70852 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

1Public Law 111–203, 124 Stat. 1376 (2010). 

2 7 U.S.C. 1a(11). 

3 7 U.S.C. 1a(10). 

4 7 U.S.C. 1a(12). 

5 7 U.S.C. 6m(1) (noting that it is unlawful for any 

CTA or CPO, unless registered under the provisions 

of that chapter, to make use of the mails or any 

means or instrumentality of interstate commerce 

with his business as such CTA or CPO). See also 

17 CFR 3.10. 

6 7 U.S.C. 1a(11)(B); 7 U.S.C. 1a(12)(B)–(C). 

7 7 U.S.C. 6n. 

8 7 U.S.C. 8a(5). 

9 17 CFR part 4. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 4 

RIN 3038–AF25 

Commodity Pool Operators, 

Commodity Trading Advisors, and 

Commodity Pools: Updating the 

‘Qualified Eligible Person’ Definition; 

Adding Minimum Disclosure 

Requirements for Pools and Trading 

Programs; Permitting Monthly Account 

Statements for Funds of Funds; 

Technical Amendments 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing amendments to 

certain provisions of its regulations that 

would: update the Portfolio 

Requirement thresholds within the 

‘‘Qualified Eligible Person’’ definition; 

require commodity pool operators 

(CPOs) and commodity trading advisors 

(CTAs) operating pools and trading 

programs under the applicable 

Commission regulations to provide 

certain minimum disclosures to their 

prospective pool participants and 

advisory clients; include revisions that 

are consistent with long-standing 

Commission exemptive letters 

addressing the timing of certain pools’ 

periodic financial reporting; and several 

technical amendments related to the 

structure of the regulations that are the 

subject of this proposal. 

DATES: Comments must be received by 

December 11, 2023. 

ADDRESSES: You may submit comments, 

which must be in writing and identified 

by RIN 3038–AF25, by any of the 

following methods: 

• CFTC Comments Portal: https://

comments.cftc.gov. Select the ‘‘Submit 

Comments’’ link for this rulemaking and 

follow the instructions on the Public 

Comment Form. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW, 

Washington, DC 20581. 

• Hand Delivery/Courier: Follow the 

same instruction as for Mail, above. 

Please submit your comments using 

only one of these methods. Submissions 

through the CFTC Comments Portal are 

encouraged. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to https://

comments.cftc.gov. You should only 

submit information that you wish to 

make available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act (FOIA), a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures in § 145.9 of the 

Commission’s regulations. The 

Commission reserves the right, but shall 

have no obligation, to review, prescreen, 

filter, redact, refuse, or remove any or 

all of your submission from https://

comments.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

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 (APA) 

and other applicable laws and may be 

accessible under the FOIA. 

FOR FURTHER INFORMATION CONTACT: 

Amanda L. Olear, Director, 202–418– 

5283 or aolear@cftc.gov; Pamela M. 

Geraghty, Acting Deputy Director, 202– 

418–5634 or pgeraghty@cftc.gov; 

Elizabeth Groover, Special Counsel, 

202–418–5985 or egroover@cftc.gov; or 

Andrew Ruggiero, Special Counsel, 

202–418–5712 or aruggiero@cftc.gov; 

each in the Market Participants Division 

at the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW, Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

II. The Proposal 

a. Updating Financial Thresholds in the 

Portfolio Requirement of the ‘‘Qualified 

Eligible Person’’ Definition 

b. Establishing Minimum Disclosure 

Requirements Under Regulation 4.7 

c. Permitting Monthly Account Statements 

Consistent With Commission Exemptive 

Letters 

d. Other Technical Amendments 

III. Related Matters 

a. Regulatory Flexibility Act 

b. Paperwork Reduction Act 

c. Cost-Benefit Considerations 

d. Antitrust Considerations 

I. Background 

As amended by the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (Dodd-Frank Act),1 section 1a(11) of 

the Commodity Exchange Act (CEA or 

Act) defines the term ‘‘commodity pool 

operator’’ as any person engaged in a 

business that is of the nature of a 

commodity pool, investment trust, 

syndicate, or similar form of enterprise, 

and who, with respect to that 

commodity pool, solicits, accepts, or 

receives from others, funds, securities, 

or property, either directly or through 

capital contributions, the sale of stock or 

other forms of securities, or otherwise, 

for the purpose of trading in commodity 

interests.2 CEA section 1a(10) defines a 

‘‘commodity pool’’ as any investment 

trust, syndicate, or similar form of 

enterprise operated for the purpose of 

trading in commodity interests.3 CEA 

section 1a(12) defines the term 

‘‘commodity trading advisor’’ as any 

person who, for compensation or profit, 

engages in the business of advising 

others, either directly or through 

publications, writing, or electronic 

media, as to the value of or the 

advisability of trading in commodity 

interests.4

Generally, CEA section 4m(1) requires 

each person whose intermediary 

activities satisfy either the CPO or CTA 

definition to register as such with the 

CFTC.5 With respect to both CPOs and 

CTAs, the CEA also authorizes the 

Commission to include persons within, 

or exclude them from, such definitions, 

by rule, regulation, or order, if the 

Commission determines that such 

action will effectuate the purposes of 

the CEA.6 In addition to the general 

registration authority set forth in CEA 

section 4m(1), CEA section 4n 

specifically empowers the Commission 

to impose compliance obligations 

related to the registration process, 

recordkeeping, disclosure, and 

reporting.7 Finally, the CEA also gives 

the Commission 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 

purposes of the CEA.8

Part 4 of the Commission’s regulations 

specifically governs the operations and 

activities of CPOs and CTAs.9 These 

regulations implement the statutory 

authority provided to the Commission 

by the CEA and also establish 

registration exemptions and definitional 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 70853 

10See 7 U.S.C. 6n; 17 CFR 4.5, 4.6, 4.13, 4.14. 

11 17 CFR 4.7. 

12These numbers are drawn from data in National 

Futures Association Form PQR filings for Q4 2022. 

13 In fact, as of March 31, 2023, there were 

approximately 1,128 CPOs registered with the 

Commission, and on average, approximately 5,257 

pools were reported via CFTC Form CPO–PQR on 

a quarterly basis in FY 2022. Assuming there is no 

material difference in the number of registered 

CPOs and pools reported between the closings of 

Q4 2022 and of Q1 2023, NFA and CFTC data show 

that approximately 69% of registered CPOs operate 

4.7 pools, and approximately 81% of all pools 

reported on CFTC Form CPO–PQR are 4.7 pools. 

After amendments to Form CPO–PQR and 

Regulation 4.27 adopted in 2020, the Commission 

accepts NFA Form PQR as substituted compliance 

for the required completion of its own Form CPO– 

PQR. See 17 CFR 4.27. Therefore, the data sources 

for both NFA and CFTC are fundamentally the 

same, if not identical. 

14See, e.g., 84 FR 67355 (Dec. 10, 2019). 

15Such exemptive letters are routinely drafted by 

Commission staff in the Market Participants 

Division (MPD) and constitute an exercise of the 

authority in Regulation 4.12(a), which is delegated 

by the Commission to MPD’s predecessor division, 

the Division of Swap Dealer and Intermediary 

Oversight, through Regulation 140.93. See 17 CFR 

4.12(a) and 140.93. 

16 17 CFR 1.3 (defining ‘‘person’’ as ‘‘includ[ing] 

individuals, associations, partnerships, 

corporations, and trusts’’). 

17 17 CFR 4.7(a)(2). Generally, this list includes, 

but is not limited to: (1) registered futures 

commission merchants (FCMs), registered retail 

foreign exchange dealers (RFEDs), registered swap 

dealers, and principals thereof; (2) a registered 

broker or dealer, or principal thereof; (3) certain 

registered CPOs, and principals thereof; (4) certain 

registered CTAs, and principals thereof; (5) certain 

investment advisers registered under the 

Investment Advisers Act of 1940 (IAA), and 

principals thereof; (6) ‘‘qualified purchasers’’ as 

defined in section 2(a)(51)(A) of the Investment 

Company Act of 1940 (ICA); (7) ‘‘knowledgeable 

employees’’ as defined in 17 CFR 270.3c–5 

pursuant to the ICA; (8) certain persons associated 

with an exempt pool or account, outlined in 

Regulation 4.7(a)(2)(viii)(A) and (B), respectively; 

(9) certain trusts; (10) organizations described in 

section 501(c)(3) of the Internal Revenue Code 

(IRC), subject to some conditions; (11) non-United 

States persons; and (12) exempt pools. Id. 

18 17 CFR 4.7(a)(3). Generally, this list includes, 

but is not limited to: (1) certain investment 

companies registered under the ICA or a business 

development company as defined in section 

2(a)(48) of the ICA; (2) banks as defined in section 

3(a)(2) of the Securities Act of 1933 (Securities Act), 

or any savings and loan association or other 

institution as defined in section 3(a)(5)(A) of the 

Securities Act acting for its own account or for the 

account of a QEP; (3) certain insurance companies 

acting for their own account or that of a QEP; (4) 

certain state employee benefit plans; (5) certain 

employee benefit plans within the meaning of the 

Employee Retirement Income Security Act of 1974 

(ERISA); (6) private business development 

companies; (7) certain corporations, Massachusetts 

or similar business trusts, or partnerships, limited 

liability companies or similar business ventures; (8) 

natural persons meeting the individual net worth or 

joint net worth tests within the ‘‘accredited 

investor’’ definition; (9) natural persons who would 

otherwise be considered accredited investors; (10) 

certain pools, trusts, insurance company separate 

accounts, or bank collective trusts; and (11) certain 

government entities. 

19 17 CFR 4.7(a)(3)(ix) and (x). For the SEC’s 

‘‘accredited investor’’ definition, see 17 CFR 

230.501. 

exclusions for CPOs and CTAs.10 Part 4 

also contains detailed regulations that 

establish the ongoing compliance 

requirements applicable to registered 

CPOs and CTAs. These compliance 

requirements pertain to the commodity 

pools and separate accounts that CPOs 

and CTAs operate and advise, and 

provide customer protection, 

disclosures, and regular reporting to a 

registrant’s pool participants or advisory 

clients. 

Regulation 4.7 provides exemptions 

from certain part 4 compliance 

requirements regarding disclosure, 

periodic reporting, and recordkeeping 

for registered CPOs and CTAs, whose 

prospective and actual pool participants 

and/or advisory services are restricted to 

individuals and entities considered 

‘‘Qualified Eligible Persons,’’ and who 

claim the desired exemptions, pursuant 

to paragraph (d) of that section.11 As of 

the end of FY 2022, 837 registered CPOs 

operated approximately 4,304 

commodity pools pursuant to claimed 

Regulation 4.7 exemptions (4.7 pools, 

and together with CTA programs 

operated under Regulation 4.7, the 4.7 

pools and trading programs).12

Relatedly, approximately 865 CTAs 

claim an exemption under Regulation 

4.7 for their trading programs, which the 

Commission estimates to number in the 

thousands. During discussions with 

CFTC staff, the National Futures 

Association (NFA), the registered 

futures association to whom the 

Commission has delegated many of its 

regulatory oversight functions with 

respect to CPOs and CTAs, has 

predicted that this population of CPOs, 

CTAs, commodity pools, and trading 

programs operating pursuant to 

Regulation 4.7 will only continue to 

grow in the future.13 Since its adoption 

over thirty years ago, the Commission 

has occasionally amended Regulation 

4.7 to enhance its usability and ensure 

that it remains fit for purpose.14 For the 

reasons discussed below, however, it is 

the Commission’s preliminary view that 

certain aspects of Regulation 4.7 no 

longer align with the Commission’s 

intentions and thus require amendment. 

After a careful review of the existing 

language and structure of Regulation 

4.7, and considering the clear public 

and regulatory interest of maintaining 

and modernizing older, but still widely 

utilized provisions, the Commission is 

issuing this Notice of Proposed 

Rulemaking (NPRM or Proposal) 

comprised of targeted amendments to 

update the regulation in several ways. In 

particular, the Commission is proposing 

amendments that would: (1) increase 

the financial thresholds in the Portfolio 

Requirement of the ‘‘Qualified Eligible 

Person’’ (QEP) definition in Regulation 

4.7(a) to reflect inflation; (2) require 

certain minimum disclosures for 4.7 

pools and trading programs operated 

and offered by CPOs and CTAs; (3) add 

a process under Regulation 4.7(b)(3) 

permitting CPOs to elect an alternative 

account statement schedule for certain 

4.7 pools consistent with long-standing 

exemptive letters issued by the 

Commission; 15 and (4) improve the 

structure and utility of Regulation 4.7 

through several technical adjustments 

(for example, reorganizing the QEP 

definition, updating cross-references, 

etc.). 

II. The Proposal 

a. Updating Financial Thresholds in the 

Portfolio Requirement of the ‘‘Qualified 

Eligible Person’’ Definition 

As discussed above, Regulation 4.7 

provides exemptions to CPOs and CTAs 

for their 4.7 pools and trading programs 

from various compliance, disclosure, 

and recordkeeping requirements within 

part 4 of the Commission’s regulations, 

provided that their prospective and 

actual pool participants and advisory 

clients are restricted to QEPs. 

Regulation 4.7(a) bifurcates the 

definition of QEP into paragraphs (a)(2) 

and (a)(3) representing two different 

QEP categories: (1) those persons 16 who 

do not need to satisfy an additional 

‘‘Portfolio Requirement,’’ as defined in 

Regulation 4.7(a)(1)(v), to be considered 

a QEP,17 and (2) those persons who 

do.18 Notably, natural persons are 

among those listed under Regulation 

4.7(a)(3) and are thus required to satisfy 

the Portfolio Requirement to be 

considered QEPs. Pursuant to 

Regulation 4.7(a)(3), to be considered 

QEPs, such natural persons must meet 

the ‘‘accredited investor’’ definition 

adopted by the Securities and Exchange 

Commission (SEC) under Regulation D 

applicable to private securities offerings 

exempt from registration under the 

Securities Act, as well as the Portfolio 

Requirement adopted by the 

Commission.19

Currently, the Portfolio Requirement 

contains two thresholds; if either (or 

some combination of the two) is 

satisfied by a person listed under 

Regulation 4.7(a)(3), then a CPO or CTA 

may consider them a QEP eligible to 

invest in the offered 4.7 pool or trading 

program. More specifically, a person can 

satisfy the Portfolio Requirement by: (1) 

owning securities (including pool 

participations) of issuers not affiliated 

with such person and other investments 


ddrumheller on DSK120RN23PROD with PROPOSALS2
70854 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

20 17 CFR 4.7(a)(1)(v)(A). 

21 17 CFR 4.7(a)(1)(v)(B). 

22 17 CFR 4.7(a)(1)(v)(C). 

23 57 FR 34853 (Aug. 7, 1992) (1992 Final Rule). 

24 57 FR 3148, 3152 (Jan. 28, 1992) (1992 

Proposed Rule). 

25See the persons listed within 17 CFR 4.7(a)(2) 

and (3); cf. 17 CFR 230.501. 

26 1992 Proposed Rule, 57 FR at 3151. 

27 Id. 

28Although in the 1992 Final Rule the 

Commission cited the lack of disclosure 

requirements as one of the reasons for adopting a 

Portfolio Requirement, it was not the only policy 

justification; the inherent differences between 

futures and securities investments, as discussed 

above, were also cited. See 1992 Final Rule, 57 FR 

at 34855. Despite the Commission’s original 

rationale in adopting the QEP definition including 

the policy decision of not requiring disclosures, the 

Commission has preliminarily concluded that 

retaining and increasing the Portfolio Requirement, 

while also proposing new disclosure requirements, 

is necessary given the increased variety and general 

evolution of the commodity interest markets since 

1992. See infra Proposal, pt. II.b. 

29See the U.S. BLS Handbook of Methods, for 

more information on the CPI, CPI–U, and CPI–W, 

available at https://www.bls.gov/opub/hom/cpi/ 

presentation.htm. As described by the BLS 

Handbook of Methods, ‘‘CPI–U represents the 

buying habits of the residents of urban and 

metropolitan areas in the United States and covers 

over 90 percent of the U.S. population.’’ Id. 

Comparatively, ‘‘the CPI–W is computed using the 

same prices as the CPI–U, but the weights of the 

CPI–W are based on a subset of the CPI–U 

population, covering approximately 30 percent of 

the U.S. population.’’ Id. The CPI–W also includes 

‘‘households where more than one-half of the 

household’s earners must have been employed for 

at least 37 weeks during the previous 12 months.’’ 

Id. Given the relevance of these indexes to the 

population of natural persons that may qualify as 

QEPs via the Portfolio Requirement, the 

Commission believes these indexes are the most 

appropriate to use in determining today’s buying 

power of the Portfolio Requirement’s monetary 

thresholds established in 1992. 

30The actual calculator for CPI–U can be found 

at https://www.bls.gov/data/inflation_

calculator.htm. The Commission is preliminarily 

choosing to include the February 2023 CPI–U data 

above because it provides a clear example of today’s 

buying power of the Portfolio Requirement, as it 

was established in 1992, and because the data can 

be easily accessed and verified via the BLS inflation 

calculator link provided herein. In comparing the 

results of each index, as applied to the Portfolio 

Requirement thresholds, the Commission found no 

material difference between the CPI–W and CPI–U. 

Analysis using the CPI–W provided similar buying 

power figures to those produced by the CPI–U 

analysis. Given that the Commission is proposing 

updated thresholds rounded down to the nearest 

million and hundred thousand, the Commission 

believes that providing the CPI–U analysis is 

sufficient for purposes of this Proposal. 

with an aggregate market value of at 

least $2,000,000 20 (Securities Portfolio 

Test); (2) having on deposit with a 

futures commission merchant, for its 

own account at any time during the six 

months preceding either the date of sale 

to that person of a pool participation in 

the exempt pool or the date the person 

opens an exempt account with the CTA, 

at least $200,000 in exchange-specified 

initial margin and option premiums, 

together with required minimum 

security deposit for retail forex 

transactions for commodity interest 

transactions 21 (Initial Margin and 

Premium Test); or (3) owning a portfolio 

comprised of a combination of the funds 

or property specified in the Securities 

Portfolio Test and the Initial Margin and 

Premium Test, which, when expressed 

as percentages of the required amounts, 

meet or exceed 100%.22

The Portfolio Requirement has 

remained unchanged since its original 

adoption by the Commission in 1992.23

When it developed the QEP definition 

and the associated Portfolio 

Requirement, the Commission sought to 

create ‘‘objective criteria’’ by which one 

could assess a person’s commodity 

interest experience, believing that 

appropriate experience would involve 

an investment portfolio of a size 

sufficient to indicate that the participant 

has substantial investment experience 

and thus a high degree of sophistication 

with regard to investments as well as 

financial resources to withstand the risk 

of their investments.24 The Commission 

sought in the 1992 Final Rule to 

harmonize Regulation 4.7 with existing 

securities laws and regulations for 

sophisticated investors by incorporating 

the SEC’s ‘‘accredited investor’’ 

definition into the QEP definition, 

which was intended to capture similarly 

experienced and sophisticated persons 

participating in the commodity interest 

markets.25 However, the Commission 

determined that an additional, higher 

standard of experience was necessary 

for certain natural and other persons, 

citing the differences between futures 

and securities investments.26

The 1992 Proposed and Final Rules 

provide insight into the level of 

sophistication the Commission then 

considered necessary for natural 

persons (and other persons listed within 

Regulation 4.7(a)(3)) to qualify as QEPs. 

For example, in response to comments 

suggesting that the Commission not 

adopt any Portfolio Requirement, and 

instead rely solely on the parameters of 

the SEC’s ‘‘accredited investor’’ 

definition, the Commission explicitly 

declined to do so.27 The Commission 

continues to believe that a Portfolio 

Requirement provides a reasonable 

proxy for the experience, acumen, and 

resources necessary for certain persons, 

including natural persons, to be 

considered QEPs eligible to invest in 

complex commodity interest products 

without receiving the full panoply of 

information otherwise required under 

part 4.28 These dollar thresholds have 

not been modified since their adoption 

over 30 years ago, and the Commission 

preliminarily believes it is long overdue 

to update these measures. 

In determining an appropriate 

increase for each threshold, the 

Commission preliminarily believes two 

inflation indexes published by the 

United States Bureau of Labor Statistics 

(BLS) are appropriate to consider. 

Specifically, the Commission consulted 

the Consumer Price Index for All Urban 

Consumers (CPI–U) and the Consumer 

Price Index for Urban Wage Earners and 

Clerical Workers (CPI–W).29 The CPI–U 

and CPI–W indexes indicate that 

inflation has had a considerable impact 

on the monetary thresholds established 

in the 1992 Final Rule. The CPI–U and 

CPI–W data reveal that the current 

monetary thresholds in Regulation 

4.7(a)(1)(v) may no longer reasonably 

indicate the high level of investor 

sophistication, acumen, and resources 

that the Commission intended when the 

Portfolio Requirement was adopted. For 

example, based on analysis using CPI– 

U data, as of February 2023, the 

$2,000,000 threshold in the Securities 

Portfolio Test has the same buying 

power as approximately $4,270,000, and 

the $200,000 threshold in the Initial 

Margin and Premiums Test has the same 

buying power as approximately 

$427,000.30

Given these results, the Commission 

is proposing to update the Portfolio 

Requirement’s thresholds by doubling 

the Securities Portfolio Test in 

Regulation 4.7(a)(1)(v)(A) to $4,000,000, 

and the Initial Margin and Premium 

Test in Regulation 4.7(a)(1)(v)(B) to 

$400,000. Although these figures do not 

match the results provided by the CPI– 

U and CPI–W indexes exactly, being 

slightly lower than the February 2023 

buying power stated above, the 

Commission preliminarily believes that 

Portfolio Requirement thresholds 

rounded down to the nearest million 

and hundred thousand would be 

simpler for CPOs and CTAs relying on 

Regulation 4.7 to apply in determining 

if a prospective pool participant or 

advisory client is a QEP. Additionally, 

the Commission would continue to 

permit persons to meet the Portfolio 

Requirement through a combination of 

the two Portfolio Requirement 

thresholds as currently allowed under 

Regulation 4.7(a)(1)(v)(C), which would 

largely remain unchanged by this 

NPRM, except to update the example 

provided therein of how the two tests 

could be combined to reflect the higher 

proposed thresholds. 

The Commission recognizes that these 

increases to the Portfolio Requirement 

will likely result in a certain portion of 

currently-qualifying QEPs no longer 


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Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 70855 

31 17 CFR 4.7(a)(3). 

32 17 CFR 4.7(b)(2) (providing an exemption from 

the specific requirements of §§ 4.21, 4.24, 4.25, and 

4.26 with respect to each exempt pool). The 

prescribed ‘‘form statement’’ indicates that the 

CPO’s offering memorandum has not been, nor is 

it required to be, filed with the Commission, and 

that the CFTC has not reviewed or approved such 

offerings or any related offering memoranda for the 

4.7 pool. Id. 

33 17 CFR 4.7(c)(1) (providing an exemption 

‘‘from the specific requirements of §§ 4.31, 4.34, 

4.35, and 4.36’’). The prescribed ‘‘form statement’’ 

indicates that the CTA’s brochure has not been, nor 

is it required to be, filed with the Commission, and 

that the CFTC has not reviewed or approved such 

trading program or brochure. Id. 

34See 17 CFR 4.7(d). 

35 17 CFR 4.7(b)(2); 17 CFR 4.7(c)(1). 

36 1992 Final Rule, 57 FR at 34857. 

37 Id. at 34858. 

38 Id. (citing pension plan regulations as an 

example). 

39 Id. 

meeting the thresholds. Regulation 

4.7(a)(3) provides that CPOs must assess 

a person’s QEP status, including 

satisfaction of the Portfolio 

Requirement, at the time of sale of any 

pool participation units, and that CTAs 

must make a similar assessment at the 

time that a person opens an exempt 

account.31 The Commission believes 

that continuing this requirement, as 

opposed to requiring mandatory 

redemptions or terminations of advisory 

relationships for those current QEPs 

who may not meet the proposed 

heightened thresholds, minimizes the 

potential for disruption to the 4.7 pool 

or trading program, as well as possible 

negative consequences for the current 

QEPs. Therefore, the Commission is 

proposing to retain the requirements of 

current Regulation 4.7(a)(3) in Proposed 

Regulation 4.7(a)(6)(ii), and requests 

comment on this aspect of the proposal. 

The Commission solicits comment on 

these proposed increases to the Portfolio 

Requirement in the QEP definition. In 

addition, the Commission also seeks 

comment on the following: 

1. Are the CPI–U and the CPI–W 

indexes the most appropriate for 

considering the impact of inflation on 

the thresholds within the Portfolio 

Requirement, and if they are not, what 

other suggested indexes or methods 

should the Commission consider using 

to assess inflationary effects? 

2. The Commission is also seeking 

any data or information, from CPOs and 

CTAs that utilize Regulation 4.7, on the 

estimated number of advisory clients 

and pool participants that currently 

qualify as QEPs via the existing 

Portfolio Requirement, but would not so 

qualify if the increased monetary 

thresholds in the Portfolio Requirement 

described above are adopted. 

3. How much time would CPOs and 

CTAs need to determine that their 

existing QEP pool participants and 

clients would continue to satisfy the 

increased Securities Portfolio or Initial 

Margin and Premium Tests, if adopted 

as proposed? 

b. Establishing Minimum Disclosure 

Requirements Under Regulation 4.7 

As stated above, Regulation 4.7 

provides exemptions from the broader 

part 4 compliance requirements, 

including those regulations requiring 

disclosures of general and performance 

information about a pool or trading 

program, for CPOs with respect to pools 

offered solely to QEPs, and for CTAs 

advising or managing the accounts of 

QEPs. More specifically, Regulation 

4.7(b)(2) provides an exemption for 

CPOs with respect to their pools offered 

solely to QEPs regarding: (1) the 

requirement to deliver a disclosure 

document in Regulation 4.21; (2) the 

general disclosures required by 

Regulation 4.24; (3) the performance 

disclosures required by Regulation 4.25; 

and (4) the use and amendment 

requirements in Regulation 4.26; so long 

as the CPO provides a form statement on 

the cover page of any offering 

memorandum it chooses to distribute to 

its prospective pool participants (or near 

the signature line of the pool’s 

subscription agreement, if its CPO 

chooses not to distribute an offering 

memorandum).32 Similarly, Regulation 

4.7(c)(1) provides an exemption for 

CTAs with respect to their trading 

programs offered to QEPs regarding: (1) 

the requirement to deliver a disclosure 

document in Regulation 4.31; (2) the 

general disclosures required by 

Regulation 4.34; (3) the performance 

disclosures required by Regulation 4.35; 

and (4) the use and amendment 

requirements in Regulation 4.36; 

provided that the CTA includes a form 

statement on the cover page of any 

brochure or disclosure statement it 

chooses to distribute to its prospective 

advisory clients (or near the signature 

line of the advisory agreement, if the 

CTA chooses not to distribute a 

brochure or disclosure statement).33

Currently, because of Regulations 

4.7(b)(2) and (c)(1), CPOs and CTAs 

claiming these exemptions 34 are not 

required to deliver or disseminate any 

offering memoranda, brochures, or 

disclosure statements to their 

prospective QEP pool participants or 

advisory clients (QEP Disclosures). 

Rather, these CPOs and CTAs are only 

required to ensure that any QEP 

Disclosures they elect to provide, 

‘‘include all disclosures necessary to 

make the information contained therein, 

in the context in which it is furnished, 

not misleading.’’ 35

At the time of Regulation 4.7’s 

adoption in 1992, the Commission’s 

rationale for providing these broad 

disclosure exemptions was, in part, 

based on the belief that QEPs are able 

to identify and obtain the information 

they deem necessary to evaluate the 

investment offered and thus that 

prescriptive rules imposing specific 

disclosure requirements are not 

essential.36 The 1992 Final Rule further 

stated that the QEP definition is 

designed to assure that 4.7 offerings are 

made only to investors with sufficient 

sophistication and expertise to assess 

the appropriateness of the investment 

for their purposes and to obtain all the 

information they need to evaluate and 

monitor the contemplated investment, 

and placed the responsibility for 

obtaining such information about 4.7 

pools and trading programs squarely on 

the prospective QEP pool participant or 

advisory client.37 The Commission also 

noted that requirements under other 

regulatory structures may apply to 

investor pools or their principals and 

require the CPO of an investor pool to 

make disclosure[s] to such 

participants.38 The Commission 

explained then that, despite the relief 

provided by Regulation 4.7, CPOs and 

CTAs relying on those exemptions with 

respect to the disclosure requirements 

in part 4 remain subject to the generally 

applicable statutory provisions in the 

CEA that prohibit defrauding or 

misleading investors, as well as those 

that specifically prohibit CPOs, CTAs, 

and their associated persons from 

defrauding or deceiving their 

participants and clients.39 In sum, the 

Commission sought in 1992 to create a 

simplified regulatory and compliance 

framework for CPO and CTA offerings to 

QEPs, leveraging the applicability of 

other Federal regulations to require 

disclosures to investors, and relying 

upon its broader enforcement powers to 

safeguard against fraud at inception, and 

throughout the lifecycle of the 4.7 

offering, as well as the ability of QEPs 

to demand and receive such disclosures 

on their own. 

