Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Proposed Rules 11345 

1 7 U.S.C. 1, et seq. 

2 7 U.S.C. 6m. 

3 7 U.S.C. 1a(11) and 1a(12). 

4 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. 

5 7 U.S.C. 12a(5). 

6See H.R. Rep. No. 93–975, 93d Cong., 2d Sess. 

(1974), p. 20. 

7 17 CFR 4.5. See 68 FR 47231 (Aug. 8, 2003). 

8 76 FR 7976 (Feb. 12, 2011). 

9See 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. 

10See generally, http://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=973. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 4 

Harmonization of Compliance 

Obligations for Registered Investment 

Companies Required To Register as 

Commodity Pool Operators 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Commodity Futures 

Trading Commission is proposing 

amendments to its regulations regarding 

requirements applicable to investment 

companies registered under the 

Investment Company Act of 1940 

(‘‘registered investment companies’’) 

whose advisors will be subject to 

registration as commodity pool 

operators due to changes that the 

Commission is adopting. 

DATES: Comments should be received on 

or before April 24, 2012. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

• Agency Web site, via its Comments 

Online Process: Comments may be 

submitted to http://comments.cftc.gov/

PublicComments/ReleasesWith

Comments.aspx. Follow the instructions 

for submitting comments on the Web 

site. 

• Mail: David A. Stawick, Secretary, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• ‘‘Regulation 4.5 Harmonization’’ 

must be in the subject field of comments 

submitted electronically, and clearly 

indicated on written submissions. All 

comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to www.cftc.gov. You 

should submit only information that 

you wish to make available publicly. If 

you wish the CFTC to consider 

information that may be exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the established procedures in CFTC 

Regulation 145.9 (17 CFR 145.9). 

• The CFTC reserves the right, but 

shall have no obligation, to: review, 

prescreen, filter, redact, refuse, or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed which contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Kevin P. Walek, Assistant Director, 

Telephone: (202) 418–5463, Email: 

kwalek@cftc.gov, Amanda Lesher Olear, 

Special Counsel, Telephone: (202) 418– 

5283, Email: aolear@cftc.gov, or 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 

A. Statutory and Regulatory Background 

The Commodity Exchange Act 

(‘‘CEA’’) 1 provides the Commission 

with the authority to register 

Commodity Pool Operators (‘‘CPOs’’) 

and Commodity Trading Advisors 

(‘‘CTAs’’),2 to exclude any entity from 

registration as a CPO or CTA,3 and to 

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.’’ 4 The 

Commission also has the power 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].’’5 The Commission’s 

discretionary power 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.’’ 6 It is pursuant to this 

authority that the Commission has 

promulgated the exclusions from the 

definition of CPO that are delineated in 

§ 4.5.7

B. Reinstatement of Trading and 

Marketing Criteria in § 4.5 

In February 2011, the Commission 

proposed to revise the requirements for 

determining which persons should be 

required to register as a CPO under 

§ 4.5.8 The Commission is adopting the 

proposed changes to § 4.5, with some 

minor modifications, and is proposing 

certain provisions to facilitate 

compliance by registered investment 

companies with the Commission’s 

disclosure, reporting, and recordkeeping 

requirements. The proposed 

amendments that follow are based on 

the consideration of the comments that 

were submitted on the previously 

proposed amendments to § 4.5, 

information provided during a staff 

roundtable on July 16, 2011 

(‘‘Roundtable’’),9 and meetings with 

interested parties.10

C. Proposed Harmonization Provisions 

Many commenters noted that 

sponsors of registered investment 

companies which also would be 

required to register as CPOs would be 

subject to duplicative, inconsistent, and 

possibly conflicting disclosure and 

reporting requirements. In comment 

letters, meetings, and at the Roundtable, 

a number of suggestions were made 

regarding the manner in which the 

Securities and Exchange Commission 

(‘‘SEC’’) and CFTC requirements could 

be harmonized. Specific areas identified 

by the commenters as needing 

harmonization include: the timing of 

delivery of Disclosure Documents to 

prospective participants; the signed 

acknowledgement requirement for 

receipt of Disclosure Documents; the 

cycle for updating Disclosure 

Documents; The timing of financial 

reporting to participants; the 

requirement that a CPO maintain its 

books and records on site; the required 

disclosure of fees; the required 

disclosure of past performance; the 

inclusion of mandatory certification 

language; and the SEC-permitted use of 

a summary prospectus of open-ended 

registered investment companies. 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
11346 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Proposed Rules 

11 76 FR 28641 (May 18, 2011). 

12 17 CFR 4.21. 

13 17 CFR 4.24 and 4.25. 

14 17 CFR 4.22. 

15 17 CFR 4.22(b). 

16 17 CFR 4.22(a). 

17 17 CFR 4.23. 

18 17 CFR 4.12(c). 

19 Id. 

20 15 U.S.C. 77a, et seq. 

21 15 U.S.C. 78a, et seq. 

22 75 FR 54794, 54795 (Sept. 9, 2010). 23 17 CFR 4.23. 

