationale for rescinding the five percent threshold test and declining
to adopt the alternative net notional test, the Commission stated that
because it was simultaneously proposing, and ultimately adopting, an
exemption from registration in Sec. 4.13(a)(4), which did not impose
any trading restriction, the Commission would remove the trading
restrictions from Sec. 4.5 as well to provide consistent
treatment.\61\
---------------------------------------------------------------------------
\57\ 67 FR 65743 (Oct. 28, 2002).
\58\ 67 FR 65743, 65744-45.
\59\ 67 FR 65743, 65745.
\60\ 68 FR 12622 (Mar. 17, 2003); 68 FR 47221 (Aug. 8, 2003).
\61\ 68 FR 12622, 12625-26 (noting that although entities
excluded under Sec. 4.5 could solicit retail participants, as
compared to those entities exempt under Sec. 4.13(a)(4), which may
only offer to certain high net worth entities and individuals, the
Commission stated that the fact that the Sec. 4.5 entities were
otherwise regulated supported consistent criteria for relief).
---------------------------------------------------------------------------
The Commission no longer believes that its prior justification for
abandoning the alternative net notional test is persuasive. By the
adoption of this final rule, the Commission will reinstate the five
percent trading threshold in Sec. 4.5 for registered investment
companies and rescind the exemption in Sec. 4.13(a)(4), which reverses
the regulatory conditions in existence in 2003. The Commission believes
that the appropriate criteria for exclusion through the use of a net
notional test is delineated in Sec. 4.13(a)(3)(ii)(B),\62\ commonly
known as the ``de minimis exemption,'' albeit with the addition of
allowing unlimited use of futures, options, or swaps for bona fide
hedging purposes, which is not permitted under Sec. 4.13(a)(3).
---------------------------------------------------------------------------
\62\ The net notional test as it appears in Sec. 4.13(a)(3)
will be amended by this rulemaking to provide guidance regarding the
ability to net cleared swaps.
---------------------------------------------------------------------------
As stated previously, the net notional test, as set forth under
Sec. 4.13(a)(3)(ii)(B), permits entities to claim relief if the
aggregate net notional value of the entity's commodity interest
positions does not exceed 100 percent of the liquidation value of the
pool's portfolio.\63\ Notional value is defined by asset class. For
example, the notional value of futures contracts is derived by
multiplying the number of contracts by the size of the contract, in
contract units, and then multiplying by the current market price for
the contract.\64\ The notional value of a cleared swap, however, will
be determined consistent with the provisions of part 45 of the
Commission's regulations. The ability to net positions is also
determined by asset class, with entities being able to net futures
contracts across designated contract markets or foreign boards of
trade, whereas swaps may only be netted if cleared by the same
designated clearing organization (``DCO'') and it is otherwise
appropriate.\65\
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\63\ 17 CFR 4.13(a)(3)(ii)(B).
\64\ Id.
\65\ See discussion of amendments to Sec. 4.13(a)(3)(ii)(B)
infra.
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The Commission believes that the adoption of an alternative net
notional test will provide consistent standards for relief from
registration as a CPO for entities whose portfolios only contain a
[[Page 11258]]
limited amount of derivatives positions and will afford registered
investment companies with additional flexibility in determining
eligibility for exclusion. Therefore, the Commission will adopt an
alternative net notional test, consistent with that set forth in Sec.
4.13(a)(3)(ii)(B) as amended herein, for registered investment
companies claiming exclusion from the definition of CPO under Sec.
4.5.
The Commission also received several comments supporting both the
imposition of a trading threshold in general and the five percent
threshold specifically.\66\ At least one commenter suggested, however,
that the Commission consider requiring registered investment companies
that exceed the threshold to register, but not subjecting them to the
Commission's compliance regime beyond requiring them to be subject to
the examination of their books and records, and examination by the
National Futures Association.\67\ In effect, this commenter requested
that the Commission subject such registrant to ``notice registration.''
The Commission believes that adopting the commenter's approach would
not materially change the information that the Commission would receive
regarding the activities of registered investment companies in the
derivatives markets, which is one of the Commission's purposes in
amending Sec. 4.5. Moreover, a type of notice registration would not
provide the Commission with any real means for engaging in consistent
ongoing oversight. Notwithstanding such notice registration, the
Commission would still be deemed to have regulatory responsibility for
the activities of these registrants. In the Commission's view, notice
registration does not equate to an appropriate level of oversight. For
that reason, the Commission has determined not to adopt the notice
registration system proposed by the commenter. The Commission is
adopting the amendment to Sec. 4.5 regarding the trading threshold
with the addition of an alternative net notional test for the reasons
stated herein and those previously discussed in the Proposal.
---------------------------------------------------------------------------
\66\ See NFA Letter, Campbell Letter, AQR Letter, Steben Letter.
\67\ See AQR Letter.
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3. Comments on the Inclusion of Swaps in the Trading Threshold
The Commission also received numerous comments opposing its
decision to include swaps within the threshold test discussed
above.\68\ Several commenters expressed concern that the Commission
would require inclusion of swaps within the threshold prior to its
adoption of final rules further defining the term ``swap'' and
explaining the margining requirements for such instruments. The
Commission agrees that it should not implement the inclusion of swaps
within the threshold test prior to the effective date of such final
rules. Therefore, it is the Commission's intention to establish the
compliance date of the inclusion of swaps within the threshold
calculation as 60 days after the final rules regarding the definition
of ``swap'' and the delineation of the margin requirement for such
instruments are effective.\69\ The Commission believes that such
compliance date will provide entities with sufficient time to assess
the impact of such rules on their portfolios and to make the
determination as to whether registration with the Commission is
required.
---------------------------------------------------------------------------
\68\ See Janus Letter; Reed Smith Letter; AllianceBernstein
Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA
Letter; Dechert II Letter; AII Letter; and SIFMA Letter.
\69\ Effective Date for Swap Regulation, 76 FR 42508 (issued and
made effective by the Commission on July 14, 2011; published in
Federal Register on July 19, 2011).
---------------------------------------------------------------------------
The Commission also received a comment asking for additional
clarification regarding its decision to include swaps within the
threshold.\70\ The Dodd-Frank Act amended the statutory definition of
the terms ``commodity pool operator'' and ``commodity pool'' to include
those entities that trade swaps.\71\ If the Commission were to adopt
the trading threshold and only include futures and options as the basis
for calculating compliance with the threshold, the swaps activities of
the registered investment companies would still trigger the
registration requirement notwithstanding the exclusion of swaps from
the calculus. That is, the purpose of the threshold test is to define a
de minimis amount of trading activity that would not trigger the
registration requirement. If swaps were excluded, any swaps activities
undertaken by a registered investment company would result in that
entity being required to register because there would be no de minimis
exclusion. As a result, one swap contract would be enough to trigger
the registration requirement. For that reason, if the Commission wants
to permit some de minimis level of swaps activity by registered
investment companies without registration with the Commission, it must
do so explicitly in the exclusion.\72\ Because the Commission has
determined that de minimis activity by registered investment companies
does not implicate the Commission's regulatory concerns, the Commission
has decided to include swaps as a component of the trading threshold.
---------------------------------------------------------------------------
\70\ See Janus Letter; Reed Smith Letter; AllianceBernstein
Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA
Letter; Dechert II Letter; AII Letter; and SIFMA Letter.
\71\ 7 U.S.C. 1a(10); 1a(11).
\72\ Any reference to a de minimis level of swaps activities by
registered investment companies only applies in the context of CPO
registration by registered investment companies.
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4. Comments on the Proposed Marketing Restriction
The marketing restriction, as proposed by the Commission, prohibits
the marketing of interests in the registered investment company ``as a
vehicle for trading in (or otherwise seeking investment exposure to)
the commodity futures, commodity options, or swaps markets.'' \73\
Again, as with the other aspects of the proposed amendments to Sec.
4.5, the Commission received numerous comments on this prohibition.\74\
---------------------------------------------------------------------------
\73\ 76 FR 7976, 7989 (Feb. 12, 2011).
\74\ See Rydex Letter; Fidelity Letter; SIFMA Letter; AII
Letter; ICI Letter; Vanguard Letter; Reed Smith Letter;
AllianceBernstein Letter; USAA Letter; PMC Letter; Invesco Letter;
Janus Letter; STA Letter; comment letter from the Managed Futures
Association regarding proposed amendments to Sec. 4.5 (April 12,
2011) (``MFA II Letter''); Dechert II Letter; NFA Letter; comment
letter from Alston & Bird, LLP (April 12, 2011) (``Alston Letter'');
Campbell Letter; AQR Letter; Steben Letter; and Dechert III Letter.
---------------------------------------------------------------------------
The vast majority of comments urged the Commission to remove the
clause ``or otherwise seeking investment exposure to'' as introducing
an unacceptable level of ambiguity into the marketing restriction.\75\
The Commission agrees with these comments and believes that the removal
of this clause is appropriate as the clause does not meaningfully add
to the marketing restriction and only creates uncertainty. Thus, the
Commission will adopt the marketing restriction without the clause ``or
otherwise seeking investment exposure to * * *''
---------------------------------------------------------------------------
\75\ See, e.g., ICI Letter; Alston Letter; Rydex Letter; and
Vanguard Letter.
---------------------------------------------------------------------------
The Commission also received many comments asking that the
Commission provide some clarification regarding the factors that it
would consider in making the determination whether an entity violated
the marketing restriction.\76\ The Commission agrees that providing
factors to further explain the plain language of the marketing
restriction would be helpful to those who plan to market registered
investment companies
[[Page 11259]]
to investors. The Commission has determined, however, that such factors
should be instructive and that no single factor is dispositive. The
Commission will determine whether a violation of the marketing
restriction exists on a case by case basis through an examination of
the relevant facts. The Commission seeks to discourage entities from
designing creative marketing with the intent to avoid the marketing
restriction.
---------------------------------------------------------------------------
\76\ See ICI Letter; MFA II Letter; Dechert II Letter; Invesco
Letter; NFA Letter; Campbell Letter; Steben Letter; and AQR Letter.
---------------------------------------------------------------------------
To address commenters' requests for guidance, the Commission
believes that the following factors are indicative of marketing a
registered investment company as a vehicle for investing in commodity
futures, commodity options, or swaps:
The name of the fund;
Whether the fund's primary investment objective is tied to
a commodity index;
Whether the fund makes use of a controlled foreign
corporation for its derivatives trading;
Whether the fund's marketing materials, including its
prospectus or disclosure document, refer to the benefits of the use of
derivatives in a portfolio or make comparisons to a derivatives index;
Whether, during the course of its normal trading
activities, the fund or entity on its behalf has a net short
speculative exposure to any commodity through a direct or indirect
investment in other derivatives;
Whether the futures/options/swaps transactions engaged in
by the fund or on behalf of the fund will directly or indirectly be its
primary source of potential gains and losses; and
Whether the fund is explicitly offering a managed futures
strategy.\77\
---------------------------------------------------------------------------
\77\ These factors are derived in substantial part from the
Steben Letter and AQR Letter.
---------------------------------------------------------------------------
The Commission will give more weight to the final factor in the
list when determining whether a registered investment company is
operating as a de facto commodity pool. In contrast, a registered
investment company that does not explicitly offer a managed futures
strategy could still be found to have violated the marketing
restriction based on whether its conduct satisfied any number of the
other factors enumerated above. Put differently, if a registered
investment company offers a strategy with several indicia of a managed
futures strategy, yet avoids explicitly describing the strategy as such
in its offering materials, that registered investment company may still
be found to have violated the marketing restriction.
The Commission also notes that whether the name of the fund
includes the terms ``futures'' or ``derivatives,'' or otherwise
indicates a possible focus on futures or derivatives, will not be
considered a dispositive factor, but rather one of many that the
Commission will consider in making its determination. Moreover, the
Commission will not consider the mere disclosure to investors or
potential investors that the registered investment company may engage
in derivatives trading incidental to its main investment strategy and
the risks associated therewith as being violative of the marketing
restriction.
At the Roundtable, several panelists questioned the Commission's
reasoning for deeming the use of a controlled foreign corporation
(``CFC'') to be an appropriate factor in determining whether the
registered investment company violates the marketing restriction. Based
on comments received at the Roundtable and during the comment period,
the Commission believes that registered investment companies use
controlled foreign corporations as a mechanism to invest up to 25
percent of the registered investment company's portfolio in
derivatives.\78\ The Commission, therefore, believes that a registered
investment company's use of a CFC may indicate that the company is
engaging in derivatives trading in excess of the trading threshold.
Again, the Commission will consider this factor in the context of the
registered investment company's other conduct and will not view this
factor as being dispositive of a violation of the marketing
restriction.
---------------------------------------------------------------------------
\78\ See Roundtable Transcript at 152-53.
---------------------------------------------------------------------------
For these reasons, and those stated in the Proposal, the Commission
adopts the marketing restriction in Sec. 4.5 with the modifications
discussed herein.
5. Comments on the Harmonization of Compliance Obligations
Many commenters raised concerns about the potential conflicts
between the Commission's regulatory regime and that imposed by the SEC
if the Commission were to adopt the proposed amendments as final
rules.\79\ As noted above, in an effort to obtain further information
from interested parties, Commission staff held the Roundtable, and
invited staff from the SEC, the IRS, and members of various trade
organizations. The roundtable focused predominantly on harmonization of
the Commission's compliance regime with that of the SEC. Upon
consideration of the comments and the discussions held as a result of
the Roundtable relating to registered investment companies that will be
required to register under amended Sec. 4.5, the Commission agrees
that it is necessary to harmonize the Commission's compliance
obligations under part 4 of the Commission's regulations with the
requirements of the SEC for registered investment companies. To that
end, concurrently with the issuance of this rule, the Commission is
issuing a notice of proposed rulemaking detailing its proposed
modifications to part 4 of its regulations to harmonize the compliance
obligations that apply to dually registered investment companies. The
Commission will not require entities that must register due to the
amendments to Sec. 4.5 to comply with the Commission's compliance
regime until the adoption of final rules governing the compliance
framework for registered investment companies subject to the
Commission's jurisdiction.
---------------------------------------------------------------------------
\79\ See Vanguard Letter; ICI Letter; Dechert III Letter; Reed
Smith Letter; AllianceBernstein Letter; USAA Letter; PMC Letter;
Invesco Letter; IAA Letter; Dechert II Letter; Fidelity Letter;
Janus Letter; SIFMA Letter; STA Letter; AQR Letter; NFA Letter; MFA
II Letter; Alston Letter; Rydex Letter; and ICI II Letter.
---------------------------------------------------------------------------
6. Comments Regarding the Entity Required to Register as the CPO
The Commission received a number of comments requesting
clarification as to which entity would be required to register as a CPO
if a registered investment company would not qualify for exclusion
under Sec. 4.5, as amended.\80\ The commenters consistently proposed
that the registered investment company's investment adviser is the
appropriate entity to register in the capacity of the investment
company's CPO. The Commission agrees that the investment adviser is the
most logical entity to serve as the registered investment company's
CPO. To require a member or members of the registered investment
company's board of directors to register would raise operational
concerns for the registered investment company as it would result in
piercing the limitation on liability for actions undertaken in the
capacity of director.\81\ Thus, the Commission concludes that the
investment adviser for the registered investment company is the entity
required to register as the CPO.
---------------------------------------------------------------------------
\80\ See ICI Letter; Reed Smith Letter; AllianceBernstein
Letter; Rydex Letter; Fidelity Letter; USAA Letter; PMC Letter; IAA
Letter; Janus Letter; SIFMA Letter; STA Letter; comment letter from
AlphaSimplex Group (April 12, 2011) (``ASG Letter''); NFA Letter;
MFDF Letter; and Campbell Letter.
\81\ See MFDF Letter.
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[[Page 11260]]
7. Comments Regarding the Use of Controlled Foreign Corporations
The Commission received many comments regarding the use of CFCs by
registered investment companies for purposes of engaging in commodities
trading. As stated previously, it is the Commission's understanding
that registered investment companies invest up to 25 percent of their
assets in the CFC, which then engages in actively managed derivatives
strategies, either on its own or under the direction of one or more
CTAs. Operators of CFCs have been exempt from Commission registration
by claiming relief under Sec. 4.13(a)(4) of the Commission's
regulations because the sole participant in the CFC is the registered
investment company. Additionally, at the Roundtable, panelists informed
Commission staff that several registered investment companies that
operated CFCs did not claim relief under Sec. 4.13(a)(4) because it
was their opinion that the CFC was merely a subdivision of the
registered investment company and was not a separate commodity
pool.\82\
---------------------------------------------------------------------------
\82\ See Roundtable Transcript at 165.
---------------------------------------------------------------------------
Commenters urged the Commission to continue to permit registered
investment companies to use CFCs and to allow such CFCs to be exempt
from registration with the Commission under Sec. 4.13 or exclude them
under Sec. 4.5 by reason of their sole investor being excluded as
well. Commenters proposed various mechanisms by which the Commission
could obtain information regarding the activities of CFCs, including
requiring disclosure of CFC fees and expenses at the registered
investment company level, requiring a representation that the CFC will
comply with key provisions of the Investment Company Act of 1940
(``Investment Company Act''),\83\ and requiring the registered
investment company to make its CFC's books and records available to the
Commission and NFA for inspection.
---------------------------------------------------------------------------
\83\ 15 U.S.C. 80a-1, et seq.
---------------------------------------------------------------------------
The Commission does not oppose the continued use of CFCs by
registered investment companies, but it believes that CFCs that fall
within the statutory definition of ``commodity pool'' should be subject
to regulation as a commodity pool.\84\ The Dodd-Frank Act amended the
CEA to define a commodity pool as ``any investment trust, syndicate, or
similar form of enterprise operated for the purpose of trading in
commodity interests, including any * * * commodity for future delivery,
security futures product, or swap.'' \85\ Based on a plain language
reading of the statutory definition, CFCs wholly owned by registered
investment companies and used for trading commodity interests are
properly considered commodity pools. These entities also satisfy the
definition of ``pool'' delineated in Sec. 4.10(d)(1) of the
Commission's regulations, which is substantively identical to the
statutory definition. There is no meaningful basis for concluding
otherwise. Moreover, the Commission believes that each separate legally
cognizable entity must be assessed on its own characteristics and that
a CFC should not be entitled to exclusion simply because its parent
company is a registered investment company that may be entitled to
exclusion under Sec. 4.5. Therefore, the Commission does not oppose
the use of CFCs for trading in commodity interests by registered
investment companies, but such CFCs will be required to have their CPOs
register with the Commission unless they may claim exemption or
exclusion therefrom on their own merits.
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\84\ 7 U.S.C. 1a(10).
\85\ 7 U.S.C. 1a(10).
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8. Comments Regarding Implementation of Amendments
The Commission received several comments with suggestions regarding
implementation of the proposed amendments to Sec. 4.5, if the
Commission decided to adopt the proposed provisions as final rules.\86\
Several commenters recommended that the Commission provide for an
undefined ``substantial transition period for compliance.'' \87\
Conversely, one commenter suggested that the Commission should only
provide a short period of time for compliance.\88\ Another commenter
suggested that at least 12-months would be required for registered
investment companies to come into registration and compliance with
Commission requirements.\89\ Finally, a commenter suggested that the
Commission delay implementation until all mandatory Dodd-Frank Act
rules are implemented.\90\
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\86\ See Steben Letter; ICI Letter; NFA Letter; Reed Smith
Letter; AllianceBernstein Letter; USAA Letter; PMC Letter; IAA
Letter; Janus Letter; STA Letter; Rydex Letter; Alston Letter; and
comment letter from the Association of Institutional Investors (July
1, 2011) (``AII II Letter'').
\87\ See ICI Letter; NFA Letter; Reed Smith Letter;
AllianceBernstein Letter; USAA Letter; PMC Letter; IAA Letter; Janus
Letter; and STA Letter.
\88\ See Steben Letter.
\89\ See Rydex Letter.
\90\ See AII II Letter.
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In light of the Commission's proposed harmonization effort with
respect to the compliance obligations for dually registered investment
companies and the ongoing efforts to further define the term ``swap''
and the margin requirements for swaps positions, the Commission
recognizes that a short implementation period is not practicable. The
Commission believes that 11 months is an adequate amount of time to
enable compliance by existing registered investment companies.
Recognizing that the definition of swap is not yet finalized, the
Commission has decided that compliance with the amendments to Sec. 4.5
for purposes of registration only will occur on the later of either
December 31, 2012 or within 60-days following the adoption of final
rules defining the term ``swap,'' and establishing margin requirements
for such instruments.\91\ Entities required to register due to the
amendments to Sec. 4.5 shall be subject to the Commission's
recordkeeping, reporting, and disclosure requirements set forth in part
4 of the Commission's regulations within 60 days following the
effectiveness of a final rule implementing the Commission's proposed
harmonization effort pursuant to the concurrent proposed rulemaking.
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\91\ Effective Date for Swap Regulation, 76 FR 42508.
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Several commenters also suggested that the Commission exempt from
compliance those registered investment companies that have already
claimed relief under Sec. 4.5.\92\ The Commission does not believe
that ``grandfathering'' is appropriate in this context. As the
Commission stated in its Proposal, and reaffirms in this preamble, part
of the purpose of amending Sec. 4.5 is to ensure that entities that
are engaged in a certain level of derivatives trading are subject to
the registration and compliance obligations and oversight by the
Commission.\93\ Grandfathering is inconsistent with the goals of the
Commission's amendments. The Commission, however, believes that
harmonization of the Commission's compliance regime with that of the
SEC will minimize the regulatory burden of existing registered
investment companies. In addition, the Commission is permitting a
sufficient amount of time for existing entities to come into compliance
before the compliance dates set forth above. Therefore, the Commission
believes that it is addressing the commenters' concerns through
harmonization while still ensuring that the Commission has the
[[Page 11261]]
information necessary to oversee all participants in the derivatives
markets.
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\92\ See ICI Letter; Reed Smith Letter; AllianceBernstein
Letter; Invesco Letter; IAA Letter; Janus Letter; AII Letter; SIFMA
Letter; and STA Letter.
\93\ 76 FR 7976, 7983-84 (Feb. 12, 2011).
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B. Comments Regarding Proposed Amendment to Sec. 4.7
The Commission proposed two amendments to Sec. 4.7. The first
proposed to amend Sec. Sec. 4.7(a)(3)(ix) and (a)(3)(x) to incorporate
by reference the accredited investor standard from the SEC's Regulation
D \94\ under the Securities Act of 1933,\95\ rather than by direct
inclusion of its specific terms. The Commission stated that this
amendment would ``permit the Commission's definition of QEP to continue
to include the specific terms of the accredited investor standard in
the event that it is later modified by the SEC without requiring the
Commission to amend Sec. 4.7 each time to maintain parity.'' \96\
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\94\ 17 CFR 230.501(a)(5), (a)(6) (2011).
\95\ 15 U.S.C. 77a, et seq.
\96\ 76 FR 7976, 7985 (Feb. 12, 2011).
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The Commission received one comment supporting this proposed
amendment. Specifically, the commenter stated its belief that this
amendment would ``facilitate consistency amongst federal standards for
financial sophistication and reduce investor confusion.'' \97\ The
Commission agrees and, accordingly, is adopting the amendments to
Sec. Sec. 4.7(a)(3)(ix) and (a)(3)(x) as proposed.