In proposing Regulation 4.7, the 

Commission explained that, with 

respect to its oversight of CPOs and 

CTAs, it had endeavored to construct a 

regulatory framework that avoids 

unnecessary burdens without reducing 

investor protection and refined that 

framework as appropriate to respond to 

changing market conditions and to 

simplify and streamline the regulatory 

structure without creating regulatory 


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40 1992 Proposed Rule, 57 FR at 3149. 

41Public Roundtable to Discuss Risk Management 

Practices by Commodity Pool Operators (Mar. 18, 

2014), available at www.cftc.gov/idc/groups/public/ 

@newsroom/documents/file/transcript031814.pdf 

(Roundtable Transcript). 

42 ‘‘Funds of funds’’ as used in this document 

means pools that invest in unrelated funds, pools, 

or other collective investment vehicles. 

43See, e.g., id. at 31–35 (comments from 

representative of UBS Alternative and Quantitative 

Investments); id. at 39–41 (comments from 

representative of Mesirow Advanced Strategies, 

Inc.). 

44See, e.g., Blackstone Alternative Asset 

Management, a registered CPO, manages 

approximately $81bn in client assets and uses the 

services of other asset managers, available at 

https://www.blackstone.com/our-businesses/hedgefund-solutions-baam/ (noting, ‘‘Our size also gives 

us the ability to negotiate customized mandates and 

improved terms with managers,’’ and touting their 

‘‘rigorous process for evaluating managers and 

opportunities’’); Lighthouse Investment Partners, 

LLC, another registered CPO that similarly allocates 

assets to other managers, manages approximately 

$15bn, available at https://www.linkedin.com/ 

company/lighthouse-investment-partners-llc and 

http://lighthousepar.wpengine.com/our-funds/ 

(noting that their portfolio of hedge funds uses a 

‘‘proprietary managed account framework’’ that 

enables them to ‘‘negotiate better terms’’ and 

ensures that Lighthouse retains the ‘‘ability to 

revoke manager trading authority at any time’’). 

45Roundtable Transcript, at 40–41 (comments 

from representative of Mesirow Advanced 

Strategies, Inc., describing how the firm had their 

‘‘tracking index running next to their performance 

at all times and if at any time their performance 

deviates from that basic tracking index, [they] are 

on the phone with that manager trying to 

understand why that happens’’). 

46See, e.g., Herbert Moskowitz and Ari Moskowitz 

v. Accredited Investment Management Corp., Peter 

G. Catranis, and Russell E. Tanner, CFTC Docket 

Nos. 13–R15 and 13–R20, Default Judgment, Apr. 

20, 2018, available at https://www.cftc.gov/idc/ 

groups/public%40lrdispositions/documents/ 

legalpleading/idmoskowitz05122016.pdf (finding in 

favor of the plaintiffs regarding a 4.7 CTA’s failure 

to provide ‘‘fair and balanced’’ disclosures 

regarding the risks and rewards of the offered 

trading program); Susan Taylor Martin, How 

Tampa’s James Cordier went from high roller to 

YouTube apology after losing $150 million, Tampa 

Bay Times, Feb. 11, 2019, available at https://

www.tampabay.com/business/how-tampas-jamescordier-went-from-high-roller-to-youtube-apologyafter-losing-150-million-20190206/ (describing how 

Mr. Cordier, according to deposition testimony from 

a former client, failed to provide an accurate 

statement regarding the treatment of customer funds 

held at a futures commission merchant and 

characterized the only risk to the client’s funds as 

‘‘market risk’’); Leanna Orr, Remember Wall Street’s 

Viral Laughingstock, OptionSeller.com?, 

Institutional Investor, May 13, 2020, available at 

https://www.institutionalinvestor.com/article/ 

b1lm2xg8g69vbc/Remember-Wall-Street-s-ViralLaughingstock-OptionSeller-com (quoting counsel 

to the failed 4.7 CTA’s clients, many of whom were 

retirees, ‘‘These people work their whole lives to 

make a nice middle class life, and then the bottom 

drops out and they drop out of the middle class. 

They don’t even understand why it happened . . . 

They rely on these [expletives] who said they knew 

what they were doing.’’). 

47Susan Taylor Martin, How Tampa’s James 

Cordier went from high roller to YouTube apology 

after losing $150 million, Tampa Bay Times, Feb. 

11, 2019, available at https://www.tampabay.com/ 

business/how-tampas-james-cordier-went-fromhigh-roller-to-youtube-apology-after-losing-150- 

million-20190206/ (reciting allegations from a 

complaint against a 4.7 CTA stating that the CTA 

promised ‘‘fastidious’’ risk management, but failed 

to hedge its naked options appropriately for the risk 

profile of its clients). 

48See, e.g., In the Matter of: Highland 

Quantitative Driven Investments LLC and Michael 

Todd Zatorski, NFA Case No. 20–BCC–004 (alleging 

that the named CPO and its principal failed to 

update their private placement memoranda, and 

thereby inform their current and prospective 4.7 

pool participants, with respect to significantly 

increased fees, while simultaneously imposing a 

one- to two-year lock up period, which foreclosed 

the possibility of threatening to withdraw their 

capital contributions absent updated disclosures). 

49See id.; see also U.S. CFTC v. Mankad, 2022 

WL 17752224 (D.C. Ariz. Oct. 19, 2022) (finding 

that the defendant and his CPO failed to update the 

private placement memorandum for its 4.7 pool 

following changes to their trading strategy). 

gaps.40 Although the Commission 

expects QEPs meeting a properly 

calibrated Portfolio Requirement to 

generally possess the level of financial 

sophistication, as described by the 

Commission in 1992, the Commission 

preliminarily concludes in this 

proposalthat current market conditions 

and industry practices support 

proposing an evolved disclosure regime 

in Regulation 4.7. The Commission is 

concerned that the absence of minimal 

disclosure obligations and an ongoing 

requirement to keep them accurate fails 

to ensure that all QEPs have the leverage 

and resources to demand the 

information necessary for QEPs to make 

informed investment decisions, or to 

engage in ongoing close monitoring to 

confirm that the information provided 

remains accurate and complete to 

facilitate their continued understanding 

of their investments. The definition of 

QEP in Regulation 4.7 encompasses a 

broad spectrum of market participants 

from large fund complexes and other 

institutional investors with significant 

assets under management to individuals 

with varying backgrounds and 

experience, each of which has vastly 

different resources available to insist 

upon the disclosure of information 

regarding the offered 4.7 pool or trading 

program and then to analyze whatever 

information is provided. 

In 2014, staff in the Commission’s 

Division of Swap Dealer and 

Intermediary Oversight (DSIO) 

convened a roundtable on the risk 

management practices of CPOs.41 As 

part of that discussion, participants 

addressed the manner in which CPOs of 

pools that are ‘‘Funds of Funds,’’ 42 or 

that allocate some or all of their assets 

under management to unaffiliated asset 

managers, engage with their underlying 

funds and asset managers. Specifically, 

several large CPOs discussed the 

ongoing oversight that they engage in 

regarding their investee funds, from 

analyzing past performance and 

understanding liquidity limitations, 

both of which require a deep 

understanding of the investment 

activities of the underlying funds, to 

addressing issues of governance, 

organization, and staffing; these CPOs 

explained that all of these efforts are 

undertaken to ensure that underlying 

investments remain the right fit for their 

investor fund’s strategy and their 

participants.43 Such large asset 

managers have the market power 

necessary to demand detailed 

investment information across all 

aspects of their underlying funds and 

managers, due to their role as 

gatekeepers for enormous pools of 

investor capital.44 Moreover, they also 

possess the resources necessary to 

develop sophisticated internal systems 

and technology to digest that 

information and engage in real-time 

monitoring of whether the underlying 

fund or manager’s actual trading and 

conduct is consistent with the 

information being provided.45

Conversely, individual natural persons, 

who meet the QEP definition through 

the Portfolio Requirement, but 

nonetheless do not command the assets 

of large financial institutions, likely lack 

the ability to demand the same level of 

transparency afforded through the 

prospect of additional significant asset 

allocations, and thus are more likely to 

be reliant upon whatever information 

the CPO or CTA is providing as its 

baseline disclosure with limited ability 

to demand more, or analyze its accuracy 

and completeness.46 This perceived 

disparity may increase the likelihood of 

CPOs and CTAs with less rigorous risk 

management and controls to seek capital 

from such individuals who are generally 

less able to engage in the same rigorous 

monitoring.47

Moreover, particularly once their 

relationship with a CPO or CTA is 

established, QEPs of all types may have 

diminished power over time to demand 

the same level of information about 

their investments as they had received 

at the outset, due to the presence of 

lock-up periods or infrequently 

permitted redemptions that may require 

extended notice periods following 

initial investment.48 The Commission 

understands that, with respect to CPOs 

and CTAs who claim and operate under 

Regulation 4.7 exemptions, NFA staff 

has observed situations where the 

quality and provision of the information 

presented to the customer may be 

inconsistent.49 The Commission 

preliminarily believes that these factors 

warrant reconsideration of the 

disclosure exemptions. Furthermore, 


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50See Adam R. Waldman, OTC Derivatives and 

Systemic Risk: Innovative Finance or the Dance into 

the Abyss?, 43 a.m. U. L. Rev. 1023, 1025 n.5 (1994) 

(citing Andrew Barry, BARRON’S, Sept. 13, 1993, 

at 49, reporting a swaps market size of $3.8T, as 

compiled by the International Swaps and 

Derivatives Association, Inc. (ISDA), which equates 

to roughly $8.8T based on CPI–U). 

51See the ISDA SwapsInfo First Quarter 2023 

Review, May 2023, available at https://

www.isda.org/2023/05/02/swapsinfo-first-quarterof-2023-review-summary/ (stating that the interest 

rate derivatives market alone was valued at $106.1T 

notional in the first quarter of 2023); Bank for 

International Settlements, ‘‘OTC derivatives 

statistics at end-June 2022,’’ available at https://

www.bis.org/publ/otc_hy2211.pdf (stating that ‘‘the 

notional value of outstanding over-the-counter 

(OTC) derivatives rose to $632 trillion at end-June 

2022, up from $598 trillion at end-2021’’). 

52Most notable, and as widely covered in the 

press, is the recent development and availability of 

commodity interest products linked to digital 

assets, such as bitcoin, discussed infra. 

53See Katherine Ross, CME Group to add ether/ 

bitcoin ratio futures in July pending regulatory 

approval, Blockworks, June 29, 2023, available at 

https://blockworks.co/news/cme-adds-ether-bitcoinratio-futures. 

54The risks of these products to investors are of 

such concern that the CFTC and SEC have both 

acknowledged their volatility in various 

publications. In fact, and most relevant to this 

discussion, the SEC and CFTC released a joint 

investor alert to investors thinking about investing 

in a fund with exposure to bitcoin futures. The alert 

emphasized that investors should understand the 

unique characteristics and heightened risks 

compared to other funds. See CFTC/SEC Investor 

Alert: Funds Trading in Bitcoin Futures, available 

at https://www.cftc.gov/LearnAndProtect/ 

AdvisoriesAndArticles/fraudadv_funds_trading_in_

bitcoin_futures.html. Although these are not the 

only new products that have launched over the last 

30 years, the Commission believes they are 

examples that highlight a need for updating the 

customer protections provided under Regulation 

4.7. See Hannah Smith, Bitcoin crash: what was 

behind the crypto collapse?, The Times (May 22, 

2023), available at https://www.thetimes.co.uk/ 

money-mentor/article/is-bitcoin-crash-coming/ 

#Why-is-bitcoin-so-volatile? (noting that bitcoin 

‘‘has no underlying asset’’ and that ‘‘means that the 

movements in its price are solely based on 

speculation among investors about whether it will 

rise or fall in the future’’); Nicole Lapin, Explaining 

Crypto’s Volatility, Forbes (Dec. 23, 2021), available 

at https://www.forbes.com/sites/nicolelapin/2021/ 

12/23/explaining-cryptos-volatility/ 

?sh=1640938f7b54 (noting that ‘‘it isn’t intrinsically 

valuable,’’ which ‘‘means the investment’s value 

isn’t very grounded, which makes its price 

incredibly sensitive to even slight changes in 

investors’ expectations or perceptions’’). 

55See, e.g., In the Matter of the Application of 

LedgerX, LLC For Registration as a Derivatives 

Clearing Organization, Amended Order of 

Registration, available at https://www.cftc.gov/ 

media/4556/ledgerxllcamededdcoorder9-2-2020/ 

download. 

56 1992 Proposed Rule, 57 FR at 3149. 

these circumstances, acting together, 

could foster an environment in which 

QEPs seeking to participate in a pool or 

advisory program must choose between 

a very limited number of offerings 

subject to the full panoply of 

compliance requirements under part 4 

that provide them with more complete 

and regular information about their 

holdings, or a more varied and growing 

collection of QEP offerings, with 

substantially lower compliance 

obligations and no formal regulatory 

requirements with respect to disclosure 

that would ensure QEPs receive 

consistent, accurate, and current 

information about these products. 

In addition to the aforementioned 

concerns about the unequal bargaining 

power of QEPs, in the 30 years since 

that provision was adopted, the 

Commission has, as described above, 

witnessed a significant expansion and 

growth in the complexity and diversity 

of commodity interest products offered 

to QEPs via 4.7 pools and trading 

programs, as well as an expansion in the 

asset classes subject to the 

Commission’s jurisdiction and 

oversight. Broadly speaking, since the 

CFTC’s authority over swaps and the 

swap markets was expanded under the 

Dodd-Frank Act, there has been a 

considerable change in the way that 

swaps trade. For example, when 

Regulation 4.7 was adopted in 1992, 

swaps trading occurred over-the-counter 

and the total estimated size of the 

market was approximately $9T in 

today’s dollars; 50 whereas, after the 

Dodd-Frank Act’s implementation, 

many swaps products are exchangetraded and the total size of the swaps 

market has increased exponentially,51

and many CPOs and CTAs today 

incorporate swaps into the portfolios of 

their pools and trading programs. 

Regarding the products themselves, 

there has also been considerable 

development of new and complex 

commodity interest products.52

Although the Commission in 1992 

considered the commodity interest 

products then available in developing 

existing customer protections for QEPs 

in Regulation 4.7, product innovation in 

the commodity interest markets has 

continued at a rapid and unrelenting 

pace 53 raising concern that certain QEP 

participants and clients may not have 

the level of information necessary to 

fully appreciate the nature of the risk 

associated with their trading. For 

example, futures are now available on 

digital assets, which, although subject to 

the same regulatory regime as other 

futures products, often experience 

higher levels of volatility than more 

traditional commodity reference 

assets.54 Moreover, the technology 

underlying these assets is highly 

complex, subject to rapid innovation, 

and can pose substantially different 

principal risks as compared to 

traditional commodities, including 

unique cybersecurity risks and the 

potential for hacks and vulnerabilities 

in the storage and transmission of these 

assets. Given the relatively recent 

development of digital assets, it remains 

unclear as to whether the underlying 

markets, to which the futures and other 

derivatives are tied, are subject to 

market fundamentals similar to those of 

the traditional commodities markets. 

The Commission preliminarily believes 

that this can result in unpredictable 

movements in both the spot and 

commodity interest markets. As the 

financial system continues to 

experience a period of rapid evolution 

in the era of artificial intelligence and 

other technological advancements, the 

Commission expects to see continued 

development of novel investment 

products that, although structured like 

the traditional asset classes enumerated 

under the CEA, may in fact deviate from 

the typical operations of markets now 

subject to the Commission’s oversight. 

In view of these developments, the 

Commission believes that minimum 

disclosure requirements are essential to 

ensure that pool participants and 

advisory clients fully understand the 

risks associated with their investments. 

In addition to developments regarding 

products, market structure has also 

evolved in the years following the initial 

adoption of Regulation 4.7. Commodity 

pools and CTA advisory clients can 

access the futures markets either 

directly 55 or through an FCM, which 

present different risks and benefits to 

pool participants and advisory clients. 

Where FCMs are not part of the market 

structure, there may be fewer 

independent sources of information 

available to pool participants and 

advisory clients, making it even more 

important that QEPs receive full and 

accurate information regarding the risks 

related to their investments. 

Thus, given these developments in 

the commodity interest markets, among 

others, and similar to the circumstances 

underlying the 1992 Final Rule, with 

respect to Regulation 4.7, the 

Commission continues seeking to 

construct a regulatory framework that 

avoids unnecessary burdens without 

reducing investor protection and to 

respond to changing market conditions 

without creating regulatory gaps.56 The 

Commission preliminarily believes that 

requiring the provision of specific 

minimum disclosures for CPOs and 

CTAs operating 4.7 pools and trading 

programs will assist in mitigating the 

customer protection gaps that have 

developed since 1992 by ensuring that 

QEPs receive the information necessary 

to make informed investment decisions, 


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57See, e.g., Rule 502(b)(2) of Regulation D, 17 

CFR 230.502(b)(2) (requiring certain disclosures for 

offerings under Rule 506(b) of Regulation D, 17 CFR 

230.506(b)). Additionally, many CPOs and CTAs 

operating under Regulation 4.7 are also registered 

with the SEC as investment advisers. All 

investment advisers registered with the SEC under 

the IAA, 15 U.S.C. 80b–1, et seq., are required to 

comply with the applicable disclosure requirements 

under the IAA and the SEC’s regulations 

promulgated thereunder, regardless of the financial 

sophistication of any or all of their clients. 

Conversely, ‘‘Exempt Reporting Advisers’’ have 

limited reporting requirements with the SEC under 

the IAA, but otherwise are not required to register, 

and therefore, are not required to comply with the 

disclosure requirements imposed on registered 

investment advisers. See 15 U.S.C. 80b–3(l) and (m) 

(providing registration exemptions for advisers to 

venture capital funds and certain advisers to private 

funds). 

58The Commission notes here its belief and 

understanding that the current applicable 

requirement that any information in QEP 

Disclosures a CPO or CTA decides to provide is, ‘‘in 

the context in which it is furnished, not 

misleading’’ is fundamentally different and a much 

lower standard than the proposed requirement that 

QEP Disclosures be generally required and regularly 

updated so that they remain ‘‘materially accurate 

and complete.’’ 

59See, e.g., 17 CFR 4.26(d). 

and that such disclosures are subject to 

Commission and NFA oversight. 

Importantly, the Commission does not 

intend this NPRM to dissuade registered 

CPOs and CTAs from structuring their 

pools and trading programs to qualify 

for and utilize the exemptions in 

Regulation 4.7. Rather, the Commission 

preliminarily believes that, as a result of 

the changing market conditions 

described above, an evolved approach to 

QEP Disclosures under Regulation 4.7 is 

necessary to ensure that QEPs 

consistently receive specific, baseline 

information with respect to their 

investments in the commodity interest 

markets, and further, that such proposed 

regulatory adjustments would not 

greatly reduce the benefits 

intermediaries currently derive from 

relying upon the relief in Regulation 4.7. 

With this Proposal, the Commission is 

not proposing to rescind the disclosure 

exemptions in Regulations 4.7(b)(2) and 

(c)(1) in their entirety. Rather, the 

Commission aims to make targeted 

updates to these provisions that are 

designed to enhance customer 

protection, transparency, and fairness 

within the market of 4.7 pools and 

trading programs. The proposed 

amendments are intended to: (1) 

recognize the increasingly complex and 

diverse commodity interest investment 

products offered to QEPs today, and 

reflect the resulting evolution in view 

by the Commission that requiring basic 

disclosures to encourage informed 

investment decisions is the necessary 

and preferred approach for 4.7 pools 

and trading programs; (2) create a 

formalized Commission regulatory 

regime for promotional, advertising, and 

disclosure practices for CPOs and CTAs 

relying on Regulation 4.7 with respect to 

their QEP offerings, allowing for 

prospective and current participants 

and clients to better compare strategies, 

fees, and other characteristics of 4.7 

pools and trading programs through 

consistent QEP Disclosures; and (3) 

strengthen intermediary oversight by 

incorporating the review of QEP 

Disclosures into existing examination 

processes used by the Commission and 

NFA, which, in turn, would increase 

their accuracy and quality over time. 

By creating a formalized regulatory 

regime in part 4 for the promotional, 

advertising, and disclosure practices of 

CPOs and CTAs with respect to their 4.7 

pools and trading programs, the 

Commission preliminarily believes that 

this would strengthen its oversight of 

CPOs and CTAs relying on Regulation 

4.7 and that QEPs and the commodity 

interest markets overall would benefit as 

a result. The promotional, advertising, 

and disclosure practices of CPOs and 

CTAs utilizing Regulation 4.7 have 

changed a great deal since the original 

adoption of these exemptions. The 

Commission has observed that, despite 

there being no such requirements in 

Regulation 4.7, many CPOs and CTAs 

currently provide and distribute some 

disclosures and information regarding 

their 4.7 pools and trading programs to 

prospective QEP pool participants and 

advisory clients. These QEP Disclosures 

are commonly delivered in the form of 

private placement memoranda or 

trading program brochures, and 

typically include much of the 

information the Commission is 

proposing to require in this rule 

proposal. This practice results both from 

investor demand seeking to understand 

the 4.7 pools and trading programs 

offered in the current marketplace, as 

described above, as well as the 

requirements of other applicable 

regulatory regimes, like the Federal 

securities laws.57 The Commission 

notes, however, that some CTAs, which 

are not also regulated as registered 

investment advisers by the SEC, may 

not be otherwise required to provide 

any disclosures and may, in fact, only 

provide cursory promotional material. 

The Commission preliminarily 

believes that establishing minimum 

content requirements would ensure that 

existing QEP Disclosures are consistent 

in structure, accurate, kept up-to-date, 

and contain materially complete 

information regarding 4.7 pools and 

trading programs. As a result, current 

and prospective QEP participants and 

clients would be able to better compare 

investment programs, trading strategies, 

fees, and other characteristics of 4.7 

pools and trading programs. 

Additionally, even if the QEP 

Disclosures provided by CPOs and 

CTAs relying upon Regulation 4.7 differ 

in form and detail, the minimum 

required disclosures proposed in this 

NPRM would result in all QEPs 

receiving the same level of basic 

information prior to making an 

investment decision. The Commission 

preliminarily concludes that replacing 

the existing broad exemptions with a 

targeted minimum disclosure regime 

under Regulation 4.7 will ultimately 

bring discipline to the current ad hoc 

QEP Disclosure process, resulting in 

more uniform and consistent 

disclosures for prospective and current 

QEP advisory clients and pool 

participants. 

Finally, the Commission believes that 

amending Regulation 4.7 to require 

CPOs and CTAs to disclose certain 

information about their 4.7 pools and 

trading programs, as well as to keep 

such QEP Disclosures as business 

records, would facilitate more effective 

oversight of registered CPOs and CTAs 

and their offerings by the Commission 

and NFA. The Commission expects that 

creating a formalized, affirmative 

regulatory requirement that materially 

accurate QEP Disclosures be delivered 

and kept current, would likely enhance 

investor confidence in commodity 

interest products generally by providing 

an increased level of transparency for 

the Commission and NFA into these 

registrants’ activities for examination 

and enforcement purposes, thereby 

improving oversight.58 Moreover, by 

facilitating Commission and NFA access 

to QEP Disclosures kept amongst CPO 

and CTA business records, the 

Commission believes that the proposed 

affirmative recordkeeping requirements 

in Regulations 4.7(b)(5) and (c)(2) would 

serve as an additional deterrent to CPOs 

or CTAs engaging in fraud or providing 

misleading representations in QEP 

Disclosures. 

The amendments proposed in this 

NPRM strike an appropriate balance, in 

the Commission’s opinion, by 

establishing minimum content 

requirements for QEP Disclosures 

regarding 4.7 pools and trading 

programs, and mandating that they be 

kept as business records of the 

intermediary, while still retaining 

exemptions from the provisions of part 

4 that require filing and pre-approval of 

non-4.7 Disclosure Documents by the 

Commission and NFA.59 These 

proposed amendments would elevate 

the disclosure provided for 4.7 pools 

and trading programs to a higher 


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60 17 CFR 4.41. 

61The Commission notes that it developed these 

part 4 required disclosures originally in response to 

changing market conditions and to implement its 

statutory mandates in regulating and overseeing 

CPO and CTA activities. In fact, in the final rule 

establishing the initial requirements under 

Regulations 4.24, 4.25, 4.34, and 4.35, the 

Commission explicitly highlighted that, since the 

adoption of the part 4 framework, the number of 

registered CPOs had more than doubled and the 

number of CTAs had increased threefold; assets 

under the management of CPOs had grown 

dramatically; and the range of available futures and 

option contracts had increased substantially. 60 FR 

38147 (July 25, 1995) (1995 Final Rule). This 

justification, cited in 1995, is arguably even more 

relevant to today’s CPO and CTA population using 

Regulation 4.7 because the growth of that specific 

category of intermediaries and that sector of the 

commodity interest markets has continued 

significantly since the 1995 Final Rule. 

62 1992 Proposed Rule, 57 FR at 3151; 1992 Final 

Rule, 57 FR at 34858. 

63 17 CFR 1.31. 

standard than that imposed on nonrequired promotional material under 

Regulation 4.41.60 In particular, the 

Commission believes that, if adopted, 

these amendments would permit it and 

NFA to monitor and assess the accuracy 

of distributed QEP Disclosures, as 

compared to a CPO’s or CTA’s actual 

trading activities, via existing 

examination processes, as well as 

through comparison to information 

these intermediaries regularly provide 

in other filings, like Forms CPO–PQR 

and/or CTA–PR. Having the ability to 

review QEP Disclosures during routine 

examinations, combined with an 

affirmative requirement that CPOs and 

CTAs provide information that is 

materially complete, accurate and up-todate, would, in the Commission’s 

preliminary opinion, provide the CFTC 

and NFA with an additional level of 

oversight that simply does not exist 

under the current regulatory framework. 

Moreover, the Commission further 

preliminarily believes that QEP 

Disclosures would likely qualitatively 

improve over time, should these 

proposed amendments be adopted, by 

virtue of the QEP Disclosures being 

regularly examined and/or reviewed by 

Commission and NFA staff possessing 

the unique, deep subject matter 

expertise with respect to commodity 

interests that other Federal agencies 

simply do not and are not reasonably 

expected to possess. 

Among the existing disclosures 

outlined in part 4 for registered CPOs 

and CTAs not claiming Regulation 4.7, 

the Commission believes that both the 

general disclosures, as described in 

Regulations 4.24 and 4.34, and 

performance disclosures, as described in 

Regulations 4.25 and 4.35, form the 

foundational level of information about 

a pool’s or advisory program’s trading 

strategies, material risks, fees, and 

conflicts associated therewith; 

furthermore, the Commission 

preliminarily believes that disclosure by 

a CPO or CTA is the primary source of 

information a prospective or actual 

participant or client would rely upon to 

make an appropriately informed 

investment decision, even for those 

financially sophisticated persons who 

are QEPs. Specifically, the subset of 

general disclosures listed in Regulations 

4.24 and 4.34 that the Commission is 

proposing to now be required for 4.7 

pools and trading programs would 

provide prospective QEP pool 

participants and clients with important 

information on principal risk factors, 

investment programs, use of proceeds, 

custodians, fees and expenses, and 

conflicts of interest. The subset of 

performance disclosures from 

Regulations 4.25 and 4.35 that the 

Commission is proposing to require 

would further involve the presentation 

of vital current and past performance 

metrics in a format consistent with that 

already developed for non-QEP pool 

participants and advisory clients. 

Combined, the Commission intends the 

proposed addition of these disclosures 

to Regulation 4.7 to both provide 

appropriate customer protection 

safeguards and to support its 

intermediary oversight through methods 

that have been assessed and further 

developed since their adoption, nearly 

thirty years ago.61

The Commission requests comment 

on all aspects of the proposed 

amendments outlined below that would 

require certain information be disclosed 

to prospective QEP pool participants 

and advisory clients under Regulation 

4.7, that QEP Disclosures are regularly 

updated and materially complete, and 

that they be included in the business 

records of CPOs and CTAs claiming 

Regulation 4.7 exemptions. In addition, 

the Commission seeks comment on the 

following questions: 

1. Should the Commission increase or 

decrease the types of information 

included in Proposed Regulations 

4.7(b)(2) and (c)(1)? In particular, should 

additional disclosure requirements 

listed in Regulations 4.24 and 4.34 be 

included for CPOs and CTAs, 

respectively? If so, what disclosures? 