Several commenters suggested that 

the Commission make available relief, 

with respect to document and report 

distribution, similar to that which it has 

recently adopted with respect to 

exchange-traded funds (‘‘ETFs’’).11

Other commenters suggested that where 

requirements are inconsistent, the 

Commission should defer to SEC 

requirements. A few commenters made 

recommendations about the treatment of 

specific disclosures, such as presenting 

both SEC and CFTC-required fee 

information and presenting certain 

performance information required by 

the CFTC in the Statement of Additional 

Information (‘‘SAI’’). At least one 

commenter noted that registered 

investment companies should be 

required to comply with all disclosure 

and other requirements applicable to 

registered CPOs. 

The Commission has carefully 

considered the comments regarding 

harmonization and has determined to 

propose the following exemptive 

provisions that would be available to 

advisors of registered investment 

companies who are required to register 

as CPOs. 

1. Delivery of Disclosure Documents 

and Periodic Reports 

Part 4 of the Commission’s regulations 

impose certain risk disclosure, 

reporting, and recordkeeping obligations 

on registered CPOs. Section 4.21 12 of 

the Commission’s regulations requires 

that each CPO registered or required to 

be registered with the Commission 

deliver a Disclosure Document prepared 

in accordance with §§ 4.24 and 4.25,13

which set forth the specific information 

required to be disclosed, including the 

past performance of the offered pool to 

each prospective participant in a pool 

that it operates or intends to operate. 

Section 4.21 further provides that the 

CPO may not accept or receive funds, 

securities, or other property from a 

prospective participant unless the CPO 

first receives from the prospective 

participant a signed and dated 

acknowledgment stating that the 

prospective participant received a 

Disclosure Document for the pool. 

With respect to a CPO’s reporting 

obligations, § 4.22 14 requires that each 

CPO registered or required to be 

registered periodically distribute to each 

participant in each pool that it operates 

an Account Statement presented in the 

form of a Statement of Income (Loss) 

and a Statement of Changes in Net Asset 

Value for the prescribed period. The 

Account Statement must be distributed 

monthly for pools with net assets of 

more than $500,000, and otherwise at 

least quarterly.15 The financial 

statements must be presented in 

accordance with generally accepted 

accounting principles, consistently 

applied.16 With respect to a CPO’s 

recordkeeping obligations, § 4.23 17 of 

the Commission’s regulations requires, 

in relevant part, that each CPO who is 

registered or required to be registered 

must make and keep the books and 

records specified in the regulation ‘‘at 

its main business office.’’ 

2. Comments Received Regarding 

Recently Adopted Exemptive Relief for 

Exchange Traded Funds 

In response to the Commission’s 

proposal to amend § 4.5, several 

commenters suggested that the 

Commission consider extending the 

exemptive relief that it recently adopted 

for CPO’s operating ETFs under 

§ 4.12(c),18 which makes available to 

such CPOs specified relief from the 

Disclosure Document delivery and 

acknowledgment requirements of § 4.21, 

the monthly Account Statement 

delivery requirement of § 4.22, and the 

requirement to keep the CPO’s books 

and records at its main business address 

in § 4.23. The relief permits CPOs to 

comply with the Disclosure Document 

and account statement delivery 

requirements by making such 

documents available on their web sites, 

and to maintain their records with 

specified third parties, on the condition 

that certain information and 

representations are filed with the CPO’s 

notice claiming relief.19 The criteria for 

claiming this relief are that: (1) The 

units of participation in the pool will be 

offered and sold pursuant to an effective 

registration statement under the 

Securities Act of 1933,20 and (2) the 

units will be listed for trading on a 

national securities exchange registered 

as such under the Securities Exchange 

Act of 1934.21 In its release proposing 

ETF relief, the Commission noted that 

historically, ETFs have been investment 

companies registered under the 

Investment Company Act of 1940 either 

as unit investment trusts or as open-end 

investment companies.22 The 

Commission did not, however, make 

such registration a condition of relief. 

Commenters noted that, like ETFs, the 

distribution and subscription 

mechanisms for registered investment 

companies would make it difficult for 

them to meet the Disclosure Document 

delivery and acknowledgment 

requirements under the Commission’s 

regulations. Commenters and 

Roundtable panelists also noted that the 

records of registered investment 

companies often are maintained by third 

parties, such as administrators, making 

it difficult for registered investment 

companies to comply with the 

requirement of § 4.23 that a pool’s books 

and records be maintained at the CPO’s 

main business office.23 To address these 

concerns, the Commission is proposing 

to add an alternative criterion under 

§ 4.12(c) that will permit registered 

investment companies to claim the 

disclosure, reporting, and recordkeeping 

relief currently available to ETFs. 

Several commenters further requested 

that the Commission extend the same 

relief it made available to operators of 

ETFs for delivery of required 

disclosures and periodic reports to 

CPOs of publicly offered commodity 

pools, noting that such offerings are 

regulated by the CFTC, SEC, National 

Futures Association (‘‘NFA’’), Financial 

Industry Regulatory Authority 

(‘‘FINRA’’), and each state in which they 

are offered. The Commission agrees that 

for purposes of the exemption, there is 

no useful distinction between publicly 

offered pools whose units are listed for 

trading on a national securities 

exchange, and those which are not. 