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\97\ See MFA II Letter.
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The second proposed amendment to Sec. 4.7 would rescind the relief
provided in Sec. 4.7(b)(3) \98\ from the certification requirement of
Sec. 4.22(c) \99\ for financial statements contained in commodity pool
annual reports. In support of the Proposal, the Commission noted that
approximately 85 percent of all pools operated under Sec. 4.7 in
fiscal year 2009 filed financial statements that were certified by
certified public accountants, ``despite being eligible to claim relief
from certification under Sec. 4.7(b)(3).'' \100\ The number of
uncertified financial statements has continued to decline and, for
fiscal year 2010, approximately 91 percent of all reports filed for
pools operated under Sec. 4.7 included financial statements that were
certified by certified public accountants.\101\ In the Proposal, the
Commission stated its belief that ``requiring certification of
financial information by an independent accountant in accordance with
established accounting standards will ensure the accuracy of the
financial information submitted by its registrants,'' and will further
the stated purposes of the Dodd-Frank Act.\102\
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\98\ 17 CFR 4.7(b)(3) (2011).
\99\ Id. 4.22(c).
\100\ 76 FR 7967, 7984-85 (Feb. 12, 2011).
\101\ In 2010, 951 pools were operated pursuant to Sec. 4.7 and
84 of those pools filed uncertified financial statements for fiscal
year 2010.
\102\ Id. at 7985.
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The Commission received two comments regarding this proposed
amendment. One commenter supported the proposed rescission and the
Commission's stated justification for doing so.\103\ The other
commenter recommended that the Commission retain an exemption from
certification of financial statements for entities where the pool's
participants are limited to the principals of its CPO(s) and CTA(s) and
other categories of employees listed in Sec. 4.7(a)(2)(viii).\104\ It
is unclear how many of the pools operated under Sec. 4.7 would qualify
for such relief if adopted. The Commission believes that rather than
adopt an exemption for such entities without data regarding the scope
of the exemption's applicability, it is more appropriate to rescind the
exemption from certification for all pools operated under Sec.
4.7(b)(3) generally and permit entities to write to the Division of
Swap Dealer and Intermediary Oversight to request exemptive relief from
the certification requirement on a case by case basis under Sec.
140.99.\105\ By requiring entities to request relief from the
Commission, the Commission can better determine whether such an
exemption should be adopted in the future. Therefore, the Commission is
adopting the amendments to Sec. 4.7 as proposed.
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\103\ See NFA Letter.
\104\ See MFA II Letter.
\105\ 17 CFR Sec. 140.99.
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C. Comments Regarding the Proposed Rescission of Sec. Sec. 4.13(a)(3)
and (a)(4)
As stated previously, the Commission proposed to rescind Sec. Sec.
4.13(a)(3) and (a)(4). After considering the comments received, which
are detailed herein, the Commission has determined to retain the de
minimis exemption in Sec. 4.13(a)(3). The Commission concluded that
overseeing entities with less than five percent exposure to commodity
interests is not the best use of the Commission's limited resources.
Moreover, the Commission believes that the retention of the de minimis
exemption in Sec. 4.13(a)(3) provides for consistent treatment of
entities engaging in de minimis levels of trading due to the addition
of a five percent trading threshold in Sec. 4.5 as well. The
Commission received several comments requesting that the Commission
modify Sec. 4.13(a)(3) in various respects. The Commission has
determined, however, that it is appropriate to retain Sec. 4.13(a)(3)
in its current form, for the reasons detailed below.
1. General Comments
In addition to the comments that the Commission received regarding
the specific parts of the Proposal rescinding Sec. Sec. 4.13(a)(3) and
(a)(4), the Commission received numerous comments regarding the
proposed rescissions generally.\106\ Broadly, the comments opposed the
rescission of both provisions.
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\106\ See comment letter from the New York State Bar Association
(April 12, 2011) (``NYSBA Letter''); comment letter from Skadden,
Arps, Slate, Meagher & Flom LLP (April 12, 2011) (``Skadden
Letter''); MFA Letter; comment letter from Katten, Muchin Rosenman
LLP (April 12, 2011) (``Katten Letter''); Fidelity Letter; Dechert
Letter; comment letter from the Alternative Investment Management
Association, Ltd. (April 12, 2011) (``AIMA Letter''); comment letter
from the Alternative Investment Management Association, Ltd. (July
1, 2011) (``AIMA II Letter''); IAA Letter; SIFMA Letter; comment
letter from HedgeOp Compliance, LLC (July 28, 2011) (``HedgeOp
Letter''); comment letter from the Private Investor Coalition; Inc.
(April 12, 2011) (``PIC Letter''); and comment letter Seward &
Kissel, LLP (April 12, 2011) (``Seward Letter'').
---------------------------------------------------------------------------
Several commenters asserted that rescission was not necessary
because the Commission has the means to obtain any needed information
from exempt CPOs through its large trader reporting requirements and
its special call authority.\107\ Although the Commission has the means
to obtain certain information through the mechanisms delineated by the
commenters, neither of those mechanisms provide the type of data
requested on Forms CPO-PQR or CTA-PR with the kind of regularity
proposed under Sec. 4.27. For example, large trader reporting may
provide detailed trading information for a particular market
participant, but it does not provide the Commission with information
regarding trends across funds that are not large enough to trigger the
reporting obligation, but that may nevertheless impact the market.
Also, with respect to the Commission's special call authority under
Sec. 21.03, the collection of data under that section is generally
reactive in nature. That is, the Commission would be in a position to
collect data under Sec. 21.03 after it became aware of an issue.
Conversely, it is anticipated that collecting data using Forms CPO-PQR
and CTA-PR will enable the Commission to be more proactive in assessing
possible threats to market stability and in carrying out its duties in
overseeing market participants generally.
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\107\ See Skadden Letter; Katten Letter; and MFA Letter.
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Some commenters suggested that the Commission adopt a limited
exemption for SEC-registered entities that are not ``primarily
engaged'' in trading commodity interests.\108\ Pursuant to the
[[Page 11262]]
terms of Sec. 4m(3) of the CEA, as amended by the Dodd-Frank Act, CTAs
that are registered with the SEC and whose business does not consist
primarily of acting as a CTA, and that do not act as a CTA to any pool
engaged primarily in the trading of commodity interests, are exempt
from registration with the Commission.\109\ The Commission believes
that that statutory exemption for CTAs is explicit as to Congress's
limited intentions regarding exempting entities from registration with
the Commission. By the plain language of Sec. 4m(3), this section
creates an exemption from the CTA registration requirements of the CEA;
commodity pools are discussed in that provision only to the extent that
the characteristics of the pool enable the CTA to claim relief. The
registration category of CPO is not implicated. Therefore, the
Commission concludes that the provisions of Sec. 4m(3) do not mandate
any exemption from the registration requirements for CPOs. Moreover,
the Commission disagrees with the commenter who asserted that
rescission is inconsistent with Congress's asserted intention to avoid
dual registration. The Commission does not believe it is accurate to
state that Congress intended to avoid oversight by both agencies, and
indeed Congress clearly anticipated some overlap when, in the Dodd-
Frank Act, it required the Commission to work with the SEC to adopt a
data collection instrument for dual registrants. Section 406 of the
Dodd-Frank Act explicitly mandated that the Commission and the SEC
jointly promulgate a reporting form for dually registered
entities.\110\ The Commission does not believe that this requirement
could be consistent with any asserted Congressional intention to
absolutely avoid dual registration with the commissions. Therefore, the
Commission concludes that dual registration of certain entities is not
irreconcilable with the Congressional intent underlying the Dodd-Frank
Act.
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\108\ See Dechert Letter; and Katten Letter.
\109\ 7 U.S.C. 6m(3).
\110\ See Section 406 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Other commenters asserted that the compliance and regulatory
obligations under the Commission's rules are burdensome and costly for
private businesses and would unnecessarily distract entities from their
primary focus of managing client assets.\111\ The Commission disagrees
with this assertion, which in any event was not fully detailed by any
commenter. The Commission believes that regulation is necessary to
ensure a well functioning market and to provide investor protection.
The Commission further believes that the compliance regime that the
Commission has adopted strikes the appropriate balance between limiting
the burden placed on registrants and enabling the Commission to carry
out its duties under the CEA. Moreover, the compliance and regulatory
obligations imposed on these CPO registrants will be no different from
those imposed on other registered CPOs. Such compliance and regulatory
obligations have not been unduly burdensome for these other
registrants.
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\111\ See MFA Letter; Seward Letter; and Katten Letter.
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2. Comments Regarding the Proposed Rescission of Sec. 4.13(a)(3)
In the Proposal, the Commission proposed rescinding the ``de
minimis'' exemption in Sec. 4.13(a)(3). The Commission stated its
belief that ``it is possible for a commodity pool to have a portfolio
that is sizeable enough that even if just five percent of the pool's
portfolio were committed to margin for futures, the pool's portfolio
could be so significant that the commodity pool would constitute a
major participant in the futures market.'' \112\ Moreover, the
Commission stated that it believed that this rescission was consistent
with the purposes of the Dodd-Frank Act, with specific regard to
increased transparency and accountability of participants in the
financial markets. The Commission did, however, solicit comment as to
whether some form of de minimis exemption should be maintained.
---------------------------------------------------------------------------
\112\ 76 FR 7976, 7985 (Feb. 12, 2011).
---------------------------------------------------------------------------
The Commission received ten comments specifically on its proposed
rescission of the ``de minimis'' exemption in Sec. 4.13(a)(3).\113\
The commenters consistently urged the Commission to retain a de minimis
exemption. Some commenters cited to the amendment to Sec. 4m(3) of the
CEA by the Dodd Frank Act, which provides an exemption from
registration for CTAs that are registered with the SEC and whose
business does not consist primarily of acting as a CTA and that does
not act as a CTA to any pool engaged primarily in the trading of
commodity interests.\114\ One commenter stated that the effect of Sec.
4m(3) was to exempt such CTAs from registration as a CPO or CTA; \115\
whereas another commenter asserted that the amendment of Sec. 4m(3) is
evidence that Congress did not intend to have the operator of a
commodity pool register as a CPO if its pool is not primarily engaged
in trading commodity interests.\116\ The Commission notes that under
the tenets of statutory interpretation, where Congress explicitly
enumerates certain exceptions to a general prohibition, additional
exceptions are not to be implied in the absence of evidence of a
contrary legislative intent.\117\ By the plain language of Sec. 4m(3),
this section creates an exemption from the CTA registration
requirements of the CEA; commodity pools are discussed only to the
extent that the characteristics of the pool enable the CTA to claim
relief. The registration category of CPO is not referenced. Therefore,
the Commission concludes that the provisions of Sec. 4m(3) do not
mandate any exemptions from registration for CPOs. The Commission
notes, however, that it has determined to retain the de minimis
exemption set forth in Sec. 4.13(a)(3).
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\113\ See MFA Letter; NYSBA Letter; comment letter from Schulte
Roth & Zabel LLP (April 12, 2011) (``Schulte Letter''); Dechert III
Letter; Skadden Letter; Seward Letter; IAA Letter; NFA Letter; SIFMA
Letter; and comment letter from McGuireWoods LLC (April 12, 2011)
(``McGuireWoods Letter'').
\114\ 7 U.S.C. 6m(3).
\115\ See Skadden Letter.
\116\ See MFA Letter.
\117\ See Andrus v. Glover Construction Co., 446 U.S. 608
(1980).
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Several commenters suggested adding as a prerequisite for exemptive
relief under Sec. 4.13(a)(3), registration with the SEC as an
investment adviser.\118\ The Commission is declining to add SEC
registration as part of the criteria for relief under Sec. 4.13(a)(3)
because the basis for providing relief is the limited nature of the
pool's trading activity rather than its operator's registration status
with the SEC. To require the CPO of an exempt pool to be regulated by
the SEC would limit the applicability of Sec. 4.13(a)(3), which is not
the Commission's intention at this time.
---------------------------------------------------------------------------
\118\ See MFA Letter; NFA Letter; Skadden Letter; Schulte
Letter; NYSBA Letter; Dechert III Letter; IAA Letter; and Seward
Letter.
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Most commenters suggesting the additional requirement of SEC
registration also proposed an increase in the trading threshold,
ranging from 20 percent to 50 percent of the pool's liquidation value
due to the inclusion of the pool's swaps activity within the trading
threshold.\119\ As discussed earlier in this release in the context of
Sec. 4.5, the Commission believes that a five percent threshold
continues to be the appropriate level for exemption or exclusion due to
limited derivatives trading. Moreover, the Commission would again note
that the inclusion of an alternative net notional test provides CPOs
with another, perhaps less restrictive means, of qualifying for the
exemption. The Commission believes
[[Page 11263]]
that trading exceeding five percent of the liquidation value of a
portfolio, or a net notional value of commodity interest positions
exceeding 100 percent of the liquidation value of a portfolio,
evidences a significant exposure to the derivatives markets, and that
such exposure should subject an entity to the Commission's oversight.
---------------------------------------------------------------------------
\119\ See MFA Letter; Skadden Letter; NYSBA Letter; Dechert III
Letter.
---------------------------------------------------------------------------
With respect to the issue of the inclusion of swaps making it more
difficult to satisfy the trading threshold, the Commission believes
that it would be premature to increase the threshold at this time.
Additionally, as stated previously, the inclusion of an alternative net
notional test may provides entities with another mechanism for
qualifying for the exemption in Sec. 4.13(a)(3). The Commission
believes that it may be more appropriate to reassess the trading
threshold after collecting data from registered CPOs through Form CPO-
PQR. Therefore, the Commission has decided not to increase the trading
threshold under Sec. 4.13(a)(3).
Additionally, the Commission believes that it must include swaps
within the threshold to enable the most entities to claim relief under
Sec. 4.13(a)(3). As stated previously with respect to the amendments
to Sec. 4.5, the Dodd-Frank Act amended the statutory definition of
the terms ``commodity pool operator'' and ``commodity pool'' to include
those entities that trade swaps.\120\ If the Commission were to keep
the de minimis test in Sec. 4.13(a)(3) and only include futures and
options as the basis for calculating compliance with the threshold, the
swaps activities of the CPOs would still trigger the registration
requirement notwithstanding the exclusion of swaps from the calculus.
That is, the purpose of the threshold test is to define a de minimis
amount of trading activity that would not trigger the registration
requirement. If swaps were excluded, any swaps activities undertaken by
a CPO would result in that entity being required to register because
there would be no de minimis exclusion for such activity. As a result,
one swap contract would be enough to trigger the registration
requirement. For that reason, if the Commission wants to permit some de
minimis level of swaps activity by CPOs without registration with the
Commission, it must do so explicitly in the exemption.\121\ Because the
Commission has determined that de minimis activity by CPOs does not
implicate the Commission's regulatory concerns, the Commission has
decided that it is appropriate to include swaps within the trading
threshold under Sec. 4.13(a)(3).\122\
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\120\ 7 U.S.C. 1a(10); 1a(11).
\121\ Any reference to a de minimis level of swaps activities by
registered investment companies only applies in the context of CPO
registration by registered investment companies.
\122\ The Commission has proposed to amend the definition of
``commodity interest'' as it appears in Sec. 1.3 to include swaps,
consistent with the Dodd-Frank Act. See, 76 FR 33066 (June 7, 2011).
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Additionally, to enable CPOs to fully exercise the alternative net
notional test, the Commission is amending Sec. 4.13(a)(3)(ii)(B) to
provide guidance as to the notional value of cleared swaps positions
and the ability to net swaps cleared by the same DCO. The Commission
believes that this amendment will serve to provide equal ability to
claim relief under Sec. 4.13(a)(3) to all CPOs regardless of the types
of commodity interests held by their operated pools. Therefore, the
Commission is amending Sec. 4.13(a)(3)(ii)(B)(1) to provide that the
notional value of a cleared swap is determined consistent with the
provisions of part 45 of the Commission's regulations and Sec.
4.13(a)(3)(ii)(B)(2) to provide that swaps cleared by the same DCO may
be netted where appropriate.
After consideration of the comments and the Commission's stated
rationale for proposing to rescind the exemption in Sec. 4.13(a)(3),
the Commission has determined to retain the de minimis exemption
currently set forth in that section without modification.\123\
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\123\ The Commission does not need to amend the language of
Sec. 4.13(a)(3) to include swaps within the trading threshold as
this section determines eligibility based on the amount of
``commodity interests'' traded. In a separate rulemaking, the
Commission has proposed to amend the definition of the term
``commodity interest'' to include swaps. See 76 FR 11701 (March 3,
2011).
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3. Comments Regarding a Family Offices Exemption
In response to the Commission's proposed rescission of Sec. Sec.
4.13(a)(3) and (a)(4), the Commission received numerous comments asking
that the Commission adopt an exemption from registration for family
offices that is akin to the exemption adopted by the SEC.\124\ The
commenters noted that prior to the adoption of Sec. Sec. 4.13(a)(3)
and (a)(4), the Commission staff granted relief to family offices on an
ad hoc basis, but that when Sec. Sec. 4.13(a)(3) and (a)(4) were
adopted, most family offices availed themselves of those exemptions
from registration. The commenters argued that the Commission should
have less regulatory concern about family offices because their
clientele is necessarily limited to family members and the family
offices do not solicit outside of the family unit.
---------------------------------------------------------------------------
\124\ See 17 CFR 250.202(a)(11)(G)-1.
---------------------------------------------------------------------------
Due to the exemptions previously granted by Commission staff, and
the resulting lack of information regarding the activities of CPOs
claiming relief thereunder, the Commission does not yet have a
comprehensive view of the positions taken and interests held by
currently exempt entities. The Commission, therefore, believes that it
is prudent to withhold consideration of a family offices exemption
until the Commission has developed a comprehensive view regarding such
firms to enable the Commission to better assess the universe of firms
that may be appropriate to include within the exemption, should the
Commission decide to adopt one. Therefore, the Commission is directing
staff to look into the possibility of adopting a family offices
exemption in the future.
The Commission notes that family offices previously relying on the
exemption under Regulation Sec. 4.13(a)(3) will not be affected by the
rules adopted herein, as the Commission is not rescinding the Sec.
4.13(a)(3) exemption and it will remain available to entities meeting
its criteria. The Commission further notes that family offices continue
to be permitted to write in on a firm by firm basis to request
interpretative relief from the registration and compliance obligations
under the Commission's rules and to rely on those interpretative
letters already issued to the extent permissible under the Commission's
regulations.\125\ Therefore, the Commission does not believe an
exemption for family offices is necessary at this time.
---------------------------------------------------------------------------
\125\ See 17 CFR 140.99(a)(3) (``An interpretative letter may be
relied upon by persons in addition to the Beneficiary.''). The most
recent letter (CFTC letter 10-25) issued affirming the Division's
interpretation that a ``family office'' is not a pool under Sec.
4.10(d) is available at the Commission's Web site at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/10-25.pdf. See, CFTC Interpretative Letter 00-100 [2000-2002 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ] 28,420 (Nov. 1, 2000); CFTC
Interpretative Letter No. 96-24, [1994-1996 Transfer Binder] Comm.
Fut. L. Rep. (CCH) ] 26,653 (March 4, 1996); CFTC Interpretative
Letter No. 97-29, [1996-1998 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ] 27,039 (March 21, 1997); CFTC Interpretative Letter No. 95-
35, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 26,376
(Nov. 23, 1994).
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4. Comments Regarding a Foreign Advisor Exemption
Several commenters suggested that if the Commission determines to
adopt the proposed rescissions, it should adopt a foreign advisor
exemption similar to that set forth in the Dodd-Frank Act under the
Investment Adviser Act of
[[Page 11264]]
1940.\126\ The commenters expressed concern that the rescission of the
exemptions under Sec. Sec. 4.13(a)(3) and (a)(4) would result in
nearly all non-US based CPOs operating a pool with at least one U.S.
investor being required to register with the Commission. Commenters
also expressed concern that foreign CPOs would have to report the
entirety of their derivatives activities to the Commission even if
foreign regulators also oversee such activities.
---------------------------------------------------------------------------
\126\ See Section 403 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Due to the exemptions previously adopted by the Commission, and the
resulting lack of information regarding the activities of CPOs claiming
relief thereunder, the Commission does not yet have a comprehensive
view of the positions taken and interests held by currently exempt
entities. The Commission, therefore, believes that it is prudent to
withhold consideration of a foreign advisor exemption until the
Commission has received data regarding such firms on Forms CPO-PQR and/
or CTA-PR, as applicable, to enable the Commission to better assess the
universe of firms that may be appropriate to include within the
exemption, should the Commission decide to adopt one. Foreign advisors
to pools that meet the criteria of Sec. 4.13(a)(3) will be able to
continue to operate pursuant to that exemption, if previously claimed,
or file notice of claim of exemption under Sec. 4.13(a)(3). Therefore,
the Commission is not providing an exemption for foreign advisors at
this time.
5. Comments Regarding the Proposed Rescission of Sec. 4.13(a)(4)
In the Proposal, the Commission proposed to rescind the exemption
in Sec. 4.13(a)(4) for operators of pools that are offered only to
individuals and entities that satisfy the qualified eligible person
standard in Sec. 4.7 or the accredited investor standard under the
SEC's Regulation D.\127\ In the Proposal, the Commission stated that it
---------------------------------------------------------------------------
\127\ See 17 CFR 4.13(a)(4).
[S]eeks to eliminate the exemptions under Sec. Sec. 4.13(a)(3)
and (4) for operators of pools that are similarly situated to
private funds that previously relied on the exemptions under
Sec. Sec. 3(c)(1) and (7) of the Investment Company Act and Sec.
203(b)(3) of the Investment Advisers Act. It is the Commission's
view that the operators of these pools should be subject to similar
regulatory obligations, including proposed form CPO-PQR, in order to
provide improved transparency and increased accountability with
respect to these pools. The Commission has determined that it is
appropriate to limit regulatory arbitrage through harmonization of
the scope of its data collection with respect to pools that are
similarly situated to private funds so that operators of such pools
will not be able to avoid oversight by either the Commission or the
SEC through claims of exemption under the Commission's
regulations.\128\
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\128\ 76 FR 7976, 7986 (Feb 12, 2011).
The Commission received several comments regarding its proposed
rescission.\129\ Several commenters argued that the Commission should
consider retaining the exemption in Sec. 4.13(a)(4) for funds that do
not directly invest in commodity interests, but do so through a fund of
funds structure, and who are advised by an SEC registered investment
adviser. Due to the exemptions previously adopted by the Commission,
and the resulting lack of information regarding the activities of CPOs
claiming relief thereunder, the Commission does not yet have a
comprehensive view of the positions taken and interests held by
currently exempt entities. The Commission, therefore, believes that it
is prudent to withhold consideration of a fund of fund exemption until
the Commission has received data regarding such firms on Forms CPO-PQR
and/or CTA-PR, as applicable, to enable the Commission to better assess
the universe of firms that may be appropriate to include within the
exemption, should the Commission decide to adopt one. Therefore, the
Commission is not providing an exemption for funds of funds at this
time. The Commission notes, however, that staff will consider requests
for exemptive relief for funds of funds on a case by case basis.