2. The Commission is seeking specific 

data or information regarding: (i) the 

current number of CPOs and CTAs 

utilizing Regulation 4.7 that provide the 

proposed minimum disclosures to their 

QEP participants and clients; (ii) the 

level of disclosure currently provided 

by CPOs and CTAs to their QEP 

participants and clients; (iii) if 

disclosures are provided, the general 

format, tenor, and manner used in both 

structuring and delivering the 

disclosures; and (iv) the context and 

timing of when any such disclosures are 

provided (e.g., whether during 

solicitation or otherwise during the 

course of the investment relationship). 

3. What specific challenges would 

CPOs and CTAs face in complying with 

the disclosure requirements in Proposed 

Regulations 4.7(b)(2) and (c)(1)? Should 

the Commission consider an 

implementation period for the proposed 

amendments, and if so, how much time 

should the Commission allow for CPOs 

and CTAs to develop and prepare QEP 

Disclosures that would comply with the 

proposed amendments? 

The following sections explain the 

proposed amendments in more detail. 

i. Proposed Amendments to Regulations 

4.7(b)(2) and (b)(5) 

The Commission is proposing to 

amend the disclosure relief outlined in 

Regulations 4.7(b)(2)(i) and (ii) to 

require CPOs to deliver to their 4.7 

pools’ prospective participants QEP 

Disclosures that enumerate certain 

specific disclosures, including 

descriptions of the 4.7 pool’s principal 

risk factors, its investment program, use 

of proceeds, custodians, fees and 

expenses, conflicts of interest, and 

certain performance disclosures, 

including basic past performance 

information. As a consequence of 

requiring these minimum disclosures 

for 4.7 pools, the Commission is also 

proposing a corresponding amendment 

to remove the exemption from 

disclosing the past performance of 4.7 

pools in the Disclosure Documents of 

non-4.7 pools. That provision had been 

proposed and adopted ‘‘in connection 

with’’ the previous policy position that 

4.7 pools had no minimum or 

mandatory disclosure requirements,62

which the Commission, as just 

discussed, now seeks to change through 

the amendments in this NPRM; the 

Commission further preliminarily 

believes such information would be 

valuable to commodity pool participants 

of all types. Finally, the Commission 

proposes to amend Regulation 4.7(b)(5) 

to additionally require that CPOs 

maintain such QEP Disclosures among 

the other books and records of their 4.7 

pools, and made available upon request 

to the Commission, NFA, and the U.S. 

Department of Justice, in accordance 

with Regulation 1.31.63

As proposed, Regulation 4.7(b)(2)(i) 

would no longer provide an exemption 

from Regulation 4.21, and instead of 

requiring compliance with Regulations 


ddrumheller on DSK120RN23PROD with PROPOSALS2
70860 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

64 17 CFR 4.24(g). 

65 17 CFR 4.24(h). 

66 17 CFR 4.24(h)(1)(iii). 

67 17 CFR 4.24(i)(1). 

4.24 and 4.25 in their entirety, the 

proposed amendments include new 

Regulations 4.7(b)(2)(i)(A) through (E) 

that enumerate the specific disclosures 

the Commission preliminarily believes 

prospective QEP pool participants 

should receive, and that incorporate 

certain subparagraphs of those part 4 

disclosure regulations by reference. As 

mentioned above, the specific 

disclosures proposed to be required for 

4.7 pools include: descriptions of the 

4.7 pool’s principal risk factors, its 

investment program, use of proceeds, 

custodians, fees and expenses, conflicts 

of interest, and certain performance 

disclosures, including past performance. 

Importantly, the Commission is not 

proposing to require that CPOs provide 

QEP Disclosures identical to the 

Disclosure Documents subject to the full 

panoply of requirements under 

Regulations 4.24 and 4.25. Rather, the 

Commission has specifically chosen 

what it believes to be the most 

meaningful and important information 

for prospective QEP pool participants, 

and is proposing to require that CPOs 

provide this information in QEP 

Disclosures, subject to the substance 

and formatting requirements of 

Regulations 4.24 and 4.25. The 

Commission is also proposing to retain, 

but reformat, the existing language in 

Regulation 4.7(b)(2)(i) into Proposed 

Regulations 4.7(b)(2)(i)(F) and (G). 

Proposed Regulation 4.7(b)(2)(i)(F) 

would include the requirement that QEP 

Disclosures provide all disclosures 

necessary to make the information 

contained therein, in the context in 

which it is furnished, not misleading, 

and Proposed Regulation 4.7(b)(2)(i)(G) 

would continue to require a form 

disclaimer like that currently required 

by Regulation 4.7(b)(2)(i). 

Furthermore, it is crucial that QEP 

Disclosures used and distributed by 

CPOs be kept current and that they be 

maintained as business records to 

ensure compliance with the proposed 

general and performance disclosure 

requirements and to facilitate 

Commission and NFA oversight of these 

intermediaries. The Commission is 

therefore proposing to amend 

Regulation 4.7(b)(5) to require that QEP 

Disclosures be maintained among a 

CPO’s other books and records for a 4.7 

pool and made available to any 

representative of the Commission, NFA, 

or the U.S. Department of Justice in 

accordance with Regulation 1.31. This 

amendment would allow the 

Commission and NFA to review QEP 

Disclosures as part of routine 

examinations and civil enforcement 

actions. Finally, Proposed Regulation 

4.7(b)(2)(i) no longer provides an 

exemption from Regulation 4.26 in its 

entirety; the Commission is proposing to 

restrict this exemption to Regulation 

4.26(d) only, such that compliance with 

Regulations 4.26(a) through (c), 

provisions that generally govern the use 

and amendment of this information, 

would otherwise be required. Because 

the Commission is not proposing to 

require that QEP Disclosures for 4.7 

pools be filed and approved by NFA 

prior to their first use, Proposed 

Regulation 4.7(b)(2)(i) retains an 

exemption from Regulation 4.26(d). 

A. Principal Risk Factors 

The Commission is proposing to add 

Proposed Regulation 4.7(b)(2)(i)(A) that 

would require QEP Disclosures 

distributed in connection with soliciting 

prospective participants in a 4.7 pool to 

include a description of the principal 

risk factors as required by Regulation 

4.24(g). Specifically, Regulation 4.24(g) 

requires CPOs to describe, in their 

Disclosure Documents, the principal 

risk factors of a pool investment 

including, without limitation, risks 

relating to volatility, leverage, liquidity, 

counterparty creditworthiness, as 

applicable to the types of trading 

programs to be followed, trading 

structures to be employed and 

investment activity (including retail 

forex and swap transactions) expected 

to be engaged in by the offered pool.64

Proposed Regulation 4.7(b)(2)(i)(A) 

would incorporate Regulation 4.24(g) by 

reference and would similarly require 

CPOs to provide a description of their 

4.7 pool’s principal risk factors in their 

QEP Disclosures. 

B. Investment Program and Use of 

Proceeds 

The Commission is also proposing to 

require that QEP Disclosures include the 

information mandated by Regulation 

4.24(h), i.e., a 4.7 pool’s investment 

program, custodians, and use of 

proceeds. Specifically, Regulation 

4.24(h) requires CPOs to disclose: (1) the 

types of commodity interests and other 

interests which the pool will trade; (2) 

a description of the trading and 

investment programs and policies that 

will be followed by the offered pool; (3) 

a summary description of the pool’s 

major CTAs, including their respective 

percentage allocations of the pool assets 

and a description of the nature and 

operation of the trading programs such 

CTAs will follow; (4) a summary 

description of the pool’s major investee 

pools or funds, including their 

respective percentage allocations of pool 

assets and a description of the nature 

and operation of such investee pools 

and funds; and (5) certain use of 

proceeds information, including the 

manner in which the pool will fulfill its 

margin requirements, the percentage of 

the pool’s assets held in segregation 

pursuant to the CEA, and information 

regarding to whom income from margin 

or security deposits will be paid.65

Additionally, Regulation 4.24(h)(1)(iii) 

requires CPOs to disclose both the types 

of commodity interests and other 

interests the pool will be trading, 

including the custodian or other entity 

(e.g., bank or broker-dealer) that will 

hold such interests, and if such interests 

will be held in jurisdictions outside of 

the United States, the jurisdiction in 

which such interests or assets will be 

held.66 Proposed Regulation 

4.7(b)(2)(i)(B) would require QEP 

Disclosures to include the information 

described above by incorporating 

Regulation 4.24(h) by reference. 

C. Fees and Expenses 

The Commission is also proposing to 

require that CPOs disclose information 

regarding their fees and expenses for 

their 4.7 pools in a manner consistent 

with Regulation 4.24(i). Regulation 

4.24(i) requires CPOs to provide a 

complete description of each fee, 

commission, and other expense, which 

the CPO knows or should know has 

been incurred by the pool for its 

preceding fiscal year and is expected to 

be incurred by the pool in its current 

fiscal year, including fees and other 

expenses incurred in connection with 

the pool’s participation in investee 

pools and funds.67 Proposed Regulation 

4.7(b)(2)(i)(C) would incorporate 

Regulation 4.24(i) by reference and 

require, without limitation, the 

disclosure of all the fees specifically 

enumerated in Regulation 4.24(i), 

subject to the other provisions therein, 

including the requirement to provide, in 

a tabular format, an analysis setting 

forth how the break-even point for a 4.7 

pool was calculated, including all fees, 

commissions, and other expenses of the 

4.7 pool. 

D. Conflicts of Interest 

The Commission is proposing to 

amend Regulation 4.7(b)(2)(i) to require 

the disclosure of conflicts of interest in 

QEP Disclosures for 4.7 pools, as 

required by Regulation 4.24(j). 

Regulation 4.24(j) requires CPOs to 

provide a full description of any actual 

or potential conflicts of interest 


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68 17 CFR 4.24(j). 

69 17 CFR 4.24(j)(2) and (3). Regulation 4.24(j)(3) 

requires a description of the conflicts of interest of 

any arrangements whereby someone may benefit, 

directly or indirectly, from the pool’s account 

maintenance with an FCM or RFED; from 

maintenance of the pool’s swap positions with a 

swap dealer; from the introduction of the pool’s 

account by an introducing broker to an FCM, RFED, 

or swap dealer; or from the investment of the pool’s 

assets in other investee pools or funds or other 

investments. 17 CFR 4.24(j)(3). 

70 17 CFR 4.25. 

71 17 CFR 4.25(a). 72 17 CFR 4.25(b) and (c). 

regarding any aspect of the pool on the 

part of: (1) the CPO; (2) the pool’s 

trading manager, if any; (3) any major 

CTA; (4) the CPO of any major investee 

pool; (5) any principal of the foregoing; 

and (6) any other person providing 

services to the pool, soliciting 

participants for the pool, acting as a 

counterparty to the pool’s retail forex or 

swap transactions, or acting as a swap 

dealer with respect to the pool.68

Additionally, Regulation 4.24(j) requires 

the disclosure of any other material 

conflict involving the offered pool, as 

well as a description of any 

arrangements described in Regulation 

4.24(j)(3).69 Proposed Regulation 

4.7(b)(2)(i)(D) would incorporate 

Regulation 4.24(j) by reference, 

requiring comparable disclosure of these 

conflicts of interest by CPOs with 

respect to their 4.7 pools. 

E. Past Performance of 4.7 Pools 

The Commission is further proposing 

to require CPOs to disclose certain 

performance information as required by 

Regulation 4.25 in the QEP Disclosures 

for their 4.7 pools. Specifically, the 

Commission is proposing to partially 

remove the existing complete exemption 

from Regulation 4.25 by requiring CPOs 

to disclose all performance information 

listed under Regulation 4.25 with 

respect to their 4.7 pools, with the 

exception of performance information 

for pools other than the 4.7 pool. 

Regulation 4.25 requires CPOs to 

include capsule performance 

information for both pools and 

accounts, subject to certain presentation 

and content requirements outlined in 

paragraph (a) of that section.70

Regulation 4.25(a) also provides 

requirements for the time period for 

required performance, trading programs, 

the calculation of and recordkeeping 

concerning performance information, 

proprietary trading results, as well as a 

legend for all performance disclosures, 

whether mandatory or voluntary, that is 

prominently displayed and states, 

‘‘PAST PERFORMANCE IS NOT 

INDICATIVE OF FUTURE 

RESULTS.’’ 71 Among the additional 

requirements within Regulation 4.25, 

paragraph (a)(3) requires CPOs to 

disclose certain past performance 

information for pools other than the 

offered pool. Finally, Regulations 

4.25(b) and (c) clarify and establish the 

required performance disclosures for 

offered pools that have at least a threeyear operating history, and for those 

with less than a three-year operating 

history, respectively.72 For the purposes 

of targeting this NPRM to requiring 

performance disclosures the 

Commission preliminarily believes are 

most important and valuable to 

prospective QEP participants, and to 

lessen the potential burden on CPOs 

resulting from incorporating minimum 

QEP Disclosures in Regulation 4.7, the 

Commission is not proposing to require 

that CPOs of 4.7 pools provide the 

disclosures referenced in paragraphs 

(a)(3) or (c)(2) of Regulation 4.25 

regarding past performance information 

for pools other than the 4.7 pool in their 

QEP Disclosures, which the 

Commission preliminarily believes 

strikes the appropriate balance of these 

potentially competing interests. 

Therefore, Proposed Regulation 

4.7(b)(2)(i) would no longer provide the 

specific exemption from Regulation 

4.25, and the Commission is proposing 

to add Regulation 4.7(b)(2)(i)(E), which 

would require QEP Disclosures to 

include performance disclosures that 

comply with Regulation 4.25, except 

paragraphs (a)(3) and (c)(2) of that 

section. 

ii. Proposed Amendments to 

Regulations 4.7(c)(1) and (c)(2) 

Consistent with the proposed 

amendments regarding additional 

disclosures for 4.7 pools discussed 

above, the Commission is also 

proposing to specifically enumerate 

additional disclosure requirements for 

4.7 trading programs in Regulation 

4.7(c)(1). Specifically, Proposed 

Regulation 4.7(c)(1)(i) would no longer 

provide an exemption from Regulation 

4.31, and, in lieu of requiring 

compliance with Regulations 4.34 and 

4.35 in their entirety, the Commission is 

proposing to enumerate specific 

disclosure requirements it wishes to 

prioritize for 4.7 trading programs. 

Proposed Regulation 4.7(c)(1)(i) would 

also include new paragraphs (c)(1)(i)(A) 

through (F) that list the specific 

disclosures the Commission is 

proposing to require for CTAs and their 

4.7 trading programs, including 

descriptions of certain persons to be 

identified, the principal risk factors of 

the investment, the CTA’s trading 

program, fees, conflicts of interest, and 

performance disclosures. The 

Commission also proposes to relocate 

the existing disclosure requirements in 

current Regulation 4.7(c)(2)(i) into 

Proposed Regulations 4.7(c)(2)(i)(G) and 

4.7(c)(2)(i)(H). Proposed Regulation 

4.7(c)(2)(i)(G) continues to require that 

QEP Disclosures provide all additional 

disclosures necessary to make the 

information contained therein, in the 

context in which it is furnished, not 

misleading, and Proposed Regulation 

4.7(c)(2)(i)(H) continues to require a 

form statement like that currently 

required by Regulation 4.7(c)(1)(i). 

Additionally, the Commission is 

proposing to remove the exemption 

from disclosing past performance of 4.7 

trading programs in the Disclosure 

Documents of non-4.7 trading programs. 

That provision had been proposed and 

adopted in connection with the 

previous policy position that 4.7 trading 

programs offered by CTAs had no 

minimum or mandatory disclosure 

requirements for their prospective QEP 

advisory clients, which the Commission 

is proposing to change through this 

NPRM. Moreover, the Commission 

preliminarily believes such information 

would be valuable to all prospective 

CTA clients, regardless of their 

sophistication or experience, and 

therefore, proposes to require more 

complete disclosure of a CTA’s 

programs, whether 4.7 or not, in 

Disclosure Documents provided to nonQEP advisory clients. 

Further, as discussed in relation to 4.7 

pools above, the Commission 

preliminarily believes that it is crucial 

that QEP Disclosures used by CTAs be 

maintained as business records of the 

CTA to ensure compliance with the 

general and performance disclosure 

requirements proposed in this NPRM 

and to facilitate Commission and NFA 

oversight of these intermediaries. 

Therefore, the Commission is also 

proposing to amend Regulation 

4.7(c)(2), such that CTAs would be 

required to maintain the QEP 

Disclosures among the other books and 

records for their 4.7 trading programs, 

making them available to the 

Commission, NFA, and the U.S. 

Department of Justice, in accordance 

with Regulation 1.31. Finally, Proposed 

Regulation 4.7(c)(1)(i) would also no 

longer provide an exemption from 

Regulation 4.36 in its entirety; the 

Commission is proposing to restrict this 

exemption to Regulation 4.36(d) only, 

such that compliance with Regulations 

4.36(a) through (c), provisions that 

generally govern the use and 

amendment of this information, would 

be required. Because the Commission is 

not proposing to require that QEP 


ddrumheller on DSK120RN23PROD with PROPOSALS2
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73 17 CFR 4.34(e). 

74 17 CFR 4.34(g). 

75 17 CFR 4.34(h). 

76 17 CFR 4.34(i). 

77 17 CFR 4.34(j). 

78Regulation 4.34(j)(3) requires a description of 

the conflicts of interest of any arrangements 

whereby the CTA or any of its principals may 

benefit, directly or indirectly, from the client’s 

account maintenance with an FCM or RFED, and/ 

or from the maintenance of the client’s swap 

positions with a swap dealer or from the 

introduction of such an account through an 

introducing broker (such as payment for order flow 

or soft dollar arrangements). 17 CFR 4.34(j)(3). 

79 17 CFR 4.35. 

80 17 CFR 4.35(a)(3) through (9). 

Disclosures used by CTAs for their 4.7 

trading programs be filed and approved 

by the Commission or NFA prior to their 

first use, Proposed Regulation 

4.7(c)(1)(i) purposefully retains an 

exemption from Regulation 4.36(d). 

A. ‘‘Persons To Be Identified’’ 

The Commission is proposing to 

require that CTAs provide their 

prospective QEP clients with 

information on certain persons to be 

identified, as mandated by Regulation 

4.34(e). Specifically, Regulation 4.34(e) 

requires CTAs to identify by name each 

principal of the CTA, the FCM and/or 

RFED with which the CTA will require 

its client to maintain an account, and 

the introducing broker through which 

the CTA will require the client to 

introduce its account (or, if the client is 

free to choose which FCM, RFED, or 

introducing broker it uses, then a 

statement to that effect).73 Proposed 

Regulation 4.7(c)(1)(A) would 

incorporate Regulation 4.34(e) by 

reference and require CTAs offering 4.7 

trading programs to identify the persons 

listed therein in their QEP Disclosures 

in the same manner as required for non4.7 trading programs under part 4. 

B. Principal Risk Factors 

The Commission is proposing to 

require that QEP Disclosures contain a 

discussion of the 4.7 trading program’s 

principal risk factors, identical to that 

required by Regulation 4.34(g). 

Regulation 4.34(g) requires CTAs to 

discuss in their Disclosure Documents 

the principal risk factors of their trading 

programs, including, without limitation, 

risks due to volatility, leverage, 

liquidity, and counterparty 

creditworthiness, as applicable to the 

offered trading program and the types of 

transactions and investment activity 

expected to be engaged in pursuant to 

such program (including retail forex and 

swap transactions, if any).74 Proposed 

Regulation 4.7(c)(1)(i)(B) would 

incorporate Regulation 4.34(g) by 

reference, and thus require CTAs to 

similarly discuss in QEP Disclosures 

their 4.7 trading programs’ principal 

risk factors. 

C. Description of the 4.7 Trading 

Program 

The Commission is also proposing to 

require CTAs to provide in their QEP 

Disclosures a description of the 4.7 

trading program as required by 

Regulation 4.34(h). Regulation 4.34(h) 

requires CTAs to include a description 

of their trading programs in their 

Disclosure Documents; such description 

must include: (1) the method chosen by 

the CTA concerning how FCMs and/or 

RFEDs carrying accounts it manages 

treat offsetting positions pursuant to 

Regulation 1.46, if the method is other 

than to close out all offsetting positions 

or to close out offsetting positions on 

other than a first-in, first-out basis; and 

(2) the types of commodity interests and 

other interests the CTA intends to trade, 

with a description of any restrictions or 

limitations on such trading established 

by the CTA or otherwise.75 Proposed 

Regulation 4.7(c)(1)(i)(C) would 

incorporate Regulation 4.34(h) by 

reference, and thus require CTAs to 

provide the same description of their 4.7 

trading programs in QEP Disclosures. 

D. Fees 

The Commission is further proposing 

to require CTAs to provide in the QEP 

Disclosures a description of each fee 

they will charge QEP advisory clients, 

as required by Regulation 4.34(i). 

Regulation 4.34(i) requires CTAs to 

include within their Disclosure 

Documents a complete description of 

fees they will charge their clients. 

Pursuant to this requirement, the 

description must specify the dollar 

amount of each fee, wherever possible, 

and must provide additional detail and 

explanation of certain fees, where the 

fees are dependent on specifically listed 

base amounts, or on any increase in a 

client’s commodity interest account.76

Proposed Regulation 4.7(c)(1)(i)(D) 

would incorporate Regulation 4.34(i) by 

reference, and thus require CTAs 

offering 4.7 trading programs to provide 

the same description of their fees in 

QEP Disclosures. 

E. Conflicts of Interest 

With respect to conflicts of interest, 

the Commission is proposing to require 

CTAs offering 4.7 trading programs to 

disclose their conflicts of interest as 

required by Regulation 4.34(j) in their 

QEP Disclosures. Regulation 4.34(j) 

requires CTAs to include a full 

description of any actual or potential 

conflicts of interest regarding any aspect 

of their trading programs on the part of: 

(1) the CTA; (2) any FCM and/or RFED 

with which the client will be required 

to maintain its commodity interest 

account; (3) any introducing broker 

through which the client will be 

required to introduce its account to an 

FCM and/or RFED; and (4) any principal 

of the foregoing, within their Disclosure 

Documents.77 Under Regulation 4.34(j), 

such description of the conflicts of 

interest must also include any other 

material conflicts involving any aspect 

of the offered trading programs and any 

certain specified direct or indirect 

arrangements where the CTA or any 

principal thereof may benefit.78

Proposed Regulation 4.7(c)(1)(i)(E) 

would incorporate Regulation 4.34(j) by 

reference, and thus require CTAs to list 

and fully describe any conflicts of 

interest in QEP Disclosures for their 4.7 

trading programs. 

F. Past Performance of 4.7 Trading 

Programs 

Finally, the Commission is also 

proposing to require CTAs offering 4.7 

trading programs to include past 

performance information in their QEP 

Disclosures as required by Regulation 

4.35. Currently, CTAs are exempt from 

disclosing performance information for 

their 4.7 trading programs. Because the 

Commission preliminarily believes such 

performance information regarding 4.7 

trading programs would be valuable and 

provide necessary detail to prospective 

QEP advisory clients, the Commission is 

proposing to require CTAs include all 

performance information required under 

Regulation 4.35 with respect to the 

offered 4.7 trading program in their QEP 

Disclosures. 

Regulation 4.35 requires CTAs to 

include in their Disclosure Documents 

capsule performance information for 

past performance of an account or 

trading program, subject to certain 

presentation and content requirements 

as outlined paragraph (a) of that 

section.79 Regulation 4.35(a) also 

provides detailed requirements for 

composite presentation, how current the 

disclosed information must be, the time 

period that must be covered in the 

performance disclosures, the calculation 

of and recordkeeping concerning the 

disclosed performance information, 

disclosing the performance of partiallyfunded accounts, the presentation of 

proprietary trading results, and a 

mandatory legend for all performance 

disclosures, stating, ‘‘PAST 

PERFORMANCE IS NOT 

NECESSARILY INDICATIVE OF 

FUTURE RESULTS.’’ 80 Additionally, 

Regulation 4.35(b) provides that a CTA 


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81 17 CFR 4.35(b). 

82 17 CFR 4.7(b)(3), 4.22(a) and (b). 

83 17 CFR 4.7(b)(3)(i); cf. 17 CFR 4.22(a) and (b). 

84See supra n. 42 (defining ‘‘Funds of Funds’’). 

85See, e.g., CFTC Letters 18–29, 19–01, 19–03, 

20–11, 21–16, 23–04. 

86 5 U.S.C. 601, et seq. 

87See, e.g., Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, 18620 

(Apr. 30, 1982). 

88 Id. at 18619–20. Regulation 4.13(a)(2) exempts 

a person from registration as a CPO when: (1) none 

of the pools operated by that person has more than 

15 participants at any time, and (2) when excluding 

certain sources of funding, the total gross capital 

contributions the person receives for units of 

participation in all of the pools it operates or 

intends to operate do not, in the aggregate, exceed 

$400,000. See 17 CFR 4.13(a)(2). 

must disclose the actual performance of 

all accounts directed by the CTA and by 

each of its trading principals, unless the 

CTA or its trading principals previously 

have not directed any accounts; in that 

case, the CTA must disclose this using 

one of three form disclosures listed 

thereunder.81 Proposed Regulation 

4.7(c)(1)(i) would remove the existing 

exemption from Regulation 4.35, and 

Proposed Regulation 4.7(c)(2)(i)(F) 

would require QEP Disclosures to 

include performance information as 

required by Regulation 4.35 with respect 

to 4.7 trading programs. 

c. Permitting Monthly Account 

Statements for Certain 4.7 Pools 

Consistent With Commission Exemptive 

Letters 

Regulation 4.7(b)(3) currently 

provides an exemption from the 

requirement in Regulations 4.22(a) and 

(b) that CPOs provide monthly account 

statements containing specific 

information to participants in their 

commodity pools.82 For 4.7 pools, CPOs 

are permitted to distribute account 

statements ‘‘no less frequently than 

quarterly within 30 days after the end of 

the reporting period.’’ 83 CPOs of 4.7 

pools that are Funds of Funds 84 have 

reported to Commission staff that they 

often have difficulty complying with 

this quarterly account statement 

schedule in Regulation 4.7(b)(3). Such 

CPOs regularly request exemptive letters 

from the Commission to permit them to 

follow an alternate account statement 

schedule, explaining that they cannot 

control the timing of when they receive 

financial information from the 

underlying investee collective 

investment vehicles, which often results 

in the investor Fund of Funds CPO not 

receiving the requisite information for 

its own 4.7 pool reporting until the 30- 

day period for distribution is nearly 

expired. The Commission has routinely 

granted these exemptive letter requests, 

thereby permitting the requesting CPOs 

to distribute monthly, rather than 

quarterly, account statements for their 

4.7 Fund of Funds pools within 45 days 

of the month-end.85 This approach of 

providing exemptive letter relief from 

Regulation 4.7(b)(3) has allowed these 

CPOs additional time to receive and 

gather the information required for their 

account statements required by 

Regulation 4.7, while also ensuring that 

their QEP participants receive both 

more accurate and more frequent 

reporting. 

Consistent with past Commission 

efforts to memorialize routinely granted 

Commission letter relief via regulatory 

amendments that streamline 

availability, provide consistency, and 

eliminate the need to process and 

respond to requests individually, the 

Commission proposes to amend 

Regulation 4.7 in a manner that would 

allow the CPOs of 4.7 pools that are 

Funds of Funds to distribute monthly 

account statements within 45 days of 

the month-end, provided that a CPO 

notifies its QEP pool participants, so 

they are aware of the schedule for the 

distribution of account statements. The 

Commission solicits comment generally 

on Proposed Regulation 4.7(b)(3)(iv); in 

particular, the Commission requests 

comment on whether the proposed 

amendment effectively creates a 

mechanism in Regulation 4.7(b)(3) that 

is equivalent to the exemptive letters 

currently issued by the Commission, 

and whether the alternate account 

statement distribution schedule and 

notice requirements are clear. 

d. Other Technical Amendments 

Finally, the Proposal also includes a 

number of technical amendments to 

Regulation 4.7 that are designed to 

improve its efficiency and usefulness for 

intermediaries and their prospective 

and actual QEP pool participants and 

advisory clients, as well as the general 

public. For example, the Commission is 

proposing to delete the introductory 

paragraph to Regulation 4.7 and to 

generally restructure the definitions 

section in Regulation 4.7(a), eliminating 

what it preliminarily views as 

unnecessary subparagraph levels in the 

QEP definition and alphabetizing the 

definitions. The Commission has also 

proposed amendments to ensure that 

cross-references within Regulation 4.7 

and other part 4 regulations are 

accurate. The Commission is seeking 

comment on these and any other 

technical amendments that it should 

consider for ease of use, as well as 

whether there are any other crossreferences within Regulation 4.7 not 

addressed by the Proposal that should 

also be corrected. The Commission 

intends to include additional 

conforming amendments correcting 

cross-references to Regulation 4.7 

provisions found in other parts of the 

Commission’s regulations as technical 

amendments in a future final rule. The 

Commission requests comment and 

public input on this approach as well. 