Therefore, the Commission is proposing 

to amend § 4.12(c) such that the CPO of 

any pool whose units of participation 

will be offered and sold pursuant to an 

effective registration statement under 

the Securities Act of 1933 may claim the 

relief from the delivery and 

acknowledgement requirements under 

§ 4.21, certain periodic financial 

reporting obligations under § 4.22, and 

the requirement that records be 

maintained at the CPO’s main office 

under § 4.23, available under § 4.12(c) 

with respect to that pool. 

3. Content and Timing of Disclosure 

Documents 

Many of the disclosures required by 

part 4 of the Commission’s regulations 

are consistent with SEC-required 

disclosures. Where CFTC requirements 

differ slightly, the Commission believes 

that CFTC-required disclosures can be 

presented concomitant with SECrequired information in a registered 

investment company’s prospectus. To 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Proposed Rules 11347 

24 17 CFR 4.25(b). 25 17 CFR 4.25(c)(2)–(5). 26The Commission has had preliminary 

discussions with SEC staff on this issue. The SEC 

staff stated that it would consider requests for noaction relief regarding the performance 

presentations, if necessary and appropriate. 27Section 4.24(a) of the Commission’s regulations 

requires that each disclosure document prepared 

and distributed by registered CPOs prominently 

display the following prescribed cautionary 

statement on its cover: THE COMMODITY 

FUTURES TRADING COMMISSION HAS NOT 

PASSED UPON THE MERITS OF PARTICIPATING 

IN THIS POOL NOR HAS THE COMMISSION 

PASSED ON THE ADEQUACY OR ACCURACY OF 

THIS DISCLOSURE DOCUMENT. 17 CFR 4.24(a). 

28 17 CFR 230.481. 

29Section 4.10(j) of the Commission’s regulations 

defines the ‘‘break-even point’’ as ‘‘the trading 

profit that a pool must realize in the first year of 

a participant’s investment to equal all fees and 

expenses such that such participant will recoup its 

initial investment, as calculated pursuant to rules 

promulgated by a registered futures association 

pursuant to section 17(j) of the Act.’’ 17 CFR 

4.10(j)(1). The break-even point must be expressed 

in terms of dollars and as a percentage of the 

minimum unit of initial investment. 17 CFR 

4.10(j)(2). It must also assume the redemption of the 

investment as of the close of the first year of 

investment. Id. 

30 17 CFR 4.24(d)(5). 

31 17 CFR 274.11a. 32 15 U.S.C. 77j. 

33 17 CFR 4.26. 

34 17 CFR 4.22 and 270.30e–1. 

address the few instances where 

conflicts in disclosure have been 

identified, the Commission is proposing 

relief to harmonize these requirements. 

With respect to performance, § 4.25(b) 

specifies that if the pool has traded 

commodity interests for three years or 

more, during which at least seventy-five 

percent of its contributions have been 

made by persons unaffiliated with the 

CPO, CTAs, or their principals, the only 

required performance is that of the 

offered pool.24 If a pool has not operated 

for at least three years, the CPO must 

present the performance of other pools 

and accounts enumerated in 

§§ 4.25(c)(2)–(5).25 The Commission is 

proposing that the performance of other 

pools and accounts required to be 

disclosed by §§ 4.25(c)(2)–(5) may be 

presented in the registered investment 

company’s SAI. The Commission notes 

that SEC requirements may conflict with 

CFTC requirements with respect to 

reporting past performance and 

accordingly seeks comment below.26 In 

addition, the Commission is proposing 

that, in lieu of the standard cautionary 

statement prescribed by § 4.24(a),27 the 

cover page of the registered investment 

company’s prospectus may contain a 

statement that combines the language 

required by both § 4.24(a) and Rule 

481(b)(1) under the Securities Act of 

1933.28 With respect to the break-even 

point29 required by § 4.24(d)(5),30 the 

Commission will consider the forepart 

of the document to be the section 

immediately following all disclosures 

required by SEC Form N–1A 31 to be 

included in the summary prospectus, or 

otherwise, for registered investment 

companies using Form N–2, in the 

forepart of the prospectus. Any other 

information required to be presented in 

the forepart of the document by 

§ 4.24(d), but that is not included in the 

summary section of the prospectus for 

open-ended registered investment 

companies, may also be presented 

immediately following the summary 

section of the prospectus for openended funds, or otherwise, for registered 

investment companies using Form N–2, 

in the forepart of the prospectus. 

Finally, with respect to disclosure of 

fees and expenses required by § 4.24(i), 

any such expenses that are not included 

in the fee table required by Item 3 of 

Form N–1A or Item 3 of Form N–2 

would be disclosed in the prospectus, 

along with the tabular presentation of 

the calculation of the pool’s break-even 

point required by § 4.24(i)(6). The 

Commission continues to believe that 

the inclusion of the tabular presentation 

of the calculation of the break-even 

point consistent with the Commission’s 

regulations is a necessary disclosure 

because, among other requirements, it 

mandates a greater level of detail 

regarding brokerage fees and does not 

assume a specific rate of return. The 

Commission believes that this results in 

meaningful disclosure through the 

break-even analysis and facilitates an 

investor’s assessment of a registered 

investment company that uses 

derivatives. 