---------------------------------------------------------------------------
\129\ See comment letter from Sidley Austin LLP (April 12, 2011)
(``Sidley Letter''); MFA Letter; NYSBA Letter; comment letter from
Cranwood Capital Management (April 12, 20110 (``Cranwood Letter'');
Dechert III Letter; and comment letter from Nantucket Multi
Managers, LLC (April 12, 2011) (``Nantucket Letter'').
---------------------------------------------------------------------------
The Commission received two comments that argued that the
rescission of Sec. 4.13(a)(4) is inconsistent with the private
offering framework under the SEC's Regulation D and that the rescission
would result in the end of private offerings.\130\ The Commission
believes that this analysis is flawed and is the result of a mistaken
conflation of the private fund structure under the Commission's rules
and privately-offered ownership interests under the SEC's rules. The
Commission notes that the rescission of Sec. 4.13(a)(4) does not
preclude CPOs from utilizing Regulation D with respect to the offering
of pool interests because the availability of relief from the
registration of an offering under Regulation D does not require that
the entity involved be exempt from regulation. Therefore, the
Commission continues to believe that rescission of Sec. 4.13(a)(4) is
appropriate for the reasons stated in the Proposing Release and that it
is consistent with the registration of investment advisers of such
exempt funds with the SEC.
---------------------------------------------------------------------------
\130\ See MFA Letter; and NYSBA Letter.
---------------------------------------------------------------------------
One commenter expressed concerns about the fact that the class of
eligible participants in a pool operated pursuant to Sec. 4.13(a)(4)
is broader than that for a pool qualifying under Sec. 4.7.\131\
Specifically, this commenter noted that under Sec. 4.13(a)(4),
participants may include non-natural participants that are QEPs under
Sec. 4.7 or accredited investors under Sec. 230.501(a)(1)-(3), (a)(7)
or (a)(8),\132\ whereas Sec. 4.7 does not include such participants as
QEPs.\133\ The Commission recognizes that this discrepancy may result
in certain entities being unable to claim relief under Sec. 4.7;
however, due to the exemptions previously adopted by the Commission,
and the resulting lack of information regarding the activities of CPOs
claiming relief thereunder, the Commission does not yet have a
comprehensive view of the positions taken and interests held by
currently exempt entities and until the Commission has more information
regarding the universe of entities affected, the Commission does not
believe that it is appropriate to amend Sec. 4.7 to reflect the nature
of participants in funds previously entitled to relief under Sec.
4.13(a)(4). After the Commission has collected data from such entities
through Form CPO-PQR, the Commission may reconsider this issue. The
Commission also notes that staff will consider requests for exemptive
relief from the limitations of Sec. 4.7 on a case-by-case basis.
---------------------------------------------------------------------------
\131\ MFA raised this concern during several meetings with
Commission staff, although it did not provide any detail regarding
the scope of its concerns and the topic was not discussed in the
written comments submitted regarding this rulemaking.
\132\ 17 CFR Sec. 4.13(a)(4)(ii)(B).
\133\ 17 CFR Sec. 4.7(a).
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One commenter argued that rescission is not necessary because any
fund that seeks to attract qualified eligible purchasers is already
required to maintain oversight and controls that exceed those mandated
by part 4 of the Commission's regulations such that any regulation
imposed would be duplicative and unnecessarily burdensome.\134\ That
commenter further stated that:
---------------------------------------------------------------------------
\134\ See Cranwood Letter.
We are accustomed to intense scrutiny from potential investors
that frequently includes independent background checks of our key
employees, onsite visits that include
[[Page 11265]]
interviews with our traders and other key personnel, interviews of
our third-party administrator and our auditors, interviews of
officials of our clearing broker, interviews of officers at our
custodial bank, and bulk delivery of transactional data for
independent analysis. To say that such information-gathering goes
far beyond the contents of a mandated disclosure document is a gross
understatement.\135\
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\135\ See Cranwood Letter.
The commenter primarily focused on the significant level of
controls that the fund operator implements independent of regulation.
The Commission believes that, contrary to the commenter's arguments as
to the import of that fact, such controls and internal oversight should
facilitate compliance with the Commission's regulatory regime.
Moreover, the Commission continues to believe that registration serves
important regulatory purposes as stated previously in this release in
the context of the amendments to Sec. 4.5.
The Commission has determined to eliminate the exemption in Sec.
4.13(a)(4) because, as stated in the proposal, there are no limits on
the amount of commodity interest trading in which pools operating under
this regulation can engage. That is, it is possible that a commodity
pool that is exempted from registration under Sec. 4.13(a)(4) could be
invested solely in commodities, which, in the Commission's view,
necessitates Commission oversight to ensure adequate customer
protection and market oversight. Therefore, the Commission adopts the
rescission of Sec. 4.13(a)(4) as proposed.
The Commission received several comments regarding the timing of
the implementation of the rescission of Sec. 4.13(a)(4).\136\ Two
commenters suggested that 18 months is the appropriate time period to
permit entities to prepare for compliance with the Commission's
registration and compliance regime.\137\ One commenter suggested that
the Commission provide ``sufficient time,'' but provided no proposed
specific period of time.\138\ Several commenters asserted that
currently exempt entities should be grandfathered.\139\
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\136\ See NYSBA Letter; AIMA Letter; Schulte Letter; comment
letter from Fulbright & Jaworski L.L.P. (April 12, 2011)
(``Fulbright Letter''); SIFMA Letter; Seward Letter; Katten Letter;
and comment letter from TIF Fund Management LLC (May 19, 2011)
(``TIF Letter''); NFA Letter; IAA Letter; and Dechert Letter.
\137\ See Schulte Letter; and Fulbright Letter.
\138\ See NFA Letter. See also, IAA Letter.
\139\ See NYSBA Letter; AIMA Letter; Schulte Letter; Fulbright
Letter; SIFMA Letter; Seward Letter; and Katten Letter.
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The Commission recognizes that entities will need time to come into
compliance with the Commission's regulations. The Commission does not,
however, believe that the process of preparing for Commission oversight
necessitates an 18 month time period. Based on the comments received
indicating that a certain portion of entities currently claiming relief
under Sec. 4.13(a)(4) already have robust controls in place
independent of Commission oversight, the Commission believes that
entities currently claiming relief under Sec. 4.13(a)(4) should be
capable of becoming registered and complying with the Commission's
regulations within 12 months following the issuance of the final rule.
For entities that are formed after the effective date of the
rescission, the Commission expects the CPOs of such entities to comply
with the Commission's regulations upon formation and commencement of
operations.
The Commission does not believe that ``grandfathering'' is
appropriate in this context. As the Commission stated in its Proposal,
part of the purpose of rescinding Sec. 4.13(a)(4) is to ensure that
entities that are engaged in derivatives trading are subject to
substantively identical registration and compliance obligations and
oversight by the Commission.\140\ Grandfathering is not consistent with
the stated goals of the Commission's rescission and would result in
disparate treatment of similarly situated entities.
---------------------------------------------------------------------------
\140\ 76 FR 7976, 7986 (Feb. 12, 2011).
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Therefore, the Commission will implement the rescission of Sec.
4.13(a)(4) for all entities currently claiming exemptive relief
thereunder on December 31, 2012, but the rescission will be implemented
for all other CPOs upon the effective date of this final rulemaking.
D. Comments Regarding the Proposed Annual Notices for Continued
Exemptive or Exclusionary Relief
In the Proposal, the Commission proposed to require annual
reaffirmance of a claim of exemption or exclusion from registration as
a CPO or CTA. In the Proposal, the Commission stated its position that
an annual notice requirement would promote improved transparency
regarding the number of entities either exempt or excluded from the
Commission's registration and compliance programs, which is consistent
with one of the primary purposes of the Dodd-Frank Act. Moreover, the
Commission stated its belief that an annual notice requirement would
enable the Commission to determine whether exemptions and exclusions
should be modified, repealed, or maintained as part of the Commission's
ongoing assessment of its regulatory scheme.
The Commission received three comments on this provision in the
Proposal.\141\ One commenter supported the adoption of an annual notice
requirement, but suggested that the due date of the notice be changed
from the exemption's original filing date to a calendar-year end for
all filers.\142\ The Commission agrees that moving the due date for the
annual notice requirement to the calendar-year end for all filers may
be more operationally efficient. Therefore, the Commission will adopt
the annual notice requirement mandating that the notice be filed at the
calendar year-end rather than the anniversary of the original filing.
---------------------------------------------------------------------------
\141\ See NFA Letter; AII Letter; and SIFMA Letter.
\142\ See NFA Letter.
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Two commenters suggested that the 30-day time period for filing was
not adequate to enable firms to comply.\143\ One commenter proposed a
60-day time period,\144\ whereas the other commenter proposed 90 days
as the necessary amount of time.\145\ The Commission recognizes that
the proposed 30-day filing period may not be adequate due to the
ramifications of an entity's failure to file its annual notice in a
timely manner, which would result in the exemption or exclusion being
deemed withdrawn. This issue is particularly important because of the
NFA's Bylaw 1101, which prohibits NFA members from conducting business
with non-members. Should an entity fail to file its annual notice
within the requisite time frame, its NFA membership could be deemed
withdrawn, which could potentially impact numerous other NFA members.
The Commission believes that extending the filing period from 30 days
to 60 days will provide NFA with adequate time to follow up with filing
entities to ensure that a filing is not omitted inadvertently and to
limit the adverse consequences for other NFA members. The Commission
does not, however, believe that 90 days is necessary as it intends for
such notice to be filed electronically with NFA and for NFA's filing
system to pre-populate the notice with the names and NFA IDs of all
exempt pools operated by the CPO with an option to choose to reaffirm
the exemptions for all exempt pools. The Commission believes that this
minimizes both the time and expense burdens on the CPO and should
enable
[[Page 11266]]
all entities to comply with the requirement within 60 days.
---------------------------------------------------------------------------
\143\ See NFA Letter; and SIFMA Letter.
\144\ See NFA Letter.
\145\ See SIFMA Letter.
---------------------------------------------------------------------------
E. Comments Regarding the Proposed Risk Disclosure Statement for Swaps
in Sec. 4.24 and Sec. 4.34
The Commission also proposed adding standard risk disclosure
statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.
4.24(b) and 4.34(b), respectively.\146\
---------------------------------------------------------------------------
\146\ 76 FR 7976, 7986 (Feb. 12, 2011).
---------------------------------------------------------------------------
The Commission received three comments with respect to the proposed
standard risk disclosure statement for swaps.\147\ Two argued that a
standard risk disclosure statement is not the appropriate way to
disclose the risks inherent in swaps activity to participants or
clients.\148\ Specifically, those commenters argued that the use of
swaps by CPOs and CTAs varies and depending on the reason for using
swaps, different risks may be implicated. Furthermore, those commenters
also noted that the proposed risk disclosure statement is inconsistent
with recent SEC guidance to registered investment companies to avoid
generic disclosures. The Commission respectfully disagrees with the
assertions of those commenters who believe that a standard risk
disclosure statement is not appropriate. The Commission believes that a
standardized risk disclosure statement addressing certain risks
associated with the use of swaps is necessary due to the revisions to
the statutory definitions of CPO, CTA, and commodity pool enacted by
the Dodd-Frank Act.\149\ Moreover, it is the Commission's position that
concerns about ``one-size-fits-all'' disclosure of risks are addressed
through additional disclosures required under Sec. Sec. 4.24(g) and
4.34(g), which govern disclosures regarding the risks associated with
participating in the offered commodity pool or program.
---------------------------------------------------------------------------
\147\ See SIFMA Letter; Fidelity Letter; and comment letter from
Chris Barnard (Feb. 26, 2011) (``Barnard Letter'').
\148\ See SIFMA Letter; and Fidelity Letter.
\149\ See 7 U.S.C. 1a(10), 1a(11), and 1a(12).
---------------------------------------------------------------------------
With respect to the comments submitted regarding the conflicting
requirements imposed on registered investment companies whose advisers
are required to register as CPOs pursuant to amended Sec. 4.5,\150\
such concerns will be addressed through the proposed modifications to
the Commission's compliance regime that will be applicable to
registered investment companies overseen by both the SEC and the
Commission.
---------------------------------------------------------------------------
\150\ See SIFMA Letter; and Fidelity Letter.
---------------------------------------------------------------------------
Additionally, the Commission received one comment that supported
the adoption of the standard risk disclosure statement for swaps, but
suggested that the Commission consider whether the wording needed to be
modified depending on whether the swaps were cleared or uncleared.\151\
Based on the language proposed, the Commission does not believe that
different language must be adopted to account for the differences
between cleared and uncleared swaps. In particular, the Commission
notes that the proposed risk disclosure statement is not intended to
address all risks that may be associated with the use of swaps, but
that the CPO or CTA is required to make additional disclosures of any
other risks in its disclosure document pursuant to Sec. Sec. 4.24(g)
and 4.34(g) of the Commission's regulations. Moreover, the language of
the proposed risk disclosure statement is conditional and does not
purport to assert that all of the risks discussed are applicable in all
circumstances. For the reasons discussed above and those stated in the
Proposal, the Commission adopts the proposed risk disclosure statements
for CPOs and CTAs regarding swaps.\152\ These additional risk
disclosure statements will be required for all new disclosure documents
and all updates filed after the effective date of this final
rulemaking.
---------------------------------------------------------------------------
\151\ See Barnard Letter.
\152\ These risk disclosure statements do not affect the swap
disclosure requirements mandated in CEA Section 4s(h)(3)(B) and
rules relating to that statutory provision. See proposed Sec.
23.431 Disclosure of Material Information, Business Conduct
Standards for Swap Dealers and Major Swap Participants with
Counterparties, 75 FR 80638 (Dec. 22, 2010). In addition, managed
accounts that do not convey discretionary authority to the CTA will
require the pass through of the swap disclosures in any final rule
promulgated pursuant to 4s(h)(3)(B).
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F. Section 4.27 and Forms CPO-PQR and CTA-PR
1. General Comments
The Commission received numerous comments in response to proposed
Sec. 4.27, which requires CPOs and CTAs to report certain information
to the Commission on Forms CPO-PQR and CTA-PR, respectively. Several
commenters questioned whether the data collection was necessary for the
Commission's oversight of its registrants.\153\ Others asserted that
certain groups, such as registered investment companies or family
offices, should be exempted from completing the data collection.\154\
---------------------------------------------------------------------------
\153\ See Fidelity Letter; and AIMA Letter.
\154\ See ICI Letter; AIMA Letter; and comment letter from K&L
Gates LLP (Feb. 12, 2011) (``K&L Letter'').
---------------------------------------------------------------------------
The Commission's new reporting requirements supplement SEC
reporting requirements for dual registrants that must file Form PF with
the SEC by virtue of their dual registration status. Information about
CTAs and CPOs that are non-dual registrants is necessary for the
Commission to identify significant risk to the stability of the
derivatives market and the financial market as a whole. Following the
recent economic turmoil, the Commission has reconsidered the level of
regulation that it believes is appropriate for entities participating
in the commodity futures and derivatives markets. With respect to the
assertion that registered investment companies should not be required
to file Form CPO-PQR, the Commission believes that it is important to
collect the data in Form CPO-PQR from registered investment companies
whose activities require CPO registration to assess the risk posed by
such investment vehicles to derivatives markets and the broader
financial system. Consequently, the Commission intends to require from
registered investment companies that are also registered as CPOs the
same information that it is requiring from entities solely registered
as CPOs. Additionally, the Commission notes that to the extent that the
entity registered as the CPO for the registered investment company is
registered as an investment adviser and is required to file Form PF
with the SEC, the activities of the registered investment company may
be reported on Form PF as well.
The Commission further believes that the same reasoning applies
with respect to the collection of data from family offices. To enable
the Commission to evaluate a potential family offices exemption
following the collection and analysis of data regarding their
activities, the Commission believes that it is essential that family
offices remain subject to the data collection requirements to the
extent that such entities are not entitled to claim relief pursuant to
the Commission's interpretative guidance regarding family offices.
One commenter recommended that the Commission clarify the filing
obligations for CPOs and CTAs that are required to file Form PF with
the SEC and to streamline the reporting obligations.\155\ Another
commenter argued that a very large private fund that has a limited
amount of derivatives trading should not be subject to Schedule C of
Form CPO-PQR.\156\ As
[[Page 11267]]
stated in the Proposal, CPOs that are dually registered with the SEC
and that file Form PF must still file Schedule A with the Commission,
and CTAs must still file Form CTA-PR. The Commission intends to adopt
Sec. 4.27 as proposed and permit dual registrants to file Form PF with
the SEC in lieu of completing Schedules B and/or C of Form CPO-PQR. The
Commission never intended to require very large dual registrants to
file anything more than the general identifying information required on
Schedule A with the Commission, and neither Sec. 4.27 nor the forms
require dual registrants to file Schedules B or C if they are filing
Form PF.
---------------------------------------------------------------------------
\155\ See Fidelity Letter.
\156\ See AIMA Letter; SIFMA Letter; and Fidelity Letter.
---------------------------------------------------------------------------
The Commission has modified both Schedule A of Form CPO-PQR and
Form CTA-PR so that both documents are only soliciting general
demographic data. The Commission has moved Question 12, which asked for
information regarding position information, from proposed Schedule A to
Schedule B of Form CPO-PQR in an effort to avoid collecting redundant
information from dual registrants. Additionally, the Commission is not
adopting Schedule B from Form CTA-PR, and therefore, will be limiting
the information collected from registered CTAs to demographic data and
the names of the pools advised by the CTA.
One commenter questioned whether the information collected on Forms
CTA-PR and CPO-PQR will provide the Commission with real-time data that
will enable it to have an accurate and timely picture of a CTA's
activities and operating status.\157\ The Commission recognizes the
limitations of the data collection instruments with respect to the
timeliness of the information requested. The Commission believes,
however, that the forms strike the appropriate balance between the time
needed to compile complex data and the Commission's need for timely
information. Moreover, the Commission believes that the information
required on Form CPO-PQR and CTA-PR will be useful because it will
allow the Commission to better deploy its enforcement and examination
resources.
---------------------------------------------------------------------------
\157\ See Barnard Letter.
---------------------------------------------------------------------------
Another commenter questioned whether the Commission possessed the
staffing and financial resources necessary to meaningfully use such
data as part of its oversight.\158\ The Commission recognizes that the
resources available to it are limited. To that end, the Commission, as
stated in the Proposal, intends to coordinate with the NFA to
accomplish the analysis necessary to make full use of the data
collected from Commission registrants.
---------------------------------------------------------------------------
\158\ See Dechert Letter.
---------------------------------------------------------------------------
In addition, the Commission intends for the data to be collected
from registrants in an electronic format, which will enable the
Commission to leverage its technology and to require less intensive
staff time to achieve the desired results. The use of an electronic
format will enable the FSOC to conduct additional analysis of the data
collected in the event that the FSOC requests such information from the
Commission, without significant consumption of Commission resources.
For these reasons, the Commission believes that it has the tools
necessary to make full use of the data that it intends to collect on
Forms CPO-PQR and CTA-PR, notwithstanding the Commission's current
staffing and financial resources.
2. Comments Regarding the Reporting Thresholds
The Commission received several comments regarding the appropriate
reporting thresholds for the various schedules of Form CPO-PQR.\159\
The commenters stated that $150 million in assets under management was
too low of a threshold for entities to be categorized as mid-sized and
required to file Schedule B. Rather, the commenters urged the
Commission to increase the threshold to $500 million in assets under
management.\160\ The Commission believes that $150 million in assets
under management is still the appropriate threshold for mid-sized CPOs.
The Commission will retain this threshold because it is consistent with
the threshold for advisers filing Section 1 of Form PF, which is
substantively similar to Schedule B of Form CPO-PQR, and it will ensure
comparable treatment of entities of similar magnitude.
---------------------------------------------------------------------------
\159\ See AIMA Letter; MFA II Letter; Seward Letter. See also,
AIMA II Letter.
\160\ See AIMA Letter.
---------------------------------------------------------------------------
These commenters also suggested that the Commission increase the
threshold for large CPOs from $1 billion to $5 billion in assets under
management.\161\ The Commission has decided not to increase the large
CPO threshold to $5 billion. The Commission has decided, however, to
increase the threshold from $1 billion to $1.5 billion. The Commission
believes that increasing the threshold to $1.5 billion will reduce the
number of CPOs required to file Schedule C of Form CPO-PQR, but will
still represent a substantial portion of the assets under management by
registered CPOs. Moreover, the Commission notes that this modification
is consistent with the revised threshold for large hedge fund advisers
that it recently adopted with respect to Form PF.\162\ The Commission
believes that increasing the threshold beyond $1.5 billion could limit
the Commission's access to information necessary to oversee entities
that could pose a risk to the derivatives markets or the financial
system as a whole.
---------------------------------------------------------------------------
\161\ See AIMA Letter; MFA II Letter; Seward Letter.
\162\ 76 FR 71128, 71135 (Nov. 16, 2011).
---------------------------------------------------------------------------
3. Comments Regarding Harmonization With the SEC's Compliance Regime
The Commission received numerous comments on harmonizing Forms CPO-
PQR and CTA-PR with Form PF.\163\ The Commission has considered
comments received on the Form PF proposed jointly with the SEC that
address harmonization of the CFTC and SEC forms in addition to the
comments received specifically on the Proposal. Two commenters argued
that the Commission and the SEC should use the same metrics for
measuring assets under management for purposes of determining filing
obligations.\164\ As noted several times in this preamble, the
Commission has sought to harmonize Forms CPO-PQR and CTA-PR to the
extent possible; however, it is not appropriate in all circumstances.
For example, the SEC and the CFTC use different methods for determining
the threshold for reporting assets under management. In order to
determine whether a CPO meets the asset threshold for classification as
a mid-sized or large CPO, Form CPO-PQR requires the use of the
aggregated gross pool assets under management. Conversely, Form PF
defines ``regulatory assets under management'' as the gross value of
the securities portfolio as reported on the SEC's Form ADV.\165\
Additionally, Form CPO-PQR uses net assets under management as the
method for determining whether a commodity pool is a large commodity
pool for filing purposes, whereas Form PF uses net regulatory assets.
In the Commission's view, gross assets under management and net asset
value are more appropriate means for determining filing obligations for
CPOs and large commodity pools because entities registered with the
Commission are familiar with the use of net asset value for other
purposes including
[[Page 11268]]
determining the required frequency of reporting to participants.\166\
Moreover, the Commission believes that it is inappropriate for it to
incorporate the SEC definitions of regulatory assets under management
and net regulatory assets under management into Form CPO-PQR as those
terms are not consistent with the existing CFTC regulatory
framework.\167\ The use of net asset value is consistent with the
longstanding utilization of net asset value in U.S. GAAP and in the
Commission's regulations.\168\ Therefore, the Commission does not
believe that its use of net asset value requires any additional
calculation by dual registrants beyond that required to complete Form
PF.
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\163\ See AIMA Letter; MFA II Letter; Dechert Letter; Seward
Letter; IAA Letter; Fidelity Letter; AIMA II Letter; K&L Letter; MFA
Letter; and SIFMA Letter.
\164\ See AIMA Letter; and MFA II Letter.