III. Related Matters 

a. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that Federal agencies, in 

promulgating regulations, consider 

whether the regulations they propose 

will have a significant economic impact 

on a substantial number of small 

entities, and if so, to provide a 

regulatory flexibility analysis regarding 

the economic impact on those entities.86

The regulatory amendments proposed 

by the Commission hereinwould affect 

only persons registered or required to be 

registered as CPOs and CTAs and those 

commodity pools and trading programs 

operated under Regulation 4.7 and 

offered solely to QEPs. 

i. CPOs 

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 

requirements of the RFA.87 With respect 

to CPOs, the Commission previously has 

determined that a CPO is a small entity 

for purposes of the RFA, only if it meets 

the criteria for an exemption from 

registration under Regulation 

4.13(a)(2).88 The regulations proposed 

herein apply to persons registered or 

required to be registered as CPOs with 

the Commission (specifically, those 

registered CPOs whose prospective and 

actual pool participants are restricted to 

QEPs) and/or provide relief to 

qualifying registrants from certain 

periodic reporting burdens. 

Accordingly, the Chairman, on behalf of 

the Commission, certifies pursuant to 5 

U.S.C. 605(b) that this NPRM will not 

have a significant economic impact on 

a substantial number of small entities, 

with respect to CPOs. 

ii. CTAs 

Regarding CTAs, the Commission has 

previously considered whether such 

registrants would be deemed small 

entities for purposes of the RFA on a 

case-by-case basis, in the context of the 

particular Commission regulation at 


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89 Id. at 18620. 90 7 U.S.C. 6m, 6n. 

91As of June 2023, there were approximately 

1,280 CTAs registered with the Commission. 

issue.89 Because certain of these 

registered CTAs may besmall entities for 

the purposes of the RFA, the 

Commission is considering whether this 

Proposal would have a significant 

economic impact on such registrants. 

The portions of this NPRM directly 

impacting CTAs would affect only CTAs 

registered or required to register with 

the Commission that offer and operate 

trading programs designed for QEPs. 

These proposed amendments would, in 

particular: (1) require CTAs claiming the 

Regulation 4.7 exemption to provide 

certain general and performance 

disclosures enumerated in other part 4 

regulations regarding their 4.7 trading 

programs to their prospective and 

current QEP advisory clients; (2) require 

such CTAs to include past performance 

information for their 4.7 trading 

programs in any Disclosure Documents 

they use and distribute for their non-4.7 

trading programs’ advisory clients; and 

(3) require such registered CTAs to 

retain the proposed limited QEP 

Disclosures regarding their 4.7 trading 

programs as business records of the 

intermediary. As stated above, these 

proposed requirements primarily impact 

registered CTAs offering 4.7 trading 

programs to QEP advisory clients and 

claiming the compliance exemptions 

currently offered by Regulation 4.7. 

Although data on the specific size of 

registered CTAs offering 4.7 trading 

programs is limited, it is the 

Commission’s anecdotal experience that 

such CTAs claiming compliance 

exemptions in Regulation 4.7 for the 

purposes of soliciting and serving QEP 

advisory clients are frequently large 

financial institutions with substantial 

financial assets and advisory 

experience, or affiliates thereof. Given 

that registered CTAs do not have a 

capital requirement applicable to them, 

it is not possible for the Commission to 

readily determine the typical or average 

size of registered CTAs, or even of 

registered CTAs who solely offer 4.7 

trading programs; moreover, registered 

CTAs frequently offer a mix of 4.7 

trading programs and trading programs 

or strategies subject to the full 

application of the Commission’s part 4 

regulations. Therefore, although the 

Commission has previously determined 

whether CTAs are small entities for RFA 

purposes on a case-by-case basis, the 

Commission is not currently in a 

position to determine whether 

registered CTAs affected by this NPRM 

would include a substantial number of 

small entities, on which the NPRM 

would have a significant economic 

impact. Therefore, pursuant to 5 U.S.C. 

603, the Commission offers for public 

comment this initial regulatory 

flexibility analysis addressing the 

impact of the Proposal on small entities: 

A. A description of the reasons why 

action by the agency is being 

considered. 

As discussed in detail above in this 

Preamble, since the 1992 Final Rule 

adopting Regulation 4.7, the 

Commission has witnessed substantial 

increases in the intermediary 

population utilizing those exemptions 

for 4.7 pools and trading programs 

offered and available to QEPs. This 

development also coincides with 

current commodity interest market 

conditions, in which the Commission 

has also seen significant expansion and 

growth in the complexity and diversity 

of commodity interest products offered 

via 4.7 pools and trading programs, 

which may be more challenging to fully 

understand. Given further that QEPs, for 

a variety of reasons, may have varying 

levels of resources and leverage to 

demand and monitor the information 

necessary for them to make informed 

investment decisions, the Commission 

believes it is no longer appropriate to 

rely solely on QEPs’ individual ability 

to obtain such information, absent 

formal regulatory requirements that 

such information be provided. 

B. A succinct statement of the 

objectives of, and legal basis for, the 

Proposal. 

The objective of these proposed 

amendments is to establish minimum 

disclosure requirements applicable to 

all CTAs offering 4.7 trading programs, 

replacing the current ad hoc methods of 

informing QEPs that have developed 

over time, and leveling the playing field 

amongst QEP advisory clients who may 

currently receive varying levels of 

investment information dependent upon 

their size and available resources. The 

proposed amendments are also intended 

to raise the quality and consistency of 

QEP Disclosures provided by registered 

CTAs by requiring them to be materially 

complete, accurate, and subject to 

regular updates by the CTA, and to 

enable the consistent review of such 

QEP Disclosures by the Commission or 

NFA through regular examinations of 

registered CTAs’ business records. As 

stated above, the CEA grants the 

Commission the authority to regulate 

and register CTAs, as well as to require 

the maintenance of books and records 

and filing of reports that the 

Commission believes is necessary to 

accomplish its regulatory mission and 

the goals of the CEA.90

C. A description of and, where 

feasible, an estimate of the number of 

small entities to which the Proposal 

would apply. 

As mentioned above, CTAs are 

generally not subject to any minimum 

capital requirements, nor does the 

Commission collect data on the ‘‘size’’ 

of registered CTAs via Commission 

registration applications or other 

required Commission filings or reports. 

Therefore, the Commission has no data 

to analyze that would enable it to 

estimate how many registered CTAs 91

may be considered small entities for 

RFA purposes. It is the Commission’s 

experience that registered CTAs 

claiming Regulation 4.7 exemptions and 

offering 4.7 trading programs to QEP 

advisory clients are frequently large 

financial institutions offering a variety 

of trading programs and strategies. 

Nonetheless, the Commission 

acknowledges that a certain percentage 

or portion of the population of CTAs 

affected by this Proposal, i.e., those 

registered or required to register with 

the Commission and utilizing the 

exemptions in Regulation 4.7, may, in 

fact, be considered small entities as 

defined by the RFA, though the 

Commission lacks the information or 

data necessary to determine or estimate 

how many. 

D. A description of the projected 

reporting, recordkeeping, and other 

compliance requirements of the 

Proposal, including an estimate of the 

classes of small entities which will be 

subject to the requirement and the type 

of professional skills necessary for 

preparation of the report or record. 

The proposed amendments would 

require CTAs registered and claiming 

the exemption in Regulation 4.7(c)(1) to 

provide certain general and performance 

disclosures regarding their 4.7 trading 

programs to prospective and current 

QEP advisory clients, to ensure that the 

information provided is materially 

complete and accurate, and to 

periodically update such information as 

needed. As noted above, the proposed 

amendments would, in particular: (1) 

require CTAs relying on the Regulation 

4.7 exemption to provide certain general 

and performance disclosures 

enumerated in other part 4 regulations 

regarding their 4.7 trading programs to 

their prospective and current QEP 

advisory clients; (2) require such CTAs 

to include past performance information 

for their 4.7 trading programs in the 

Disclosure Documents they use and 

distribute for their non-4.7 trading 

programs; and (3) require such 


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registered CTAs to retain the proposed 

QEP Disclosures regarding their 4.7 

trading programs as business records of 

the intermediary. The Commission 

expects that some CTAs may already be 

disclosing some of this information, via 

the existing ad hoc industry practices 

that have developed for QEP Disclosures 

like private placement memoranda and 

trading program brochures, as discussed 

above. Additionally, the proposed 

amendments would require registered 

CTAs to provide past performance 

information regarding their 4.7 trading 

programs in the Disclosure Documents 

of other trading programs they operate 

that are subject to broader part 4 

compliance. Finally, CTAs offering 4.7 

trading programs would be required to 

keep their QEP Disclosures containing 

the information the Commission 

proposes to require as business records, 

subject to routine examination and 

inspection by the Commission and/or 

NFA. 

The Commission anticipates that the 

proposed amendments would affect 

registered CTAs claiming Regulation 4.7 

and offering 4.7 trading programs, 

which, as stated above, may include 

some small entities for RFA purposes. 

Nonetheless, regardless of whether a 

CTA is considered a small entity, the 

Commission believes that all registered 

CTAs offering and managing 4.7 trading 

programs generally possess the 

professional skills necessary to generate 

and distribute the subset of disclosures 

proposed to be required and to 

appropriately retain such QEP 

Disclosures as business records of their 

registered intermediary, i.e., the CTA, as 

such skills are not significantly different 

from those already necessary to 

establish, register, and operate a CTA 

subject to the broader part 4 compliance 

requirements beyond Regulation 4.7. 

E. An identification, to the extent 

practicable, of all relevant Federal rules 

which may duplicate, overlap or conflict 

with the Proposal. 

The Commission is generally unaware 

of any Federal rules or regulations 

which may conflict with the proposed 

amendments. Federal securities laws 

and regulations do govern investment 

disclosures by registered investment 

advisers, which may result in those 

entities that are dually registered with 

the SEC and CFTC being subject to more 

than one regulatory regime. The 

Commission does not expect the 

proposed amendments to conflict with 

those laws and regulations, based on its 

understanding of those disclosure 

requirements. Moreover, some 4.7 CTAs 

are registered only with the Commission 

and thus, are not currently subject to 

any other regulations mandating 

disclosures to their QEP advisory 

clients. 

F. A description of any significant 

alternatives to the Proposal which 

accomplish the stated objectives of 

applicable statutes and which minimize 

significant economic impact of the 

Proposal on small entities. 

Potential alternatives to the proposed 

amendments would be: (1) to not amend 

Regulation 4.7 to add disclosure 

requirements for 4.7 trading programs; 

or (2) to amend Regulation 4.7(c)(1) to 

require compliance with the entirety of 

the disclosure regulations generally 

applicable to registered CTAs offering 

trading programs to non-QEP advisory 

clients. Additionally, the Commission 

could also consider limiting the 

application of the proposed 

amendments to registered CTAs 

claiming Regulation 4.7 and offering 4.7 

trading programs to those CTAs who are 

not small entities for RFA purposes. 

The Commission believes that there 

have been significant developments in 

the commodity interest markets since 

Regulation 4.7 was adopted in 1992. 

Based on current market conditions and 

the increasing complexity of commodity 

interest products, among other factors, 

the Commission preliminarily believes 

it necessary to establish minimum 

disclosures for CTAs offering 4.7 trading 

programs at this time. Although 

declining to require any disclosures 

would certainly minimize the economic 

impact on registered CTAs that are also 

small entities, the Commission believes 

that, due to the circumstances explained 

above, including the varying resources 

available to QEPs to independently 

demand and assess the accuracy of such 

disclosures, certain information should 

be required to be disclosed to all QEP 

advisory clients, in furtherance of the 

Commission’s regulatory goals and the 

purposes of the CEA. Additionally, the 

Commission believes it would be overly 

burdensome if registered CTAs offering 

4.7 trading programs were required to 

comply with the entirety of Regulations 

4.34 and 4.35, and to comply with the 

review and filing requirements in 

Regulation 4.36, given the 

characteristics of their advisory clients. 

Through these proposed amendments, 

the Commission is seeking to balance its 

customer protection and regulatory 

concerns for QEP advisory clients and 

4.7 trading programs with the existing 

compliance burdens of registered CTAs. 

Thus, the proposed amendments 

prioritize and require certain 

disclosures, while providing relief from 

others, and permit CTAs to use and 

distribute QEP Disclosures containing 

that information without filing or 

advance review by the Commission or 

NFA, provided that they are complete, 

accurate, and kept as business records of 

the CTA. In the Commission’s opinion, 

the proposed amendments offer a more 

tailored approach to QEP Disclosure 

requirements applicable to CTAs’ 4.7 

trading programs and would have less of 

an economic impact on CTAs claiming 

Regulation 4.7 than requiring 

compliance with the entirety of the part 

4 disclosure requirements. 

Finally, as stated above, CTAs are 

generally not subject to capital 

requirements under the Commission’s 

regulatory regime, and CTAs manage the 

assets of their advisory clients, whether 

QEPs or not, without receiving or taking 

custody of those assets, due to the 

statutory and regulatory provisions 

defining the permitted activities of 

CTAs. The Commission also does not 

collect data on the size of CTAs 

registered or required to register with it, 

beyond their assets under management, 

and it would be difficult to determine or 

estimate the number of registered CTAs 

that may be considered small entities for 

RFA purposes. Therefore, the 

Commission is unable to limit the 

application of the proposed 

amendments to CTAs offering 4.7 

trading programs who are not small 

entities for RFA purposes, though 

anecdotally the Commission believes 

that the majority of CTAs utilizing 

Regulation 4.7 would not be considered 

small entities. As noted earlier, 

regardless of whether a CTA is 

considered a small entity, the 

Commission believes that all registered 

CTAs offering and managing 4.7 trading 

programs generally possess the 

resources and know-how necessary to 

generate and distribute the subset of 

disclosures proposed to be required and 

to appropriately retain such QEP 

Disclosures as business records of their 

registered intermediary. 

To the extent the proposed 

amendments may apply to an unknown 

number of small entities who are 

registered CTAs offering 4.7 trading 

programs, the Commission believes that 

its customer protection and oversight 

concerns under the CEA in ensuring 

that QEP advisory clients are adequately 

and consistently informed regarding 4.7 

trading programs, and that the 

Commission can effectively oversee the 

activities of all CTAs claiming 

exemptions under Regulation 4.7, 

nevertheless outweigh that concern. The 

Commission understands that the direct 

effect of these proposed amendments 

would be an increase in the operating 

costs of CTAs utilizing Regulation 4.7, 

due to the addition of minimum 

content, dissemination, and 

recordkeeping requirements for QEP 


ddrumheller on DSK120RN23PROD with PROPOSALS2
70866 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

92 5 U.S.C. 601, et seq. 

93See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3). 

94See 44 U.S.C. 3501. 

95See 44 U.S.C. 3502(3). 

96See Notice of Office of Management and Budget 

Action, OMB Control No. 3038–0005, available at 

https://www.reginfo.gov/public/do/ 

PRAViewICR?ref_nbr=202011-3038-006 (last visited 

Sept. 27, 2023). 

97See 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

98See 5 U.S.C. 552; see also 17 CFR part 145 

(Commission Records and Information). 

99 7 U.S.C. 12(a)(1). 

100 5 U.S.C. 552a. 

Disclosures. The Commission also 

understands, however, that some of the 

information proposed to be required is 

similar in content to information many 

CTAs are already providing based on 

the demands of their QEP advisory 

clients, or because they are required to 

provide them by other applicable 

regulatory regimes. Notwithstanding 

these additional operating costs, the 

Commission preliminarily believes that 

mandating the provision of certain 

foundational information to all QEPs, 

which the proposed amendments would 

require to be kept up-to-date and 

accurate, is expected to result in more 

consistent disclosures to all persons 

gaining exposure to the commodity 

interest markets through registered 

CTAs, which may include small entities 

for RFA purposes. The Commission 

preliminarily concludes that the 

proposed amendments would result in 

better informed QEP advisory clients, 

who may, as a result of consistent, 

detailed disclosures, possess enhanced 

confidence in their intermediaries and 

the commodity interest markets overall, 

by virtue of their increased 

understanding of the nature of the 

advisory services they are procuring. 

The Commission therefore believes that 

the QEP Disclosures proposed in this 

NPRM would benefit both the CTAs and 

their QEP advisory clients by requiring 

certain general and performance 

disclosures, thereby promoting 

transparency and consistency, as well as 

increasing confidence in the CTAs and 

the commodity interest markets overall. 

Therefore, in comparing the 

aforementioned alternatives of (1) not 

amending Regulation 4.7 to impose 

disclosure requirements for 4.7 trading 

programs, and (2) amending Regulation 

4.7(c)(1) to require compliance with the 

entirety of the disclosure regulations 

generally applicable to registered CTAs 

offering trading programs to non-QEP 

advisory clients, the Commission 

believes that the proposed minimum 

disclosure requirements strike an 

appropriate balance that achieves the 

Commission’s regulatory objectives 

without burdening the small entity 

population of CTAs offering 4.7 trading 

programs with the compliance costs and 

burdens that would be associated with 

the full disclosure regime required 

under part 4. 

b. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) 92 imposes certain requirements 

on Federal agencies, including the 

Commission, in connection with their 

conducting or sponsoring any 

‘‘collection of information,’’ as defined 

by the PRA. Under the PRA, an agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a valid control number from 

the Office of Management and Budget 

(OMB).93 The PRA is intended, in part, 

to minimize the paperwork burden 

created for individuals, businesses, and 

other persons as a result of the 

collection of information by Federal 

agencies, and to ensure the greatest 

possible benefit and utility of 

information created, collected, 

maintained, used, shared, and 

disseminated by or for the Federal 

Government.94 The PRA applies to all 

information, regardless of form or 

format, whenever the Federal 

Government is obtaining, causing to be 

obtained, or soliciting information, and 

includes required disclosure to third 

parties or the public, of facts or 

opinions, when the information 

collection calls for answers to identical 

questions posed to, or identical 

reporting or recordkeeping requirements 

imposed on, ten or more persons.95

This NPRM, if adopted, would result 

in a collection of information within the 

meaning of the PRA, as discussed 

below. The Proposal affects a collection 

of information for which the 

Commission has previously received a 

control number from OMB. The title for 

this collection is, ‘‘Rules Relating to the 

Operations and Activities of Commodity 

Pool Operators and Commodity Trading 

Advisors and to Monthly Reporting by 

Futures Commission Merchants’’ 

(Collection 3038–0005).96 Collection 

3038–0005 primarily accounts for the 

burden associated with the 

Commission’s part 4 regulations that 

concern compliance generally 

applicable to CPOs and CTAs, as well as 

certain exemptions from registration as 

such and exclusions from those 

definitions, and available relief from 

compliance with certain regulatory 

requirements, e.g., Regulation 4.7. 

The Commission is therefore 

submitting this NPRM to OMB for 

review.97 Responses to this collection of 

information would be mandatory. The 

Commission will protect any 

proprietary information according to 

FOIA and part 145 of the Commission’s 

regulations.98 In addition, CEA section 

8(a)(1) strictly prohibits the 

Commission, unless specifically 

authorized by the CEA, from making 

public any ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ 99 Finally, the Commission 

is also required to protect certain 

information contained in a government 

system of records according to the 

Privacy Act of 1974.100

i. Collection 3038–0005: Revisions to 

the Collection of Information 

Collection 3038–0005 governs 

responses made pursuant to part 4 of the 

Commission’s regulations, pertaining to 

the operations of CPOs and CTAs, 

including the itemization of compliance 

burdens remaining after CPOs and CTAs 

elect certain exemptions from broader 

compliance obligations in the part 4 

regulations. The Commission is 

proposing to amend Collection 3038– 

0005 to account for the amendments 

proposed in this NPRM, as follows: (a) 

adding reporting burdens for the 

proposed required general and 

performance disclosures to prospective 

or actual QEP pool participants and 

advisory clients by CPOs and CTAs, 

pursuant to the proposed amendments 

to Regulations 4.7(b)(2) and (c)(1); (b) 

increasing the existing recordkeeping 

requirements of Regulations 4.7(b)(5) 

and (c)(2) to include the proposed 

maintenance of QEP Disclosures as 

business records by CPOs and CTAs 

utilizing Regulation 4.7; and (c) adding 

monthly account statements as a 

permissible reporting schedule by CPOs 

of 4.7 pools that are Funds of Funds 

through Proposed Regulation 

4.7(b)(3)(iv). In addition, and more 

generally, the Commission is proposing 

to update its estimates of the number of 

respondents subject to the information 

collection requirements under 

Regulation 4.7, such that they are better 

aligned with more recent NFA data 

provided to the Commission on the 

number of CPOs (and pools) and CTAs 

subject to those requirements. 

Accordingly, the Commission proposes 

to revise Collection 3038–0005 to 

address the reporting and recordkeeping 

burdens associated with these proposed 

amendments as described in further 

detail below. 


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101See supra Section II.b for additional 

discussion of these regulations. 

102See supra Section II.c for additional 

discussion of this proposed amendment. 

103See supra Section II.b for additional 

discussion of these regulations. 

A. Proposed Amendments Affecting 

CPOs 

As stated above, Regulation 4.7 

currently provides exemptions from the 

broader part 4 compliance requirements, 

and Regulation 4.7(b)(2), in particular, 

provides exemptions for CPOs with 

respect to 4.7 pools offered solely to 

QEPs from the requirements of 

Regulations 4.21, 4.24, 4.25, and 4.26, 

under certain additional conditions 

further specified in the regulation.101 As 

a result, Collection 3038–0005 does not 

currently include any reporting burden 

with respect to Regulation 4.7(b)(2). 

Proposed Regulation 4.7(b)(2), if 

adopted, however, would result in 

additional reporting burdens for CPOs 

offering and operating 4.7 pools because 

certain general and performance 

disclosures would become required for 

their prospective and actual QEP pool 

participants. Therefore, the Commission 

is proposing to amend Collection 3038– 

0005 in a manner that accounts for the 

additional reporting burden associated 

with Proposed Regulation 4.7(b)(2). To 

that end, the Commission has 

endeavored to add reporting burden for 

this proposed amendment that is based 

upon the burden already itemized in 

Collection 3038–0005 for compliance 

with Regulations 4.21/4.26, but that is 

proportionate to the more limited scope 

of disclosures the Commission is 

proposing to require from CPOs with 

respect to their 4.7 pools. Accordingly, 

the aggregate annual estimate for the 

reporting burden associated with 

Proposed Regulation 4.7(b)(2) would be 

as follows: 

Estimated number of respondents: 

1,000. 

Estimated frequency/timing of 

responses: At least annually, or asneeded. 

Estimated number of annual 

responses per respondent: 5. 

Estimated number of annual 

responses for all respondents: 5,000. 

Estimated annual burden hours per 

response: 1.5. 

Estimated total annual burden hours 

per respondent: 7.5. 

Estimated total annual burden hours 

for all respondents: 7,500. 

Additionally, this NPRM proposes to 

amend Regulation 4.7(b)(5) to require 

that CPOs retain the QEP Disclosures 

they use and distribute to their 

prospective and actual QEP pool 

participants as business records of the 

CPO. Collection 3038–0005 currently 

contains a recordkeeping burden 

associated with Regulation 4.7(b)(5) 

which estimates that each CPO expends 

approximately 2 hours maintaining 

business records related to its 4.7 

pool(s), as that provision requires. The 

Commission recommends an increase of 

0.5 hours to this existing burden, to 

account for the additional burden of 

retaining the QEP Disclosures as CPO 

business records, and estimates that the 

respondents include 1,000 CPOs each 

operating up to five 4.7 pools. 

Accordingly, the aggregate annual 

estimate for the recordkeeping burden 

associated with Proposed Regulation 

4.7(b)(5) would be as follows: 

Estimated number of respondents: 

1,000. 

Estimated frequency/timing of 

responses: Annual. 

Estimated number of annual 

responses per respondent: 5. 

Estimated number of annual 

responses for all respondents: 5,000. 

Estimated annual burden hours per 

response: 2.5. 

Estimated total annual burden hours 

per respondent: 12.5. 

Estimated total annual burden hours 

for all respondents: 12,500. 

Finally, the Commission is also 

proposing amendments to Regulation 

4.7(b)(3) that would, consistent with 

routinely issued Commission exemptive 

letters, permit CPOs of 4.7 pools that are 

Funds of Funds to distribute monthly 

account statements within 45 days of 

the month-end.102 Collection 3038–0005 

currently lists a reporting burden 

associated with Regulation 4.7(b)(3) that 

accounts for the quarterly account 

statements currently required to be 

distributed by such CPOs to their 4.7 

pools’ QEP participants. The 

Commission is proposing to add an 

additional reporting burden associated 

with Proposed Regulation 4.7(b)(3)(iv), 

the provision that, if adopted, would 

add this monthly reporting as an option 

for 4.7 pools that are Funds of Funds. 

The Commission believes that a smaller 

subset of CPOs and 4.7 pools would rely 

on this reporting schedule, and 

therefore, burden estimates below are 

based on 100 CPOs utilizing this 

alternative monthly account statement 

schedule for up to three 4.7 pools each. 

Accordingly, the aggregate annual 

estimate for the reporting burden 

associated with Proposed Regulation 

4.7(b)(3)(iv) would be as follows: 

Estimated number of respondents: 

100. 

Estimated frequency/timing of 

responses: Monthly. 

Estimated number of annual 

responses per respondent: 36. 

Estimated number of annual 

responses for all respondents: 3,600. 

Estimated annual burden hours per 

response: 1. 

Estimated total annual burden hours 

per respondent: 36. 

Estimated total annual burden hours 

for all respondents: 3,600. 

B. Proposed Amendments Affecting 

CTAs 

Similar to Regulation 4.7(b)(2), 

Regulation 4.7(c)(1) provides 

exemptions for CTAs with respect to 

their 4.7 trading programs offered to 

QEPs from Regulations 4.31, 4.34, 4.35, 

and 4.36, subject to additional 

conditions specified in that 

regulation.103 Consequently, Collection 

3038–0005 does not currently include 

any reporting burden associated with 

Regulation 4.7(c)(1). Proposed 

Regulation 4.7(c)(1), if adopted, would 

result in CTAs incurring additional 

burden because certain general and 

performance disclosures with respect to 

their 4.7 trading programs would be 

required to be distributed to their 

prospective and actual QEP advisory 

clients. Therefore, the Commission is 

proposing to amend Collection 3038– 

0005 in a manner that would account 

for the additional reporting burden 

associated with Proposed Regulation 

4.7(c)(1). To that end, the Commission 

has endeavored to add reporting burden 

for this proposed amendment that is 

based upon the burden already itemized 

in this information collection for 

compliance with Regulations 4.31/4.36, 

but that is proportionate to the more 

limited scope of disclosures the 

Commission is proposing to require 

from CTAs with respect to their 4.7 

trading programs. Accordingly, the 

aggregate annual estimate for the 

reporting burden associated with 

Proposed Regulation 4.7(c)(1) would be 

as follows: 

Estimated number of respondents: 

1,000. 

Estimated frequency/timing of 

responses: At least annually, or asneeded. 

Estimated number of annual 

responses per respondent: 12. 

Estimated number of annual 

responses for all respondents: 12,000. 

Estimated annual burden hours per 

response: 1.5. 

Estimated total annual burden hours 

per respondent: 18. 

Estimated total annual burden hours 

for all respondents: 18,000. 

Additionally, this NPRM proposes to 

amend Regulation 4.7(c)(2) to require 

that CTAs retain the QEP Disclosures 

they use and distribute to their 


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104 7 U.S.C. 19(a). 

prospective and actual QEP advisory 

clients as business records of the CTA. 