Commenters noted that the CFTC’s 

and SEC’s timing requirements for 

Disclosure Document updates were 

inconsistent. Section 4.26 of the 

Commission’s regulations specifies that 

a Disclosure Document may be used for 

nine months from the date of the 

document before a new Disclosure 

Document must be prepared and filed. 

Conversely, provisions of the securities 

laws effectively require an annual 

prospectus update. Section 10(a)(3) of 

the Securities Act of 1933 specifies that 

‘‘when a prospectus is used more than 

nine months after the effective date of 

the registration statement, the 

information contained therein shall be 

as of a date not more than sixteen 

months prior to such use * * *.’’ 32

Because financial statements are 

prepared annually as of the end of the 

investment company’s fiscal year, and 

information from the financial 

statements is included in the 

prospectus, the operation of Section 

10(a)(3) results in an annual prospectus 

updating cycle. To address this 

inconsistency, the Commission is 

proposing to require that CPOs and 

CTAs file updates of all Disclosure 

Documents twelve months from the date 

of the document. 

Some commenters, including NFA, 

raised an operational issue in 

connection with Disclosure Document 

amendments filed pursuant to 

§ 4.26(c).33 NFA noted that CPOs filing 

amended Disclosure Documents cannot 

distribute the document until NFA 

accepts the disclosure document. NFA 

suggested that the Commission consider 

whether it may be appropriate to allow 

CPOs of pools that provide for daily 

liquidity to post the Disclosure 

Document with the highlighted changes 

on their internet web sites for pool 

participants at the same time the CPO 

files with NFA, with the final document 

posted upon completion of the NFA 

review process. The Commission notes 

that § 4.26(d)(2) currently permits CPOs 

to provide Disclosure Document 

updates to participants at the same time 

such updates are filed with NFA. 

Therefore, if the proposed relief is 

adopted by the Commission, CPOs 

claiming such relief may follow the 

procedure recommended by NFA with 

no additional action by the Commission. 

4. Reports—Timing and Certification 

Section 4.22(a) requires CPOs to 

provide periodic reports, generally 

monthly, to participants in the pools 

that they operate. SEC regulations 

require that registered investment 

companies provide semiannual reports 

to shareholders. Regulations of both 

commissions require provision of 

annual financial statements to 

commodity pool participants and 

investment company shareholders, 

respectively.34 Some commenters noted 

that the requirement to prepare and 

provide monthly account statements 

would be burdensome because 

registered investment companies are not 

required to do so under SEC regulations, 

and suggested that the Commission 

accept the reporting required under 

securities laws. The Commission has 

carefully considered these comments 

and determined not to propose relief 

regarding the content or timing of the 

monthly account statement, as the 

information required to prepare the 

account statement should be readily 

available to the operator of an 

investment vehicle maintaining records 

of its trading activity and other 

operations in accordance with 

recordkeeping requirements under the 

CEA and applicable securities laws. 

Registered investment companies will 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
11348 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Proposed Rules 

35Published elsewhere in this issue of the 

Federal Register. 

36See 17 CFR 250.202(a)(11)(G)–1. 

37See 5 U.S.C. 601, et seq. 

38 47 FR 18618 (Apr. 30, 1982). 

39See 47 FR 18618, 18619 (Apr. 30, 1982). 

40See 47 FR at 18619–20. 

41See 47 FR at 18620. 

42See 44 U.S.C. 3501 et seq. 

43CITE to FR for Non-Joint Rulemaking. 

be able to satisfy the requirement to 

deliver account statements to 

participants by making such statements 

available on their internet Web sites, 

thereby substantially reducing any 

burden under § 4.22(a). 

One commenter noted that the 

language required by the CFTC and the 

SEC in their respective periodic and 

annual report certifications is not 

identical, and encouraged the 

Commission to work with the SEC 

either to accept one language in lieu of 

the other or to develop agreed upon 

language for these certifications. Section 

4.22(h) requires the individual making 

the oath or affirmation on behalf of the 

CPO to affirm that, to the best of his or 

her knowledge and belief, the 

information contained in the document 

is accurate and complete. The first item 

in the certification required by SEC 

Form N–CSR is: ‘‘Based on my 

knowledge, this report does not contain 

any untrue statement of a material fact 

or omit to state a material fact necessary 

to make the statements made, in light of 

the circumstances under which such 

statements were made, not misleading 

with respect to the period covered by 

this report.’’ The certification under 

§ 4.22(h) must be included with the 

periodic and annual reports provided to 

participants and with the annual report 

filed with NFA. The certification 

required by SEC Form N–CSR is made 

available through EDGAR, but does not 

have to be provided to shareholders. 

Because the Form N–CSR certification 

includes language that is substantively 

consistent with the certification 

required under § 4.22(h), the 

Commission will accept the SEC’s 

certification as meeting the requirement 

under § 4.22(h), as long as such 

certification is part of the Form N–CSR 

filed with the SEC. 