\165\ Form PF defines net assets under management as regulatory
assets under management less liabilities 76 FR 71128, 71136 (Nov.
16, 2011).
\166\ Id.
\167\ Id. Additionally, the Commission notes that Form PF also
asks for net assets under management in question 3 of Section 1.
\168\ See, e.g., 17 CFR 4.22.
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Several commenters argued that the Commission does not need to
collect information through Forms CPO-PQR and CTA-PR because it already
receives information through the Large Trader Reporting System and Form
40.\169\ Large Trader Reporting and Form 40 do not provide the
information regarding the relationship between a large position held by
a pool and the rest of the pool's other derivatives positions and
securities investments. The Commission believes that the scope of
information sought through Forms CPO-PQR and CTA-PR will provide it
with substantially more detail regarding the activities of entities
engaged in derivatives trading and will better enable it to assess the
risk posed by a pool or CPO as a whole.
---------------------------------------------------------------------------
\169\ See Fidelity Letter; and K&L Letter.
---------------------------------------------------------------------------
Several commenters also urged the Commission to consider
coordinating with the SEC to promulgate a single form.\170\ The
Commission believes that it is most efficient for Commission-only
registrants to use a form that is based upon the format of NFA's Form
PQR, with which current registrants are already familiar. Currently
registered CPOs have been filing NFA's Form PQR on a quarterly basis
for more than one year and have experience using NFA's interface for
the collection of data. The Commission recognizes that new registrants
will not have any experience with NFA's Form PQR or NFA's filing
system; however, the same would be true if the Commission were to
implement an altogether new system. Therefore, the Commission believes
that by continuing to use the system developed by NFA for collecting
data from CPOs and CTAs, it is minimizing the burden on current
registrants because they will not be required to learn a new system,
without adding any additional burden to new registrants.
---------------------------------------------------------------------------
\170\ See AIMA II Letter; Seward Letter; MFA Letter; AIMA
Letter; and SIFMA Letter.
---------------------------------------------------------------------------
Several commenters raised concerns about how affiliated entities
will be treated on the forms.\171\ The Commission believes that
affiliated entities should be permitted, but should not be required, to
report on a single form with respect to all affiliates and the pools
that they advise. This position is consistent with the treatment of
affiliated entities on Form PF. Furthermore, the Commission believes
that where a pool is operated by one or more co-CPOs, only one CPO
should report on the activities of the jointly operated pool, but that
CPO must disclose the identities of the other co-CPOs. The Commission
believes that this will eliminate the potential for double counting of
pool assets if all co-CPOs were required to report on the jointly
operated pool.
---------------------------------------------------------------------------
\171\ See MFA II Letter; MFA Letter; AIMA Letter; SIFMA Letter;
and Seward Letter.
---------------------------------------------------------------------------
4. Comments Regarding Funds of Funds
The Commission also received one comment regarding issues unique to
fund of funds and feeder funds.\172\ Specifically, this commenter
asserted that funds of funds that invest in unaffiliated commodity
pools are ``not in the business of trading commodity interests,'' and
therefore, should not be subject to reporting obligations on Form CPO-
PQR.\173\ This commenter further argues that funds of funds reporting
is not necessary because either the Commission or the SEC will oversee
the investee fund and that funds of funds likely do not have access to
information with sufficient detail to respond to the questions in Form
CPO-PQR regarding size, strategy, or positions held by the investee
fund.\174\
---------------------------------------------------------------------------
\172\ See MFA II Letter.
\173\ Id.
\174\ Id.
---------------------------------------------------------------------------
The Commission disagrees with the commenter's assertion that funds
investing in unaffiliated commodity pools are not in the business of
trading commodity interests. Although it is true that the fund does not
directly engage in such trading, it is the position of the Commission
that a fund investing in an unaffiliated commodity pool is itself a
commodity pool. This interpretation is consistent with the statutory
definition of commodity pool, which draws no distinctions between
direct and indirect investments in commodity interests.\175\ Moreover,
the Commission believes that permitting indirect investment in
commodity interests to occur without Commission oversight would create
an incentive for entities to avoid direct investment in commodity
interests and possibly increase the opacity of the market. Therefore,
the Commission concludes that a fund that invests in an unaffiliated
commodity pool is a commodity pool for purposes of the CEA and the
Commission's regulations promulgated thereunder.
---------------------------------------------------------------------------
\175\ See 7 U.S.C. 1a(11).
---------------------------------------------------------------------------
With respect to the commenter's assertion that the funds of funds
need not report because the investee fund will be subject to the
jurisdiction of either the Commission or the SEC, the Commission must
again disagree. As the commenter itself noted in its comment, the funds
of funds could be invested in a fund whose adviser or operator is not
required to report due to exemptive relief granted by either the
Commission or the SEC. The Commission acknowledges that a fund of funds
may not have access to the kind of information necessary to respond to
all of the data elements in Schedules B and C with respect to the
investment activities of its investee funds. Nevertheless, the
Commission believes that requiring basic information about the
investment in the investee funds without requiring that funds of funds
complete the additional detail strikes an appropriate balance between
recognizing the limitations of the information available to funds of
funds and enabling the Commission to analyze and monitor the levels of
interconnectedness among a CPO's funds. The Commission believes that a
fund of funds should still be required to provide at a minimum the name
of the investee fund(s) and the size of its investment(s) in such
funds.
Accordingly, the Commission is adding a question to Schedule A of
Form CPO-PQR requesting the names of the investee funds and the size of
the fund of funds' investment in the investee funds. The Commission is
also adding an instruction to Form CPO-PQR permitting the CPO of a fund
of funds to exclude any assets invested in the equity of commodity
pools or private funds for purposes of determining the CPO's reporting
obligations. The CPO must, however, treat these assets consistently for
purposes of Form CPO-PQR. For example, an adviser may not include these
assets for purposes of certain questions such as those regarding
borrowing, but disregard such assets for purposes of determining the
reporting thresholds. This new instruction will permit a CPO to
disregard investments in commodity pools or private funds,
[[Page 11269]]
but would not allow a CPO to disregard the liabilities of the fund,
even if incurred due to the investment in the underlying fund.
Moreover, if any of the CPO's commodity pools invests substantially all
of its assets in the equity of other commodity pools or private funds
and, aside from those investments, holds only cash, cash equivalents,
and instruments intended to hedge currency risk, the CPO may complete
only Schedules A and B with respect to that fund and otherwise
disregard such assets for reporting purposes. These instructions are
consistent with those instructions adopted as part of the joint Form
PF, and the Commission believes that this treatment of funds of funds
reduces the burden of reporting for CPOs and improves the quality of
the data obtained by the Commission. Therefore, the Commission is
adding a general question regarding funds of funds, but is otherwise
permitting CPOs to disregard the assets of such funds that are invested
in other commodity pools or private funds for reporting purposes.
5. Adopted Modifications to Form CPO-PQR
The Commission has decided to make several additional revisions to
Form CPO-PQR in addition to those discussed previously. The Commission
believes that these revisions are necessary to provide clarification,
decrease the burden imposed on registrants, and further harmonize Form
CPO-PQR with Form PF.
a. Instructions
As discussed previously, the Commission has decided to revise
certain instructions governing the completion of Form CPO-PQR.
Specifically, the Commission has determined that it is appropriate to
raise the threshold for large CPOs from $1 billion to $1.5 billion in
an effort to reduce the number of CPOs required to report on a
quarterly basis and respond to commenters' concerns, but still provide
the Commission with the information necessary to effectively oversee
such large market participants. The Commission has also determined to
modify the frequency of reporting for filers of Form CPO-PQR. As
adopted, all CPOs, other than large CPOs, will be required to file
Schedule A on an annual basis; mid-size CPOs will be required to file
Schedule B on an annual basis; and large CPOs will be required to file
Schedules A, B, and C on a quarterly basis.
The Commission received several comments asserting that the 15-day
period for reporting was not sufficient to permit reporting CPOs to
complete and file the form and all suggested extending the period to 30
or 45 days.\176\ The Commission agrees that reporting CPOs will need
additional time in which to submit the various schedules of Form CPO-
PQR.
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\176\ See NFA Letter; Seward Letter; and AIMA Letter.
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Upon further consideration, the Commission believes that it is
appropriate to require all CPOs, other than large CPOs, to file
Schedule A within 90 days of the end of the calendar year. This time
period coincides with the annual questionnaire required by NFA of its
entire population of member CPOs and with the vast majority of annual
report filings for commodity pools. The revised deadline will enable
CPOs, other than large CPOs, to benefit from the availability of the
NFA annual questionnaire and the availability of the information in CPO
annual report filings. Moreover, because the Commission has transferred
the pool position information from Schedule A to Schedule B, the
Commission believes that non-large CPOs should be able to comply with
filing basic demographic data within 90 days.
With respect to mid-sized CPOs filing Schedule B, the Commission
believes that 90 days is an adequate time period for compiling data and
completing that schedule. The Commission notes that CPOs are generally
required to file annual reports for their pools within 90 days of their
fiscal year end, most of which coincide with the calendar year end. The
Commission believes that the alignment of pools' fiscal years with the
calendar year end should facilitate the preparation of Schedule B and
reduce the burden imposed on mid-size CPOs because some of the
information required will be similar to that included in a pool's
annual financial statements.
With respect to the quarterly reporting by large CPOs on Schedules
A, B, and C, the Commission believes that 60 days is a sufficient
amount of time to complete those schedules for large CPOs. The
Commission notes that the entities required to file on a quarterly
basis have a significant amount of assets under management, and as
such, the Commission anticipates that such entities routinely generate
the type of information requested on Schedules B and C as part of their
internal governance. Accordingly, the Commission will require large
CPOs to file Schedules B and C within 60 days following the end of the
reporting period as defined in Form CPO-PQR.
In October 2011, the Commission adopted Form PF as a joint
reporting form with the SEC. The terms of Form PF permit dually
registered entities that are filing the form for their private funds
under advisement to report on the activities of their other commodity
pools as well. Entities that choose to file Form PF for all of their
funds under advisement will still be required to file Schedule A on an
annual basis, which is consistent with the terms of the Proposal. The
instructions of Form CPO-PQR have been modified to reflect this change.
The Commission has also determined to omit the statement that the
failure to answer all required questions completely and accurately may
severely impact your ability to operate. The Commission does not
believe that such language is necessary to inform registered CPOs of
their obligations under the CEA and the Commission's regulations to
comply with such obligations in good faith.
Additionally, the Commission has concluded that it should clarify
the obligations of co-CPOs of a pool with respect to the submission of
Form CPO-PQR. The Commission has amended the instructions to the form
to clarify that for co-CPOs, the CPO with the greater assets under
management overall is required to report for the co-operated pool.
Furthermore, if a pool is operated by co-CPOs and one of the CPOs is
also a registered investment adviser, the non-investment adviser CPO
will still be obligated to file the applicable sections of Form CPO-PQR
regardless of whether the investment adviser CPO filed a Form PF. The
Commission believes that this will prevent the possibility of double
counting and unnecessary duplicative filings regarding co-operated
pools.
b. Schedule A
Schedule A seeks basic identifying information about the CPO, each
of its pools, and any services providers used. The Commission has
decided to adopt Schedule A as proposed with the following revisions.
In question 3 of part 2, the Commission has added a question asking
whether the pool is operated by co-CPOs and for the name of the other
CPO(s). This question will enable the Commission to ensure that only
one CPO is filing with respect to each co-operated commodity pool. In
addition, question 12 of part 2, which asked for information regarding
the pool's trading strategies, has been moved to Schedule B, both in
response to a commenter's suggestion \177\ and in an effort to ensure
that dual registrants are not required to file extensive duplicative
information
[[Page 11270]]
on Schedule A that they are already providing on Form PF.
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\177\ See AIMA Letter.
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The Commission added a question asking for the telephone number and
email for the contact person for the reporting CPO as this was
inadvertently omitted in the Proposal. Also, the Commission added a
subpart h. to question 10 regarding the base currency used by the CPO
for the particular pool for which it is reporting. This question was
inadvertently omitted but is necessary for the Commission to fully
utilize the information reported regarding the changes in the pool's
assets under management.
The Commission added subparts to question 12 regarding prospective
risks for the imposition of ``gates'' and restrictions on redemption of
participant withdrawals. The terms of question 12, as proposed, only
seek information on a retrospective basis, which, although useful to
the Commission in assessing overall issues regarding the imposition of
restrictions on redemption, does not assist the Commission in assessing
possible sources of prospective risk to the market and pool
participants. Moreover, question 12, as proposed, did not capture
information about pools that have procedures in place governing the
imposition of restrictions on redemptions, but whose restrictions have
not been triggered. The Commission believes that the modifications to
this question solicits such information and will provide the Commission
with a more complete understanding of the role of restrictions on
redemptions in the operation of commodity pools. Moreover, the
Commission believes that the request for additional information
regarding the potential imposition of restrictions on redemptions is
consistent with the tenor and intent of question 12 as proposed.
The Commission also has made numerous non-substantive technical
amendments in Schedule A, including formatting corrections, the
deletion of the term ``carrying'' from question 5 in part 2, and the
addition of two months that were inadvertently omitted from the monthly
rate of return table in part 2, question 11.
c. Schedule B
Mid-sized and large CPOs will be required to complete Schedule B,
which will solicit data about each pool operated by these CPOs. The
Commission has decided to adopt Schedule B with the following
revisions.
In question 1, subpart d, the Commission has decided to change the
format of the question from a pull-down list of options to a chart,
consistent with the format used for substantively identical question
20, section 1c in Form PF. The Commission believes that the chart
format change will add clarity to the question and will facilitate the
completion by registrants. The Commission also has added a column
requesting the percentage of the pool's capital invested in each
strategy. This additional information aligns Form CPO-PQR with the
information requested in Form PF and also provides the Commission with
the means to assess the risk that a pool derives from its borrowing
activities.
The Commission has also amended question 1 to add a subpart g
asking the reporting CPO to report the percentage of the commodity
pool's net asset value that is traded pursuant to a high frequency
trading strategy. This subpart previously appeared as part of the chart
in question 1 regarding investment strategies. The Commission believes
that denoting the issue of high frequency trading as its own subpart of
question 1 will enhance the clarity of the question and make the data
gained by the Commission more usable in its assessment of risks posed
to the derivatives markets.
The Commission is amending question 2 to include the percentage of
a pool's borrowings from U.S. and non-U.S. creditors that are not
``financial institutions,'' as that term is defined in Form CPO-PQR, as
separate line items. This revision parallels the structure of subparts
b and c of that question.
Finally, the Commission has made several non-substantive
corrections/alterations, including modifying the format of question 3
to provide a more user-friendly interface for reporting funds and
combining several subparts into charts, correcting a typographical
error in question 5, adding the question that was formerly question 12
of Schedule A to Schedule B as question 6, and expanding several
categories of investments to provide a parallel level of detail among
the asset classes.
d. Schedule C
Schedule C requests information about the pools operated by large
CPOs on an aggregated and pool by pool basis. The Commission is
adopting Schedule C as proposed with the following revisions.
Part 1
The questions in part 1 of Schedule C seek information for all of
the pools operated by the large CPO on an aggregate basis.
Question 1 requires a CPO to report a geographical breakdown of
investments held by the pools that it operates. The Commission has
modified this question to require a less detailed breakdown by focusing
on regions as opposed to individual countries and has added a separate
disclosure regarding investment in certain countries of interest. The
Commission expects that this revision will reduce the burden of
responding to this question because the less granular categories should
permit more CPOs to rely on classifications that they already use.
The Commission has determined that question 3, which seeks
information regarding the duration of the pools' fixed income
investments on an aggregate basis, is redundant in light of question 9
in part 2 of Schedule C. Question 9 in part 2 of Schedule C asks for
the same information on a pool by pool basis. For that reason, the
Commission has deleted question 3 from part 1 of Schedule C.
Part 2
Part 2 of Schedule C seeks information from large CPOs on an
individual pool basis for each operated ``large pool'' as that term is
defined in Form CPO-PQR. The Commission has revised subpart c of
question 3 to be a yes/no response with respect to whether the pool
used a central clearing counterparty (``CCP'') during the reporting
period. The Commission believes that this is less burdensome and
provides it with sufficient information regarding the use of CCPs
because the CPO's relationship is with the swap dealer, futures
commission merchant, or direct clearing member rather than directly
with the CCP.
In subpart b of question 4, the Commission has made several
revisions correcting the technical terminology used with respect to
``value at risk'' (``VaR''). These revisions are non-substantive. The
Commission also added a new subpart c to question 4, which asks the CPO
whether it uses any metrics other than VaR for risk management purposes
for the reporting fund. The Commission believes that this information
will be useful as it continues to amend Form CPO-PQR as necessary to
obtain relevant information from registrants. Because of the addition
of a new subpart c to question 4, subpart c of question 4 as proposed
has been redesignated as subpart d of question 4. The Commission also
added a category of ``relevant/not formally tested'' to subpart d of
question 4 in an effort to capture all possible opinions of the
reporting CPO with respect to the listed market factors. The Commission
believes that this modification will reduce the burden on reporting
CPOs
[[Page 11271]]
because fewer CPOs will need to provide detailed responses, and because
those CPOs without existing quantitative models will not be required to
build or acquire them to respond to the question. The Commission
continues to believe that this question will provide valuable risk
information to the Commission with respect to specific large pools.
The Commission is revising subpart a of question 5 to include the
percentage of a pool's borrowings from U.S. and non-U.S. creditors that
are not ``financial institutions'' as that term is defined in Form CPO-
PQR, as separate line items. This revision parallels the structure of
the question as proposed with respect to financial institutions.
The Commission is also amending question 9, regarding the duration
of each large pool's fixed income instruments. This question, as
amended, requires the CPO to report the duration, weighted average
tenor, or 10-year equivalents of fixed income portfolio holdings,
including asset-backed securities. This is a difference from the
question as proposed, which would have required all large CPOs to
report duration. Through this revision, the Commission is giving large
CPOs the option of instead reporting weighted average tenor or 10-year
bond equivalents because the Commission understands that CPOs may use a
wide range of metrics to measure interest rate sensitivity. The
Commission expects that this revised approach will reduce the burden on
CPOs because they will generally be able to utilize their existing
practices when providing this information on the form.
6. Form CTA-PR
The Commission received several comments regarding the content of
Form CTA-PR.\178\ Most commenters urged the Commission to eliminate the
form in its entirety.\179\ Although the Commission does not believe
that the complete elimination of Form CTA-PR is appropriate, it
believes that Schedule B of the form contains redundant information
that will already be collected through Form CPO-PQR. To reduce the
burden on CTAs, the Commission will eliminate Schedule B. Instead, the
Commission has decided to adopt only Schedule A of Form CTA-PR and will
add a question asking the reporting CTA to identify the pools under its
advisement so that the Commission can analyze the relationships among
the various registrants to better assess sources of risk to the market
and measure their potential reach. Because Form CTA-PR will be limited
to demographic data, the Commission believes that it is appropriate for
CTAs to file the form on an annual basis within 45 days of the end of
the fiscal year. Therefore, the Commission has amended the text of
Sec. 4.27 to reflect this modification of the reporting obligations of
CTAs.
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\178\ See, e.g., IAA Letter; MFA II Letter; AIMA Letter; SIFMA
Letter; and Fidelity Letter.
\179\ Id.
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7. Implementation
The effective date for Sec. 4.27 and Forms CPO-PQR and CTA-PR is
July 2, 2012. The Commission is adopting a two-stage phase-in period
for compliance with Form CPO-PQR filing requirements. The compliance
date for Sec. 4.27 is September 15, 2012 for any CPO having at least
$5 billion in assets under management attributable to commodity pools
as of the last day of the fiscal quarter most recently completed prior
to September 15, 2012. Therefore, a CPO with $5 billion in commodity
pool assets under management as of June 30, 2012, must file its first
Form CPO-PQR within 60 days following September 30, 2012. Reporting
CPOs must file all schedules of Form CPO-PQR.
For all other registered CPOs and all CTAs, the compliance date for
Sec. 4.27 is December 15, 2012. As a result, most advisers must file
their first Form CPO-PQR or CTA-PR based on information as of December
31, 2012. This delay in compliance should allow sufficient time for
CPOs and CTAs to develop systems for collecting the information
required on the forms and prepare for filing. The Commission
anticipates that this timeframe will also enable the NFA to have
adequate time to program a system to accept the filings. The Commission
has determined that the extension of the compliance dates is necessary
because the rule and forms are being adopted later than expected.
G. Amendments to Sec. Sec. 145.5 and 147.3: Confidential Treatment of
Data Collected on Forms CPO-PQR and CTA-PR
As the Commission stated in the Proposal, the collection of certain
proprietary information through Forms CPO-PQR and CTA-PR raises
concerns regarding the protection of such information from public
disclosure.\180\ The Commission received two comments requesting that
the Commission treat the disclosure of a pool's distribution channels
as nonpublic information,\181\ and numerous other comments urging the
Commission to be exceedingly circumspect in ensuring the
confidentiality of the information received as a result of the data
collections.\182\
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\180\ 76 FR 7976, 7982 (Feb. 12, 2011).
\181\ See MFA II Letter and Seward & Kissel Letter.
\182\ See Roundtable transcript. Commission staff also had
numerous meetings with commenters that addressed this issue of
confidentiality of information.
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The Commission agrees that the distribution and marketing channels
used by a CPO for its pools may be sensitive information that
implicates other proprietary secrets, which, if revealed to the general
public, could put the CPO at a competitive disadvantage. Accordingly,
the Commission is amending Sec. Sec. 145.5 and 147.3 to include
question 9 of Schedule A of Form CPO-PQR as a nonpublic document.
Additionally, the Commission is amending Sec. Sec. 145.5 and 147.3
to remove reference to question 13 in Schedule A of Form CPO-PQR
because such question no longer exists due to amendments to that
schedule. Similarly, the Commission will be designating question
subparts (c) and (d) of question 2 of Form CTA-PR as nonpublic because
it identifies the pools advised by the reporting CTA.
Therefore, as adopted, the parts of Form CPO-PQR that are
designated nonpublic under parts 145 and 147 of the Commission
regulations are:
Schedule A: Question 2, subparts (b) and (d); Question 3,
subparts (g) and (h); Question 9; Question 10, subparts (b), (c), (d),
(e), and (g); Question 11; and Question 12.
Schedule B: All.
Schedule C: All; and
Form CTA-PR: question 2, subparts c and d.
H. Conforming Amendments to Part 4
As a result of the amendments adopted herein, the Commission must
amend various provisions in part 4 of the Commission's regulations for
purposes of making conforming changes. Specifically, the Commission is
deleting references to repealed Sec. 4.13(a)(4) in other sections of
the Commission's regulations.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)\183\ requires that agencies,
in proposing rules, consider the impact of those rules on small
businesses. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on
[[Page 11272]]
such entities in accordance with the RFA.\184\
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\183\ See 5 U.S.C. 601, et seq.
\184\ 47 FR 18618 (April 30, 1982).