Collection 3038–0005 currently contains 

a recordkeeping burden associated with 

Regulation 4.7(c)(2) which estimates 

that each CTA expends approximately 2 

hours maintaining business records 

related to its 4.7 trading program(s), as 

that provision requires. The 

Commission recommends an increase of 

0.5 hours to account for the additional 

burden of retaining QEP Disclosures as 

business records of the CTA, and 

estimates that the respondents include 

1,000 CTAs offering and operating up to 

12 4.7 trading programs each. 

Accordingly, the aggregate annual 

estimate for the recordkeeping burden 

associated with Proposed Regulation 

4.7(c)(2) would be as follows: 

Estimated number of respondents: 

1,000. 

Estimated frequency/timing of 

responses: Annual. 

Estimated number of annual 

responses per respondent: 12. 

Estimated number of annual 

responses for all respondents: 12,000. 

Estimated annual burden hours per 

response: 2.5. 

Estimated total annual burden hours 

per respondent: 30. 

Estimated total annual burden hours 

for all respondents: 30,000. 

e. Request for Comment 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the proposed 

information collection requirements 

discussed above. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission solicits 

comment in order to (1) evaluate 

whether the proposed collections of 

information are necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information will have practical utility; 

(2) evaluate the accuracy of the 

estimated burden of the proposed 

information collection requirements, 

including the degree to which the 

methodology and assumptions the 

Commission employed were valid; (3) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information proposed to be 

collected; and (4) minimize the burden 

of the proposed collections of 

information on those who are required 

to respond, i.e., CPOs and CTAs, 

including through the use of appropriate 

automated, electronic, mechanical, or 

other technological information 

collection techniques. 

The public and other Federal agencies 

may submit comments directly to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 20503, 

Attn: Desk Officer of the Commodity 

Futures Trading Commission, by fax at 

(202) 395–6566, or by email at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted documents, so that all 

comments can be summarized and 

addressed in the final rule preamble. 

Refer to the ADDRESSES section of this 

NPRM 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 

https://www.RegInfo.gov. OMB is 

required to make a decision concerning 

the collections of information between 

30 and 60 days after publication of this 

document in the Federal Register. 

Therefore, a comment to OMB is best 

assured of receiving full consideration if 

OMB (and the Commission) receives it 

within 30 days of the publication of this 

document. Nothing in the foregoing 

affects the deadline enumerated above 

for public comment to the Commission 

on the proposed regulations. 

c. Cost-Benefit Considerations 

i. Statutory and Regulatory Background 

Section 15(a) 104 of the CEA requires 

the Commission to consider the costs 

and benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. CEA 

section 15(a) further specifies that the 

costs and benefits shall be evaluated 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 markets; (3) price 

discovery; (4) sound risk management 

practices; and (5) other public interest 

considerations. The Commission 

considers the costs and benefits 

resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

The Commission recognizes that the 

proposed amendments to Regulation 4.7 

in this NPRM will result in additional 

costs for CPOs and CTAs operating 4.7 

pools and trading programs. However, 

the Commission lacks the data 

necessary to reasonably quantify all of 

the costs and benefits considered below. 

Additionally, any initial and recurring 

compliance costs for any particular CPO 

or CTA will depend on its size, existing 

infrastructure, practices, and cost 

structures. The Commission welcomes 

comments on such costs, particularly 

from existing CPOs and CTAs utilizing 

Regulation 4.7 exemptions, who may be 

better able to provide quantitative cost 

data or estimates, based on their 

respective experiences. Commenters 

may also suggest other alternative(s) to 

the proposed approach that would be 

expected to further the Commission’s 

stated policy and regulatory goals as 

described in this NPRM. 

The Commission is also including a 

number of questions herein for the 

purpose of eliciting direct cost estimates 

from public commenters wherever 

possible. Quantifying other costs and 

benefits, such as the effects of potential 

induced changes in the behavior of 

CPOs, CTAs, and their QEPs resulting 

from the proposed amendments are 

inherently harder to measure ex ante. 

Thus, the Commission is similarly 

requesting comment through questions 

to help it better quantify these impacts. 

Due to these quantification difficulties, 

for this NPRM, the Commission offers 

the following qualitative discussion of 

its costs and benefits. 

ii. Increasing Financial Thresholds in 

the Portfolio Requirement of the 

‘‘Qualified Eligible Person’’ Definition 

A. Baseline 

As described in more detail above, the 

QEP definition in Regulation 4.7 

outlines two categories, those that do 

not have to satisfy the Portfolio 

Requirement, listed in Regulation 

4.7(a)(2), and those that do, listed in 

Regulation 4.7(a)(3). Persons listed in 

Regulation 4.7(a)(3), including natural 

persons who must also be considered 

‘‘accredited investors,’’ must meet the 

Portfolio Requirement by either: (1) 

owning securities and other assets 

worth at least $2,000,000; (2) having on 

deposit with an FCM for their own 

account at least $200,000 in initial 

margin, option premiums, or minimum 

security deposits; or (3) owning a 

portfolio of funds and assets that, when 

expressed as percentages of the first two 

thresholds, have a combined value of at 

least 100%. 

B. The Proposal 

The Commission is proposing in this 

NPRM to increase the Portfolio 

Requirement in Regulation 4.7 such that 

persons listed in Regulation 4.7(a)(3) 

could satisfy the QEP definition by 

either: (1) owning securities and other 

assets worth at least $4,000,000; (2) 

having on deposit with an FCM for their 

own account at least $400,000 in initial 

margin, option premiums, or minimum 

security deposits; or (3) owning a 

portfolio of funds and assets that, when 

expressed as percentages of the prior 

two thresholds, have a combined value 


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105 1992 Proposed Rule, 57 FR at 3152. 

of at least 100%. As stated previously in 

this release, the Commission 

preliminarily believes that increasing 

such thresholds appropriately accounts 

for the impacts of inflation on the 

Portfolio Requirement’s ability to 

adequately address the Commission’s 

concerns regarding the financial 

sophistication of QEPs required to meet 

its terms. 

C. Benefits 

The Portfolio Requirement was 

adopted to identify those prospective 

participants in the commodity interest 

markets that are of a size sufficient to 

indicate that the participant has 

substantial investment experience and 

thus a high degree of sophistication 

with regard to investments as well as 

financial resources to withstand the risk 

of their investments.105 As discussed in 

detail above in this NPRM, these 

Portfolio Requirement thresholds have 

not been changed since their adoption 

in 1992. The Commission preliminarily 

believes that updating these thresholds 

would have the benefit of bringing the 

Portfolio Requirement back in line with 

the Commission’s original intent when 

adopting the QEP definition. 

The Commission understands that 

raising the Portfolio Requirement 

thresholds may cause some QEPs to no 

longer be so qualified, turning them into 

non-QEP participants in the commodity 

interest markets. The Commission 

nonetheless believes preliminarily that 

this proposed amendment would benefit 

the commodity interest markets and the 

general public by realigning financial 

thresholds in its most commonly used 

regulations to account for the impacts of 

inflation since its original adoption and 

to more accurately reflect the current 

economic reality, such that the scope of 

Regulation 4.7 would be more closely 

aligned with the Commission’s original 

intent in the 1992 Final Rule. 

Additionally, to the extent that former 

QEPs choose to continue investing in 

commodity pools or allocate their funds 

to be managed by CTAs, such persons 

may then purchase participations in 

pools or utilize the services of CTAs not 

operating pursuant to Regulation 4.7. 

This, in turn, could result in the 

creation and offering of additional pools 

and trading programs by registered 

CPOs and CTAs outside of the 

Regulation 4.7 regime, given the 

potential additional demand by nonQEPs. Because more capital may, as a 

result, likely be deployed to such pools 

and trading programs subject to the full 

panoply of the Commission’s part 4 

compliance requirements, this could 

indirectly lead to greater transparency 

in the offerings of registered CPOs and 

CTAs, as well as improved customer 

protection for persons engaging with 

CPOs and CTAs. Moreover, if additional 

pools and trading programs are created 

for the non-QEP investing public, this 

would be expected to enhance the 

variety and vibrancy of the non-QEP 

pool and trading program marketplace. 

As a result, more options for non-QEP 

individuals and entities to gain access to 

the commodity interest markets in a 

manner consistent with their individual 

risk appetites and exposure needs 

would become available. 

D. Costs 

If the proposed amendments are 

adopted, CPOs that currently offer pools 

operated under Regulation 4.7 may no 

longer accept additional investment 

from pool participants that fall in the 

gap between the old and new Portfolio 

Requirement thresholds. Such registered 

CPOs and CTAs may decide to offer 

pools and trading programs not exempt 

under Regulation 4.7 that would 

necessarily have higher operating and 

compliance costs, due to the 

unavailability of Regulation 4.7 

compliance exemptions for those 

investment products. 

E. Questions 

The Commission poses the following 

questions to better assess the costs and 

benefits of the proposed increases to the 

QEP definition’s Portfolio Requirement 

in Regulation 4.7(a)(1)(v). The 

Commission requests further that, to the 

extent possible, commenters please 

provide quantitative bases for your 

responses. 

1. How many QEPs would 

intermediaries expect to no longer be 

considered QEPs, if the Portfolio 

Requirement threshold increases are 

adopted? 

2. How many CPOs and CTAs that 

currently offer pools and trading 

programs exclusively to QEPs have 

participants and clients that would no 

longer be QEPs under the new 

thresholds? 

3. If the increased thresholds are 

adopted, will registered CPOs and CTAs 

form and begin offering new pools and 

trading programs designed for nonQEPs? 

F. Section 15(a) Factors 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of the proposed amendments to 

Regulation 4.7 with respect to the 

following factors: protection of market 

participants and the public; efficiency, 

competitiveness, and financial integrity 

of markets; price discovery; sound risk 

management practices; and other public 

interest considerations. As discussed 

above, the proposed revision of 

Regulation 4.7(a)(1)(v) would increase 

the financial thresholds for the Portfolio 

Requirement in the definition of QEPs. 

These proposed updates to the 

thresholds would, in the Commission’s 

preliminary opinion, more closely align 

the QEP definition with the intent of the 

regulation, which is to assure that 

offerings operated pursuant to 

Regulation 4.7 compliance exemptions 

are only made to persons with sufficient 

expertise and assets. 

a. Protection of Market Participants and 

the Public 

As stated above, the Commission 

believes preliminarily that this 

proposed amendment would benefit the 

commodity interest markets and the 

general public by realigning financial 

thresholds in its most commonly used 

regulations in a manner that accounts 

for the impacts of inflation since their 

original adoption and more accurately 

reflects current economic 

circumstances; the Commission expects 

that this would result in persons 

investing in commodity interest 

products offered by registered CPOs and 

CTAs being more accurately categorized 

as QEPs, and thus, more appropriately 

limited in their investment choices. 

Moreover, raising the Portfolio 

Requirement thresholds, as a practical 

matter, would likely limit the 

prospective investor population for 4.7 

pools and trading programs to a smaller 

number of persons. To the extent 

persons who meet the higher Portfolio 

Requirement thresholds are (on average) 

more financially sophisticated or 

resilient than those who no longer 

qualify, this proposed amendment 

should result in individuals and 

entities, both QEPs and non-QEPs, being 

offered pools and trading programs that 

are regulated in a manner 

commensurate with their respective 

needs for customer protection. If the 

increased thresholds further lead to the 

creation of more commodity pools and 

trading programs subject to the full part 

4 compliance requirements by registered 

CPOs and CTAs, this too would 

potentially lead to greater transparency 

in their activities, which also protects 

persons investing in commodity interest 

investment products. Additionally, 

greater variety in the commodity pools 

and trading programs available to nonQEPs would provide more options for 

this population to consider, which may 

further enable them to make more 

appropriate investment decisions by 

choosing the offerings best suited to 


ddrumheller on DSK120RN23PROD with PROPOSALS2
70870 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

106 Goldstein and Yang, ‘‘Commodity 

Financialization and Information Transmission,’’ 

2022, Journal of Finance, 77, 2613–2668. 

107 Id. 108 17 CFR 4.7(b)(2); 17 CFR 4.7(c)(1). 

their individual risk appetite or other 

portfolio needs. 

b. Efficiency, Competitiveness, and 

Financial Integrity of Markets 

The proposed amendments to the 

Portfolio Requirement may also affect 

the size, composition, or number of 

commodity pools and trading programs 

in the commodity interest markets, 

especially those offered solely to QEPs. 

This may, in turn, affect the flow of 

investing in commodity interests. 

Financial economics literature suggests 

that, to the extent changing the QEP 

definition reduces the flow of noncommercial funds into commodity 

interest markets, the cost to commercial 

traders using futures markets to hedge 

their risks may increase.106 Via this 

mechanism, this proposed amendment 

may have an indirect effect on efficiency 

of the futures markets with respect to 

the hedging costs of operating 

companies, commodity producers, or 

other commercial traders. 

c. Price Discovery 

The increased Portfolio Requirement 

thresholds are likely to result in fewer 

persons being considered QEPs, which 

may further result in fewer participants 

and clients in offered pools and trading 

programs operated under Regulation 

4.7. An additional indirect effect of the 

proposed rule change could be a change 

in the flow of investment in commodity 

interests by non-commercial traders. 

The financial economics literature has 

found ambiguous results regarding the 

relationship between increased 

investment by non-commercial traders 

in commodity interest markets and price 

discovery.107 As such, it is difficult to 

ex ante predict how changes in the 

Portfolio Requirement thresholds would 

impact price discovery. 

d. Sound Risk Management Practices 

Increasing the Portfolio Requirement 

thresholds may result in registered 

CPOs and CTAs that previously only 

offered pools and trading programs to 

QEPs creating and offering pools and 

trading programs designed for persons 

that are not QEPs. Consequently, these 

non-QEP pools and trading programs 

operated by registered CPOs and CTAs 

would then be subject to the full 

complement of part 4 compliance 

requirements, which could result in 

more diligent risk management practices 

by the CPOs and CTAs. 

e. Other Public Interest Considerations 

The original Portfolio Requirement 

thresholds in the QEP definition were 

intended to ensure that only persons 

possessing an appropriate and high 

level of trading experience, acumen, and 

financial resources would be eligible to 

invest in complex commodity interest 

investments offered and operated under 

Regulation 4.7. The Commission 

determined it appropriate to lessen the 

compliance burdens for registered CPOs 

and CTAs limiting their prospective 

participants and clients to financially 

sophisticated QEPs through the 

exemptions provided by Regulation 4.7 

for their 4.7 pools and trading programs. 

The 1992 Portfolio Requirement 

thresholds were adopted to provide a 

metric by which CPOs and CTAs could 

approximately assess the experience 

and financial wherewithal of potential 

pool participants or advisory clients, 

ensuring that they truly possessed the 

sophistication and resilience of other 

QEPs not subject to such thresholds. 

Updating these thresholds to account for 

inflation would realign the Portfolio 

Requirement with the original intent of 

the QEP definition and modernize its 

provisions consistent with today’s 

economic circumstances. 

iii. Requiring Minimum Disclosures for 

4.7 Pools and Trading Programs 

A. Baseline 

In general, registered CPOs and CTAs 

are required by several part 4 

regulations (i.e., Regulations 4.24–4.26 

for CPOs and 4.34–4.36 for CTAs) to 

provide Disclosure Documents 

containing specific types of information 

about their commodity pools and 

trading programs to prospective pool 

participants and advisory clients; such 

Disclosure Documents must be filed 

with and reviewed and approved by 

NFA prior to being used and 

distributed. Currently, Regulation 4.7 

makes available exemptions from these 

regulatory requirements for the 4.7 

pools and trading programs of registered 

CPOs and CTAs. While registered CPOs 

and CTAs are not required to disclose 

any information to prospective QEP 

pool participants or advisory clients 

about their 4.7 pools or trading 

programs, if they do choose to provide 

any disclosures, Regulation 4.7 requires 

the CPO or CTA to include a form 

disclaimer and to ensure that they 

provide all disclosures necessary to 

make the information, in the context in 

which it is being provided, not 

misleading.108

B. The Proposal 

The Proposal would narrow the 

existing exemptions in Regulation 4.7 

by proposing to require compliance 

with portions of the broader disclosure 

requirements in part 4, thereby 

establishing minimum content, use, and 

recordkeeping requirements applicable 

to QEP Disclosures, and bringing the 

disclosure requirements for 4.7 pools 

and trading programs closer to those 

applicable to pools and trading 

programs offered to non-QEPs by 

registered CPOs and CTAs. Specifically, 

CPOs and CTAs utilizing Regulation 4.7 

would be required by the proposed 

amendments to provide QEP 

Disclosures containing, at a minimum, 

the information outlined above through 

offering memoranda or trading program 

brochures delivered to their prospective 

QEP pool participants or advisory 

clients. Although the extent of 

information proposed to be required 

under Regulation 4.7 is less than that 

required by the part 4 regulations for 

non-QEP pools and trading programs, 

these proposed amendments represent a 

significant policy change from the 

current status quo, where Regulation 4.7 

currently provides broad exemptions 

from the entirety of the CPO and CTA 

disclosure regulations. Under the 

Proposal, CPOs and CTAs offering and 

operating 4.7 pools and trading 

programs would be required to provide 

information to their prospective QEP 

participants and clients regarding 

principal risk factors, investment 

programs, use of proceeds, custodians, 

fees and expenses, conflicts of interest, 

and certain performance information. 

Importantly, the Proposal also includes 

amendments to Regulation 4.7 that 

would require that the QEP Disclosures 

be materially complete and accurate, be 

kept up-to-date through routine reviews 

and updated as needed to reflect any 

changes to a 4.7 pool or trading 

program, and be maintained among an 

intermediary’s other books and records 

for the pool or trading program and 

made available to any representative of 

the Commission, NFA, or the U.S. 

Department of Justice, in accordance 

with Regulation 1.31. 

C. Benefits 

The direct effects of these proposed 

amendments would include greater 

availability and increased accuracy and 

reliability of the information QEPs 

receive prior to making their investment 

decisions. Mandating the provision of 

certain foundational information to all 

QEPs, which the proposed amendments 

would require to be kept up-to-date and 

accurate, is expected to result in more 


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109Sirra and Tufano (‘‘Costly Search and Mutual 

Fund Flows,’’ Journal of Finance, 1998, 53, 1589– 

1622) show that investments in mutual funds are 

highly influenced by both past returns and fees. 

Although there is some disagreement in the 

literature regarding the reason for this relationship, 

Berk and van Binsbergen (‘‘Measuring Skill in the 

Mutual Fund Industry’’ Journal of Financial 

Economics, 2015, 118, 1–20) provide evidence that 

this reflects investor money flowing to more skillful 

managers. Although the Commission is not aware 

of any analogous studies for investments in 

commodity pools, it seems plausible that the same 

factors matter in commodity interest markets. 

110For example, Del Guercio and Reuter (‘‘Mutual 

Fund Performance and the Incentive to Generate 

Alpha,’’ Journal of Finance, 2014, 1673–1704) show 

that investors who buy directly from mutual funds 

managers are highly responsive to funds’ riskadjusted returns. 

consistent disclosures to all persons 

gaining exposure to the commodity 

interest markets through CPOs and 

CTAs; better informed pool participants 

and advisory clients are likely to 

enhance market participant confidence 

in intermediaries and the commodity 

interest markets as a whole, as they 

better understand the nature of the 

services they are procuring. Moreover, 

the Commission preliminarily believes 

that this potential benefit is likely to be 

further bolstered by the proposed 

change in the material accuracy 

required of the QEP Disclosures. Rather 

than any disclosures being acceptable 

provided that they are, in totality, not 

materially misleading—meaning that 

material information could be 

permissibly omitted provided that it 

does not render the information that is 

disclosed false—the Proposal would 

further require that the QEP Disclosures 

be materially complete and accurate, 

which would mandate that all material 

information be included and be correct. 

This change is expected to result in 

more complete disclosures by CPOs and 

CTAs operating under Regulation 4.7, 

which is likely to result in a betterinformed universe of market 

participants served by such 

intermediaries. Additionally, by 

requiring that specific topics be 

addressed by all CPOs and CTAs 

offering 4.7 pools and trading programs, 

QEPs could more readily compare and 

understand the differences between 

offered pools and trading programs, and 

as such, the Proposal could lead to 

better quality investment decisions by 

QEPs.109

Several aspects of the Proposal may 

also indirectly enhance Commission 

and NFA oversight of CPOs and CTAs 

utilizing Regulation 4.7. First, the 

improved ability of QEPs to more easily 

compare and understand critical 

information about 4.7 pools and trading 

programs offered to them may provide 

incentives for better governance of those 

commodity interest investment products 

by CPOs and CTAs.110 Second, as 

discussed above, QEP Disclosures 

would be required by the Proposal to be 

materially complete and accurate, kept 

current by CPOs and CTAs, and 

maintained by them as business records 

available to the CFTC and NFA during 

routine examinations; these proposed 

amendments would likely also ensure 

that QEPs receive accurate information 

in QEP Disclosures, while also 

incentivizing good management and 

operational practices by CPOs and 

CTAs. 

Disclosure of information about an 

offered 4.7 pool or trading program may 

also result in additional benefits inuring 

to QEP pool participants and advisory 

clients. One such benefit would be the 

expectation that CPOs and CTAs may 

seek to compete with one another to 

offer lower or more cost-efficient fees 

and expenses, or to minimize potential 

conflicts of interest, for the purposes of 

presenting more attractive and 

competitive investment products to 

prospective QEP participants and 

clients. This may result in CPOs and 

CTAs attempting to eliminate any fees 

and expenses extraneous to their 4.7 

pools and trading programs, and/or to 

mitigate or resolve their conflicts of 

interest, each of which would benefit 

QEPs investing in these offerings. 

Additionally, by requiring the provision 

of standard disclosures to QEP pool 

participants and advisory clients, and 

the maintenance of such disclosures by 

the CPO or CTA in its books and records 

(which are subject to routine review by 

the Commission and NFA as part of 

their examination functions), the 

Commission preliminarily believes that 

these proposed amendments would 

result in higher quality disclosures on 

an on-going basis, even after a QEP 

participant or client receives 

information initially, due to the 

consistent and regular review of such 

QEP Disclosures by subject matter 

expert regulators, i.e., the Commission 

and NFA, that this NPRM would 

facilitate. As previously acknowledged 

in this Proposal, many, if not most, 

CPOs and CTAs offering 4.7 pools and 

trading programs currently provide 

some level of disclosure, due to other 

applicable Federal statutory and 

regulatory requirements and/or investor 

demand. Given the complexity and 

unique nature of the commodity interest 

markets, especially in light of market 

and product developments in the past 

30 years, the Commission preliminarily 

believes, however, that participants 

therein would benefit overall from the 

application of deep market and product 

expertise regarding the appropriate 

disclosure of risks, costs, and investing 

strategies for such products by the 

Commission and NFA to QEP 

Disclosures they may already regularly 

receive. By enabling this review of QEP 

Disclosures and requiring updates by 

CPOs and CTAs when necessary, the 

Commission preliminarily believes that 

these proposed amendments would 

thereby improve the quality and 

accuracy of QEP Disclosures, and as a 

result, enhance the understanding of 

market participants accessing the 

commodity interest markets through 4.7 

pools and trading programs. 

D. Costs 

The direct effect of these proposed 

amendments would be an increase in 

the operating costs of CPOs and CTAs 

utilizing Regulation 4.7, due to the 

addition of minimum content 

requirements for QEP Disclosures and 

requirements that such information be 

produced, disseminated to prospective 

pool participants and advisory clients, 

updated regularly, and kept as business 

records of the CPO or CTA. Regarding 

information production, CPOs and 

CTAs claiming Regulation 4.7 would be 

required to disclose information on 

several important features of their 4.7 

pools and trading programs relevant to 

expected future performance and 

activities of the CPO or CTA, including 

past performance, fees and expenses, 

principal risk factors, and potential 

conflicts of interest. 

The Commission understands that 

some of the information proposed to be 

required is similar in content to 

information that many CPOs and CTAs 

are already providing based on the 

demands of such QEPs, or because they 

are otherwise required to produce such 

information for compliance 

requirements in other regulatory 

regimes, like that of the SEC. 

Additionally, though, the QEP 

Disclosures would also require the 

provision of information that CPOs and 

CTAs already produce to comply with 

other CFTC regulations. For example, 

CPOs are already required by 

Regulations 4.7(b)(3) and 4.22(a) and (b) 

to calculate the net asset value of 4.7 

pool(s), accounting for fees, expenses, 

commissions, and other financial 

information, no less frequently than on 

a quarterly basis, for the purposes of 

producing account statements for QEP 

pool participants. The Proposal would 

also require CPOs and CTAs to provide 

past performance information 

prospectively to QEP pool participants. 

The Commission expects that the 

information required to produce a 4.7 

pool’s or trading program’s performance 


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70872 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

111For example, the JOBS Act of 2012 required 

the SEC to adopt regulations that would permit the 

use of ‘‘general solicitation’’ and/or general 

advertising in private placements under its existing 

Regulation D. Public Law 112–106, 126 Stat. 306 

(Apr. 5, 2012). As a result, the SEC adopted 

Regulation 506(c), which permits the use of general 

solicitation in Regulation D securities offerings, 

subject to certain conditions, including that all 

purchasers in the offering are accredited investors 

and that the issuer takes reasonable steps to verify 

their accredited investor status. See also 

Registration and Compliance Requirements for 

Commodity Pool Operators and Commodity 

Trading Advisors, 83 FR 52902, 52909–11 (Oct. 18, 

2018); ‘‘Eliminating the Prohibition Against General 

Solicitation and General Advertising in Rule 506 

and Rule 144A Offerings,’’ A Small Entity 

Compliance Guide, SEC, available at https://

www.sec.gov/info/smallbus/secg/generalsolicitation-small-entity-compliance-guide. When 

relying on the exemption in Regulation 506(c), 

offerors today may comfortably use general 

solicitation and advertising in their Regulation D 

offerings, which has led to the use of 

advertisements, press releases, and other broadly 

available publications discussing the details of this 

type of investment. 

112 Goldstein and Yang, ‘‘Commodity 

Financialization and Information Transmission,’’ 

2022, Journal of Finance, 77, 2613–2668. 

113Milyo and Waldfogel (‘‘The Effect of Price 

Advertising on Prices: Evidence in the Wake of 44 

Liquormart,’’ 1999, American Economic Review, 89, 

1081–1096) show that the removal of a ban on 

liquor price advertising led to decreases in the 

prices of advertised products, and an associated 

increase in quantity of sales by retailers who chose 

to advertise. More recently, Itern and Rigbi (‘‘Price 

Transparency, Media, and Informative 

history is already calculated by CPOs 

and CTAs for the purposes of providing 

periodic account statements, as required 

by other part 4 regulations. 

In addition to this direct effect, the 

proposed disclosure requirements may 

affect how CPOs and CTAs operate more 

generally. For example, providing 

descriptions of 4.7 pools’ and trading 

programs’ investment program 

information, principal risk factors and 

past returns routinely may likely make 

such information more publicly 

available,111 in turn potentially making 

it easier for new pools and trading 

programs to replicate or copy such 

investment plans and activities of 

previously formed successful ones. 

Although this could theoretically 

discourage CPOs and CTAs from 

developing more innovative or novel 

investment offerings, the Commission 

believes that this potential risk, 

however, is mitigated by the fact that 

the complexity, variety, and novelty of 

commodity interest products appear to 

be increasing constantly and are 

expected to continue to generate and 

propel innovation by asset managers in 

the future. 

E. Questions 

The Commission poses the following 

questions to better assess the costs and 

benefits of the proposed disclosure 

requirements that would be added to 

Regulations 4.7(b) and (c). The 

Commission requests further that, to the 

extent possible, commenters please 

provide quantitative bases for your 

responses. 

1. To what extent is the information 

necessary to provide past performance 

and fees already gathered in order to 

provide account information under 

Regulations 4.7 and 4.22? What 

additional steps would be required to 

process and disseminate that 

information in QEP Disclosures, as 

required under the Proposal? 

2. What are the costs of gathering and 

disseminating the other types of 

information required to be included in 

QEP Disclosures? 

3. How will the fees and expenses 

charged by CPOs and CTAs for pools 

and trading programs operated under 

Regulation 4.7 be affected by the 

proposed disclosure requirements? 

4. To what extent would CPOs’ and 

CTAs’ trading strategies be revealed in 

QEP Disclosures? How would such 

proposed disclosure requirements 

impact the development of such trading 

strategies and/or directly affect the 

behaviors of CPOs and CTAs utilizing 

Regulation 4.7? 

F. Section 15(a) Factors 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of the proposed amendments to 

Regulations 4.7(b)(2), (b)(5), (c)(1), and 

(c)(2), with respect to the following 

factors: protection of market 

participants and the public; efficiency, 

competitiveness, and financial integrity 

of markets; price discovery; sound risk 

management practices; and other public 

interest considerations. 