The Commission seeks comment on 

the proposed harmonization provisions. 

In particular, do any provisions of part 

4 in addition to those identified in the 

proposal need to be harmonized? For 

instance, as noted in the Commission’s 

final rulemaking, Commodity Pool 

Operators and Commodity Trading 

Advisors: Amendments to Compliance 

Obligations,35 the Commission is 

considering adopting a family offices 

exemption from CPO registration akin to 

the exemption adopted by the SEC.36

What are the factors that weigh in favor 

or against such an exemption? Do the 

proposed harmonization provisions for 

break-even analysis and performance 

disclosure strike the appropriate balance 

between achieving the Commission’s 

objective of providing material 

information to pool participants, and 

reducing duplicative or conflicting 

disclosure? Should the Commission 

consider harmonizing its account 

statement reporting requirement with 

the SEC’s semiannual reporting 

requirement? Should the Commission 

consider harmonizing its past 

performance reporting requirements 

with the SEC requirements? Are there 

other approaches to harmonizing these 

requirements that the Commission 

should consider? Should the 

Commission consider applying any of 

the harmonization provisions to 

operators of pools that are not registered 

investment companies? 

II. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(RFA) 37 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 

such entities in accordance with the 

RFA.38

CPOs: The Commission has 

previously determined that registered 

CPOs are not small entities for the 

purpose of the RFA.39 With respect to 

CPOs exempt from registration, the 

Commission has determined that a CPO 

is a small entity if it meets the criteria 

for exemption from registration under 

current Rule 4.13(a)(2).40 Based on the 

requisite level of sophistication needed 

to comply with the SEC’s regulatory 

regime for registered investment 

companies and the fact that registered 

investment companies are generally 

intended to serve as retail investment 

vehicles and do not qualify for 

exemption under § 4.13(a)(2), the 

Commission believes that registered 

investment companies are generally not 

small entities for purposes of the RFA 

analysis. Moreover, the proposals herein 

will reduce the burden of complying 

with part 4 for CPOs of registered 

investment companies. The Commission 

has determined that the proposed 

regulation will not create a significant 

economic impact on a substantial 

number of small entities. 

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.41 The sole aspect 

of the proposal that affects CTAs would 

allow disclosure documents to be used 

for 12 months rather than nine months, 

thereby reducing the frequency with 

which updates must be prepared. 

Therefore, the Commission has 

determined that the proposal 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. 

B. Paperwork Reduction Act 

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.42 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’’). 

The Commission is amending 

Collection 3038–0023 to allow for an 

increase in response hours for the 

rulemaking resulting from the 

amendments to § 4.5 that the 

Commission adopted in a concurrent 

release.43 In the context of that 

rulemaking, the Commission received 

comments 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 their activities involving 

commodity interests. Because the 

Commission is proposing provisions to 

harmonize its compliance regime for 

sponsors or advisors to registered 

investment companies required to 

register as CPOs, the Commission 

believes that such entities will be able 

to register with the Commission and 

comply with the applicable compliance 

obligations. 

The Commission also is amending 

Collection 3038–0005 to allow for an 

increase in response hours for the 

rulemaking associated with modified 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Proposed Rules 11349 

44See 7 U.S.C. 12. 

45See 5 U.S.C. 552a. 

46The Commission notes that the PRA burden 

proposes that it be considered in light of the costs 

entities may have incurred under the part 4 

regulations as proposed in the Commodity Pool 

Operators and Commodity Trading Advisors: 

Amendments to Compliance Obligations 

rulemaking. In that rulemaking, the Commission 

estimated that entities would incur 9.58 burden 

hours in filing an annual report, 3.85 burden hours 

in compiling and distributing periodic account 

statements, and 3.25 burden hours in compiling and 

distributing disclosure documents; in sum, the 

Commission estimated that these provisions would 

incur a burden in total of 16.68 hours. By operation 

of this proposal, registered investment companies 

regulated by the SEC will be able to use similar 

documents required under SEC regulations to 

satisfy their CFTC registration and compliance 

requirements under part 4 of the Commission’s 

regulations. 

47See 2011 Investment Company Fact Book, 

Chap. 1 and Data Tables, Investment Company 

Institute (2011), available at http:// 

www.icifactbook.org/. 

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. 

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.’’ 44 The Commission is 

also required to protect certain 

information contained in a government 

system of records according to the 

Privacy Act of 1974.45

In the Commission’s February 

proposal, the Commission estimated 

that the burden of § 4.5 compliance 

would be 16.68 hours for an estimated 

416 CPOs and CTAs that would be 

obligated to comply.46 There currently 

is no source of reliable information 

regarding the general use of derivatives 

by registered investment companies. 