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CPOs: The Commission has determined previously that registered CPOs
are not small entities for the purpose of the RFA.\185\ With respect to
CPOs exempt from registration, the Commission has previously determined
that a CPO is a small entity if it meets the criteria for exemption
from registration under current Rule 4.13(a)(2).\186\ Such CPOs will
continue to qualify for either exemption or exclusion from registration
and therefore will not be required to report on proposed Form CPO-PQR;
however, they will have an annual notice filing obligation confirming
their eligibility for exemption or exclusion from registration and
reporting. The Commission estimates that the time required to complete
this new requirement will be approximately 0.25 of an hour, which the
Commission has concluded will not be a significant time expenditure.
The Commission has determined that the proposed regulation will not
create a significant economic impact on a substantial number of small
entities.
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\185\ See 47 FR 18618, 18619, Apr. 30, 1982.
\186\ See 47 FR at 18619-20.
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CTAs: The Commission has previously decided to evaluate, within the
context of a particular rule proposal, whether all or some CTAs should
be considered to be small entities, and if so, to analyze the economic
impact on them of any such rule.\187\ Form CTA-PR is proposed to be
required of all registered CTAs, which necessarily includes entities
that would be considered small. The majority of the information
requested on Form CTA-PR is information that is readily available to
the CTA or readily calculable by the CTA, regardless of size.
Therefore, the Commission estimates that the time required to complete
the items contained in Form CTA-PR will be approximately 0.5 hours as
it is comprised of only two questions, which solicit information that
is expected to be readily available. The Commission has determined that
Form CTA-PR will not create a significant economic impact on a
substantial number of small entities. Accordingly, the Chairman, on
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)
that the proposed rules, will not have a significant impact on a
substantial number of small entities.
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\187\ See 47 FR at 18620.
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The Commission did not receive any comments on its analysis of the
application of the RFA to the instant part 4 amendments.
B. Paperwork Reduction Act
This rulemaking contains information collection requirements. The
Paperwork Reduction Act (``PRA'') imposes certain requirements on
Federal agencies in connection with their conducting or sponsoring any
collection of information as defined by the PRA.\188\ An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number from the Office of Management and Budget (``OMB'').
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\188\ See 44 U.S.C. 3501 et seq.
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The Commission is amending Collection 3038-0023 to allow for an
increase in response hours for the rulemaking resulting from the
rescission of Sec. Sec. 4.13(a)(4) and the modification of Sec. 4.5.
This amendment differs from that in the Proposal due to the
Commission's decision to retain the exemption set forth in Sec.
4.13(a)(3). The Commission is amending Collection 3038-0005 to allow
for an increase in response hours for the rulemaking associated with
new and modified compliance obligations under part 4 of the
Commission's regulations resulting from these revisions. The titles for
these collections are ``Part 3--Registration'' (OMB Control number
3038-0023) and ``Part 4--Commodity Pool Operators and Commodity Trading
Advisors'' (OMB Control number 3038-0005). Responses to this collection
of information will be mandatory.
Both amendments differ from those set forth in the Proposal due to
comments received asserting that, absent harmonization of the
Commission's compliance regime for CPOs with that of the SEC for
registered investment companies, entities operating registered
investment companies that would be required to register with the
Commission would not be able to comply with the Commission's
regulations and would have to discontinue its activities involving
commodity interests.\189\ The Commission acknowledges that there are
certain provisions of its compliance regime that conflict with that of
the SEC and that it would not be possible to comply with both. For this
reason, the Commission is considering issuing a notice of proposed
rulemaking regarding the areas of potential harmonization between the
Commission's compliance obligations and those of the SEC. Until such
time as the harmonized compliance regime is adopted as final rules, the
Commission will not be requiring compliance with the provisions of
Sec. 4.5 for registered investment companies. Therefore, the
Commission is excluding Sec. 4.5 compliance from the PRA burden
calculation for these final rules, and is recalculating the information
collection requirements associated with Sec. 4.5 in the proposed
harmonized compliance rules.
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\189\ See, e.g., ICI Letter, Fidelity Letter, Dechert III
Letter.
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The Commission will protect proprietary information according to
the Freedom of Information Act (``FOIA'') and 17 CFR part 145,
``Commission Records and Information.'' In addition, section 8(a)(1) of
the CEA strictly prohibits the Commission, unless specifically
authorized by the CEA, from making public ``data and information that
would separately disclose the business transactions or market position
of any person and trade secrets or names of customers.'' \190\ The
Commission is also required to protect certain information contained in
a government system of records according to the Privacy Act of
1974.\191\
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\190\ See 7 U.S.C. 12.
\191\ See 5 U.S.C. 552a.
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1. Additional Information Provided by CPOs and CTAs
a. OMB Control Number 3038-0023
Part 3 of the Commission's regulations concern registration
requirements. The Commission is amending existing Collection 3038-0023
to reflect the obligations associated with the registration of new
entrants, i.e., CPOs that were previously exempt from registration
under Sec. Sec. 4.5 and 4.13(a)(4), that had not previously been
required to register. The Commission is omitting those CPOs continuing
to claim relief under Sec. 4.13(a)(3), as that section will remain
effective, and those CPOs that would be required to register under
revised Sec. 4.5, as those entities will not be able to register and
comply with the Commission's compliance obligations until such time as
the harmonization of its requirements with those of SEC is finalized.
Because the registration requirements are in all respects the same as
for current registrants, the collection has been amended only insofar
as it concerns the increased estimated number of respondents and the
corresponding estimated annual burden.
Accordingly, the Commission is amending existing Collection 3038-
0023 to provide, in the aggregate:
Estimated number of respondents: 75,425.
[[Page 11273]]
Annual responses by each respondent: 75,932.
Estimated average hours per response: 0.09.
Annual reporting burden: 6,833.9.
In addition to the reporting burdens, each CPO or CTA not
previously subject to registration will be obligated to submit a $200
registration fee, an $85 registration fee for each associated person,
and a $15 fee for fingerprinting services for each associated person.
Those entities that do not already provide certified annual reports
will now incur public accounting costs as a result of the newly adopted
rules requiring certification. Moreover, the Commission anticipates
that reporting entities may hire external service providers, such as
law firms or accounting firms, to prepare and submit some of the
documents required both in Collection 3038-0023 and in Collection 3038-
0005, which is accounted for below.
b. OMB Control Number 3038-0005
Part 4 of the Commission's regulations concerns the operations of
CTAs and CPOs, and the circumstances under which they may be exempted
or excluded from registration. Under existing Collection 3038-0005 the
estimated average time spent per response has not been altered;
however, adjustments have been made to the collection to account for
current information available from NFA concerning CPOs and CTAs
registered or claiming exemptive relief under the part 4 regulations,
and the new burden expected under proposed Sec. 4.27. The Commission
estimates that a total of 300 entities annually will file the Notice of
Exemption from CTA Registration under Sec. 4.14(a)(8), with an
estimated burden of 0.5 hours per notice filing. An estimated 253
entities will annually file 7,890 Notices of Exclusion from CPO
Definition under Sec. 4.5, with an estimated burden of 0.5 hours per
notice filing. The rules also require certain reports by each entity
registered as a CPO or CTA. These include certain disclosure documents,
pool account statements and pool annual reports, and requests for
extensions of the annual report deadline. The Commission estimates that
180 entities will prepare an average of 1.5 pool account statements as
required under Sec. 4.22(a) an average of 9 times per year, with a
per-response burden of 3.85 hours. The Commission estimates that these
same 180 entities will prepare and file an average of 1.5 annual
reports, with a burden of 9.58 hours per report. In addition, the
Commission anticipates that 962 entities will file a request for a
deadline extension for the annual report each year, with a burden of
0.5 hours per request.
These burden estimates, together with those associated with the
increases necessary to account for the filing of forms CPO-PQR, PF, and
CTA-PR discussed below, will result in an amendment to Collection 3038-
0005 to provide, in the aggregate:
Estimated number of respondents: 43,168.
Annual responses for all respondents: 61,868.
Estimated average hours per response: 8.77.
Annual reporting burden: 257,635.8.
Proposed Sec. 4.27 is expected to be the main reason for the
increased burden under Collection 3038-0005.
The Commission has amended its burden estimates with respect to
Form CPO-PQR to reflect the fact that dually registered entities that
operate pools that are not private funds may report the activities for
such funds on Form PF.\192\ The Commission expects that any entity that
is eligible to file form PF will file that form and not the form CPO-
PQR, and has excluded from the estimates for form CPO-PQR those
entities. As most of the burden associated with filing form PF for CPOs
newly required to register with the Commission has been accounted for
by the Commission in an information collection request associated with
a rulemaking adopted jointly with the SEC, the amendment to Collection
3038-0005 accounts only for the burden of filing form PF by dually
registered CPOs for pools that are not private funds as defined in the
joint rulemaking.
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\192\ Based on information that the Commission received from
registrants on their annual financial report filings, the Commission
determined that \1/3\ of all pools reporting to the Commission in
2009 reported gains or losses from securities or a combination of
securities and futures. Based on the provisions of Form PF, which
permits filers of the form to file with respect to commodity pools
that are not private funds, the Commission anticipates that all
entities entitled to file Form PF for their commodity pools will do
so, as it is less burdensome on the filer. Therefore, the Commission
has included burden estimates for CPOs to file Form PF for their
commodity pools that are not private funds, which is an incremental
increase over the burden imposed by the obligation to file Form PF
for the entity's private funds.
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i. Comments on Sec. 4.27 Reporting Requirements
The Commission received numerous comments in response to proposed
Sec. 4.27, and in response has adopted a number of cost-mitigating
measures. Several commenters questioned whether the data collection was
necessary for the Commission's oversight of its registrants.\193\
Others asserted that certain groups, such as registered investment
companies or family offices, should be exempted from completing the
data collection.\194\ In the Commission's judgment, in order to fulfill
the Commission's systemic-risk mitigation mandate, it is necessary to
obtain information from the full universe of registrants to fully
assess the activities of CPOs and CTAs in the derivatives markets.
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\193\ See Fidelity Letter; and AIMA Letter.
\194\ See ICI Letter; AIMA Letter; and K&L Letter.
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With respect to the assertion that registered investment companies
should not be required to file form CPO-PQR, the Commission believes
that it is important to collect the data in form CPO-PQR from
registered investment companies whose activities require CPO
registration to assess the risk posed by such investment vehicles in
the derivatives markets and the financial system generally. In this
respect, the Commission intends to require the same information from
the CPOs of registered investment companies as it is requiring from
other registered CPOs. Additionally, the Commission notes that to the
extent that the entity registered as the CPO for the registered
investment company is registered as an investment adviser and is
required to file Form PF with the SEC, the activities of the registered
investment company may be reported on Form PF rather than form CPO-PQR.
The Commission further believes that the same reasoning applies
with respect to the collection of data from family offices. To enable
the Commission to evaluate a potential family offices exemption
following the collection and analysis of data regarding their
activities, the Commission believes that it is essential that family
offices remain subject to the data collection requirements.
One commenter recommended that the Commission clarify the filing
obligations for CPOs and CTAs that are required to file form PF with
the SEC and streamline the reporting obligations.\195\ Another
commenter argued that a very large private fund that has a limited
amount of derivatives trading should not be subject to schedule C of
form CPO-PQR.\196\
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\195\ See Fidelity Letter.
\196\ See AIMA Letter; see also, SIFMA Letter; and Fidelity
Letter.
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As stated in the Proposal, CPOs that are dually registered with the
SEC and that file form PF must still file schedule A, containing basic
demographic information, with the Commission, and CTAs must still file
form CTA-PR. The Commission intends to adopt Sec. 4.27 as proposed and
permit dual registrants to
[[Page 11274]]
file form PF with the SEC in lieu of completing schedules B and/or C of
form CPO-PQR.
However, the Commission did not intend to require very large dual
registrants to file anything more than the general identifying
information required on schedule A with the Commission, and neither
Sec. 4.27 nor the forms require dual registrants to file schedules B
or C if they are filing form PF. Similarly, the Commission is not
adopting schedule B from form CTA-PR, and therefore, will be limiting
the information collected from registered CTAs to demographic data and
the names of the pools advised by the CTA. These measures will mitigate
costs to market participants by limiting the number of registrants that
must file these forms with the Commission.
One commenter questioned whether the information collected on forms
CTA-PR and CPO-PQR will provide the Commission with real-time data that
will enable it to have an accurate and timely picture of a CTA's
activities and operating status.\197\ Another commenter questioned
whether the Commission possessed the staffing and financial resources
necessary to meaningfully use such data as part of its oversight.\198\
The Commission recognizes the limitations of the data collection
instruments with respect to the timeliness of the information
requested. The Commission believes, however, that the forms strike the
appropriate balance between the time needed to compile complex data and
the Commission's need for timely information. Information that is less
than real-time is nevertheless useful in assisting the Commission in
overseeing registrants as it will provide additional information upon
which the Commission can base future program adjustments to ensure
efficient deployment of the Commission's resources.
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\197\ See Barnard Letter.
\198\ See Dechert Letter.
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As an offset to the costs otherwise associated with additional
reporting, the Commission intends for the data to be collected from
registrants in an electronic format. The Commission anticipates that
electronic data filing will be less time-intensive and should lower
compliance costs for participants, as well as processing costs for the
Commission. Moreover, the Commission believes that, over time,
participants will develop certain efficiencies in the filing of their
annual CPO-PQR and CTA-PR forms, allowing costs to continue to decrease
over time. Further, the Commission recognizes that the resources
available to it are variable. As a further cost-mitigating measure, the
Commission will leverage any limits on its resources through its
coordination with NFA to accomplish the analysis necessary to make full
use of the data collected from Commission registrants.
The Commission received several comments regarding the appropriate
reporting thresholds for the various schedules of form CPO-PQR.\199\
The commenters stated that $150 million in assets under management was
too low of a threshold for entities to be categorized as mid-sized and
required to file schedule B. Rather, the commenters urged the
Commission to increase the threshold to $500 million in assets under
management.\200\ These commenters also suggested that the Commission
increase the threshold for large CPOs to $5 billion in assets under
management.\201\
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\199\ See AIMA Letter; MFA II Letter; Seward Letter. See also,
AIMA II Letter.
\200\ See AIMA Letter.
\201\ See AIMA Letter; MFA II Letter; and Seward Letter.
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The Commission believes that $150 million in assets under
management is still the appropriate threshold for mid-sized CPOs. The
Commission will retain this threshold because it is consistent with the
threshold for advisers filing section 1 of form PF, which is
substantively similar to schedule B of form CPO-PQR, and it will ensure
comparable treatment of entities of similar magnitude. In addition, the
Commission has decided not to increase the large CPO threshold to $5
billion. The Commission has decided, however, to increase the threshold
for large CPOs from $1 billion to $1.5 billion. The Commission
anticipates that increasing the threshold to $1.5 billion will lower
costs by reducing the number of CPOs required to file schedule C of
form CPO-PQR, while still capturing data concerning a substantial
portion of the assets under management by registered CPOs. The
Commission believes that increasing the threshold beyond $1.5 billion,
however, could limit the Commission's access to information necessary
to oversee entities that could pose a risk to the derivatives markets
or the financial system as a whole.
In response to comments, the Commission has also determined to
mitigate costs and promote efficiency by modifying the frequency of
reporting for filers of form CPO-PQR. As adopted, all CPOs other than
large CPOs will be required to file schedule A on an annual basis; mid-
size CPOs will be required to file schedule B on an annual basis; and
large CPOs will be required to file schedules A, B, and C on a
quarterly basis.
The Commission received several comments asserting that the 15-day
period for reporting was not sufficient to permit reporting CPOs to
complete and file the form and all suggested extending the period to 30
or 45 days.\202\ The Commission agrees that reporting CPOs will need
additional time in which to submit the various schedules of form CPO-
PQR. In a further effort to reduce costs to participants, all CPOs
other than large CPOs will be required to file schedule A within 90
days of the end of the calendar year. This time period was chosen for
efficiency and cost mitigation inasmuch as it coincides with the annual
questionnaire required by NFA of its entire population of member CPOs
and with the vast majority of annual report filings for commodity
pools. Moreover, because the Commission has transferred the pool
position information from schedule A to schedule B, the Commission
believes that CPOs should be able to comply with filing basic
demographic data within 90 days.
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\202\ See NFA Letter; Seward Letter; and AIMA Letter.
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For schedule B, mid-sized CPOs are required to submit that schedule
within 90 days; the Commission believes this is an adequate time period
for compiling and reporting that schedule. The Commission notes that
CPOs are generally required to file annual reports for their pools
within 90 days of their fiscal year end, most of which coincide with
the calendar year end. The Commission believes that the alignment of
pools' fiscal years with the calendar year end should facilitate the
preparation of schedule B and reduce the burden imposed on mid-size
CPOs because some of the information required will be similar to that
included in a pool's annual financial statements.
With respect to the quarterly reporting by large CPOs on schedules
A, B, and C, the Commission believes that 60 days is a sufficient
amount of time to complete those schedules for large CPOs. The
Commission notes that the entities required to file on a quarterly
basis have a significant amount of assets under management, and as
such, the Commission anticipates that such entities routinely generate
the type of information requested on schedules B and C as part of their
internal governance. Accordingly, the Commission will require large
CPOs to file schedules A, B, and C within 60 days following the end of
the reporting period as defined in form CPO-PQR.
[[Page 11275]]
The Commission received several comments regarding the content of
form CTA-PR.\203\ Most commenters urged the Commission to eliminate the
form in its entirety.\204\ The Commission does not believe that the
complete elimination of form CTA-PR is appropriate; however, the
Commission agrees that schedule B of the form contains redundant
information that will already be collected through form CPO-PQR.
Accordingly, the Commission has decided to adopt only schedule A of
form CTA-PR. In so doing, the Commission believes the burden on CTAs
should be significantly reduced. Because form CTA-PR will be limited to
demographic data, the Commission believes that it is appropriate for
CTAs to file the form on an annual basis within 45 days of the end of
the fiscal year.
---------------------------------------------------------------------------
\203\ See e.g., IAA Letter; MFA II Letter; AIMA Letter; SIFMA
Letter; and Fidelity Letter.
\204\ Id.
---------------------------------------------------------------------------
Finally, because the regulations have been modified to allow dually
registered entities to file only form PF (plus the first schedule A of
form CPO-PQR) for all of their commodity pools, even those that are not
``private funds,'' the Commission expects that such entities should not
be burdened by the costs of dual registration and dual filing.
ii. Information Collection Estimates for Forms CPO-PQR, PF, and CTA-PR
The Commission expects the following burden with respect to the
various schedules of Forms CPO-PQR, PF, and CTA-PR:
Form CPO-PQR: Schedule A:
Estimated number of respondents (excluding large CPOs): 3,890.
Annual responses by each respondent: 1.
Estimated average hours per response: 6.
Annual reporting burden: 23,340.
Estimated number of respondents (large CPOs): 170.
Annual responses by each respondent: 4.
Estimated average hours per response: 6.
Annual reporting burden: 4,080.
Form CPO-PQR: Schedule B:
Estimated number of respondents (mid size CPOs): 440.
Annual responses by each respondent: 1.
Estimated average hours per response: 4.
Annual reporting burden: 1,760.
Estimated number of respondents (large CPOs): 170.
Annual responses by each respondent: 4.
Estimated average hours per response: 4.
Annual reporting burden: 2,720.
Form CPO-PQR: Schedule C:
Estimated number of respondents: 170.
Annual responses by each respondent: 4.
Estimated average hours per response: 18.
Annual reporting burden: 12,240.
Form PF (non-large CPOs):
Estimated number of respondents: 220.
Annual responses by each respondent: 1.
Estimated average hours per response: 4.
Annual reporting burden: 880.
Form PF (large CPOs):
Estimated number of respondents: 90.
Annual responses by each respondent: 4.
Estimated average hours per response: 18.
Annual reporting burden: 6,480.
Form CTA-PR:
Estimated number of respondents: 450.
Annual responses by each respondent: 1.
Estimated average hours per response: 0.5.
Annual reporting burden: 225.
C. Considerations of Costs and Benefits
The Commission has historically exercised its authority to exempt
certain categories of entity from the CPO and CTA registration
requirement set forth in Section 4m(1) of the CEA, which states that it
is otherwise ``unlawful for any commodity trading advisor or commodity
pool operator, unless registered under this Act'' to conduct business
in interstate commerce.\205\ Exempted entities have included certain
investment companies registered with the SEC pursuant to the Investment
Company Act of 1940, and certain entities whose only participants are
``qualified eligible persons.'' \206\ This system of exemptions was
appropriate because such entities engaged in relatively little
derivatives trading, and dealt exclusively with qualified eligible
persons, who are considered to possess the resources and expertise to
manage their risk exposure.
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\205\ 7 U.S.C. 6m.
\206\ 17 CFR Sec. Sec. 4.5(a)(1), 4.13(a)(4).
---------------------------------------------------------------------------
In the Commission's judgment, changed circumstances warrant
revisions to these rules. The Commission is aware, for example, of
increased derivatives trading activities by entities that have
previously been exempted from registration with the Commission, such
that entities now offering services substantially identical to those of
registered entities are not subject to the same regulatory oversight.
Meanwhile, the Dodd-Frank Act has given the Commission a more robust
mandate to manage systemic risk and to ensure safe trading practices by
entities involved in the derivatives markets, including qualified
eligible persons and other participants in commodity pools. Yet, while
the Commission must execute this mandate, there currently is no source
of reliable information regarding the general use of derivatives by
registered investment companies.
The Commission, therefore, is adopting a new registration and data
collection regime for CPOs and CTAs that is consistent with the data
collection required under the Dodd-Frank Act. In these final rules, the
adopted amendments to part 4 of the Commission's regulations will do
the following: (A) Rescind the exemption from CPO registration provided
in Sec. 4.13(a)(4) of the Commission's regulations; (B) rescind relief
from CTA registration for those CTAs who advise pools with relief under
Sec. 4.13(a)(4); (C) rescind relief from the certification requirement
for annual reports provided to operators of certain pools only offered
to qualified eligible persons (``QEPs'') under Sec. 4.7(b)(3); (D)
modify the criteria for claiming relief under Sec. 4.5 of the
Commission's regulations; (E) require the annual filing of notices
claiming exemptive relief under Sec. 4.5, Sec. 4.13, and Sec. 4.14
of the Commission's regulations; and (F) require additional risk
disclosures for CPOs and CTAs regarding swap transactions and, certain
conforming amendments. By these amendments, the Commission seeks to
eliminate informational ``blind spots,'' which will benefit all
investors and market participants by enhancing the Commission's ability
to form and frame effective policies and procedures.
Section 15(a) \207\ of the CEA requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing an order. Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. To the extent that these new regulations reflect the
statutory requirements of the Dodd-
[[Page 11276]]
Frank Act, they will not create costs and benefits beyond those
resulting from Congress's statutory mandates in the Dodd-Frank Act.
However, to the extent that the new regulations reflect the
Commission's own determinations regarding implementation of the Dodd-
Frank Act's provisions, such Commission determinations may result in
other costs and benefits. It is these other costs and benefits
resulting from the Commission's own determinations pursuant to and in
accordance with the Dodd-Frank Act that the Commission considers with
respect to the Section 15(a) factors.