As discussed above, for CPOs and 

CTAs operating pools and trading 

programs under Regulations 4.7, the 

NPRM would narrow the existing 

exemptions from the part 4 disclosure 

regulations available under Regulations 

4.7(b)(2) and (c)(1). Under the Proposal, 

such CPOs and CTAs would be required 

to provide QEP Disclosures containing 

information regarding past performance, 

fees and expenses, principal risk factors, 

potential conflicts of interest, and other 

aspects of their investments to 

prospective QEP pool participants and 

advisory clients. 

a. Protection of Market Participants and 

the Public 

These proposed amendments to 

Regulation 4.7 would mandate a 

minimum amount of transparency into 

pools and trading programs trading 

commodity interests and restricting 

their offerings to QEPs. This could help 

such QEPs protect themselves against 

excessive fees and self-dealing, and 

generally help insure that the products 

offered by such CPOs and CTAs are 

performing and being operated, as 

anticipated. In addition, mandating QEP 

Disclosures and requiring that they be 

materially accurate and complete, rather 

than just optional and not materially 

misleading, will benefit market 

participants and the public by ensuring 

that prospective investors would receive 

QEP Disclosures containing, at a 

minimum, certain important general 

and performance information that they 

can reliably assume is kept current and 

materially complete with respect to the 

items proposed to be required. Finally, 

requiring that such QEP Disclosures be 

maintained among CPOs’ and CTAs’ 

other books and records, and thus made 

available to the Commission and NFA, 

would allow for improved oversight of 

the regulated activities of CPOs and 

CTAs. 

b. Efficiency, Competitiveness, and 

Financial Integrity of Markets 

The proposed amendments regarding 

QEP Disclosures may also indirectly 

affect the functioning of commodity 

interest markets. To the extent that the 

proposed changes would increase 

transparency and affect the number or 

composition of pools and trading 

programs operated under Regulation 

4.7, the NPRM might also affect the flow 

of investing in commodity interests. 

Financial economics literature suggests 

that, to the extent greater transparency 

into pools and trading programs 

increases the flow of non-commercial 

funds into commodity interest markets, 

that may also tend to reduce the costs 

to commercial traders using the futures 

market to hedge.112 In that sense, the 

NPRM may have an indirect effect on 

the efficiency of the futures market in 

regard to the hedging costs of operating 

companies, commodity producers, and 

other commercial traders. 

This increase in transparency 

resulting from the Proposal may also 

lead to QEPs having better information 

about fees and expenses, performance, 

and potential returns on their 

investments in 4.7 pools and trading 

programs, which may lead further to 

enhanced competition amongst CPOs 

and CTAs relying on Regulation 4.7. 

There is considerable evidence that 

eliminating prohibitions on price 

advertising, or mandating transparency 

of prices can lead to more ‘‘competitive 

markets,’’ in the sense that service 

providers and vendors compete to offer 

lower prices to consumers of their 

products.113 This general trend suggests 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 70873 

Advertising,’’ 2023, American Economic Journal: 

Microeconomics, 15, 1–29) show that a law 

requiring price transparency on grocery prices led 

to 4–5% lower prices, as well as less price 

dispersion. Similarly, Brown (‘‘Equilibrium Effects 

of Health Care Price Information,’’ 2019, The 

Review of Economics and Statistics, 101, 699–712) 

finds that providing online information on health 

care procedure pricing led to lower prices and less 

price dispersion. In a paper on hedge fund returns, 

Aragon, Liang and Park (‘‘Onshore and Offshore 

Hedge Funds: Are They Twins?’’ 2014, 

Management Science, 60, 74–91) show that 

advertising restrictions on hedge funds reduce the 

impact of past returns on new investment. 

114 Goldstein and Yang, ‘‘Commodity 

Financialization and Information Transmission,’’ 

2022, Journal of Finance, 77, 2613–2668. 115 17 CFR 4.7(b)(3). 

that by increasing transparency of 

information about 4.7 pools and trading 

programs through requiring minimum 

QEP Disclosures, CPOs and CTAs may, 

as a result, compete to offer lower fees 

and expenses and more efficiently and 

honestly implement their investment 

programs, resulting in better returns for 

QEPs. 

c. Price Discovery 

As noted above, an indirect effect of 

the Proposal could be a change in the 

flow of investment into commodity 

interests by non-commercial traders. 

Financial economics literature has 

found ambiguous results regarding the 

relationship between increased 

investment by non-commercial traders 

in commodity interest markets and price 

discovery.114 As such, it is difficult for 

the Commission to ex ante predict how 

increasing transparency in the returns, 

fees, etc. of pools and trading programs 

operating under Regulation 4.7 would 

impact price discovery. 

d. Sound Risk Management Practices 

The NPRM may also help some QEPs 

better manage their business risks. For 

example, some QEPs are insurance 

companies and pensions funds that 

have specific operational risks that may 

be mitigated through appropriate 

financial investment. The availability 

and provision of more accurate and 

complete information about 4.7 pools 

and trading programs, including their 

fees and principal risk factors, may 

assist such QEPs in making more 

appropriate and targeted investment 

decisions that support their operations. 

As discussed above, the Proposal may 

also promote sound risk management by 

CPOs and CTAs. Specifically, requiring 

QEP Disclosures be maintained among 

CPOs’ and CTAs’ other books and 

records would allow for greater 

regulatory oversight of such 

intermediaries by the Commission and 

NFA. This requirement would help 

identify those intermediaries that lack 

suitable risk management practices, or 

that are engaging in practices that do not 

match their QEP Disclosures and other 

regulatory filings, potentially 

encouraging the adoption of better risk 

management practices. Finally, the 

anticipation of greater regulatory 

oversight and transparency in their 

operations might also provide an 

incentive for CPOs and CTAs to adopt 

and follow sound risk management 

practices. 

e. Other Public Interest Considerations 

The proposed requirement for CPOs 

and CTAs to include past performance 

information in their QEP Disclosures 

may enable regulators and the general 

public to gain a better understanding of 

the trading behavior of CPOs and CTAs 

utilizing Regulation 4.7, and 

consequently, the impact they have on 

commodity interest markets through 

their 4.7 pools and trading programs. 

iv. Permitting Monthly Account 

Statements Consistent With 

Commission Exemptive Letters for 

Certain 4.7 Pools 

A. Baseline 

CPOs operating pools under 

Regulation 4.7 are required to provide 

account statements to investors ‘‘no less 

frequently than quarterly within 30 days 

after the end of the reporting 

period.’’ 115 Some of these 4.7 pools 

invest some or all of their assets in other 

pools or other types of collective 

investment vehicles, and are 

colloquially referred to, as discussed 

above, as ‘‘Funds of Funds.’’ It is the 

Commission’s understanding that the 

requirement that a 4.7 Fund of Funds 

pool provide account statements within 

30 days of the end of each quarter may 

become difficult to meet when its CPO 

may not receive an account statement 

regarding underlying investment returns 

until nearly the end of the required 30- 

day period. For example, if a 4.7 Fund 

of Funds pool regularly receives account 

statements from its investee pool’s CPO 

29 days after the end of the quarter, the 

CPO of the 4.7 Fund of Funds pool will 

likely find it difficult to provide 

accurate and complete account 

statements to its 4.7 Fund of Funds pool 

participants within 30 days of quarter 

end, as Regulation 4.7(b)(3) requires. In 

recognition of this potential difficulty, 

the Commission has routinely issued 

exemptive letters providing relief from 

this requirement, upon individual 

request, that permit the requesting CPO 

to distribute account statements for its 

4.7 Fund of Funds pool(s) on a monthly 

basis within 45 days of the month-end. 

Nevertheless, the regulatory baseline 

remains the reporting requirements of 

Regulation 4.7(b)(3). 

B. Proposal 

Consistent with longstanding 

exemptive letter relief described herein, 

the Proposal would add a provision to 

Regulation 4.7(b)(3) allowing CPOs of 

4.7 pools that are Funds of Funds to 

distribute account statements on a 

monthly basis, within 45 days of the 

end of the month-end, provided that 

such CPOs notify their pool 

participants, so they know when to 

expect to receive their account 

statements. 

C. Benefits 

Relative to the baseline, the primary 

benefit of this proposed amendment is 

to make it more feasible for 4.7 pools to 

invest in other pools or collective 

investment vehicles without potentially 

violating the periodic reporting 

requirements in Regulation 4.7. This 

proposed amendment may also allow 

CPOs of 4.7 pools to seek higher returns 

and/or better diversification for their 

participants by investing in other pools 

or other collective investment vehicles, 

without having to seek an exemptive 

letter to ensure they can meet their 

periodic reporting requirements, or 

without risking chronic compliance 

violations. Consequently, this proposed 

amendment may encourage more CPOs 

to operate their 4.7 pools as Funds of 

Funds, and that may further result in 

higher returns and/or more effective 

diversification for their QEP pool 

participants. Additionally, offering this 

alternative account statement schedule 

would allow CPOs of 4.7 Fund of Funds 

pools to provide more accurate and 

complete account statements to their 

QEP participants more frequently, rather 

than generating quarterly account 

statements containing estimates of such 

information, if they have not yet 

received it. The Commission further 

predicts that an overall benefit of this 

proposed amendment would be more 

frequent, accurate, and complete 

periodic reporting to QEP participants 

in 4.7 Fund of Funds pools. 

Finally, as noted above, exemptive 

letters providing relief from this 

reporting requirement have been 

commonly issued by the Commission 

for many years. Hence, as a practical 

matter, a primary benefit from this 

proposed amendment is CPOs of 4.7 

Fund of Funds pools being able to adopt 

an alternative account statement 

schedule at their convenience or 

immediately when necessary, rather 

than being required to seek an 

exemptive letter individually from the 


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70874 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

116 Goldstein and Yang, ‘‘Commodity 

Financialization and Information Transmission,’’ 

2022, Journal of Finance, 77, 2613–2668. 

Commission and potentially delaying 

operational decisions or changes until 

such letter is received. Moreover, the 

proposed amendment would also ensure 

that similarly situated registrants are 

treated in a consistent manner by 

making the alternative schedule 

available to all qualifying CPOs and 4.7 

pools without the need for individual 

requests. Finally, if this proposed 

amendment were adopted, such CPOs 

would no longer have to expend legal 

and other compliance resources for the 

purpose of seeking such exemptive 

letters from the Commission for each of 

their 4.7 Fund of Funds pools needing 

this account statement schedule. 

D. Costs 

Relative to the baseline, the primary 

cost of the proposed amendment would 

be the offering of a monthly account 

statement schedule, provided such 

monthly statements are provided within 

45 days of the end of the month, as an 

alternative to the current at least 

quarterly statement schedule provided 

within 30 days of the end of the quarter. 

Although the addition of 15 days may 

slightly delay the arrival of account 

information to QEP pool participants 

each month, such participants would 

also be receiving account statements 

containing more complete and accurate 

information more often, as a monthly 

schedule is more frequent than that 

required by Regulation 4.7(b)(3) 

currently, and the 15 days is designed 

to allow CPOs to compile more 

information about the 4.7 pool’s 

underlying investments in such 

statements. CPOs of 4.7 Fund of Funds 

pools may also incur costs to effectively 

notify QEP participants of their 

adoption of this alternative account 

statement schedule. To the extent this 

alternative account statement schedule 

encourages CPOs to operate more of 

their 4.7 pools as Funds of Funds, QEP 

participants therein may experience 

slightly higher costs, as the fees and 

expenses from underlying pools or other 

collective investment vehicles could 

possibly be passed along to them by 

their 4.7 Fund of Funds pool’s CPO. 

E. Questions 

The Commission poses the following 

questions to better assess the costs and 

benefits of the proposed amendment 

permitting an alternative monthly 

account statement schedule for Fund of 

Funds pools operated by CPOs utilizing 

Regulation 4.7. The Commission 

requests further that, to the extent 

possible, commenters please provide 

quantitative bases for your responses. 

1. How many CPOs operate their 4.7 

pools as Funds of Funds, meaning such 

pools invest in other 4.7 pools, other 

commodity pools, or other collective 

investment vehicles? 

2. How many CPOs operating 4.7 

pools provide sufficiently timely 

account statements to their participants 

that are other 4.7 commodity pools, so 

as to allow their CPOs to also produce 

their own account statements within 30 

days of the quarter-end? 

3. How many 4.7 Fund of Funds pools 

are currently able to provide quarterly 

account statements within 30 days of 

the end of the quarter, without the 

alternative monthly schedule currently 

provided exemptive relief? 

F. Section 15(a) Factors 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of the proposed amendments to 

Regulation 4.7(b)(3) with respect to the 

following factors: protection of market 

participants and the public; efficiency, 

competitiveness, and financial integrity 

of markets; price discovery; sound risk 

management practices; and other public 

interest considerations. As discussed 

above, the addition to Regulation 

4.7(b)(3) of a permissible monthly 

account statement schedule would 

facilitate compliance with periodic 

reporting deadlines for CPOs of 4.7 

Fund of Funds pools. Absent this 

change (and assuming such 4.7 pool has 

received no exemptive letter from the 

Commission), it may otherwise be 

impractical for such 4.7 pools to operate 

as Funds of Funds. 

a. Protection of Market Participants and 

the Public 

The baseline requirement in 

Regulation 4.7(b)(3) for at least quarterly 

account statements distributed within 

30 days of the quarter-end helps ensure 

that QEP pool participants have access 

to timely information about the 4.7 

pool’s performance, and serves to 

protect such participants from 

malfeasance and other sources of poor 

pool performance. As discussed above, 

relative to the baseline, the proposed 

amendment would permit CPOs of 4.7 

Fund of Funds pools to adopt an 

alternative monthly account statement 

schedule, provided such statements are 

provided within 45 days of the end of 

each month, and provided that they 

notify their QEP pool participants of 

such reporting schedule. To the extent 

the proposed amendment may 

encourage QEPs to participate in 4.7 

Fund of Funds pools, rather than other 

4.7 pools, it may require them to adjust 

to a different account statement 

schedule, but would likely ultimately 

provide them with more complete and 

accurate account statements on a more 

frequent basis. Additionally, the 

proposed amendment may facilitate the 

formation of 4.7 Fund of Funds pools by 

making it easier for their CPOs to 

comply with the applicable periodic 

reporting requirements under 

Regulation 4.7; this trend may also serve 

to benefit QEP participants, in that the 

CPOs of 4.7 Fund of Funds pools may 

be able to operate them in a manner that 

achieves exposure to a wider variety of 

underlying investment strategies 

through their investee pools, while 

continuing to remain compliant with 

their regulatory obligations. Finally, 

such CPOs would also have greater 

incentive and may possess more 

resources to monitor the behavior of 

their 4.7 Fund of Funds pools’ 

underlying investments in other pools 

or funds, than QEPs directly investing 

therein. 

b. Efficiency, Competitiveness, and 

Financial Integrity of Markets 

The proposed amendment to 

Regulation 4.7(b)(3) may indirectly 

affect the functioning of commodity 

interest markets. To the extent that the 

proposed amendment affects the 

behavior of CPOs or the size and 

composition of their 4.7 Fund of Funds 

pools, it might also affect the flow of 

investing in commodity interests. The 

financial economics literature suggests 

that increased investment by noncommercial traders in commodity 

interest markets will generally reduce 

the difference between futures prices 

and expected future spot prices.116 This 

effect means that, to the extent that 

offering an alternative schedule for 

periodic reporting in 4.7 Fund of Funds 

pools increases the flow of noncommercial funds into commodity 

interest markets, it will tend to also 

reduce the cost to commercial traders of 

using the futures market to hedge their 

risks. In that sense, this proposed 

amendment may have an indirect effect 

on efficiency of the futures markets in 

regard to the hedging costs of operating 

companies, commodity producers, or 

other commercial market participants. 

c. Price Discovery 

To the extent that the proposed 

amendment to Regulation 4.7(b)(3) 

affects the size or composition of 4.7 

pools, it might also affect the flow of 

investing in commodity interests. The 

financial economics literature has found 

ambiguous results regarding the 

relationship between increased 

investment by non-commercial traders 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 70875 

117 Id. 

118Sirra and Tufano, ‘‘Costly Search and Mutual 

Fund Flows,’’ Journal of Finance, 1998, 53, 1589– 

1622; Del Guercio and Reuter, ‘‘Mutual Fund 

Performance and the Incentive to Generate Alpha,’’ 

Journal of Finance, 2014, 1673–1704. 119 7 U.S.C. 19(b). 

in commodity interest markets and 

commodity price discovery.117 As such, 

it is difficult for the Commission to ex 

ante predict how the addition of an 

alternative account statement schedule 

for 4.7 Fund of Funds pools would 

impact price discovery. 

d. Sound Risk Management Practices 

Periodic reporting requirements in the 

form of regular account statements 

provided to pool participants serve as 

an effective means for participants as 

well as CPOs to monitor pools’ risk 

management. Because the amount of 

funds a CPO manages through its 

operated pools is likely responsive to its 

past performance,118 requiring the 

provision of complete financial 

information on pool performance 

through regular account statements can 

serve to provide an incentive for sound 

risk management by such CPOs. As 

discussed above, relative to the baseline, 

the proposed amendment to Regulation 

4.7(b)(3) may encourage the formation of 

4.7 Fund of Funds pools, whose CPOs 

may be better able to monitor the 

performance of underlying commodity 

pools or funds in which they invest, as 

compared to QEP participants investing 

directly therein. This also may 

positively influence CPOs’ risk 

management practices in their pools, to 

the extent their participants are other 

4.7 pools. 

e. Other Public Interest Considerations 

A key practical consideration is that, 

absent exemptive letters issued by the 

Commission, the existing Regulation 

4.7(b)(3) appears to make it very 

difficult for CPOs to operate their 4.7 

pools as Funds of Funds, while 

complying with applicable periodic 

reporting requirements. To the extent 

that facilitating the operation of such 4.7 

pools as Funds of Funds is a legitimate 

policy goal of the Commission (as 

suggested by its routine granting of 

exemptive letters on this topic), 

changing the regulations to explicitly 

permit this alternative account 

statement schedule would be a more 

effective and direct means of 

accomplishing that objective that further 

ensures more consistent treatment of 

similarly situated registrants. 

d. Antitrust Considerations 

Section 15(b) of the CEA requires the 

Commission to take into consideration 

the public interest to be protected by the 

antitrust laws and endeavor to take the 

least anticompetitive means of 

achieving the purposes of the CEA in 

issuing any order or adopting any 

Commission rule or regulation.119 The 

Commission believes that the public 

interest to be protected by the antitrust 

laws is generally to protect competition. 

The Commission requests comment on 

whether the Proposal implicates any 

other specific public interest to be 

protected by the antitrust laws. 

The Commission has considered the 

proposed amendments in this NPRM to 

determine whether they are 

anticompetitive and has preliminarily 

identified no anticompetitive effects. 

The Commission requests comment on 

whether the NPRM is anticompetitive 

and, if it is, what the anticompetitive 

effects are. 

Because the Commission has 

preliminarily determined that the 

Proposal is not anticompetitive and has 

no anticompetitive effects, the 

Commission has not identified any less 

anticompetitive means of achieving the 

purposes of the CEA. The Commission 

requests comment on whether there are 

less anticompetitive means of achieving 

the relevant purposes of the CEA that 

would otherwise be served by adopting 

the amendments proposed in this 

NPRM. 

List of Subjects in 17 CFR Part 4 

Advertising, Brokers, Commodity 

futures, Commodity pool operators, 

Commodity trading advisors, Consumer 

protection, Reporting and recordkeeping 

requirements. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission 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, 6(c), 6b, 6c, 6l, 

6m, 6n, 6o, 12a, and 23. 

■ 2. In § 4.7: 

■ a. Remove the introductory text; 

■ b. Revise paragraphs (a) and (b)(2)(i); 

■ c. Add paragraphs (b)(2)(i)(A) through 

(G); 

■ d. Remove and reserve paragraph 

(b)(2)(ii); 

■ e. Add paragraph (b)(3)(iv); 

■ f. Revise paragraphs (b)(5) and 

(c)(1)(i); 

■ g. Add paragraphs (c)(1)(i)(A) through 

(H); 

■ h. Remove and reserve paragraph 

(c)(1)(ii); and 

■ i. Revise paragraphs (c)(2) and (d)(4)(i) 

and (ii). 

The revisions and additions read as 

follows: 

§ 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) Definitions. (1) Affiliate of, or a 

person affiliated with, a specified 

person means a person that directly or 

indirectly through one or more persons, 

controls, is controlled by, or is under 

common control with the specified 

person. 

(2) Exempt account means the 

account of a qualified eligible person 

that is directed or guided by a 

commodity trading advisor pursuant to 

an effective claim for exemption under 

this section. 

(3) Exempt pool means a pool that is 

operated pursuant to an effective claim 

for exemption under this section. 

(4) Non-United States person means: 

(i) A natural person who is not a 

resident of the United States; 

(ii) A partnership, corporation or 

other entity, other than an entity 

organized principally for passive 

investment, organized under the laws of 

a foreign jurisdiction and which has its 

principal place of business in a foreign 

jurisdiction; 

(iii) An estate or trust, the income of 

which is not subject to United States 

income tax regardless of source; 

(iv) An entity organized principally 

for passive investment such as a pool, 

investment company or other similar 

entity; Provided, that units of 

participation in the entity held by 

persons who do not qualify as NonUnited States persons or otherwise as 

qualified eligible persons represent in 

the aggregate less than 10% of the 

beneficial interest in the entity, and that 

such entity was not formed principally 

for the purpose of facilitating 

investment by persons who do not 

qualify as Non-United States persons in 

a pool with respect to which the 

operator is exempt from certain 

requirements of this part by virtue of its 

participants being Non-United States 

persons; and 

(v) A pension plan for the employees, 

officers or principals of an entity 

organized and with its principal place of 

business outside the United States. 

(5) Portfolio Requirement means that 

a person: 

(i) Owns securities (including pool 

participations) of issuers not affiliated 


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with such person and other investments 

with an aggregate market value of at 

least $4,000,000; 

(ii) Has had on deposit with a futures 

commission merchant, for its own 

account at any time during the sixmonth period preceding either the date 

of sale to that person of a pool 

participation in the exempt pool or the 

date that the person opens an exempt 

account with the commodity trading 

advisor, at least $400,000 in exchangespecified initial margin and option 

premiums, together with any required 

minimum security deposits for retail 

forex transactions (defined in § 5.1(m) of 

this chapter), for commodity interest 

transactions; or 

(iii) Owns a portfolio comprised of a 

combination of the funds or property 

specified in paragraphs (a)(5)(i) and (ii) 

of this section, in which the sum of the 

funds or property includable under 

paragraph (a)(5)(i) of this section, 

expressed as a percentage of the 

minimum amount required thereunder, 

and the amount of initial margin, option 

premiums, and minimum security 

deposits includable under paragraph 

(a)(5)(ii) of this section, expressed as a 

percentage of the minimum amount 

required thereunder, equals at least one 

hundred percent. An example of a 

composite portfolio acceptable under 

this paragraph (a)(5)(iii) would consist 

of $2,000,000 in securities and other 

property (50% of paragraph (a)(5)(i) of 

this section) and $200,000 in initial 

margin, option premiums, and 

minimum security deposits (50% of 

paragraph (a)(5)(ii) of this section). 

(6) Qualified eligible person means 

any person, acting for its own account 

or for the account of a qualified eligible 

person, who the commodity pool 

operator reasonably believes, at the time 

of the sale to that person of a pool 

participation in the exempt pool, or who 

the commodity trading advisor 

reasonably believes, at the time that 

person opens an exempt account, is 

eligible to invest in the exempt pool or 

open the exempt account and is 

included in the following list of persons 

that is divided into two categories: 

Persons who are not required to satisfy 

the Portfolio Requirement defined in 

paragraph (a)(5) of this section to be 

qualified eligible persons, and those 

persons who must satisfy the Portfolio 

Requirement in paragraph (a)(5) of this 

section to be qualified eligible persons. 

(i) Persons who need not satisfy the 

Portfolio Requirement to be qualified 

eligible persons. (A) A futures 

commission merchant registered 

pursuant to section 4d of the Act, or a 

principal thereof; 

(B) A retail foreign exchange dealer 

registered pursuant to section 

2(c)(2)(B)(i)(II)(gg) of the Act, or a 

principal thereof; 

(C) A swap dealer registered pursuant 

to section 4s(a)(1) of the Act, or a 

principal thereof; 

(D) A broker or dealer registered 

pursuant to section 15 of the Securities 

Exchange Act of 1934, or a principal 

thereof; 

(E) A commodity pool operator 

registered pursuant to section 4m of the 

Act, or a principal thereof; Provided, 

that the pool operator: 

(1) Has been registered and active as 

such for two years; or 

(2) Operates pools which, in the 

aggregate, have total assets in excess of 

$5,000,000; 

(F) A commodity trading advisor 

registered pursuant to section 4m of the 

Act, or a principal thereof; Provided, 

that the trading advisor: 

(1) Has been registered and active as 

such for two years; or 

(2) Provides commodity interest 

trading advice to commodity accounts 

which, in the aggregate, have total assets 

in excess of $5,000,000 deposited at one 

or more futures commission merchants; 

(G) An investment adviser registered 

pursuant to section 203 of the 

Investment Advisers Act of 1940 

(‘‘Investment Advisers Act’’) or 

pursuant to the laws of any state, or a 

principal thereof; Provided, that the 

investment adviser: 

(1) Has been registered and active as 

such for two years; or 

(2) Provides securities investment 

advice to securities accounts which, in 

the aggregate, have total assets in excess 

of $5,000,000 deposited at one or more 

registered securities brokers; 

(H) A ‘‘qualified purchaser’’ as 

defined in section 2(a)(51)(A) of the 

Investment Company Act of 1940 

(‘‘Investment Company Act’’); 

(I) A ‘‘knowledgeable employee’’ as 

defined in § 270.3c–5 of this title; 

(J) With respect to an exempt pool: 

(1) The commodity pool operator, 

commodity trading advisor or 

investment adviser of the exempt pool 

offered or sold, or an affiliate of any of 

the foregoing; 

(2) A principal of the exempt pool or 

the commodity pool operator, 

commodity trading advisor or 

investment adviser of the exempt pool, 

or an affiliate of any of the foregoing; 

(3) An employee of the exempt pool 

or the commodity pool operator, 

commodity trading advisor or 

investment adviser of the exempt pool, 

or of an affiliate of any of the foregoing 

(other than an employee performing 

solely clerical, secretarial or 

administrative functions with regard to 

such person or its investments) who, in 

connection with his or her regular 

functions or duties, participates in the 

investment activities of the exempt 

pool, other commodity pools operated 

by the pool operator of the exempt pool 

or other accounts advised by the trading 

advisor or the investment adviser of the 

exempt pool, or by the affiliate; 

Provided, that such employee has been 

performing such functions and duties 

for or on behalf of the exempt pool, pool 

operator, trading advisor, investment 

adviser or affiliate, or substantially 

similar functions or duties for or on 

behalf of another person engaged in 

providing commodity interest, securities 

or other financial services, for at least 12 

months; 

(4) Any other employee of, or an agent 

engaged to perform legal, accounting, 

auditing or other financial services for, 

the exempt pool or the commodity pool 

operator, commodity trading advisor or 

investment adviser of the exempt pool, 

or any other employee of, or agent so 

engaged by, an affiliate of any of the 

foregoing (other than an employee or 

agent performing solely clerical, 

secretarial or administrative functions 

with regard to such person or its 

investments); Provided, that such 

employee or agent: 

(i) Is an accredited investor as defined 

in § 230.501(a)(5) or (a)(6) of this title; 

and 

(ii) Has been employed or engaged by 

the exempt pool, commodity pool 

operator, commodity trading advisor, 

investment adviser or affiliate, or by 

another person engaged in providing 

commodity interest, securities or other 

financial services, for at least 24 

months; 

(5) The spouse, child, sibling or 

parent of a person who satisfies the 

criteria of paragraph (a)(6)(i)(J)(1), (2), 

(3) or (4) of this section; Provided, that: 

(i) An investment in the exempt pool 

by any such family member is made 

with the knowledge and at the direction 

of the person; and 

(ii) The family member is not a 

qualified eligible person for the 

purposes of paragraph (a)(6)(ii)(K) of 

this section; 

(6) Any person who acquires a 

participation in the exempt pool by gift, 

bequest or pursuant to an agreement 

relating to a legal separation or divorce 

from a person listed in paragraph 

(a)(6)(i)(J)(1), (2), (3), (4) or (5) of this 

section; 

(7) The estate of any person listed in 

paragraph (a)(6)(i)(J)(1), (2), (3), (4) or (5) 

of this section; or 

(8) A company established by any 

person listed in paragraph (a)(6)(i)(J)(1), 


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(2), (3), (4) or (5) of this section 

exclusively for the benefit of (or owned 

exclusively by) that person and any 

person listed in paragraph (a)(6)(i)(J)(6) 

or (7) of this section; 

(K) With respect to an exempt 

account: 

(1) An affiliate of the commodity 

trading advisor of the exempt account; 

(2) A principal of the commodity 

trading advisor of the exempt account or 

of an affiliate of the commodity trading 

advisor; 

(3) An employee of the commodity 

trading advisor of the exempt account or 

of an affiliate of the trading advisor 

(other than an employee performing 

solely clerical, secretarial or 

administrative functions with regard to 

such person or its investments) who, in 

connection with his or her regular 

functions or duties, participates in the 

investment activities of the trading 

advisor or the affiliate; Provided, that 

such employee has been performing 

such functions and duties for or on 

behalf of the trading advisor or the 

affiliate, or substantially similar 

functions or duties for or on behalf of 

another person engaged in providing 

commodity interest, securities or other 

financial services, for at least 12 

months; 

(4) Any other employee of, or an agent 

engaged to perform legal, accounting, 

auditing or other financial services for, 

the commodity trading advisor of the 

exempt account or any other employee 

of, or agent so engaged by, an affiliate 

of the trading advisor (other than an 

employee or agent performing solely 

clerical, secretarial or administrative 

functions with regard to such person or 

its investments); Provided, that such 

employee or agent: 

(i) Is an accredited investor as defined 

in § 230.501(a)(5) or (a)(6) of this title; 

and 

(ii) Has been employed or engaged by 

the commodity trading advisor or the 

affiliate, or by another person engaged 

in providing commodity interest, 

securities or other financial services, for 

at least 24 months; or 

(5) The spouse, child, sibling or 

parent of the commodity trading advisor 

of the exempt account or of a person 

who satisfies the criteria of paragraph 

(a)(6)(i)(K)(1), (2), (3) or (4) of this 

section; Provided, that: 

(i) The establishment of an exempt 

account by any such family member is 

made with the knowledge and at the 

direction of the person; and 

(ii) The family member is not a 

qualified eligible person for the 

purposes of paragraph (a)(6)(ii)(K) of 

this section; 

(6) Any person who acquires an 

interest in an exempt account by gift, 

bequest or pursuant to an agreement 

relating to a legal separation or divorce 

from a person listed in paragraph 

(a)(6)(i)(K)(1), (2), (3), (4) or (5) of this 

section; 

(7) The estate of any person listed in 

paragraph (a)(6)(i)(K)(1), (2), (3), (4) or 

(5) of this section; 

(8) A company established by any 

person listed in paragraph (a)(6)(i)(K)(1), 

(2), (3), (4) or (5) of this section 

exclusively for the benefit of (or owned 

exclusively by) that person and any 

person listed in paragraph (a)(6)(i)(K)(6) 

or (7) of this section; 

(L) A trust; Provided, that: 

(1) The trust was not formed for the 

specific purpose of either participating 

in the exempt pool or opening an 

exempt account; and 

(2) The trustee or other person 

authorized to make investment 

decisions with respect to the trust, and 

each settlor or other person who has 

contributed assets to the trust, is a 

qualified eligible person; 

(M) An organization described in 

section 501(c)(3) of the Internal Revenue 

Code (the ‘‘IRC’’); Provided, that the 

trustee or other person authorized to 

make investment decisions with respect 

to the organization, and the person who 

has established the organization, is a 

qualified eligible person; 

(N) A Non-United States person; 

(O) An entity in which all of the unit 

owners or participants, other than the 

commodity trading advisor claiming 

relief under this section, are qualified 

eligible persons; 

(P) An exempt pool; or 

(Q) Notwithstanding paragraph 

(a)(6)(ii) of this section, an entity as to 

which a notice of eligibility has been 

filed pursuant to § 4.5 which is operated 

in accordance with such rule and in 

which all unit owners or participants, 

other than the commodity trading 

advisor claiming relief under this 

section, are qualified eligible persons. 