Because of this lack of information, the 

Commission has derived the estimated 

entities affected and the number of 

burden hours associated with this 

proposal through the use of statistical 

analysis. According to the one source of 

data available to the Commission, in 

2010, there were 669 sponsors of 9,719 

registered investment companies, 

including mutual funds, closed end 

funds, exchange traded funds, and unit 

investment trusts.47 In the comment 

letter submitted by the Investment 

Company Institute (‘‘ICI’’) with respect 

to the Commission’s February proposal 

the ICI stated that it surveyed its 

membership and 13 sponsors responded 

representing 2,111 registered investment 

companies. Of those 2,111 registered 

investment companies, the 13 sponsors 

estimated that 485 would trigger 

registration and compliance obligations 

under § 4.5 as amended. This 

constitutes approximately 23% of the 

reported registered investment 

companies. 

The Commission then deducted the 

2,111 registered investment companies 

discussed in the ICI comment letter 

from the 9,719 entities comprising the 

universe of registered investment 

companies, and deducted the 13 

sponsors surveyed by the ICI from the 

universe of 669 fund sponsors to arrive 

at 656 fund sponsors operating 7,608 

registered investment companies. This 

resulted in an average of 11.6 registered 

investment companies being offered per 

sponsor. 

The Commission then calculated 23% 

of the 7,608 registered investment 

companies not covered by the ICI 

survey, which equals 1,750 registered 

investment companies that the 

Commission would expect to trigger 

registration under amended § 4.5. Then, 

the Commission divided this number by 

the average number of registered 

investment companies operated per 

sponsor and added the 13 sponsors from 

the ICI survey to reach 164 sponsors 

expected to be required to register under 

amended § 4.5. Because the Commission 

cannot state with absolute certainty that 

only 164 entities would be required to 

register, due to the uncertainty inherent 

in the use of averages, the Commission 

believes that the number of sponsors or 

advisors required to register to be 

somewhere between 164 and 669 

entities. For PRA purposes, the 

Commission believes that it is 

appropriate to use the midpoint 

between the outer bounds of the range, 

which is 416 entities. The Commission 

estimates that there will still be some 

burden associated with § 4.5 compliance 

under the proposed rule, as there are 

some incompatibilities between SEC 

and Commission regulations (as 

discussed above). The Commission 

estimated this burden at approximately 

2 hours annually. Thus, the Commission 

estimates that this new proposal will 

reduce the information collection 

burden associated with § 4.5 compliance 

for the estimated 416 entities by 14.68 

hours per entity. 

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 § 4.5 that had not 

previously been required to register. 

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. 

Estimated number of respondents: 

75,841. 

Annual responses by each 

respondent: 76,350. 

Annual reporting burden: 6,871.6. 

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 the new burden 

expected under the proposed 

rulemaking. The total burden associated 

with Collection 3038–0005 is expected 

to be: 

Estimated number of respondents: 

44,142. 

Annual responses by each 

respondent: 62,121. 

Estimated average hours per response: 

4.22. 

Annual reporting burden: 262,347.8. 

The proposed harmonization 

specifically will add the following 

burden with respect to compliance 

obligations other than Form CPO–PQR: 

Estimated number of respondents: 

416. 

Annual responses by each 

respondent: 5. 

Estimated average hours per response: 

2. 

Annual reporting burden: 4160. 

The proposed harmonization will add 

the following burden with respect to the 

burden associated with Form CPO–PQR: 

Schedule A: 

Estimated number of respondents: 

586. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

6. 


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48 7 U.S.C. 19(a). 

49 7 U.S.C. 19(a). 

50 44 U.S.C. 3501 et seq. 

Annual reporting burden: 14,064. 

Schedule B: 

Estimated number of respondents: 

586. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

4. 

Annual reporting burden: 9,376. 

Schedule C: 

Estimated number of respondents: 

586. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

18. 

Annual reporting burden: 42,192. 

2. Information Collection Comments 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the reporting and 

recordkeeping burdens discussed above. 

Pursuant to 44 U.S.C. 3506(c)(2)(B), the 

Commission solicits comments in order 

to: (i) Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed collection 

of information; (ii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information 

collected; and (iv) minimize the burden 

of the collection of information on those 

who are required to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by email at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that they can be 

summarized and addressed in the final 

rule. Refer to the ADDRESSES section of 

this notice of proposed rulemaking for 

comment submission instructions to the 

Commission. A copy of the supporting 

statements for the collections of 

information discussed above may be 

obtained by visiting RegInfo.gov. 

OMB is required to make a decision 

concerning the collection of information 

between 30 and 60 days after 

publication of this release. 

Consequently, a comment to OMB is 

most assured of being fully effective if 

received by OMB (and the Commission) 

within 30 days after publication of this 

notice of proposed rulemaking. 

C. Considerations of Costs and Benefits 

Section 15(a) of the Act requires the 

Commission, before promulgating a 

regulation under the Act or issuing an 

order, to consider the costs and benefits 

of its action.48 Section 15(a) specifies 

that costs and benefits shall be 

evaluated in light of the following 

considerations: (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.49 The 

Commission can, in its discretion, give 

greater weight to any of the five 

considerations and determine that, 

notwithstanding its costs, a particular 

regulation was necessary or appropriate 

to protect the public interest, or to 

effectuate any of the provisions, or to 

accomplish any of the purposes, of the 

Act. 