---------------------------------------------------------------------------
\207\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission has quantified estimated costs and benefits where it
is reasonably practicable to do so. The Commission notes that, unless
otherwise specified, all costs discussed herein are estimates based on
the Commission's knowledge of the operations and registration statuses
of CPOs and CTAs. Moreover, the Commission is obligated to estimate the
burden of and provide supporting statements for any collections of
information it seeks to establish under considerations contained in the
PRA, 44 U.S.C. 3501 et seq., and to seek approval of those requirements
from the OMB. Therefore, the estimated burden and support for the
collections of information in this this rulemaking, as well as the
consideration of comments thereto, are discussed in the PRA section of
this rulemaking and the information collection requests filed with OMB
as required by that statute. All estimates are based on average costs;
actual costs may vary depending on the entity's individual business
model and compliance procedures.
The Commission is sensitive to costs incurred by market
participants and has attempted in a variety of ways to minimize burdens
on affected entities. These include the Commission's efforts to
harmonize its compliance requirements with those of the SEC, including
through specific harmonizing provisions in the joint SEC-CFTC rule for
dually registered investment advisers, as well as through tailoring of
the current amendments.\208\ A number of other cost-mitigation measures
are discussed later in this section.
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\208\ See Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128 (Nov. 16, 2011).
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In its Proposal, the Commission invited commenters to ``to submit
any data and other information that they may have quantifying or
qualifying the costs and benefits of this proposed rule with their
comment letters.'' \209\ Many comments addressed the costs and benefits
of the proposed rule in qualitative terms. These comments are
considered below.
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\209\ 76 FR 7976, 7989 (Feb. 11, 2011).
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In the following discussion, the Commission sets forth its own
assessment of the benefits and costs of the amendments; addresses
relevant comments on the Proposal and alternatives to the Proposal
submitted by commenters; and evaluates the benefits and costs in light
of the five broad areas of market and public concern set forth in
Section 15(a) of the CEA. The analysis begins by addressing general
comments related to cost-benefit analysis in the context of the
Proposal as a whole, and then proceeds to examine the specific issues
according to the following three categories of regulation contained
within the Proposal: (1) registration (including changes to Sec. 4.5,
Sec. 4.13(a), and Sec. 4.14); (2) data collection (including the
adoption of forms CPO-PQR and CTA-PR); and (3) complementary amending
provisions (including changes to Sec. 4.7, Sec. 4.24, Sec. 4.34, and
parts 145 and 147).
1. General Comments
Several commenters claimed that the Commission did not provide a
sufficient consideration of costs and benefits in the Notice of
Proposed Rulemaking.\210\ One commenter noted that the cost-benefit
considerations focused on benefits that are already provided by other
federal securities laws, making the regulations duplicative.\211\
Another commenter asserted that until other rules, such as the further
definition of ``swaps,'' as well as capital and margin requirements,
have been finalized, it is not possible to determine the costs and
benefits of these rules.\212\ Other commenters suggested there be
another roundtable meeting to discuss the proposed rules.\213\
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\210\ See SIFMA Letter; USCC Letter; Reed Smith Letter; NFA
Letter; Invesco Letter; Dechert II Letter; and ICI Letter.
\211\ See ICI Letter.
\212\ See Dechert II Letter.
\213\ See Vanguard Letter; MFA Letter.
---------------------------------------------------------------------------
In response to these comments, the Commission has further
considered costs and benefits as they relate to the final rules. As
explained below in the discussion concerning dual SEC and Commission
registrants, the Commission believes that the benefits provided by
these rules are supplementary to, and not duplicative or redundant of,
benefits provided by the federal securities laws. The Commission does
not believe that the adoption of these regulations should be postponed
until after other regulations are finalized and believes that the costs
and benefits are sufficiently clear at this point and that delay is not
justified.\214\ In addition, the Commission has no reason to believe
that another roundtable meeting would yield information substantially
different from that gleaned from prior roundtables, comment letters,
and meetings with industry representatives.
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\214\ As noted above, however, the Commission agrees that it
should not implement the inclusion of swaps within the threshold
test prior to the effective date of such relevant final rules.
Therefore, it is the Commission's intention to delay the effective
date of the inclusion of swaps into the threshold calculation until
60 days after the final rules regarding the definition of ``swap''
and the delineation of the margin requirement for such instruments
are effective.
---------------------------------------------------------------------------
The Commission has determined that these amendments will create
additional compliance costs for affected participants. These costs
include, but may not be limited to, the cost to prepare and file new
forms CPO-PQR and CTA-PR; the cost to file an annual notice to claim
exemptive relief under Sec. Sec. 4.5, 4.13, and 4.14; the cost of
preparing, certifying, and submitting annual reports as required for
registrants; the cost of preparing required disclosure documents; the
cost of preparing and distributing account statements on a periodic
basis to participants; the cost of keeping certain records as required;
and the cost of registering as a CPO or CTA. These costs each relate to
collections of information subject to PRA compliance, and therefore
have been accounted for in the PRA section of this rulemaking and the
information collection requests filed with OMB as required by that
statute.
Notably, many of the benefits associated with the requirements
adopted or amended in these regulations are recognized not only by the
Commission in its mission to protect derivatives markets and the
participants in them but also by the industry. Several ``best
practices'' manuals highlight the benefits of being registered with the
Commission, preparing and disseminating risk disclosure documents,
confirming receipt of disclosure documents, and ensuring independent
audit of financial statements and annual reports.\215\ These benefits
include increased consumer
[[Page 11277]]
confidence in offered pools and funds as well as increased internal
risk management structures.
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\215\ See, e.g. ``Sound Practices for Hedge Fund Managers.''
Managed Funds Association (MFA). Washington DC, 2007.; ``Principles
and Best Practices for the Hedge Fund Industry.'' Investors
Committee Report to the President's Working Group on Financial
Markets, Washington DC, 2008.; and ``Best Practices for the Hedge
Fund Industry.'' Asset Managers Committee Report to the President's
Working Group on Financial Markets, Washington DC, 2009.
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2. Regulations Regarding Registration Requirements for CPOs and CTAs
As discussed above, the amendments to the registration provisions
under part 4 include rescissions of the exemptions for entities
functioning as commodity pools with only ``qualified eligible persons''
as participants and the exclusion of registered investment companies
under the Investment Company Act of 1940, unless those investment
companies fall below a certain threshold level of derivatives
investment activity. With respect to those entities that will continue
to claim exemption or exclusion from registration as CPOs or CTAs under
the rules, the amendments will also require annual reaffirmance of
those claims of exemption or exclusion.
a. Benefits of Registration Provisions
As discussed above in II.A.1, the Commission believes that
registration provides two significant interrelated benefits. First,
registration allows the Commission to ensure that entities with greater
than a de minimis level of participation in the derivatives markets
meet minimum standards of fitness and competency. Second, registration
provides the Commission and members of the public with a direct means
to address wrongful conduct by participants in the derivatives markets.
The Commission has direct authority to take punitive and/or remedial
action against registered entities for violations of the CEA or of the
Commission's regulations. The Commission also has the ability to deny
or revoke registration, thereby prohibiting an unfit individual or
entity from serving as an intermediary in the industry. Members of the
public also may access the Commission's reparations program to seek
redress for wrongful conduct by a Commission registrant.
The Commission believes that the registration procedures enacted as
part of its regulatory regime upgrade the overall quality of market
participants, which, in turn, strengthens the derivatives industry by
minimizing lost business due to customer dissatisfaction and by
reducing litigation arising from acts of market participants.
Therefore, the Commission believes that its registration requirements
further critical regulatory objectives and serve important public
policy goals.
By expanding the Commission's regulatory oversight of entities
performing the functions of CPOs and CTAs, the Commission believes that
the final rules related to registration will help to ensure that such
entities meet basic standards of competency and fitness, which in turn
will provide a greater level of protection to market participants.
Ensuring that CPOs and CTAs are qualified in the first instance--as
opposed to relying solely on after-the-fact enforcement actions to
deter and remedy misconduct--should reduce such instances of misconduct
and resulting litigation, and thereby promote overall market
confidence. Therefore, the Commission believes that its registration
requirements are integral to its regulatory objectives and are in the
public interest.
With specific respect to the annual reaffirmance requirement, this
amendment will promote transparency regarding the number of entities
either exempt or excluded from the Commission's registration and
compliance programs. One primary purpose of the Dodd Frank Act is the
promotion of transparency in the financial system, particularly in the
derivatives market. This requirement is consistent with and will
further that purpose. Finally, the annual notice requirement will
enable the Commission to determine whether exemptions and exclusions
should be modified, repealed, or maintained as part of the Commission's
ongoing assessment of its regulatory scheme.
These benefits--enhancing the quality of entities operating within
the market, and the screening of unfit participants from the markets--
are substantial, even if unquantifiable. Through registration, the
Commission will be better able to protect the public and markets from
unfit persons and conduct that may threaten the integrity of the
markets subject to its jurisdiction.
b. Costs of Registration Provisions
Because of the amendments to part 4 as adopted here, the Commission
recognizes that some participants who previously were excluded or
exempted from registering as a CPO or CTA will now be required to
register with the Commission through NFA. In addition to costs
associated with registration accounted for under the PRA, which one
commenter said would ``vary significantly depending on a range of
factors, including the number of employees who will need to pass
examinations, the number of funds advised, investment strategy and
complexity, existing IT systems, and whether or not an adviser is
already registered or authorized and subject to a different regulatory
regime,'' \216\ the commenter estimated ongoing costs to be in the
range of $150,000 to $250,000 per year, a substantial part of which
would be made up of additional compliance personnel, information
technology development and legal/accounting advice that will be
required, and again vary significantly depending on the factors
mentioned above.\217\ The Commission presents these estimates for the
consideration of affected entities, reiterating the high variability of
costs depending on the factors enumerated by the commenter. This
variability is one reason the Commission presented its own estimates of
costs on a per-requirement basis; affected entities should be aware
that the total cost of registration and compliance will most likely be
the sum of any number of the estimates presented in this section and
under the PRA. In addition to the information collection costs
addressed by the Commission under the PRA, entities that will be
required to register with the Commission also will become subject to
NFA rules and to NFA audit procedures. NFA assesses annual membership
dues on CPOs and CTAs, currently $750, and charges $90 for the National
Commodity Futures Examination (NCFE) or Series 3 Examination for each
AP. The Commission understands that NFA audits CPOs and CTAs, on
average, every two to three years, though the frequency of audit
depends greatly on individual risk factors, and NFA generally conducts
an audit within the first year following registration of an
entity.\218\ The cost of such an audit may be incurred by the CPO or
CTA through an ``audit fee'' imposed by NFA; however, the audit fee
varies greatly by individual entity and individual audit and thus is
difficult to quantify on any sort of aggregated basis. Notwithstanding
the difficulty of quantifying such a burden, the Commission notes this
cost will most likely arise in the first year of registration and on
average every few years thereafter, and entities should expect such a
fee to be incurred.
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\216\ See AIMA II Letter.
\217\ Id.
\218\ For more information on audit procedures, visit the NFA
Web site, currently at http://www.nfa.futures.org/NFA-compliance/NFA-general-compliance-issues/nfa-audits.HTML.
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c. Comments Regarding Registration Provisions
1. Sec. 4.5 Amendments
Commenters who opposed the changes to Sec. 4.5 claimed that
requiring registered investment companies to register and comply with
the Commission's regulatory regime would
[[Page 11278]]
provide no benefit, because such entities are already subject to
comprehensive regulation by the SEC.\219\ The Commission disagrees.
---------------------------------------------------------------------------
\219\ See, e.g., ICI Letter.
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While the Commission and the SEC share many of the same regulatory
objectives, including protecting market users and the public from fraud
and manipulation, the Commission administers the CEA to foster open,
competitive, and financially sound commodity and derivatives markets.
The Commission's programs are structured and its resources deployed to
meet the needs of the markets it regulates. In light of this
Congressional mandate, it is the Commission's view that entities
engaging in more than a de minimis amount of derivatives trading should
be required to register with the Commission. The alternative approaches
suggested by commenters would, as discussed above, detract from the
benefits of registration.
As also discussed above, the Commission is aware that currently
unregistered entities are offering services substantially identical to
those of registered CPOs. Several commenters also asserted that
modifying Sec. 4.5 would result in a significant burden on entities
required to register with the Commission without any meaningful benefit
to the Commission.\220\ The Commission recognizes that significant
burdens may arise from the modifications to Sec. 4.5; however, the
Commission believes, as discussed throughout this release, that
entities that are offering services substantially identical to those of
a registered CPO should be subject to substantially identical
regulatory obligations.
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\220\ See ICI Letter; Vanguard Letter; Reed Smith Letter;
AllianceBernstein Letter; USAA Letter; PMC Letter; IAA Letter;
Dechert II Letter; Janus Letter; STA Letter; Invesco Letter; and
Equinox Letter.
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Nevertheless, the Commission has not eliminated altogether the
exemption available under Sec. 4.5. Where an entity's trading does not
exceed five percent of the liquidation value of its portfolio, that
entity will remain exempt from registration. In the Commission's
judgment, trading exceeding five percent of the liquidation value of a
portfolio evidences a significant exposure to the derivatives
markets.\221\ This threshold was adopted by the Commission in its
earlier enactment of Sec. 4.13(a)(3).\222\ In promulgating that
exemption for de minimis activity, the Commission determined that five
percent is an appropriate threshold beyond which oversight by the
Commission is warranted.\223\ Because current data and information does
not allow the Commission to evaluate the difference in market impact at
various threshold levels \224\ the Commission believes it is prudent to
maintain the current threshold level. Further, as discussed above, no
facts have been put before the Commission that would warrant deviation
from the five-percent threshold, including data respecting the costs
and benefits of the same. The Commission also received numerous
comments on the proposed addition of a trading threshold to the
exclusion under Sec. 4.5.\225\ Some commenters stated that a five
percent de minimis threshold is too low in light of the Commission's
determination to include swaps within the measured activities. Although
these commenters presented alternatives to this five percent threshold
(some said twenty percent would be more reasonable, for example) the
Commission believes, as stated in the Proposal, that trading exceeding
five percent of the liquidation value of a portfolio evidences a
significant exposure to the derivatives markets.\226\ Moreover, in its
adoption of the exemption under Sec. 4.13(a)(3),\227\ the Commission
previously determined that five percent is an appropriate threshold to
determine whether an entity warrants oversight by the Commission.\228\
Current data and information does not allow the Commission to evaluate
the difference in market impact at various threshold levels; \229\
thus, the Commission believes it is prudent to maintain the current
threshold level. Commenters also recommended that the Commission
exclude from the threshold calculation various instruments including
broad-based stock index futures, security futures generally, or
financial futures contracts as a whole.\230\ As discussed above, the
Commission does not believe that a meaningful distinction can be drawn
between those security or financial futures and other categories of
futures for the purposes of registration; thus, the Commission does not
believe that exempting any of these instruments from the threshold
calculation is appropriate.
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\221\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the]
Commission believes that it is possible for a commodity pool to have
a portfolio that is sizeable enough that even if just five percent
of the pool's portfolio were committed to margin for futures, the
pool's portfolio could be so significant that the commodity pool
would constitute a major participant in the futures market'').
\222\ 17 CFR 4.13(a)(3).
\223\ 68 FR 47221, 47225 (Aug. 8, 2003).
\224\ The Commission currently only has information on the
positions held by CPOs in futures markets, i.e., those entities
already registered as CPOs, as opposed to those excluded from the
definition of CPO under Sec. 4.5. The Commission does not have
access to information on the total liquidation value of funds
operated by registered CPOs or those operated by excluded CPOs,
values that are needed to determine the universe of entities
affected by one particular percentage threshold versus another.
These data limitations are one reason why the Commission is pursuing
additional data collection initiatives under these final rules.
\225\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed
Smith Letter; AllianceBernstein Letter; AII Letter; STA Letter;
Janus Letter; PMC Letter; USAA Letter; Fidelity Letter; SIFMA
Letter; Dechert III Letter; Rydex Letter; USCC Letter; Sidley
Letter; NFA Letter; Campbell Letter; AQR Letter; Steben Letter; ICI
II Letter; and AII Letter.
\226\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the]
Commission believes that it is possible for a commodity pool to have
a portfolio that is sizeable enough that even if just five percent
of the pool's portfolio were committed to margin for futures, the
pool's portfolio could be so significant that the commodity pool
would constitute a major participant in the futures market'').
\227\ 17 CFR 4.13(a)(3).
\228\ 68 FR 47221, 47225 (Aug. 8, 2003).
\229\ The Commission currently only has information on the
positions held by CPOs in futures markets, i.e., those entities
already registered as CPOs, as opposed to those excluded from the
definition of CPO under Sec. 4.5. The Commission does not have
access to information on the total liquidation value of funds
operated by registered CPOs or those operated by excluded CPOs,
values that are needed to determine the universe of entities
affected by one particular percentage threshold versus another.
These data limitations are one reason why the Commission is pursuing
additional data collection initiatives under these final rules.
\230\ See Rydex Letter; Invesco Letter; and ICI Letter.
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Several panelists at the Roundtable suggested that, instead of a
trading threshold that is based on a percentage of margin, that the
Commission should focus solely on entities that offer ``actively
managed futures'' strategies.\231\ As discussed in section II.A.2, the
Commission does not find it appropriate to establish a differentiation
between ``active'' and ``passive'' derivative investments because, in
addition to other reasons,\232\ establishing such differentiation would
introduce an element of subjectivity to an otherwise objective standard
and make the threshold more difficult to interpret, apply, and enforce.
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\231\ See Transcript of CFTC Staff Roundtable Discussion on
Proposed Changes to Registration and Compliance Regime for Commodity
Pool Operators and Commodity Trading Advisors (``Roundtable
Transcript''), at 19, 25, 30, 76-77, 87-90, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.
\232\ Additional reasons for not accepting this alternative are
discussed in section II.A.2 of this release.
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One commenter suggested that the Commission should consider the
adoption of an alternative test that would be identical to the
aggregate net notional value test that is currently available under
Sec. 4.13(a)(3)(ii)(B).\233\ Section 4.13(a)(3)(ii)(B) provides that
an entity can claim exemption from
[[Page 11279]]
registration if the net notional value of its fund's derivatives
trading does not exceed one hundred percent of the liquidation value of
the fund's portfolio.\234\
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\233\ See Dechert III Letter.
\234\ 17 CFR 4.13(a)(3)(ii)(B).
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Conversely, several panelists at the Roundtable opposed such a
test, stating that it was not a reliable means to measure an entity's
exposure in the market.\235\ As stated previously herein, the
Commission believes that the adoption of an alternative net notional
test will provide consistent standards for relief from registration as
a CPO for entities whose portfolios only contain a limited amount of
derivatives positions and will afford registered investment companies
with additional flexibility in determining eligibility for exclusion.
Therefore, the Commission will adopt an alternative net notional test,
consistent with that set forth in Sec. 4.13(a)(3)(ii)(B) as amended
herein, for registered investment companies claiming exclusion from the
definition of CPO under Sec. 4.5.
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\235\ See Roundtable Transcript at 69-71.
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The Commission also received several comments supporting both the
imposition of a trading threshold in general and the five percent
threshold specifically.\236\ At least one commenter suggested, however,
that the Commission consider requiring registered investment companies
that exceed the threshold to register, but not subjecting them to the
Commission's compliance regime beyond requiring them to be subject to
the examination of their books and records, and examination by
NFA.\237\ In effect, this commenter requested that the Commission
subject such registrant to ``notice registration.'' The Commission
believes that adopting the approach proposed by the commenter would not
materially change the information that the Commission would receive
regarding the activities of registered investment companies in the
derivatives markets, which is one of the Commission's purposes in
amending Sec. 4.5. Moreover, a type of notice registration would not
provide the Commission with any real means for engaging in consistent
ongoing oversight. Notwithstanding such notice registration, the
Commission would still be deemed to have regulatory responsibility for
the activities of these registrants. In the Commission's view, notice
registration does not equate to an appropriate level of oversight. For
that reason, the Commission has determined not to adopt the alternative
proposed by the commenter. The Commission is adopting the amendment to
Sec. 4.5 regarding the trading threshold without modification for the
reasons stated herein and those previously discussed in the Proposal.
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\236\ See NFA Letter, Campbell Letter, AQR Letter, and Steben
Letter.
\237\ See AQR Letter.
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2. Sec. Sec. 4.13(a)(3) and (a)(4) Rescissions
In addition to the comments that the Commission received regarding
the specific parts of the Proposal rescinding Sec. Sec. 4.13(a)(3) and
(a)(4), the Commission received numerous comments regarding the
proposed rescissions generally.\238\ Broadly, the comments opposed the
rescission of the provisions. In the Proposal, the Commission proposed
rescinding the ``de minimis'' exemption in Sec. 4.13(a)(3). The
Commission received ten comments specifically on this aspect of the
Proposal, which consistently urged the Commission to retain a de
minimis exemption. As discussed above in section II.C.2, the
Commission, after consideration of the comments and the Commission's
stated rationale for proposing to rescind the exemption in Sec.
4.13(a)(3), has determined to retain the ``de minimis'' exemption
currently set forth in that section without modification.
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\238\ See NYSBA Letter; Skadden Letter; MFA Letter; Katten
Letter; Fidelity Letter; Dechert Letter; AIMA Letter; AIMA II
Letter; IAA Letter; SIFMA Letter; HedgeOp Letter; PIC Letter; and
Seward Letter.
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Several commenters asserted that rescission was not necessary
because the Commission has the means to obtain any needed information
from exempt CPOs through its large trader reporting requirements and
its special call authority.\239\ Although the Commission has those
means, neither of those rules were intended to provide the kind of data
requested of registered entities on forms CPO-PQR or CTA-PR with the
regularity proposed under Sec. 4.27.
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\239\ See Skadden Letter; Katten Letter; and MFA Letter.
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Another commenter asserted that the compliance and regulatory
obligations under the Commission's rules are burdensome for private
businesses and would unnecessarily distract entities from their primary
focus of managing client assets.\240\ The Commission believes that
regulation is necessary to ensure a well functioning market and to
provide protection of those clients. The Commission further believes
that the compliance regime that the Commission has adopted strikes the
appropriate balance between limiting the burden placed on registrants
and enabling the Commission to carry out its duties under the Act.
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\240\ See MFA Letter; Seward Letter; and Katten Letter.
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In the Proposal, the Commission also proposed to rescind the
exemption in Sec. 4.13(a)(4) for operators of pools that are offered
only to individuals and entities that satisfy the qualified eligible
person standard in Sec. 4.7 or the accredited investor standard under
the SEC's Regulation D.\241\ Several commenters argued that the
Commission should consider retaining the exemption in Sec. 4.13(a)(4)
for funds that do not directly invest in commodity interests, but do so
through a fund of funds structure, and who are advised by an SEC
registered investment adviser. The Commission has not developed a
comprehensive view regarding the role of funds of funds in the
derivatives markets, in part, due to a lack of data regarding their
investment activities. The Commission, therefore, believes that it is
prudent to withhold consideration of a fund of funds exemption until
the Commission has received data regarding such firms on forms CPO-PQR
and/or CTA-PR, as applicable, to enable the Commission to better assess
the universe of firms that may be appropriate to include within the
exemption, should the Commission decide to adopt one. Therefore, the
Commission declines to adopt the commenter's alternative to provide an
exemption for funds of funds at this time.