(ii) Persons who must satisfy the 

Portfolio Requirement to be qualified 

eligible persons. With respect to the 

persons listed in this paragraph 

(a)(6)(ii), the commodity pool operator 

must reasonably believe, at the time of 

the sale to such person of a participation 

in the exempt pool, or the commodity 

trading advisor must reasonably believe, 

at the time such person opens an 

exempt account, that such person 

satisfies the Portfolio Requirement in 

paragraph (a)(5) of this section. 

(A) An investment company 

registered under the Investment 

Company Act or a business 

development company as defined in 

section 2(a)(48) of such Act not formed 

for the specific purpose of either 

investing in the exempt pool or opening 

an exempt account; 

(B) A bank as defined in section 

3(a)(2) of the Securities Act of 1933 (the 

‘‘Securities Act’’) or any savings and 

loan association or other institution as 

defined in section 3(a)(5)(A) of the 

Securities Act acting for its own account 

or for the account of a qualified eligible 

person; 

(C) An insurance company as defined 

in section 2(13) of the Securities Act 

acting for its own account or for the 

account of a qualified eligible person; 

(D) A plan established and 

maintained by a state, its political 

subdivisions, or any agency or 

instrumentality of a state or its political 

subdivisions, for the benefit of its 

employees, if such plan has total assets 

in excess of $5,000,000; 

(E) An employee benefit plan within 

the meaning of the Employee 

Retirement Income Security Act of 1974; 

Provided, that the investment decision 

is made by a plan fiduciary, as defined 

in section 3(21) of such Act, which is a 

bank, savings and loan association, 

insurance company, or registered 

investment adviser; or that the 

employee benefit plan has total assets in 

excess of $5,000,000; or if the plan is 

self-directed, that investment decisions 

are made solely by persons that are 

qualified eligible persons; 

(F) A private business development 

company as defined in section 

202(a)(22) of the Investment Advisers 

Act; 

(G) An organization described in 

section 501(c)(3) of the IRC, with total 

assets in excess of $5,000,000; 

(H) A corporation, Massachusetts or 

similar business trust, or partnership, 

limited liability company or similar 

business venture, other than a pool, 

which has total assets in excess of 

$5,000,000, and is not formed for the 

specific purpose of either participating 

in the exempt pool or opening an 

exempt account; 

(I) 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 § 230.501(a)(5) of this title; 

(J) A natural person who would 

qualify as an accredited investor as 

defined in § 230.501(a)(6) of this title; 

(K) A pool, trust, insurance company 

separate account or bank collective 

trust, with total assets in excess of 

$5,000,000, not formed for the specific 

purpose of either participating in the 

exempt pool or opening an exempt 


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account, and whose participation in the 

exempt pool or investment in the 

exempt account is directed by a 

qualified eligible person; or 

(L) Except as provided for the 

governmental entities referenced in 

paragraph (a)(6)(ii)(D) of this section, if 

otherwise authorized by law to engage 

in such transactions, a governmental 

entity (including the United States, a 

state, or a foreign government) or 

political subdivision thereof, or a 

multinational or supranational entity or 

an instrumentality, agency, or 

department of any of the foregoing. 

(7) United States means the United 

States, its states, territories or 

possessions, or an enclave of the United 

States government, its agencies or 

instrumentalities. 

(b) * * * 

(2) * * * 

(i) Exemption from the specific 

requirements in §§ 4.24 and 4.26(d) with 

respect to each pool; Provided, that any 

offering memorandum distributed in 

connection with soliciting prospective 

participants in the exempt pool be 

distributed consistent with the 

requirements of § 4.21 and include: 

(A) A description of principal risk 

factors for the exempt pool, as required 

by § 4.24(g); 

(B) A description of the exempt pool’s 

investment program and use of 

proceeds, as required by § 4.24(h); 

(C) A description of fees and 

expenses, as required by § 4.24(i); 

(D) A description of conflicts of 

interest, as required by § 4.24(j); 

(E) Performance disclosures, as 

required by § 4.25, with the exception of 

information required by paragraphs 

(a)(3) and (c)(2) of § 4.25; 

(F) All other disclosures necessary to 

make the information contained therein, 

in the context in which it is furnished, 

not misleading; and 

(G) The following statement, 

prominently disclosed on the cover page 

of the offering memorandum: 

‘‘PURSUANT TO AN EXEMPTION 

FROM THE COMMODITY FUTURES 

TRADING COMMISSION IN 

CONNECTION WITH POOLS WHOSE 

PARTICIPANTS ARE LIMITED TO 

QUALIFIED ELIGIBLE PERSONS, AN 

OFFERING MEMORANDUM FOR THIS 

POOL IS NOT REQUIRED TO BE, AND 

HAS NOT BEEN, FILED WITH THE 

COMMISSION. THE COMMODITY 

FUTURES TRADING COMMISSION 

DOES NOT PASS UPON THE MERITS 

OF PARTICIPATING IN A POOL OR 

UPON THE ADEQUACY OR 

ACCURACY OF AN OFFERING 

MEMORANDUM. CONSEQUENTLY, 

THE COMMODITY FUTURES 

TRADING COMMISSION HAS NOT 

REVIEWED OR APPROVED THIS 

OFFERING OR ANY OFFERING 

MEMORANDUM FOR THIS POOL 

PRIOR TO FIRST USE.’’ 

(3) * * * 

(iv) Where the exempt pool is 

invested in one or more other pools or 

funds operated by third parties, the 

commodity pool operator may choose 

instead to prepare and distribute to its 

pool participants statements signed and 

affirmed in accordance with § 4.22(h) on 

a monthly basis within 45 days of the 

month-end; Provided, that the 

statements otherwise meet the 

conditions of paragraphs (b)(3)(i) 

through (ii) of this section, and that the 

commodity pool operator notifies its 

pool participants of this alternate 

distribution schedule in the exempt 

pool’s offering memorandum distributed 

prior to the initial investment, or upon 

its adoption of this reporting schedule, 

for then existing pool participants. 

* * * * * 

(5) Recordkeeping relief. Exemption 

from the specific requirements of § 4.23; 

Provided, that the commodity pool 

operator must maintain the offering 

memoranda and reports referred to in 

paragraphs (b)(2), (3), and (4) of this 

section, and all other books and records 

prepared in connection with its 

activities as the pool operator of the 

exempt pool (including, without 

limitation, records relating to the 

qualifications of qualified eligible 

persons and substantiating any 

performance representations). Books 

and records that are not maintained at 

the pool operator’s main business office 

shall be maintained by one or more of 

the following: the pool’s administrator, 

distributor, or custodian, or a bank or 

registered broker or dealer acting in a 

similar capacity with respect to the 

pool. Such books and records must be 

made available to any representative of 

the Commission, the National Futures 

Association and the United States 

Department of Justice in accordance 

with the provisions of § 1.31 of this 

chapter. 

* * * * * 

(c) * * * 

(1) * * * 

(i) Exemption from the specific 

requirements of §§ 4.34 and 4.36(d); 

Provided, that any brochure or other 

disclosure statement delivered by a 

commodity trading advisor to its 

prospective qualified eligible person 

clients be distributed consistent with 

the requirements of § 4.31 and include: 

(A) A description of persons to be 

identified, as required by § 4.34(e); 

(B) A description of principal risk 

factors, as required by § 4.34(g); 

(C) A description of the exempt 

commodity trading advisor’s trading 

program, as required by § 4.34(h); 

(D) A description of fees, as required 

by § 4.34(i); 

(E) A description of conflicts of 

interest, as required by § 4.34(j); 

(F) Performance disclosures, as 

required by § 4.35; 

(G) All additional disclosures 

necessary to make the information 

contained therein, in the context in 

which it is furnished, not misleading; 

and 

(H) The following statement, 

prominently displayed on the cover 

page of the brochure or other disclosure 

statement: 

‘‘PURSUANT TO AN EXEMPTION 

FROM THE COMMODITY FUTURES 

TRADING COMMISSION IN 

CONNECTION WITH ACCOUNTS OF 

QUALIFIED ELIGIBLE PERSONS, THIS 

BROCHURE OR ACCOUNT 

DOCUMENT IS NOT REQUIRED TO BE, 

AND HAS NOT BEEN, FILED WITH 

THE COMMISSION. THE COMMODITY 

FUTURES TRADING COMMISSION 

DOES NOT PASS UPON THE MERITS 

OF PARTICIPATING IN A TRADING 

PROGRAM OR UPON THE ADEQUACY 

OR ACCURACY OF COMMODITY 

TRADING ADVISOR DISCLOSURE. 

CONSEQUENTLY, THE COMMODITY 

FUTURES TRADING COMMISSION 

HAS NOT REVIEWED OR APPROVED 

THIS TRADING PROGRAM OR THIS 

BROCHURE OR ACCOUNT 

DOCUMENT PRIOR TO FIRST USE.’’ 

* * * * * 

(2) Recordkeeping relief. Exemption 

from the specific requirements of § 4.33; 

Provided, that the commodity trading 

advisor must maintain, at its main 

business office, the trading brochure or 

disclosure statement referred to in 

paragraph (c)(1) of this section, and all 

other books and records prepared in 

connection with its activities as the 

commodity trading advisor of qualified 

eligible persons (including, without 

limitation, records relating to the 

qualifications of such qualified eligible 

persons and substantiating any 

performance representations). Such 

books and records must be made 

available to any representative of the 

Commission, the National Futures 

Association, and the United States 

Department of Justice in accordance 

with the provisions of § 1.31 of this 

chapter. 

(d) * * * 

(4)(i) Any exemption from the 

requirements of §§ 4.22, 4.23, 4.24, 4.25, 

and 4.26 claimed hereunder with 

respect to a pool shall not affect the 

obligation of the commodity pool 


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operator to comply with all other 

applicable provisions of this part, the 

Act and the Commission’s rules and 

regulations, with respect to the pool and 

any other pool the pool operator 

operates or intends to operate. 

(ii) Any exemption from the 

requirements of §§ 4.33, 4.34, and 4.36 

claimed hereunder shall not affect the 

obligation of the commodity trading 

advisor to comply with all other 

applicable provisions of this part, the 

Act and the Commission’s rules and 

regulations, with respect to any 

qualified eligible person and any other 

client to which the commodity trading 

advisor provides or intends to provide 

commodity interest trading advice. 

* * * * * 

■ 3. In § 4.14, revise paragraph 

(a)(8)(i)(C)(2) to read as follows: 

§ 4.14 Exemption from registration as a 

commodity trading advisor. 

(a) * * * 

(8) * * * 

(i) * * * 

(C) * * * 

(2) With the exception of the pool’s 

operator, advisor, and their principals, 

solely ‘‘Non-United States persons,’’ as 

that term is defined in § 4.7(a)(7), will 

contribute funds or other capital to, and 

will own beneficial interests in, the 

pool; Provided, that units of 

participation in the pool held by 

persons who do not qualify as NonUnited States persons or otherwise 

qualified eligible persons represent in 

the aggregate less than 10 percent of the 

beneficial interest of the pool; 

* * * * * 

■ 4. In § 4.21, revise paragraph (a)(2) to 

read as follows: 

§ 4.21 Required delivery of pool 

Disclosure Document. 

(a) * * * 

(2) For the purpose of the Disclosure 

Document delivery requirement, 

including any offering memorandum 

delivered pursuant to § 4.7(b)(2)(i) or 

§ 4.12(b)(2)(i), the term ‘‘prospective 

pool participant’’ does not include a 

commodity pool operated by a pool 

operator that is the same as, or that 

controls, is controlled by, or is under 

common control with, the pool operator 

of the offered pool. 

* * * * * 

■ 5. In § 4.22: 

■ a. Revise paragraphs (a)(4), (c)(7) 

introductory text, (c)(8), (d)(1) 

introductory text, (d)(2)(i) introductory 

text, (f)(2) introductory text, and 

(f)(2)(iv)(B) and (C); and 

■ b. Remove paragraph (f)(2)(iv)(D). 

The revisions read as follows: 

§ 4.22 Reporting to pool participants. 

(a) * * * 

(4) For the purpose of the Account 

Statement delivery requirement, 

including any Account Statement 

distributed pursuant to § 4.7(b)(3) or 

§ 4.12(b)(2)(ii), the term ‘‘participant’’ 

does not include a commodity pool 

operated by a pool operator that is the 

same as, or that controls, is controlled 

by, or is under common control with, 

the pool operator of a pool in which the 

commodity pool has invested. 

* * * * * 

(c) * * * 

(7) For a pool that has ceased 

operation prior to, or as of, the end of 

the fiscal year, the commodity pool 

operator may provide the following, 

within 90 days of the permanent 

cessation of trading, in lieu of the 

annual report that would otherwise be 

required by § 4.22(c) or § 4.7(b)(4): 

* * * * * 

(8) For the purpose of the Annual 

Report distribution requirement, 

including any annual report distributed 

pursuant to § 4.7(b)(4) or § 4.12(b)(2)(iii), 

the term ‘‘participant’’ does not include 

a commodity pool operated by a pool 

operator that is the same as, or that 

controls, is controlled by, or is under 

common control with, the pool operator 

of a pool in which the commodity pool 

has invested; Provided, that the Annual 

Report of such investing pool contain 

financial statements that include such 

information as the Commission may 

specify concerning the operations of the 

pool in which the commodity pool has 

invested. 

(d)(1) Subject to the provisions of 

paragraphs (d)(2) and (g)(2) of this 

section, the financial statements in the 

Annual Report required by this section 

or by § 4.7(b)(4) must be presented and 

computed in accordance with United 

States generally accepted accounting 

principles consistently applied and 

must be audited by an independent 

public accountant; Provided, however, 

and subject to the exception in 

paragraph (c)(7)(iii)(B) of this section, 

that the requirement that the Annual 

Report be audited by an independent 

public accountant does not apply for 

any fiscal year during which the only 

participants in the pool are one or more 

of the pool operator, the pool’s 

commodity trading advisor, any person 

controlling, controlled by, or under 

common control with the pool operator 

or trading advisor, and any principal of 

the foregoing; and Provided further, that 

the commodity pool operator obtains a 

written waiver from each such pool 

participant of their right to receive an 

audited Annual Report for such fiscal 

year, maintains such waivers in 

accordance with § 4.23, and makes such 

waivers available to the Commission or 

National Futures Association upon 

request. The requirements of § 1.16(g) of 

this chapter shall apply with respect to 

the engagement of such independent 

public accountants, except that any 

related notifications to be made may be 

made solely to the National Futures 

Association, and the certification must 

be in accordance with § 1.16 of this 

chapter, except that the following 

requirements of that section shall not 

apply: 

* * * * * 

(2)(i) Where a pool is organized in a 

jurisdiction other than the United 

States, the financial statements in the 

Annual Report required by this section 

or by § 4.7(b)(4) may be presented and 

computed in accordance with the 

generally accepted accounting 

principles, standards or practices 

followed in such other jurisdiction; 

Provided, that: 

* * * * * 

(f) * * * 

(2) In the event a commodity pool 

operator finds that it cannot obtain 

information necessary to prepare annual 

financial statements for a pool that it 

operates within the time specified in 

paragraph (c) of this section or 

§ 4.7(b)(4)(i), as a result of the pool 

investing in another collective 

investment vehicle, it may claim an 

extension of time under the following 

conditions: 

* * * * * 

(iv) * * * 

(B) For all reports prepared under 

paragraph (c) of this section and for 

reports prepared under § 4.7(b)(4)(i) that 

are audited by an independent public 

accountant, the commodity pool 

operator has been informed by the 

independent public accountant engaged 

to audit the commodity pool’s financial 

statements that specified information 

required to complete the pool’s Annual 

Report is necessary in order for the 

accountant to render an opinion on the 

commodity pool’s financial statements. 

The notice must include the name, main 

business address, main telephone 

number, and contact person of the 

accountant; and 

(C) The information specified by the 

accountant cannot be obtained in 

sufficient time for the Annual Report to 

be prepared, audited, and distributed 

before the Extended Date. 

* * * * * 


ddrumheller on DSK120RN23PROD with PROPOSALS2
70880 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

1Mandatory disclosure serves as a theoretical and 

practical linchpin in capital markets regulation. 

Unless an offering is otherwise exempt from 

registration, Section 5 of the Securities Act requires 

issuers who seek to raise capital to register the 

offering with the Securities and Exchange 

Commission (SEC) prior to offering the securities to 

investors for sale. See 15 U.S.C. 77a–77mm. To 

complete the registration process, issuers must 

compile and distribute extensive disclosures 

describing, among other matters, the nature of the 

issuer’s business; the educational and professional 

profiles of executives appointed to senior 

management positions and individuals selected to 

serve on the board of directors; tangible and 

intangible property; risk factors; and the financial 

health—current and forecasted earnings and 

revenues—of the firm. 

2 Investigative Congressional hearings revealed 

that more than half of the $25 billion in securities 

distributed between the end of World War I and the 

stock market crash of 1929 were worthless. H.R. 

REP. NO. 73–85, at 2 (1933); see also U.S. Senate 

Hist. Off., Subcommittee on Senate Resolutions 84 

and 239, https://www.senate.gov/about/powersprocedures/investigations/pecora.htm. Detailed 

accounts of issuers’ intentional dissemination of 

false and misleading information punctuated 

evidence of fraud and stunning acts of avarice. 

During this period, securities listed on the New 

York Stock Exchange declined from a pre-crash 

high of $89 billion to $15 billion in 1932. One 

critical investigative report suggested that ‘‘had 

there been full disclosure,’’ issuers’ schemes ‘‘could 

not long have survived the fierce light of publicity 

and criticism.’’ Ferdinand Pecora, Wall Street 

Under Oath: The Story of Our Modern Money 

Changers (1939). 

3Louis D. Brandeis, Other People’s Money And 

How The Bankers Use It, 92 (1914). 

4 17 CFR 4.7. On January 2, 1979, the CFTC 

adopted rules for the regulation of CPOs and CTAs. 

See Commodity Pool Operators and Commodity 

Trading Advisors; Final Rules, 44 FR 1918 (Jan. 8, 

1979). These rules became effective April 1, 1979. 

Issued in Washington, DC, on October 3, 

2023, by the Commission. 

Christopher Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Commodity Pool 

Operators, Commodity Trading 

Advisors, and Commodity Pools: 

Updating the ‘Qualified Eligible Person’ 

Definition; Adding Minimum 

Disclosure Requirements for Pools and 

Trading Programs; Permitting Monthly 

Account Statements for Funds of Funds; 

Technical Amendments—Commission 

Voting Summary and Commissioners’ 

Statements 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Behnam and 

Commissioners Johnson and Goldsmith 

Romero voted in the affirmative. 

Commissioner Pham concurred. 

Commissioner Mersinger voted in the 

negative. 

Appendix 2—Statement of 

Commissioner Kristin N. Johnson 

History of Disclosure-Centered 

Regulation 

Federal regulation expressly establishes 

that customer protection is a core principle 

of and central to the oversight mission of the 

Commodity Futures Trading Commission 

(CFTC or Commission). For almost a century, 

mandatory disclosure has played a critical 

role in market regulation, directly shaping 

the development of the U.S. capital and 

derivatives markets.1 Requiring disclosure of 

material information mitigates inherent 

asymmetries of information. 

The Commission allocates resources among 

registration and supervision responsibilities 

and enforcement actions to foster effective 

oversight of market participants and 

transactions. This approach not only 

enhances the integrity of markets, but 

effectively protects customers from material 

misrepresentations and fraud. 

Congress has judiciously introduced 

Federal markets legislation, often in response 

to nationwide or global market-wide crises, 

and has carefully balanced Federal regulation 

with the role and significance of state 

regulatory oversight. 

One hundred years ago, Congress passed 

the Grain Futures Act—the statute that was 

superseded by the Commodity Exchange Act 

(CEA) and that established the Grain Futures 

Administration (GFA, the predecessor of the 

CFTC)—authorizing the GFA to regulate 

certain commodity futures. A decade later, in 

the wake of the stock market crash of 1929 

and the conclusion of the roaring ’20s—a 

period characterized by a surging economy 

and intense market speculation accompanied 

by pervasive fraud in retail securities 

markets 2—Congress adopted the Securities 

Act of 1933 (the Securities Act). The stock 

market crash of 1929 triggered staggering 

losses by retail investors and initiated a long 

period of industrial decline and widespread 

unemployment, ultimately leading to deeply 

depressed macroeconomic conditions. 

Consistent with an adage made popular by 

U.S. Supreme Court Justice Louis Brandeis— 

‘‘[s]unlight is said to be the best of 

disinfectants; electric light the most efficient 

policeman’’ 3—Congress adopted a 

disclosure-centric approach. 

Disclosure increases transparency, reduces 

asymmetries of information, and mitigates 

fraud and manipulation as well as other 

misconduct in our financial markets. In the 

absence of mandatory disclosures, investors 

may have limited access to the material 

information needed to make a reasonable 

investment decision. Mandatory disclosure 

neutralizes incentives to misrepresent 

material information. 

It is incumbent upon the Commission to 

continue to carry out this mandate reflected 

in the principles of Federal markets 

regulation and firmly established in the CEA. 

Novel Financial Products and Evolving 

Derivatives Markets 

Novel financial products, such as digital 

assets and innovative technologies like 

distributed digital ledger or blockchain 

technology and generative artificial 

intelligence, increasingly dominate 

regulatory discourse and popular 

discussions. The derivatives markets offer 

futures on digital assets, which are priced on 

a volatile spot market, employ technology 

that is highly complex and rapidly changing, 

and offer novel market structures including 

market structures designed to permit retail 

customers direct access to trading and 

clearing platforms. In some contexts, trading 

structures eliminate intermediaries such as a 

futures commission merchants (FCM), raising 

important questions regarding the best 

approach for preserving important customer 

protections such as segregation of customer 

assets. 

As our markets are evolving, more and 

more vulnerable customers increasingly 

engage in complex derivatives activities. It is 

important that these customers have an 

opportunity to consider critical, material 

information when making an investment 

decision. Disclosure serves a valuable role in 

protecting customers. 

Consequently, regulators must 

continuously revisit regulation to ensure that 

it remains fit for purpose. Our regulations 

must keep pace with innovation in our 

evolving markets. In particular, we must 

refresh our understanding of which 

customers may benefit from disclosure when 

investing, directly or indirectly, in 

derivatives markets. 

* * * * * 

I support the notice of proposed 

rulemaking (NPRM) regarding commodity 

pool operators (CPOs), commodity trading 

advisors (CTAs), and commodity pools 

operated under CFTC Regulation 4.7. The 

NPRM addresses regulatory gaps that have 

arisen due to, at least in part, the changing 

dynamics in the derivatives markets. The 

proposed amendments adapt the CFTC’s 

existing regulations to reinforce, preserve, 

and promote customer protection safeguards. 

CFTC Regulation 4.7 dictates the disclosure 

obligations of CPOs and CTAs by establishing 

the test for classifying a natural person as a 

retail investor to whom extensive disclosures 

and financial reports must be delivered or a 

financially sophisticated investor with 

respect to whom a more streamlined process 

may be warranted. 

Updating Our Understanding of the Legal 

Standard for ‘‘Financial Sophistication’’ 

Adopted in 1979, part 4 of the CFTC’s 

regulations requires CPOs and CTAs to 

deliver disclosures and regular financial 

reports to pool participants or advisory 

clients.4 This framework acts as an important 

layer of protection for customers, by 

providing customers with material 

information about the commodity pool or 

trading platform, which may include 

investment objectives, past performance 

record, conflicts of interest, risk disclosures, 

or other prescribed information. 

CFTC Regulation 4.7, adopted in 1992, 

creates an exemption from certain part 4 

requirements for CPOs and CTAs that 

privately offer or sell pool participations 

solely to qualified eligible persons (QEPs) 

pursuant to an exemption under the 

Securities Act or direct or guide the 

commodity trading accounts of QEPs. As a 

result, QEPs or wealthy individuals do not 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 70881 

5 17 CFR 4.7(a)(3)(ix) and (x). The portfolio test 

applies to certain legal entities and natural persons. 

Generally, the portfolio test is satisfied if the natural 

person owns securities of unaffiliated issuers and 

other investments with a market value of at least 

$2,000,000 (Securities Portfolio Test); has on 

deposit with an FCM for such person’s account at 

least $200,000 in initial margin, option premiums, 

or minimum security deposits (Initial Margin and 

Premium Test); or owns a portfolio of funds and 

assets that, when expressed as percentages of the 

first two thresholds, meet or exceed 100%. 17 CFR 

4.7(a)(1)(v). 