In February 2011, the Commission 

proposed to revise the requirements for 

determining which persons should be 

required to register as a CPO under 

§ 4.5. The Commission received 

numerous comments that sponsors of 

registered investment companies that 

also would be required to register as 

CPOs would be subject to duplicative, 

inconsistent, and possibly conflicting 

disclosure and reporting requirements. 

The purpose of this proposal is to 

harmonize certain CFTC and SEC 

registration requirements in an effort to 

reduce the costs to dual registrants of 

complying with two regulatory regimes. 

To address the commenters’ concerns 

about the content and timing of 

disclosure documents, account 

statement delivery and certification, and 

recordkeeping requirements, the 

Commission is proposing to harmonize 

its regulatory requirements with those of 

the SEC to reduce the costs for dual 

registrants. Each of these harmonizing 

provisions involves recordkeeping and 

reporting obligations that would be a 

collection of information under the 

PRA. 

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,50 and to seek 

approval of those requirements from the 

OMB. Therefore, the estimated burden 

costs and support for the collections of 

information is provided for in the PRA 

section of this notice of proposed 

rulemaking and the information 

collection requests that will be filed 

with OMB contemporaneously with this 

rulemaking as required by that statute. 

1. Section 15(a) Considerations 

As stated above, section 15(a) of the 

CEA requires the CFTC to consider the 

costs and benefits of its actions in light 

of 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. 

a. Protection of Market Participants and 

the Public 

The Commission believes that these 

regulations protect market participants 

and the public by achieving the same 

regulatory objectives of its proposed 

part 4 registration and reporting 

requirements but at reduced costs. 

b. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The Commission believes that 

harmonization and its concomitant 

reduction in regulatory burden 

promotes the efficiency of futures 

markets in an indirect way; by lessening 

the costs that entities must bear to 

operate within markets, participants can 

pass along such savings to their 

customers or devote more resources to 

serving those customers. Moreover, as 

registered participants are relieved of 

some burdens, the incentive to remain 

unregistered may diminish. 

c. Price Discovery 

The Commission has not identified a 

specific effect on price discovery as a 

result of these harmonizing regulations. 

d. Sound Risk Management 

The Commission has not identified a 

specific effect on sound risk 

management as a result of these 

harmonizing regulations. 

e. Other Public Interest Considerations 

The CFTC has not identified other 

public interest considerations related to 

the costs and benefits of these 

regulations. 

2. Conclusion 

The Commission believes these 

regulations will lower burdens for many 

market participants who are also 

registered with other regulatory agencies 

as a result of doing business in multiple 

markets. The Commission welcomes all 

public comments on its cost and benefit 

considerations, including its analysis of 

the regulations in light of the five factors 

enumerated in § 15(a). Specifically, are 


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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Proposed Rules 11351 

there potential costs associated with 

these harmonizing rules that the 

Commission has not considered? Are 

there benefits to market participants, the 

public, or futures markets that the 

Commission should consider? 

List of Subjects in 17 CFR Part 4 

Advertising, Brokers, Commodity 

futures, Commodity pool operators, 

Consumer protection, Reporting and 

recordkeeping requirements. 

Accordingly, the CFTC proposes to 

amend 17 CFR part 4 as follows: 

PART 4—COMMODITY POOL 

OPERATORS AND COMMODITY 

TRADING ADVISORS 

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. 

2. Amend § 4.12 by revising paragraph 

(c) to read as follows: 

§ 4.12 Exemption from provisions of part 

4. 

* * * * * 

(c) Exemption from Subpart B for 

certain commodity pool operators based 

on registration under the Securities Act 

of 1933 or the Investment Company Act 

of 1940. (1) Eligibility. Subject to 

compliance with the provisions of 

paragraph (d) of this section, any person 

who is registered as a commodity pool 

operator, or has applied for such 

registration, may claim any or all of the 

relief available under paragraph (c)(2) of 

this section if, with respect to the pool 

for which it makes such claim: 

(i) The units of participation will be 

offered and sold pursuant to an effective 

registration statement under the 

Securities Act of 1933; or 

(ii) The pool is registered under the 

Investment Company Act of 1940. 

(2) Relief available to pool operator. 

The commodity pool operator of a pool 

whose units of participation meet the 

criteria of paragraph (c)(1) of this 

section may claim the following relief: 

(i) In the case of § 4.21, exemption 

from the Disclosure Document delivery 

and acknowledgment requirements of 

that section, Provided, however, that the 

pool operator: 

(A) Causes the pool’s Disclosure 

Document to be readily accessible on an 

Internet Web site maintained by the 

pool operator; 

(B) Causes the Disclosure Document 

to be kept current in accordance with 

the requirements of § 4.26(a); 

(C) Clearly informs prospective pool 

participants with whom it has contact of 

the Internet address of such Web site 

and directs any broker, dealer or other 

selling agent to whom the pool operator 

sells units of participation in the pool to 

so inform prospective pool participants; 

and 

(D)(1) If claiming relief under 

paragraph (c)(1)(i) of this section, 

comply with all other requirements 

applicable to pool Disclosure 

Documents under part 4. The pool 

operator may satisfy the requirement of 

§ 4.26(b) to attach to the Disclosure 

Document a copy of the pool’s most 

current Account Statement and Annual 

Report if the pool operator makes such 

Account Statement and Annual Report 

readily accessible on an Internet Web 

site maintained by the pool operator. 