One commenter argued that rescission is not necessary because any
fund that seeks to attract qualified eligible persons is already
required to maintain oversight and controls that exceed those mandated
by part 4 of the Commission's regulations such that any regulation
imposed would be duplicative and unnecessarily burdensome.\242\ The
commenter primarily focused on the significant level of controls that
the fund operator implements independent of regulation. The Commission
believes that, contrary to the commenter's arguments as to the import
of that fact, such controls and internal oversight should make
compliance with the Commission's regulatory regime easier and cheaper
rather than more burdensome. If the information required to be
disclosed under the Commission's regulations is to a large extent
already being disclosed by the firm, the Commission anticipates that
this would limit the costs of compliance to those costs directly
involved with formatting such information as required by the
Commission's disclosure and reporting
[[Page 11280]]
rules. The Commission adopts the rescission of Sec. 4.13(a)(4) as
proposed.
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\242\ See Cranwood Letter.
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The Commission has also elected to mitigate costs by phasing in
gradually the rescission of Sec. 4.13(a)(4). As discussed in section
II.C.5, in response to certain comments, the Commission will implement
the rescission of Sec. 4.13(a)(4) for all entities currently claiming
exemptive relief thereunder on December 31, 2012, but the rescission
will be implemented for all other CPOs upon the effective date of this
final rulemaking. This timeline reflects the Commission's belief that
entities currently claiming relief under Sec. 4.13(a)(4) should be
capable of becoming registered and complying with the Commission's
regulations within 11 months following the issuance of the final rule.
For entities that are formed after the effective date of the
rescission, the Commission expects the CPOs of such entities to comply
with the Commission's regulations upon formation and commencement of
operations.
3. Annual Notice of Exemption or Exclusion Requirement
The amendments will require annual reaffirmance of any claim of
exemption or exclusion from registration as a CPO or CTA.\243\ In the
Proposal, the Commission stated that an annual notice requirement would
promote transparency, a primary purpose of the Dodd Frank Act,
regarding the number of entities either exempt or excluded from the
Commission's registration and compliance programs. Moreover, the
Commission stated that an annual notice requirement would enable the
Commission to determine whether exemptions and exclusions should be
modified, repealed, or maintained as part of the Commission's ongoing
assessment of its regulatory scheme.
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\243\ 76 FR 7976, 7986 (Feb. 12, 2011).
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Two commenters suggested that the 30-day time period for filing was
not adequate to enable firms to comply.\244\ One commenter proposed a
60-day time period,\245\ whereas the other commenter proposed 90 days
as the necessary amount of time.\246\ As a further cost-mitigating
measure, and for the reasons discussed in section II.D, the Commission
has elected to extend the filing period from 30 days to 60 days.
Further, the Commission will adopt the annual notice requirement with
one significant modification designed, among other things, to mitigate
costs--that the notice be filed at the end of the calendar year and not
the anniversary of the original filing. The Commission believes this
alternative presented by a commenter will be more operationally
efficient.\247\
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\244\ See NFA Letter; and SIFMA Letter.
\245\ See NFA Letter.
\246\ See SIFMA Letter.
\247\ See NFA Letter.
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d. Section 15(a)
In this section, the Commission considers the costs and benefits of
its actions in light of five broad areas of market and public concern
set forth in Sec. 15(a) of the CEA: (1) protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations.
1. Protection of Market Participants and the Public
Registration provides many benefits for both the registrants and
their customers. The registration process allows the Commission to
ensure that all entities participating in derivative markets meet a
minimum standard of fitness and competency. The regulations governing
who must register and what registrants must do provide clear direction
for CPOs and CTAs. At the same time, clients wishing to invest with
registered entities have the knowledge that such entities are held to a
high financial standard through periodic account statements, disclosure
of risk, audited financial statements, and other measures designed to
provide transparency to investors. The Commission believes its
regulations protect market participants and the public by requiring
certain parties previously excluded or exempt from registration to be
held to the same standards as registered operators and advisors, which
ensures the fitness of such market participants and professionals.
Additionally furthering the goal of investor protection, NFA
provides an on-line, public database with information on the
registration status of market participants and their principals as well
as certain additional registrant information such as regulatory actions
taken by the NFA or Commission.\248\ This information is intended to
assist the public in making investment decisions regarding the use of
derivatives professionals. Although those previously exempt entities
may incur costs associated with registering and the compliance
obligations arising therefrom, or may incur costs to inform the
Commission of their exempt status, the Commission believes the benefits
of transparency in the derivatives markets in the long term will
outweigh these costs, which should decrease over time as efficiencies
develop.
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\248\ The National Futures Association's Background Affiliation
Status Information Center (BASIC) is currently available at http://www.nfa.futures.org/basicnet/.
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2. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
The amendments adopted herein will result in the registration of
more CPOs and CTAs, which will enable the Commission to better oversee
their activities in the derivatives markets, thereby protecting the
integrity of the markets. Indeed, even including those entities still
exempt under revised part 4 that are required to file notice with the
Commission on an annual basis, the Commission will be able to better
understand who is operating in derivatives markets and identify any
threats to the efficiency, competitiveness, or integrity of markets.
Moreover, because similarly situated entities in the derivatives
markets will be subject to the same regulatory regime, the
competitiveness of market participants will be enhanced.
3. Price Discovery
The Commission has not identified any impact on price discovery
through the registration of additional CPOs and CTAs as a result of
these regulations.
4. Sound Risk Management
The information the Commission gains from the registration of
entities allows the Commission to better understand the participants in
the derivatives markets and the interconnectedness of all market
participants. Such an understanding allows the Commission to better
assess potential threats to the soundness of derivatives markets and
thus the financial system of the United States. The Commission also
believes that the information required of registrants, to the extent
that producing such information requires entities to examine their
internal systems and operations in a manner not previously assessed,
provides registrants with an additional method of understanding the
risk inherent in their day-to-day businesses.
5. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations impacted by the registration of additional CPOs and CTAs
as a result of these regulations.
3. Data Collection
In these final rules, the Commission is enacting new Sec. 4.27,
which requires CPOs and CTAs to report certain
[[Page 11281]]
information to the Commission on forms CPO-PQR and CTA-PR,
respectively. The forms, reporting thresholds, and filing deadlines are
further detailed in section II.F of this release.
a. Benefits of Data Collection
The Commission expects that the data collected from forms CPO-PQR
and CTA-PR will increase the amount and quality of information
available to the Commission regarding a previously opaque area of
investment activity. Entities that are required to file all three
schedules of the forms are large enough to have, potentially, a great
impact on derivatives markets should such entities default, whereas
smaller entities are required to file only basic demographic
information. Because the data currently available to the Commission
regarding CPOs and CTAs is limited in scope, the Commission does not
have complete information as to who is transacting in derivatives
markets. With the additional information that the Commission will have
as a result of the new requirements under Sec. 4.27, the Commission
will be able to tailor its regulations to the needs of, and risks posed
by, entities in the market, and to protect investors and the general
public from potentially negative or overly risky behavior.
The Dodd-Frank Act charged the Commission, as a member of FSOC and
as a financial regulatory agency, with mitigating risks that may impact
the financial stability of the United States. The Commission is
dedicated to assisting FSOC in that goal, and these final regulations
are essential for the Commission to be able to fulfill that role
effectively because the Commission cannot protect against risks of
which it is not aware. By creating a reporting regime that makes the
operations of commodity pools more transparent to the Commission, the
Commission is better able to identify and address potential threats.
The total benefit of risk mitigation as it pertains to the overall
financial stability of the United States is not quantifiable, but it is
significant insofar as the Commission may be able to use this data to
prevent further future shocks to the U.S. financial system.
b. Costs of Data Collection
The Commission has not identified costs of data collection that are
not associated with an information collection subject to the PRA. These
costs therefore have been accounted for in the PRA section of this
rulemaking and the information collection requests filed with OMB, as
required by the PRA.
c. Section 15(a) Determination
This section analyzes the data collection rules according to the
five factors set forth in section 15(a) of the CEA: (1) protection of
market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations.
1. Protection of Market Participants and the Public
The Commission believes that the information to be gathered from
forms CPO-PQR and CTA-PR increases the amount and quality of
information available regarding a previously opaque area of investment
activity and, thereby, enhances the ability of the Commission to
protect investors and oversee derivatives markets. This enhanced
ability provides a better understanding of the participants in
derivatives markets and their operations, and as such, the Commission
is better able to protect the public from the potential risk that
large, unregulated entities could bring to markets under the
Commission's jurisdiction, many of which are essential to society at
large. Moreover, to mitigate reporting costs to regulated entities that
may be registered both with the Commission and with the SEC, the
regulations have been modified to allow dually registered entities to
file only form PF (plus the first schedule A of form CPO-PQR) for all
of their commodity pools, even those that are not ``private funds.''
The cost mitigation has been accounted for in the PRA section of this
rulemaking and the information collection requests filed with OMB, as
required by the PRA.
2. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
Although the Commission does not believe this rule relates directly
to the efficiency or competitiveness of futures markets, the Commission
does recognize that the interconnectedness of the participants within
derivatives markets can be extensive such that the proper oversight of
each category of participants affects proper oversight of derivatives
markets and the financial system as a whole. To the extent that the
information collected by form CPO-PQR and form CTA-PR and the adopted
amendments to the Commission's compliance regime assist the Commission
in identifying threats in derivatives markets, the regulations herein
protect the integrity of futures markets.
3. Price Discovery
The Commission has not identified any impact on price discovery as
a result of this data collection initiative.
4. Sound Risk Management
The Dodd-Frank Act tasks FSOC and its member agencies (including
both the SEC and the Commission) with mitigating risks to the financial
stability the United States. The Commission believes these regulations
are necessary to fulfill that obligation. These regulations improve the
ability of the Commission to oversee the derivatives markets. As the
Commission's understanding of the regulated entities, their behavior in
derivatives markets, and the overall riskiness of their positions
increases through the data collection in these rules, the Commission
will be able to better understand any risks posed to the financial
system as a whole arising from markets under the Commission's
jurisdiction. These benefits are shared by market participants, at
least indirectly, as a part of the United States financial system. In
addition, CPOs and CTAs may benefit from these regulations to the
extent that reporting form CPO-PQR and form CTA-PF requires such
entities to review their firms' portfolios, trading practices, and risk
profiles; thus, the CFTC believes that these regulations may improve
the sound risk management practices within their internal risk
management systems.
5. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations impacted by this data collection initiative.
4. Complementary Provisions
As part of these final regulations, the Commission is also adopting
other amending provisions that complement the registration and data
collection provisions, including changes to Sec. 4.7, Sec. 4.22,
Sec. Sec. 4.24 and 4.34, and parts 145 and 147. This section sets
forth the Commission's consideration of related costs and benefits in
general, responds to relevant comments, and then analyzes the
complementary provisions in light of the five factors enumerated in
Sec. 15(a) of the CEA.
a. Benefits of the Complementary Provisions
The provisions in this category amend additional sections of part 4
in order to improve the Commission's ability to effectively regulate
derivatives markets and their participants. Some of these complementary
provisions are specifically designed to protect
[[Page 11282]]
investors, e.g., requiring certified annual reports and disclosure of
swaps risk ensures investors are getting complete and accurate
information regarding their investment, which increases consumer
confidence in the financial system. As the information available to
consumers becomes more accurate and complete, a prospective investor
can more easily compare investment vehicles to choose the investment
vehicle best suited to the investor's individual financial plan and
risk tolerance.
Other provisions protect market participants by amending the
Commission's internal procedures to provide for the confidentiality of
certain proprietary information. Moreover, the Commission's planned
harmonization rules are designed to limit the impact to entities
regulated by multiple entities, protecting those participants from
overly burdensome regulatory regimes.
b. Costs of the Complementary Provisions
The Commission has identified no costs of the complementary
provisions that are not associated with an information collection
subject to the PRA. These costs therefore have been accounted for in
the PRA section of this rulemaking and the information collection
requests filed with OMB, as required by the PRA.
c. Comments on the Complementary Provisions
1. Sec. 4.7 Amendments
As stated previously, the Commission is adopting an amendment to
Sec. 4.7 that would rescind the relief provided in Sec. 4.7(b)(3)
from the certification requirement of Sec. 4.22(c) for financial
statements contained in commodity pool annual reports. The Commission
received two comments regarding this proposed amendment. One commenter
supported the proposed rescission and the Commission's stated
justification for doing so. The other commenter recommended that the
Commission retain an exemption from certification of financial
statements for entities where the pool's participants are limited to
the principals of its CPO(s) and CTA(s) and other categories of
employees listed in Sec. 4.7(a)(2)(viii). It is unclear how many of
the pools operated under Sec. 4.7 would qualify for such relief if
adopted. The Commission is therefore unable to agree that such
exclusions would materially reduce costs or increase any benefit
achieved by the rule.
2. Sec. 4.24 and Sec. 4.34 Amendments
The Commission also proposed adding standard risk disclosure
statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.
4.24(b) and 4.34(b), respectively. The Commission received three
comments with respect to the proposed standard risk disclosure
statement for swaps. Two argued that a standard risk disclosure
statement does not beneficially disclose the risks inherent in swaps
activity to participants or clients. A third recommended that the
Commission consider whether the wording of the standard disclosure
should be modified depending on whether the swaps were cleared or
uncleared.
The Commission respectfully disagrees with the assertions of those
commenters who believe that a standard risk disclosure statement is not
beneficial. The Commission believes that a standardized risk disclosure
statement addressing certain risks associated with the use of swaps is
necessary due to the revisions to the statutory definitions of CPO,
CTA, and commodity pool enacted by the Dodd-Frank Act. In addition,
based on the language proposed, the Commission does not believe that
different language must be adopted to account for the differences
between cleared and uncleared swaps. In particular, the Commission
notes that the proposed risk disclosure statement is not intended to
address all risks that may be associated with the use of swaps, but
that the CPO or CTA is required to make additional disclosures of any
other risks in its disclosure document pursuant to Sec. Sec. 4.24(g)
and 4.34(g) of the Commission's regulations. Moreover, the language of
the proposed risk disclosure statement is conditional and does not
purport to assert that all of the risks discussed are applicable in all
circumstances.
For the reasons discussed above in section II.E and those stated in
the Proposal, the Commission adopts the proposed risk disclosure
statements for CPOs and CTAs regarding swaps. These additional risk
disclosure statements will be required for all new disclosure documents
and all updates filed after the effective date of this final
rulemaking.
3. Harmonization of Regulations and Fund-of-Fund Investments
The Commission received numerous other comments regarding such
subjects as harmonizing CFTC regulations with SEC regulations and fund
of fund investments. These comments are discussed in detail in sections
II.F.3 and 4 and adopted by reference herein.
4. Confidentiality of Submitted Data
Additionally, as the Commission stated in the Proposal, the
collection of certain proprietary information through forms CPO-PQR and
CTA-PR raises concerns regarding the protection of such information
from public disclosure. The Commission received two comments requesting
that the Commission treat the disclosure of a pool's distribution
channels as nonpublic information, and numerous other comments urging
the Commission to be exceedingly circumspect in ensuring the
confidentiality of the information received as a result of the data
collections.
The Commission agrees that the distribution and marketing channels
used by a CPO for its pools may be sensitive information that
implicates other proprietary secrets, which, if revealed to the general
public, could put the CPO at a competitive disadvantage. Accordingly,
and to mitigate costs and eliminate risks to participants, the
Commission is amending Sec. Sec. 145.5 and 147.3 to include question 9
of schedule A of form CPO-PQR as a nonpublic document. Additionally,
the Commission is amending Sec. Sec. 145.5 and 147.3 to remove
reference to question 13 in Schedule A of Form CPO-PQR because that
such question no longer exists due to amendments to that schedule.
Similarly, the Commission will be designating subparts c. and d. of
question 2 of form CTA-PR as nonpublic because it identifies the pools
advised by the reporting CTA.
d. Section 15(a) Determination
This section considers these costs and benefits in light of the
five broad areas of market and public concern set forth in section
15(a) of the CEA: (1) protection of market participants and the public;
(2) efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery; (4) sound risk management practices; and
(5) other public interest considerations.
1. Protection of Market Participants and the Public
The complementary provisions discussed in this section protect
market participants and the public in a variety of ways. The changes
under Sec. 4.7 require entities to have their annual financial
statements independently audited; such a requirement protects the
investors in pools registered under Sec. 4.7 by ensuring that the
financial statements provided to participants are accurate and correct.
As most CPOs registered under Sec. 4.7 currently file audited annual
reports, the burden to the industry as a whole will be relatively minor
whereas the benefits, including increased consumer confidence, are
likely to be
[[Page 11283]]
large. The dollar value of improvements to overall accuracy of
financial reporting is not quantifiable, but is a significant benefit.
Registered entities can remain confident in the confidentiality of
their reports to the Commission, as the revised parts 145 and 147
protect proprietary information from being released to the public,
while still giving the Commission needed information to protect
derivatives markets and their participants.
The amending provisions that require similar information from CPOs
transacting in swaps products and markets increase the Commission's
awareness of transactions in the previously unregulated over-the-
counter markets. That awareness will help to bring transparency to the
swaps markets, as well as to the interaction of swaps and futures
markets, protecting the participants in both markets from potentially
negative behavior.
2. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
Although the Commission does not believe this part of these
regulations has a direct impact on the efficiency of futures markets,
the Commission does recognize that the protection of proprietary
information is essential for the competitiveness and integrity of
futures markets. The Commission believes that requiring all registered
CPOs to provide participants and the Commission with annual financial
statements that are certified by independent public accountants will
increase the reliability of the information provided, which will serve
to enhance the financial integrity of market participants, and by
extension, the market as a whole. Moreover, the Commission also
believes that requiring such certified statement of all registrants
serves to make market participants more competitive as it enables
prospective participants to more easily compare various investment
vehicles.
3. Price Discovery
The Commission has not identified any impact on price discovery as
a result of these regulations.
4. Sound Risk Management
The Commission has not identified any other impacts on sound risk
management as a result of the other amending provisions that are
different from the impacts of the registration and data collection
initiatives described in sections III.A.3 and 4.
5. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations impacted by as a result of these regulations.
5. Conclusion
The Commission recognizes that the final regulations will impose
some significant costs on the industry, as described above and in the
PRA section. Notwithstanding the costs, the Commission has determined
to adopt this rule because the Commission believes that proper
regulation and oversight of market participants is necessary to promote
fair and orderly derivatives markets.
List of Subjects
17 CFR Part 4
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 145
Commission records and information.
17 CFR Part 147
Open commission Meetings.
Accordingly, 17 CFR Chapter I is amended as follows:
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
0
1. The authority citation for part 4 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o,
12a, and 23.
0
2. In Sec. 4.5, add paragraphs (c)(2)(iii) and (c)(5) to read as
follows:
Sec. 4.5 Exclusion from the definition of the term ``commodity pool
operator.''
* * * * *
(c) * * *
(2) * * *
(iii) Furthermore, if the person claiming the exclusion is an
investment company registered as such under the Investment Company Act
of 1940, then the notice of eligibility must also contain
representations that such person will operate the qualifying entity as
described in Rule 4.5(b)(1) in a manner such that the qualifying
entity:
(A) Will use commodity futures or commodity options contracts, or
swaps solely for bona fide hedging purposes within the meaning and
intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5);
Provided however, That in addition, with respect to positions in
commodity futures or commodity option contracts, or swaps which do not
come within the meaning and intent of Rules 1.3(z)(1) and 151.5, a
qualifying entity may represent that the aggregate initial margin and
premiums required to establish such positions will not exceed five
percent of the liquidation value of the qualifying entity's portfolio,
after taking into account unrealized profits and unrealized losses on
any such contracts it has entered into; and, Provided further, That in
the case of an option that is in-the-money at the time of purchase, the
in-the-money amount as defined in Rule 190.01(x) (17 CFR 190.01(x)) may
be excluded in computing such five percent;
(B) The aggregate net notional value of commodity futures,
commodity options contracts, or swaps positions not used solely for
bona fide hedging purposes within the meaning and intent of Rules
1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5), determined at the
time the most recent position was established, does not exceed 100
percent of the liquidation value of the pool's portfolio, after taking
into account unrealized profits and unrealized losses on any such
positions it has entered into. For the purpose of this paragraph:
(1) The term ``notional value'' shall be calculated for each
futures position by multiplying the number of contracts by the size of
the contract, in contract units (taking into account any multiplier
specified in the contract, by the current market price per unit, for
each such option position by multiplying the number of contracts by the
size of the contract, adjusted by its delta, in contract units (taking
into account any multiplier specified in the contract, by the strike
price per unit, for each such retail forex transaction, by calculating
the value in U.S. Dollars for such transaction, at the time the
transaction was established, excluding for this purpose the value in
U.S. Dollars of offsetting long and short transactions, if any, and for
any cleared swap by the value as determined consistent with the terms
of 17 CFR part 45; and
(2) The person may net futures contracts with the same underlying
commodity across designated contract markets and foreign boards of
trade; and swaps cleared on the same designated clearing organization
where appropriate; and
(C) Will not be, and has not been, marketing participations to the
public as or in a commodity pool or otherwise as or in a vehicle for
trading in the commodity futures, commodity options, or swaps markets.
* * * * *
(5) Annual notice. Each person who has filed a notice of exclusion
under
[[Page 11284]]
this section must affirm on an annual basis the notice of exemption
from registration, withdraw such exemption due to the cessation of
activities requiring registration or exemption therefrom, or withdraw
such exemption and apply for registration within 30 days of the
calendar year end through National Futures Association's electronic
exemption filing system.
* * * * *
0
3. In Sec. 4.7:
0
a. Revise paragraphs (a)(3)(ix), (a)(3)(x), and (b)(3) to read as
follows:
Sec. 4.7 Exemption from certain part 4 requirements for commodity
pool operators with respect to offerings to qualified eligible persons
and for commodity trading advisors with respect to advising qualified
eligible persons.
* * * * *
(a) * * *
(3) * * *
(ix) A natural person whose individual net worth, or joint net
worth with that person's spouse at the time of either his purchase in
the exempt pool or his opening of an exempt account would qualify him
as an accredited investor as defined in Sec. 230.501(a)(5) of this
title;
(x) A natural person who would qualify as an accredited investor as
defined in SSec. 203.501(a)(6) of this title;
* * * * *
(b) * * *
(3) Annual report relief. (i) Exemption from the specific
requirements of Sec. 4.22(c) of this part; Provided, that within 90
calendar days after the end of the exempt pool's fiscal year or the
permanent cessation of trading, whichever is earlier, the commodity
pool operator electronically files with the National Futures
Association and distributes to each participant in lieu of the
financial information and statements specified by that section, an
annual report for the exempt pool, affirmed in accordance with Sec.