(2) If claiming relief under paragraph 

(c)(1)(ii) of this section, comply with all 

other requirements applicable to pool 

Disclosure Documents under part 4, 

except that, with respect to the specific 

requirements listed below, comply as 

follows: 

(i) With respect to the legend required 

by § 4.24(a), include a legend that 

indicates that the Commodity Futures 

Trading Commission and the Securities 

and Exchange Commission have not 

approved or disapproved of the 

securities or passed upon the merits of 

participating in the pool, nor has either 

agency passed upon the accuracy or 

adequacy of the disclosure in the 

prospectus, and that any contrary 

representation is a criminal offense. The 

legend may be in one of the following 

or other clear and concise language: 

Example A: The Securities and Exchange 

Commission and the Commodity Futures 

Trading Commission have not approved or 

disapproved these securities or this pool, or 

passed upon the adequacy or accuracy of this 

prospectus. Any representation to the 

contrary is a criminal offense. 

Example B: The Securities and Exchange 

Commission and the Commodity Futures 

Trading Commission have not approved or 

disapproved these securities or this pool, or 

determined if this prospectus is truthful or 

complete. Any representation to the contrary 

is a criminal offense. 

(ii) With respect to performance that 

is required under § 4.25(c)(2), (3), (4) or 

(5), present such information in the 

Statement of Additional Information. 

(ii) In the case of § 4.22, exemption 

from the Account Statement distribution 

requirement of that section; Provided, 

however, that the pool operator: 

(A) Causes the pool’s Account 

Statements, including the certification 

required by § 4.22(h) to be readily 

accessible on an Internet Web site 

maintained by the pool operator within 

30 calendar days after the last day of the 

applicable reporting period and 

continuing for a period of not less than 

30 calendar days. The commodity pool 

operator may meet the requirement of 

§ 4.22(h) by including the certification 

required by Rule 30e–1 under the 

Investment Company Act of 1940 (17 

CFR 270.30e–1) with its posting of the 

pool’s Account Statements; and 

(B) Causes the Disclosure Document 

for the pool to clearly indicate: 

(1) That the information required to 

be included in the Account Statements 

will be readily accessible on an Internet 

Web site maintained by the pool 

operator; and 

(2) The Internet address of such Web 

site. 

* * * * * 

3. Amend § 4.26 by revising paragraph 

(a)(2) to read as follows: 

§ 4.26 Use, amendment and filing of 

Disclosure Document. 

(a) * * * 

(2) No commodity pool operator may 

use a Disclosure Document or profile 

document dated more than twelve 

months prior to the date of its use. 

* * * * * 

4. Amend § 4.36 by revising paragraph 

(b) to read as follows: 

§ 4.36 Use, amendment and filing of 

Disclosure Document. 

* * * * * 

(b) No commodity trading advisor 

may use a Disclosure Document dated 

more than twelve months prior to the 

date of its use. 

* * * * * 

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 Harmonization of Compliance 

Obligations for Registered Investment 

Companies Required to Register as 

Commodity Pool Operators—Commission 

Voting Summary and Statements of 

Commissioners. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

The Commodity Futures Trading 

Commission’s (CFTC) part 4 rules require 

recordkeeping, reporting and disclosures 

from Commodity Pool Operators. I support 

the proposed rule that would harmonize such 

requirements with those of the Securities and 

Exchange Commission (SEC) for investment 

companies registered with both the CFTC 

and SEC. The Commission is committed to 


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11352 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Proposed Rules 

ensuring that customers of registered 

investment companies receive basic 

protections while also seeking to balance the 

compliance requirements for the operators of 

these funds. I look forward to comments from 

the public to further build on this 

harmonization effort. 

Appendix 3—Statement of 

Commissioner Jill E. Sommers 

The final rules amending the Commission’s 

Part 4 regulations adopted today will require, 

among other things, that investment advisors 

of certain registered investment companies 

register as CPOs and operate under a dual 

SEC/CFTC regulatory regime. As explained 

in my dissent to the final rules, I could have 

supported a version of the rules that would 

have achieved the regulatory objectives 

outlined by the NFA in its August 18, 2010 

petition to amend Rule 4.5. While I opposed 

the version of the rules the Commission 

ultimately adopted, having finalized them I 

support the Commission’s effort to 

harmonize the resulting compliance 

obligations. Dually registered entities should 

not be subject to duplicative, inconsistent, or 

conflicting requirements. The proposed rules, 

if finalized in their current form, would not 

achieve true harmonization. I urge those 

affected by the rules to submit detailed 

comment letters, with a focus on the costs 

and benefits of the rules as proposed and any 

suggested alternatives. 

[FR Doc. 2012–3388 Filed 2–23–12; 8:45 am] 

BILLING CODE 6351–01–P 


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