4.22(h) which contains, at a minimum:
(A) A Statement of Financial Condition as of the close of the
exempt pool's fiscal year (elected in accordance with Sec. 4.22(g));
(B) A Statement of Operations for that year;
(C) Appropriate footnote disclosure and such further material
information as may be necessary to make the required statements not
misleading. For a pool that invests in other funds, this information
must include, but is not limited to, separately disclosing the amounts
of income, management and incentive fees associated with each
investment in an investee fund that exceeds five percent of the pool's
net assets. The income, management and incentive fees associated with
an investment in an investee fund that is less than five percent of the
pool's net assets may be combined and reported in the aggregate with
the income, management and incentive fees of other investee funds that,
individually, represent an investment of less than five percent of the
pool's net assets. If the commodity pool operator is not able to obtain
the specific amounts of management and incentive fees charged by an
investee fund, the commodity pool operator must disclose the percentage
amounts and computational basis for each such fee and include a
statement that the CPO is not able to obtain the specific fee amounts
for this fund;
(D) Where the pool is comprised of more than one ownership class or
series, information for the series or class on which the financial
statements are reporting should be presented in addition to the
information presented for the pool as a whole; except that, for a pool
that is a series fund structured with a limitation on liability among
the different series, the financial statements are not required to
include consolidated information for all series.
(ii) Legend. If a claim for exemption has been made pursuant to
this section, the commodity pool operator must make a statement to that
effect on the cover page of each annual report.
* * * * *
0
4. In Sec. 4.13:
0
a. Revise paragraphs (a)(3)(ii)(B)(1) and (2);
0
b. Remove and reserve paragraph (a)(4);
0
c. Revise paragraph (b)(1)(ii);
0
d. Redesignate paragraph (b)(4) as paragraph (b)(5) and add new
paragraph (b)(4); and
0
e. Revise paragraph (e)(2) introductory text.
The revisions and additions read as follows:
Sec. 4.13 Exemption from registration as a commodity pool operator.
* * * * *
(a) * * *
(3) * * *
(ii) * * *
(B) * * *
(1) The term ``notional value'' shall be calculated for each
futures position by multiplying the number of contracts by the size of
the contract, in contract units (taking into account any multiplier
specified in the contract, by the current market price per unit, for
each such option position by multiplying the number of contracts by the
size of the contract, adjusted by its delta, in contract units (taking
into account any multiplier specified in the contract, by the strike
price per unit, for each such retail forex transaction, by calculating
the value in U.S. Dollars of such transaction, at the time the
transaction was established, excluding for this purpose the value in
U.S. Dollars of offsetting long and short transactions, if any, and for
any cleared swap by the value as determined consistent with the terms
of part 45 of the Commission's regulations; and
(2) The person may net futures contracts with the same underlying
commodity across designated contract markets and foreign boards of
trade; and swaps cleared on the same designated clearing organization
where appropriate; and
* * * * *
(b) * * *
(2) * * *
(ii) Contain the section number pursuant to which the operator is
filing the notice (i.e., Sec. 4.13(a)(1), (2), or (3)) and represent
that the pool will be operated in accordance with the criteria of that
paragraph; and
* * * * *
(4) Annual Notice. Each person who has filed a notice of exemption
from registration under this section must affirm on an annual basis the
notice of exemption from registration, withdraw such exemption due to
the cessation of activities requiring registration or exemption
therefrom, or withdraw such exemption and apply for registration within
30 days of the calendar year end through National Futures Association's
electronic exemption filing system.
* * * * *
(e) * * *
(2) If a person operates one or more commodity pools described in
paragraph (a)(3) of this section, and one or more commodity pools for
which it must be, and is, registered as a commodity pool operator, the
person is exempt from the requirements applicable to a registered
commodity pool operator with respect to the pool or pools described in
paragraph (a)(3) of this section; Provided, That the person:
* * * * *
0
5. In Sec. 4.14:
0
a. Revise paragraph (a)(8)(i)(D); and
0
b. Redesignate paragraph (a)(8)(iii)(D) as (a)(8)(iii)(E) and add a new
paragraph (a)(8)(iii)(D).
The revision and addition read as follows:
Sec. 4.14 Exemption from registration as a commodity trading adviser.
* * * * *
(a) * * *
[[Page 11285]]
(8) * * *
(i) * * *
(D) A commodity pool operator who has claimed an exemption from
registration under Sec. 4.13(a)(3), or, if registered as a commodity
pool operator, who may treat each pool it operates that meets the
criteria of Sec. 4.13(a)(3) as if it were not so registered; and
* * * * *
(iii) * * *
(D) Annual notice. Each person who has filed a notice of exemption
from registration under this section must affirm on an annual basis the
notice of exemption from registration, withdraw such exemption due to
the cessation of activities requiring registration or exemption
therefrom, or withdraw such exemption and apply for registration within
30 days of the calendar year end through National Futures Association's
electronic exemption filing system.
* * * * *
0
6. In Sec. 4.24, add paragraph (b)(5) to read as follows:
Sec. 4.24 General disclosures required.
* * * * *
(b) * * *
(5) If the pool may engage in swaps, the Risk Disclosure Statement
must further state:
SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL
RISK.
HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE
LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN
VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF
AN UNDERLYING OR RELATED MARKET FACTOR.
IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL
OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE
POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS
SCHEDULED TERMINATION DATE.
* * * * *
0
7. In Sec. 4.34, add paragraph (b)(4) to read as follows:
Sec. 4.34 General disclosures required.
* * * * *
(b) * * *
(4) If the commodity trading advisor may engage in swaps, the Risk
Disclosure Statement must further state:
SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
FUNDING RISK, AND OPERATIONAL RISK.
HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE
LIQUIDITY RISK, WHICH MAY RESULT IN YOUR ABILITY TO WITHDRAW YOUR FUNDS
BEING LIMITED. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL
GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE
VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.
IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE TO MODIFY, TERMINATE, OR
OFFSET YOUR OBLIGATIONS OR YOUR EXPOSURE TO THE RISKS ASSOCIATED WITH A
TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.
* * * * *
0
8. Effective July 2, 2012, revise Sec. 4.27, as added November 16,
2011, at 76 FR 71114, and effective March 31, 2012 to read as follows:
Sec. 4.27 Additional reporting by advisors of certain large commodity
pools.
(a) General definitions. For the purposes of this section:
(1) Commodity pool operator or CPO has the same meaning as
commodity pool operator defined in section 1a(11) of the Commodity
Exchange Act;
(2) Commodity trading advisor or CTA has the same meaning as
defined in section 1a(12);
(3) Direct has the same meaning as defined in section 4.10(f);
(4) Net asset value or NAV has the same meaning as net asset value
as defined in section 4.10(b);
(5) Pool has the same meaning as defined in section 1(a)(10) of the
Commodity Exchange Act;
(6) Reporting period means the reporting period as defined in the
forms promulgated hereunder;
(b) Persons required to report. A reporting person is:
(1) Any commodity pool operator that is registered or required to
be registered under the Commodity Exchange Act and the Commission's
regulations thereunder; or
(2) Any commodity trading advisor that is registered or required to
be registered under the Commodity Exchange Act and the Commission's
regulations thereunder.
(c) Reporting. (1) Except as provided in paragraph (c)(2) of this
section, each reporting person shall file with the National Futures
Association, a report with respect to the directed assets of each pool
under the advisement of the commodity pool operator consistent with
appendix A to this part or commodity trading advisor consistent with
appendix C to this part.
(2) All financial information shall be reported in accordance with
generally accepted accounting principles consistently applied.
(d) Investment advisers to private funds. Except as otherwise
expressly provided in this section, CPOs and CTAs that are dually
registered with the Securities and Exchange Commission and are required
to file Form PF pursuant to the rules promulgated under the Investment
Advisers Act of 1940, shall file Form PF with the Securities and
Exchange Commission in lieu of filing such other reports with respect
to private funds as may be required under this section. In addition,
except as otherwise expressly provided in this section, CPOs and CTAs
that are dually registered with the Securities and
[[Page 11286]]
Exchange Commission and are required to file Form PF pursuant to the
rules promulgated under the Investment Advisers Act of 1940, may file
Form PF with the Securities and Exchange Commission in lieu of filing
such other reports with respect to commodity pools that are not private
funds as may be required under this section. Dually registered CPOs and
CTAs that file Form PF with the Securities and Exchange Commission will
be deemed to have filed Form PF with the Commission for purposes of any
enforcement action regarding any false or misleading statement of a
material fact in Form PF.
(e) Filing requirements. Each report required to be filed with the
National Futures Association under this section shall:
(1)(i) Contain an oath and affirmation that, to the best of the
knowledge and belief of the individual making the oath and affirmation,
the information contained in the document is accurate and complete;
Provided, however, That it shall be unlawful for the individual to make
such oath or affirmation if the individual knows or should know that
any of the information in the document is not accurate and complete and
(ii) Each oath or affirmation must be made by a representative duly
authorized to bind the CPO or CTA.
(2) Be submitted consistent with the National Futures Association's
electronic filing procedures.
(f) Termination of reporting requirement. All reporting persons
shall continue to file such reports as are required under this section
until the effective date of a Form 7W filed in accordance with the
Commission's regulations.
(g) Public records. Reports filed pursuant to this section shall
not be considered Public Records as defined in Sec. 145.0 of this
chapter.
0
9. Revise appendix A to part 4 to read as follows:
Appendix A to Part 4--Form CPO-PQR
BILLING CODE 6351-01-P
[[Page 11287]]
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[[Page 11288]]
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[[Page 11337]]
[GRAPHIC] [TIFF OMITTED] TR24FE12.051
0
10. Add appendix C to part 4 to read as follows:
Appendix C to Part 4--Form CTA-PR
[[Page 11338]]
[GRAPHIC] [TIFF OMITTED] TR24FE12.052
[[Page 11339]]
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[[Page 11341]]
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[GRAPHIC] [TIFF OMITTED] TR24FE12.056
BILLING CODE 6351-01-C
PART 145--COMMISSION RECORDS AND INFORMATION
0
11. The authority citation for part 145 continues to read as follows:
Authority: Publ. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389
(5 U.S.C. 4a(j)).
0
12. In Sec. 145.5, revise paragraphs (d)(1)(viii) and (h) to read as
follows:
Sec. 145.5 Disclosure of nonpublic records.
* * * * *
(d) * * *
(1) * * *
(viii) The following reports and statements that are also set forth
in paragraph (h) of this section, except as specified in 17 CFR
1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant
to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR
pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to
17 CFR 31.13; the accountant's report on material inadequacies filed in
accordance with 17 CFR 1.16(c)(5); all reports and statements required
to be filed pursuant to 17 CFR 1.17(c)(6); and
(A)(1) The following portions of Form CPO-PQR required to be filed
pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d);
Question 3, subparts (g) and (h); Question 9; Question 10, subparts
(b), (c), (d), (e), and (g); Question 11; Question 12; and Schedules B
and C;
(2) The following portions of Form CTA-PR required to be filed
pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d);
* * * * *
(h) Contained in or related to examinations, operating, or
condition reports prepared by, on behalf of, or for the use of the
Commission or any other agency responsible for the regulation or
supervision of financial institutions, including, but not limited to
the following reports and statements that are also set forth in
paragraph (d)(1)(viii) of this section, except as specified in 17 CFR
1.10(g)(2) and 17 CFR 31.13(m): Forms 1-FR required to be filed
pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms
1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed
pursuant to 17 CFR 31.13; the accountant's report on material
inadequacies filed in accordance with 17 CFR 1.16(c)(5); all reports
and statements required to be filed pursuant to 17 CFR 1.17(c)(6); and
(1) The following portions of Form CPO-PQR required to be filed
pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d);
Question 3, subparts (g) and (h); Question 9; Question 10, subparts
(b), (c), (d), (e), and (g); Question 11; Question 12; and Question 13;
and Schedules B and C;
(2) The following portions of Form CTA-PR required to be filed
pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d); and
* * * * *
PART 147--OPEN COMMISSION MEETINGS
0
13. The authority citation for part 147 continues to read as follows:
Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.
552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.
4a(j) (Supp. V, 1975)).
0
14. In Sec. 147.3, revise paragraphs (b)(4)(i)(H) and (b)(8) to read
as follows:
Sec. 147.3 General requirement of open meetings; grounds upon which
meetings may be closed.
* * * * *
(b) * * *
(4)(i) * * *
(H) The following reports and statements that are also set forth in
paragraph (b)(8) of this section, except as specified in 17 CFR
1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant
to 17 CFR 1.10;
[[Page 11343]]
FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR
1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the
accountant's report on material inadequacies filed in accordance with
17 CFR 1.16(c)(5); all reports and statements required to be filed
pursuant to 17 CFR 1.17(c)(6); the following portions of Form CPO-PQR
required to be filed pursuant to 17 CFR 4.27: Schedule A: Question 2,
subparts (b) and (d); Question 3, subparts (g) and (h); Question 9;
Question 10, subparts (b), (c), (d), (e), and (g); Question 11; and
Question 12; and Schedules B and C; and the following portions of Form
CTA-PR required to be filed pursuant to 17 CFR 4.27: Question 2,
subparts (c) and (d);
* * * * *
(8) Disclose information contained in or related to examination,
operating, or condition reports prepared by, on behalf of, or for the
use of the Commission or any other agency responsible for the
regulation or supervision of financial institutions, including, but not
limited to the following reports and statements that are also set forth
in paragraph (b)(4)(i)(H) of this section, except as specified in 17
CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed
pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms
1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR pursuant to 17 CFR 31.13;
the accountant's report on material inadequacies filed in accordance
with 1.16(c)(5); and all reports and statements required to be filed
pursuant to 17 CFR 1.17(c)(6); and
(i) The following portions of Form CPO-PQR required to be filed
pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D;
Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),
(e), and (g); Question 11; Question 12; and Question 13; and Schedules
B and C; and
(ii) The following portions of Form CTA-PR required to be filed
pursuant to 17 CFR 4.27: Schedule B: Question 4, subparts (b), (c),
(d), and (e); Question 5; and Question 6;
* * * * *
Issued in Washington, DC, on February 8, 2012, by the
Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations:
Appendices to Commodity Pool Operators and Commodity Trading Advisors:
Amendments to Compliance Obligations--Commission Voting Summary and
Statements of Commissioners
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler, Commissioners Chilton, O'Malia
and Wetjen voted in the affirmative; Commissioners Sommers voted in
the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rule increasing the transparency to
regulators of commodity pool operators (CPOs) and commodity trading
advisors (CTAs) acting in the derivatives marketplace--for both
futures and swaps. This rule reinstates the regulatory requirements
in place prior to 2003 for registered investment companies that
trade over a de minimis amount in commodities or market themselves
as commodity funds. This rule enhances transparency in a number of
ways and increases customer protections through amendments to the
compliance obligations for CPOs and CTAs.
First, these amendments are consistent with the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act), as these
changes bring the swaps activities of CPOs and CTAs under the CFTC's
oversight. If CPOs and CTAs are trading swaps, they will have to
register with the Commission, giving their customers the benefit of
the protections in the Dodd-Frank Act.
Second, these amendments addressed the concerns raised by the
National Futures Association (NFA) in its petition requesting the
Commission to reinstate Commission oversight of CPOs and CTAs for
futures that existed prior to 2003. Since 2003, the participation of
registered investment companies in commodity futures, swaps, and
options markets has increased significantly. Some registered
investment companies have been marketing commodity pools to retail
investors and are operating without the supervision of the CFTC and
the NFA. In addition, foreign advisors with U.S. customers have been
exempt from supervision since 2003. The final rule reinstates the
protections that futures customers of CPOs and CTAs had prior to the
exemptions the Commission granted in 2003. It is critical to bring
the pools that have been in the dark since 2003 back into the light
so their customers can benefit from the CFTC's oversight.
Third, the final rule increases transparency to regulators by
enhancing data available to the Commission and the NFA, providing a
much more complete understanding of how these pools are operating in
the derivatives markets for futures and swaps. The data, which CPOs
and CTAs will submit through Form CPO-PQR and Form CTA-PR, will help
the Commission develop further regulatory protections for customers
of these entities, market participants and the American public.
The Commission benefited from significant public comment on this
rule. Some commenters raised questions about the definition of bona
fide hedging under section 4.5, in particular that risk mitigation
positions were not included in such bona fide hedging transactions.
The final rule provides treatments consistent with the Commission's
treatment of registered investment companies prior to 2003, and, in
fact, this rule reinstates criteria in place before 2003. The
Commission determined not to include risk management positions
within the bona fide hedging exemption because many, if not most,
positions in a portfolio could potentially be characterized as
serving a risk management purpose. This would result in an overly
broad exclusion from the definition of CPO.
Further, bona fide hedging transactions are excluded from
determining whether a registered investment company has to register
under 4.5, though these transactions are not excluded when
determining whether commodity pools not registered with the
Securities and Exchange Commission (SEC) will be required to
register with the CFTC under section 4.13(a)(3). With respect to the
consideration of bona fide hedging positions under 4.13(a)(3), the
Commission previously stated its position that bona fide hedging
positions should not be excluded within the de minimis exemption in
4.13(a)(3) when it proposed that rule. In the proposal for
4.13(a)(3) (68 FR 12622, 12627), the Commission stated its belief
that 4.13(a)(3) should not differentiate between trading for bona
fide hedging and non-hedging purposes because the rule is intended
to apply to strictly de minimis situations, where trading is limited
regardless of purpose. Conversely, the exclusion under 4.5 was not
solely determined by the de minimis nature of the trading, but
rather the combination of the de minimis amount of trading and the
fact that the investment vehicle was otherwise regulated by the SEC.
See 67 FR 65743.
Several commenters asked the Commission to reconsider the
treatment of family offices under these rules. The Commission will
continue to permit family offices to rely on existing guidance for
family offices seeking relief from the requirements of Part 4. The
Commission also is directing staff to look into the possibility of
adopting a family offices exemption that is similar to the rule
recently adopted by the SEC and is soliciting comment from the
public.
Appendix 3--Dissenting Statement of Commissioner Jill E. Sommers
The amendments to the Commission's Part 4 regulations we are
adopting with these final rules were prompted by a petition from the
NFA seeking to reinstate certain operating restrictions that were in
place prior to 2003 for entities excluded from the definition of CPO
under Sec. 4.5. Had we limited the amendments to address the issues
raised by the NFA's petition, we could have met our regulatory
objectives without disrupting a significant number of business
structures. I would have supported such an approach. As it is, we
have gone far beyond what was needed to resolve NFA's concerns and I
must dissent.
Section 404 of the Dodd-Frank Act requires certain advisors of
private funds to register
[[Page 11344]]
with the SEC and to report to the SEC information ``as necessary and
appropriate * * * for the protection of investors or for the
assessment of systemic risk by the Financial Stability Oversight
Council.'' With the finalization of these rules, the Commission has
determined that the ``sources of risk delineated in the Dodd-Frank
Act with respect to private funds are also presented by commodity
pools'' and that registration of certain previously exempt or
excluded CPOs is therefore necessary ``to assess the risk posed by
such investment vehicles in the derivatives markets and the
financial system generally.'' The Commission states that the data it
will collect as a consequence of registration is necessary ``in
order to fulfill the Commission's systemic risk mitigation
mandate.'' While I agree that the Commission has a regulatory
interest in the activities of commodity pools, this overstates the
case and gives a false impression that the data we gather will
enable us to actively monitor pools for systemic risk, that we have
the resources to do so, and that we will do so. Moreover, Congress
was aware of the existing exclusions and exemptions for CPOs when it
passed Dodd-Frank and did not direct the Commission to narrow their
scope or require reporting for systemic risk purposes. The
Commission justifies the new rules as a response to the financial
crisis of 2007 and 2008 and the passage of Dodd-Frank, yet there is
no evidence to suggest that inadequate regulation of commodity pools
was a contributing cause of the crisis, or that subjecting entities
to a dual registration scheme will somehow prevent a similar crisis
in the future.
I could nevertheless support a revision of the current
exclusions and exemptions that would give us access to information
we determine is necessary to carry out our regulatory mission if
supported by a sufficient cost-benefit analysis. The rationale
underlying a number of the decisions encompassed by the rules is
sorely lacking, however, and is not supported by the existing cost-
benefit analysis. The Commission concludes, for example, that bona
fide hedging transactions are unlikely to present the same level of
risk as risk mitigation positions because they are offset by
exposure in the physical markets. A risk mitigation position is, by
definition, a position that mitigates or ``offsets'' exposure in
another market. Both are hedges and there is no explanation as to
why the Commission believes that bona fide hedges are less risky.
The preamble states that the alternative net notional test under
Sec. 4.5 is meant to be consistent with the net notional test set
forth in Sec. 4.13(a)(3), except the Sec. 4.5 test allows
unlimited use of futures, options or swaps for bona fide hedging
purposes, while the Sec. 4.13(a)(3) test does not. No explanation
is given for the differing treatment. We reject an exemption for
foreign advisors similar to the exemption allowed by the Investment
Advisors Act of 1940 under Section 403 of Dodd-Frank because we lack
information on the activities of foreign pools, even though, as some
commenters observed, this may result in nearly all non-U.S. based
CPOs operating a pool with at least one U.S. investor having to
register and report all of their derivatives activities to the
Commission, including activity that may be subject to comparable
foreign regulation. While we leave open the possibility of future
exemptions based on information we collect on Forms CPO-PQR and CTA-
PR, the more likely result of this new policy is that U.S.
participants will be excluded from investing in foreign pools. The
Commission may have good reasons for this course of action, but no
rationale is given.
Our ``split the baby'' approach on the issue of family offices
is illogical. The Commission states that it is ``essential that
family offices remain subject to the data collection requirements''
to fulfill our regulatory mission and to develop a comprehensive
view of such firms to determine whether an exemption may be
appropriate in the future. At the same time, we are allowing an
unknown percentage of family offices to rely on previously issued
interpretive letters to avoid registration, reporting and other
compliance obligations. This makes no sense. We either need this
data or we do not. Family offices may fit within the parameters of
the existing interpretive letters, in which case we will not develop
the comprehensive view we are seeking. On the other hand, we ignore
the fact that we have consistently found, for more than three
decades, that family offices are not the type of collective
investment vehicle that Congress intended to regulate in adopting
the CPO and commodity pool definitions, a finding that Congress
confirmed in Sec. 409 of Dodd-Frank with respect to investment
advisors. Moreover, our repeal of the family office exemption is
inconsistent with the exclusion recently adopted by the SEC pursuant
to Sec. 409 at a time when Dodd-Frank has urged us to harmonize our
rules to the fullest extent possible.
It is unlikely, in my view, that the cost-benefit analysis
supporting the rules will survive judicial scrutiny if challenged.
And, although I am relieved that the recordkeeping, reporting and
disclosure obligations required by the rules will be delayed until
after proposed harmonization rules are finalized, the rules contain
a confusing and needlessly complicated set of compliance dates for
other provisions.
While I have felt that many of the rules we have finalized in
the last few months were far too overreaching, our justification
that a particular rule was required by statute was largely accurate.
With regard to these rules the same justification does not hold
true. These rules are not mandated by Dodd-Frank, and I do not
believe that the benefits articulated within the final rules
outweigh the substantial costs to the fund industry. We admit in the
preamble that we do not have enough information to determine the
validity of requiring some of these entities to register. A more
prudent approach would have been to gather the information first and
then decide what constitutes sound policy. For these and other
reasons, I cannot support the final rules.
[FR Doc. 2012-3390 Filed 2-23-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: February 24, 2012
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