6Exemption for Commodity Pool Operators With 

Respect to Offerings to Qualified Eligible 

Participants; Exemption for Commodity Trading 

Advisors With Respect to Qualified Eligible Clients, 

57 FR 34853, 34854 (Aug. 7, 1992). To clarify, in 

respect of natural persons, the portfolio requirement 

does not facilitate the concurrent use of an 

exemption from registration under the Securities 

Act and the CFTC Regulation 4.7 exemption 

because the QEP status is not completely 

harmonized with the accredited investor status of 

the SEC. 

7The NPRM also revises the timing of certain 

pools’ periodic financial reporting, based on longstanding no-action letters, to permit funds of funds 

to provide account statements within 45 days of the 

month-end rather than 30 days of the quarter-end 

and makes technical adjustments to reorganize 

CFTC Regulation 4.7 to improve its structure and 

utility (e.g., to fix cross-references). 

8The Commission is proposing to update the 

portfolio requirement’s thresholds by doubling the 

Securities Portfolio Test to $4,000,000 and the 

Initial Margin and Premium Test to $400,000. 

9As originally proposed in 1992, the portfolio 

requirement had two components: (1) $5,000,000 in 

securities or (2) $1,000,000 deposited as initial 

margin and options premiums with an FCM for 

commodity interest trading. 57 FR at 34855. 

10The new minimum standards will require the 

disclosure of principal risk factors, investment 

programs, use of proceeds, custodians, conflicts of 

interest, fees and expenses, and past performance, 

and the retention of disclosures as business records. 

1This Statement will refer to the Commodity 

Futures Trading Commission as the ‘‘CFTC’’ or the 

‘‘Commission.’’ 

2CFTC Rule 4.7, 17 CFR 4.7. 

3Opening Statement of Commissioner Summer 

Mersinger Regarding CFTC Open Meeting on June 

7, 2023, section regarding Amendments to part 17 

Large Trader Reporting Requirements Proposed 

Rule (June 7, 2023), available at https://

www.cftc.gov/PressRoom/SpeechesTestimony/ 

mersingerstatement060723. 

4 Dissenting Statement of Commissioner Summer 

K. Mersinger Regarding CFTC’s Regulatory Agenda, 

section entitled ‘‘ ‘Kicking the Can Down the Road’ 

Rather than Working on Rulemaking Solutions’’ 

(January 9, 2023), available at https://www.cftc.gov/ 

PressRoom/SpeechesTestimony/mersinger

statement010923. 

receive any of the specific disclosures 

otherwise provided to non-QEPs or retail 

investors (e.g., offering memoranda, 

brochures, or disclosure statements) and 

receive streamlined financial reporting. 

A natural person, investing capital in a 

commodity pool or whose trading account 

invests in derivatives, would be a QEP if the 

individual is an ‘‘accredited investor,’’ as 

defined by the SEC in Regulation D under the 

Securities Act, and also meets the CFTC’s 

portfolio requirement.5 The portfolio 

requirement is designed to ensure that a 

person’s investments reach a specified 

threshold related to the person’s securities 

portfolio and derivatives account. This 

functions as a proxy for identifying 

individuals who, based on the size of their 

investments, have ‘‘substantial investment 

experience and thus a high degree of 

sophistication with regard to investments as 

well as financial resources to withstand the 

risk of their investments.’’ 6

Recognizing that classifying individuals as 

QEPs may result in reduced regulatory 

protections, it is therefore critical that the 

Commission is careful in setting out the 

standard for determining that an individual 

is a QEP. 

An individual customer may experience 

substantial losses if the market moves against 

the customer’s positions. This concern is 

heightened by the fact that the participation 

interests acquired in an exempt pool offering 

are not registered offerings subject to the 

SEC’s robust public offering disclosure 

regime outlined in public offering 

registration obligation. 

Commodity pools are commonly hedge 

funds that may use leverage to magnify 

returns, engage in speculation, and take 

directional positions. These types of 

structured investment strategies may result in 

amplified losses for customers. 

While our markets are undergoing 

unprecedented changes, robust customer 

protections must remain consistent and 

effective. Natural persons who currently meet 

the outdated thresholds in the portfolio 

requirement test introduced in 1992 are not 

necessarily sophisticated investors in today’s 

markets. What’s worse, under the existing 

regulation, individuals that meet the QEP test 

may not be receiving disclosures to be fully 

apprised of the risks associated with 

investing in novel derivatives instruments, 

whether directly or through a commodity 

pool, and our evolving markets. 

Two-Part Recalibration of Customer 

Protection Measures 

This NPRM has two important objectives.7

First, it doubles the financial thresholds of 

the portfolio requirement test to account for 

inflation since the exemption was adopted in 

1992, thereby recalibrating the standard for 

determining which pool investors or advisory 

clients are QEPs.8 If this proposed 

amendment is adopted, certain pool 

participants and advisory clients that do not 

receive disclosures or receive streamlined 

financial reporting under the existing 

regulation will benefit from the full range of 

customer protection measures in part 4 of the 

CFTC’s regulations. The proposed thresholds 

are not even as high as those that were 

originally proposed in 1992, and so I do not 

find the amended portfolio requirement to be 

too restrictive or limiting today, more than 30 

years later.9 Perhaps the thresholds could be 

higher. 

Second, the NPRM sets a new minimum 

standard of disclosure regarding pools and 

trading programs that must be provided to all 

QEPs or wealthy investors, while retaining 

the more robust disclosure and reporting 

requirements applicable to non-QEPs or retail 

investors.10 The adoption of this amendment 

will result in heightened customer 

protections for QEPs that currently are 

entitled to none. I strongly believe that as a 

market regulator, we must, when warranted, 

carefully recalibrate how investors 

participate in our evolving markets to ensure 

that CPOs and CTAs provide a prospective or 

actual investor, whether such investor is a 

QEP or not, with information that is 

sufficient and adequate to enable the investor 

to assess the material risks and rewards of the 

commodity pool or trading program. 

Disclosure is key to remediating the dangers 

of information asymmetry. 

I appreciate the staff’s efforts in 

heightening disclosure and enhancing 

customer protections and their cooperation 

in implementing my comments to refine the 

preamble and regulatory text concerning the 

specific disclosures that will be required 

under the proposed rule. 

I am looking forward to thoughtful 

comments and responses from market 

participants. In particular, I welcome 

perspectives on the potential impact of the 

proposed rule changes on natural persons 

who are investing in exempt pools operated 

by a CPO, or are advisory clients of a CTA, 

that is relying on the exemptions under CFTC 

Regulation 4.7 and navigating our complex 

and evolving derivatives markets. 

Appendix 3—Dissenting Statement of 

Commissioner Summer K. Mersinger 

I regrettably dissent from the 

Commission’s 1 proposed rulemaking to 

amend Rule 4.7,2 which for the past 30 years 

has provided exemptions to registered 

commodity pool operators (‘‘CPOs’’) and 

commodity trading advisors (‘‘CTAs’’) that 

operate commodity pools or trading programs 

for Qualified Eligible Persons (‘‘QEPs’’). I say 

‘‘regrettably’’ because there are two aspects of 

this proposal that are consistent with views 

I have expressed before, and which I support. 

First, I agree that it is time for the 

Commission to consider increasing the 

monetary thresholds in the ‘‘Portfolio 

Requirement’’ in the definition of a QEP in 

Rule 4.7(a) to account for inflation. As I 

previously have stated, ‘‘I believe that it is 

incumbent upon the CFTC, like any 

regulatory agency, to continually review its 

rule set to evaluate whether rules . . . need 

to be updated because they have simply 

failed to keep up with the times.’’ 3

Second, I support proposing a process in 

our rules that would permit CPOs relying on 

Rule 4.7 to elect an alternate account 

statement schedule that is consistent with 

exemptive letters issued regularly by the 

Commission. This schedule would address 

the fact that our current rule is not workable 

in the context of funds-of-funds, and also 

would generate more frequent reporting. As 

I previously have stated, ‘‘when one of our 

rules needs to be fixed because it is 

unworkable, ambiguous, or inefficient, 

corrective action by notice-and-comment 

rulemaking is the gold standard because it 

allows the Commission to hear from 

stakeholders and develop regulatory 

solutions that provide certainty.’’ 4

However, I cannot support the proposal to 

narrow the scope of the historical exemptions 

in Rule 4.7 by imposing universal disclosure 

requirements to QEPs. It represents a 

‘‘mandate first, evaluate later’’ approach 

based on assumptions, speculation, and poor 


ddrumheller on DSK120RN23PROD with PROPOSALS2
70882 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

5See Proposing Release at 7–9. 

6See id. at 5–6. 

7 Id. at 16. 

8The analysis of costs and benefits in the 

Proposing Release suggests that there is reason to 

believe the proposal to increase the Portfolio 

Requirement’s monetary thresholds may take care 

of the stated concern based on differences in QEPs’ 

ability to protect their interests. It states: ‘‘To the 

extent persons who meet the higher Portfolio 

Requirement thresholds are (on average) more 

financially sophisticated or resilient than those who 

no longer qualify, this proposed amendment [to 

increase the Portfolio Requirement thresholds] 

should result in individuals and entities, both QEPs 

and non-QEPs, being offered pools and trading 

programs that are regulated in a manner 

commensurate with their respective needs for 

customer protection.’’ Proposing Release at 66–67. 

9 Id. at 19, 20. 

10 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010) (‘‘Dodd-Frank Act’’). 

11Proposing Release at 21 (emphases added). 

12See id. at 16–17. 

13See id. at 17–18 n.46–47. Footnote no. 46 also 

cites to a CFTC reparations case from 2018 that 

sourcing. It also fails to fulfill certain 

fundamental functions of sound notice-andcomment rulemaking. 

Rule 4.7 in Brief 

Rule 4.7 provides exemptions for registered 

CPOs and CTAs operating commodity pools 

and trading programs restricted to QEPs (‘‘4.7 

CPOs and CTAs’’) from, among other things, 

disclosure, recordkeeping, and use-and-filing 

requirements that otherwise would apply 

pursuant to the CFTC’s rules. The rationale 

for the exemptions is that QEPs are 

sufficiently financially sophisticated, and 

have sufficient leverage and resources, to 

protect their own interests when 

participating in such pools and trading 

programs. 

As explained in the Proposing Release, the 

definition of a QEP is bifurcated into two 

categories: (1) those pool participants or 

advisory clients that need to satisfy a 

‘‘Portfolio Requirement’’ to be considered a 

QEP; and (2) those that do not. The Portfolio 

Requirement, in turn, can be met by 

satisfying either a Securities Portfolio Test of 

$2 million or an Initial Margin and Premium 

Test of $200,000, or a combination of the 

two.5

The Commission is proposing to double 

the monetary thresholds of the Portfolio 

Requirement in the QEP definition to $4 

million for the Securities Portfolio Test and 

$400,000 for the Initial Margin and Premium 

Test. This proposal is intended to account for 

inflation since Rule 4.7 was adopted in 1992. 

The ‘‘Mandate First, Evaluate Later’’ 

Approach to Disclosures to QEPs Is Not 

Good Government 

At the same time, the Commission also is 

proposing to narrow the scope of Rule 4.7 by 

eliminating a significant portion of the 

current disclosure exemptions available to 

4.7 CPOs and CTAs, thereby imposing 

universal disclosure requirements to QEPs. 

This is a ‘‘mandate first, evaluate later’’ 

approach to regulation that I strongly oppose. 

1. We May Already be Taking Care of the 

Stated Concern 

The Proposing Release begins by observing 

that the number of 4.7 CPOs and CTAs, and 

the number of commodity pools and trading 

programs relying on Rule 4.7, have ballooned 

over the years.6 It then states its primary 

justification for significantly narrowing the 

scope of the 4.7 exemptions by imposing 

universal disclosure requirements to QEPs as 

follows: 

The definition of QEP in Regulation 4.7 

encompasses a broad spectrum of market 

participants from large fund complexes and 

other institutional investors with significant 

assets under management to individuals with 

varying backgrounds and experience, each of 

which has vastly different resources available 

to insist upon the disclosure of information 

regarding the offered 4.7 pool or trading 

program and then to analyze whatever 

information is provided.7

Yet, this justification fails to consider that 

the increasing numbers of pools and trading 

programs relying on Rule 4.7, and of QEPs 

that may not have the wherewithal to protect 

their interests, may result from the erosion in 

the Portfolio Requirement’s monetary 

thresholds due to inflation—which the 

Commission is now proposing to address. If 

the Commission appropriately adjusts the 

Portfolio Requirement thresholds for 

becoming a QEP to return them to levels 

comparable to when the Commission 

adopted the disclosure exemptions in Rule 

4.7, then there is no logical reason why it 

should also eliminate those disclosure 

exemptions with respect to QEPs that still 

satisfy the new (higher) thresholds and are 

entirely capable of protecting their interests.8

In short: Before imposing universal 

disclosure requirements that many QEPs do 

not need, the Commission should evaluate 

whether adjusting the Portfolio Requirement, 

as it is proposing to do, will address its stated 

concern about differences between QEPs. As 

regulators, we should always evaluate first, 

and then, if appropriate, adopt regulations 

based on the results of that evaluation. This 

proposal’s ‘‘mandate first, evaluate later’’ 

approach has it exactly backwards. 

2. We Should Not Act Based on Speculation 

and Assumptions 

Another rationale the Proposing Release 

offers for imposing universal disclosure 

requirements to QEPs is that ‘‘the 

Commission has . . . witnessed a significant 

expansion and growth in the complexity and 

diversity of commodity interest products 

offered to QEPs via 4.7 pools and trading 

programs,’’ and ‘‘product innovation in the 

commodity interest markets has continued at 

a rapid and unrelenting pace.’’ 9 The primary 

examples cited are swaps and digital assets. 

Yet, the Proposing Release offers no 

evidence to support its paternalistic 

conjecture that QEPs may not appreciate the 

nature of the risk associated with trading 

swaps in commodity pools and trading 

programs that rely on the exemptions in Rule 

4.7. And there is no logical reason why such 

swap trading should now require a 

significant narrowing of the exemptions in 

Rule 4.7 more than a decade after Congress 

enacted a full regulatory regime for swaps in 

the Dodd-Frank Act 10—which the 

Commission has fully implemented. The 

Proposing Release does not cite to any 

provision of the Dodd-Frank Act or its 

legislative history suggesting Congress felt 

that the development of swap trading 

warranted a reconsideration of the scope of 

the exemptions provided by Rule 4.7 in 

general—or universal disclosure 

requirements to QEPs in particular. 

As for digital assets and technological 

innovation, the Proposing Release recognizes 

that it is relying on mere speculation. It 

candidly acknowledges that: (1) ‘‘Given the 

relatively recent development of digital 

assets, it remains unclear as to whether the 

underlying markets . . . are subject to market 

fundamentals similar to those of the 

traditional commodities’’; and (2) ‘‘As the 

financial system continues to experience a 

period of rapid evolution in the era of 

artificial intelligence and other technological 

advancements, the Commission expects to 

see continued development of novel 

investment products that . . . may in fact 

deviate from the typical operations of 

markets now subject to the Commission’s 

oversight.’’ 11

Throughout the 30 years since Rule 4.7 was 

adopted, there has been a steady expansion 

of the number, complexity, and diversity of 

available derivatives products, and 

derivatives markets have undergone 

transformational changes resulting from 

technological innovation (none greater than 

the migration from open-outcry pit trading to 

all-electronic trading). Yet, through it all, 

there has never been any suggestion that the 

exemptions under Rule 4.7 needed to be 

significantly narrowed as a result. 

We should not act based on what we don’t 

know. More specifically, we should not 

impose universal disclosure requirements to 

QEPs based on speculation about 

hypothetical future developments. As 

markets continue to evolve and innovate as 

they always have done, we as regulators 

should evaluate first and then adopt 

regulations only as appropriate based on the 

results of that evaluation. Once again, this 

proposal has it exactly backwards. 

3. The Justifications for Acting Now Are 

Poorly Sourced 

Certainly, regulators must often act quickly 

when confronted with urgent circumstances. 

But that is hardly the case here. 

The Proposing Release contains no 

indication that QEPs are clamoring for the 

Commission to require disclosures by 4.7 

CPOs and CTAs. Indeed, one of the principal 

sources cited in support of the assertion that 

there is a problem that needs to be addressed 

is a roundtable—on CPO risk management 

practices—convened by CFTC staff way back 

in 2014.12

Other support for the claim that the 

Commission needs to act consists of footnote 

citations to individual cases of alleged 

wrongdoing by 4.7 CPOs and CTAs. These 

footnotes cite news clippings reporting on 

allegations in deposition testimony, 

statements of litigation counsel, and 

litigation documents—with no indication 

whether these allegations were proved to be 

true.13 And in some of the cases, it appears 


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Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 70883 

resulted in a default judgment and thus was not 

litigated. 

14CFTC Rules 4.7(b)(2) (CPOs) and 4.7(c)(1) 

(CTAs), 17 CFR 4.7(b)(2), 4.7(c)(1). 

15See Request for Comment on the Impact of 

Affiliations on Certain CFTC-Regulated Entities 

(June 28, 2023), available at https://www.cftc.gov/ 

PressRoom/PressReleases/8734-23, and Risk 

Management Programs for Swap Dealers, Major 

Swap Participants, and Futures Commission 

Merchants, 88 FR 45826 (July 18, 2023), 

respectively. 

16One of the Commission’s Core Values is 

‘‘Clarity,’’ i.e., ‘‘Providing transparency to market 

participants about our rules and processes.’’ See 

The Commission, CFTC Core Values, Clarity, 

available at https://www.cftc.gov/About/ 

AboutTheCommission. 

17CFTC Rule 4.7(a)(3), 17 CFR 4.7(a)(3). 

18Proposing Release at 12. 

19 Id. at 26 and 23, respectively. 

20See id. at 5–6 (citing statistics). 

21The Commission also should be more 

transparent about the estimates in its analysis 

required by the Paperwork Reduction Act (‘‘PRA’’). 

The Proposing Release estimates the annual burden 

hours per response of the disclosures proposed to 

be required of 4.7 CPOs and CTAs to be 1.5 hours. 

See Proposing Release at 56 (CPOs) and 59 (CTAs). 

But the Proposing Release does not explain how it 

arrived at this estimate—which strikes me as very 

low. 

22After presenting its justifications for imposing 

universal disclosure requirements to QEPs, the 

Proposing Release ‘‘requests comment on all aspects 

of the proposed amendments outlined below that 

would require certain information be disclosed to 

prospective QEP pool participants and advisory 

clients under Regulation 4.7 . . .’’ Proposing 

Release at 27 (emphasis added). That is, the 

Proposing Release requests comment on the 

disclosures to QEPs ‘‘outlined below’’ that it is 

proposing to require of 4.7 CPOs and CTAs—but 

not on the preceding discussion of whether 

universal disclosure requirements to QEPs are 

needed in the first place. 

that the 4.7 CPO or CTA was alleged to have 

committed fraud, or violated the 

Commission’s existing requirement ‘‘to 

provide all disclosures necessary to make 

information provided, in the context in 

which it is furnished, not misleading.’’ 14

Overall, the sourcing in the Proposing 

Release is woefully insufficient to support a 

proposal to impose universal disclosure 

requirements to QEPs on 4.7 CPOs and CTAs. 

There is no reason the Commission cannot 

undertake a proper evaluation of whether 

there really is a problem that needs to be 

addressed and, if so, the appropriate means 

to address it. 

The Commission has a variety of tools at 

its disposal to undertake such an evaluation. 

For starters, our staff could convene a 

roundtable specifically devoted to this issue, 

so that the Commission would not have to 

look to comments at a roundtable in another 

context that occurred nine years ago. The 

Commission or staff also could issue a 

Request for Comment or an Advance Notice 

of Proposed Rulemaking—both tools that 

have been utilized recently 15—in order to 

evaluate the necessity of taking action (and 

what action might be appropriate to take). 

In sum: Given its poor sourcing, the 

proposal to impose universal disclosure 

requirements to QEPs is a solution in search 

of a problem. The Proposing Release fails to 

justify its ‘‘mandate first, evaluate later’’ 

approach. The Commission should evaluate 

first, and act later based on that evaluation, 

if appropriate, consistent with established 

principles of good government. 

The Proposal Fails To Fulfill Fundamental 

Functions of Sound Rulemaking 

A sound notice of proposed rulemaking is 

characterized by, among other things: (1) 

transparency as to the agency’s plans; and (2) 

requests for comment on key issues. This 

Proposing Release is deficient on both 

counts. 

1. The Commission Should Be Fully 

Transparent About Its Plans 

The Proposing Release is not fully 

transparent about the Commission’s plans on 

two key issues.16 First, it says little about 

how the proposed amendments to Rule 4.7 

would be implemented. This is especially 

critical with respect to the proposed 

increases to the Portfolio Requirement 

monetary thresholds, which would create a 

class of pool participants and advisory 

clients that qualify as QEPs under existing 

Rule 4.7, but would no longer qualify as 

QEPs under amended Rule 4.7. 

Would these ‘‘former QEPs’’ be permitted 

to make additional investments in 

commodity pools and trading programs that 

are exempt under Rule 4.7 and in which they 

currently are investing? The Proposing 

Release explains that it would continue the 

requirement of existing Rule 4.7(a)(3) 17 that 

a CPO must assess QEP status at the time of 

sale of a pool participation, and that a CTA 

must do so at the time the person opens an 

exempt account.18 But it does not explain 

that, as a result, ‘‘former QEPs’’ would not be 

able to make additional investments in 

exempt commodity pools they are currently 

participating in (although they could make 

additional investments to trading programs 

in these circumstances). 

I appreciate the rationale of existing Rule 

4.7(a)(3) with respect to a participant in an 

exempt commodity pool whose financial 

resources drop below QEP thresholds. But I 

am not sure that same rationale should apply 

where a participant drops below QEP 

thresholds because the Commission is 

‘‘moving the goalposts’’ by increasing those 

thresholds. I imagine there may be QEPs that 

are comfortable with their 4.7 CPOs, pleased 

by the performance of the 4.7 exempt pools 

in which they are participating, and satisfied 

with the information disclosures they have 

received—and that would like to be able to 

contribute additional funds to those 

investments. 

The Commission should be forthright that 

the proposal would deny them this 

opportunity if they fall on the wrong side of 

the increased thresholds being proposed, and 

seek comment from potentially affected QEPs 

specifically on that issue. To shroud the issue 

in mystery in the Proposing Release is 

inconsistent with sound notice-and-comment 

rulemaking. 

Second, the Proposing Release does 

transparently reveal that the CFTC would use 

universal disclosure requirements to QEPs 

imposed on 4.7 CPOs and CTAs as ‘‘an 

additional level of oversight’’ by 

‘‘incorporating the review of [the new 

mandatory disclosures] into existing 

examination processes used by the 

Commission . . .’’ 19 What it does not reveal, 

however, is where the Commission plans to 

find the resources for ‘‘an additional level of 

oversight’’ by reviewing the disclosures that 

would be required of the approximately 1700 

CPOs and CTAs that rely on Rule 4.7 with 

respect to thousands of commodity pools and 

trading programs.20

What Commission programs or functions 

will have to be cut or curtailed in order for 

it to perform this new task? The public is 

entitled to know whether the CFTC’s review 

of required disclosures to QEPs that are 

capable of protecting their own interests may 

come at the expense of, say, reductions in 

enforcement resources to prosecute those 

who defraud retail customers, or the 

Commission’s oversight of derivatives 

exchanges and clearinghouses for which we 

are responsible by statute. But once again, the 

Proposing Release is silent.21

2. Putting the ‘‘Comment’’ Back in ‘‘Noticeand-Comment’’ Rulemaking 

It is somewhat startling how few questions 

the Proposing Release asks regarding its 

proposed amendments to Rule 4.7. Most 

notably, it does not even request comment on 

the foundational question of whether 

universal disclosure requirements to QEPs 

are needed. As discussed above, the 

Commission’s justifications for the proposed 

requirements are poorly sourced and based 

largely on assumptions and allegations—but 

the Proposing Release does not ask the public 

if those assumptions and allegations are 

accurate.22 It appears that the Commission 

has already made up its mind that universal 

disclosure requirements to QEPs are 

necessary, and is not interested in whether 

QEPs, other market participants, or the 

public agree with that. 

Nor does the Proposing Release ask: (1) 

whether current QEPs that fall below the 

increased Portfolio Requirement monetary 

thresholds for QEP status should be 

permitted to make additional investments in 

a commodity pool exempt under Rule 4.7; or 

(2) whether reviewing mandatory disclosures 

to QEPs that are able to protect their own 

interests is an appropriate use of the 

Commission’s limited resources. 

Accordingly, since the Commission 

declines to ask these questions, I will. I invite 

comment—especially, but not exclusively, 

from QEPs—on the following questions 

regarding the amendments that the 

Commission is proposing to Rule 4.7: 

1. Do QEPs agree that the Commission 

should impose universal disclosure 

requirements on 4.7 CPOs and CTAs? Why or 

why not? 

2. Is the Commission correct in its 

preliminary belief that universal disclosure 

requirements to QEPs are necessary to 

address unequal bargaining power of QEPs? 

Would they be necessary if the Commission’s 

proposed increases to the Portfolio 

Requirement monetary thresholds in the QEP 

definition are adopted? 

3. Is the Commission correct in its 

preliminary belief that universal disclosure 

requirements to QEPs are necessary in light 


ddrumheller on DSK120RN23PROD with PROPOSALS2
70884 Federal Register / Vol. 88, No. 196 / Thursday, October 12, 2023 / Proposed Rules 

1See Exemption for Commodity Pool Operators 

with Respect to Offerings to Qualified Eligible 

Participants; Exemption for Commodity Trading 

Advisors with Respect to Qualified Eligible Clients, 

57 FR 34853 (Aug. 7, 1992). 

2See Dissenting Statement of Commissioner 

Caroline D. Pham Regarding the Proposed 

Amendments to Form PF, U.S. Commodity Futures 

Trading Commission (August 10, 2022), https://

www.cftc.gov/PressRoom/SpeechesTestimony/ 

phamstatement081022. 

of significant expansion and growth in the 

complexity and diversity of commodity 

interest products offered to QEPs via 4.7 

pools and trading programs, and in light of 

the rapid pace of innovation in the 

commodity interest markets? 

4. Is the Commission correct in its 

preliminary belief that the development of 

markets for swaps and digital assets 

necessitates universal disclosure 

requirements to QEPs? 

5. Are there alternative, more tailored, 

means by which the Commission could 

achieve its policy objectives than the 

universal disclosure requirements to QEPs 

that it is proposing? If so, please describe. 

6. Should QEPs under existing Rule 4.7 

that would no longer qualify as QEPs under 

the proposed amendments to the Portfolio 

Requirement thresholds in Rule 4.7 be 

permitted to contribute additional funds to 

exempt commodity pools operated by 4.7 

CPOs in which they currently are 

participating? Why or why not? 

7. Should the Commission impose 

universal disclosure requirements to QEPs 

that are capable of protecting their own 

interests in order to incorporate the review of 

such disclosures into its existing examination 

processes if such review comes at the 

expense of other Commission 

responsibilities? Why or why not? 

8. To what extent will the proposed 

universal disclosure requirements to QEPs 

impact the benefits that 4.7 CPOs and CTAs 

derive from relying on the exemptions in 

Rule 4.7? Is it likely that 4.7 CPOs and CTAs 

will decide to no longer rely on the 

remaining exemptions afforded by Rule 4.7 if 

the proposed universal disclosure 

requirements to QEPs are adopted? 

9. If a 4.7 CPO or CTA is registered as an 

investment adviser with the SEC and not 

subject to an exemption regarding disclosures 

required by the SEC, should the CFTC accept 

compliance with disclosures required by the 

SEC as sufficient to satisfy the proposed 

universal disclosure requirements to QEPs 

under Rule 4.7, too? 

10. Is the Commission’s PRA estimate of 

1.5 annual burden hours per response for the 

disclosures proposed to be required of 4.7 

CPOs and CTAs appropriate? If not, what 

would be an appropriate estimate? 

Conclusion 

Given my support for certain aspects of 

this proposal, and given my support for 

obtaining public input on initiatives to 

improve our rulebook generally, I wish that 

I could support the issuance of the Proposing 

Release. Unfortunately, because of its 

‘‘mandate first, evaluate later’’ approach to 

the issue of disclosures to QEPs by 4.7 CPOs 

and CTAs, and its serious omissions in 

transparency and requests for comment, I 

cannot do so. Accordingly, I respectfully 

dissent. 

Appendix 4—Concurring Statement of 

Commissioner Caroline D. Pham 

I respectfully concur on the Notice of 

Proposed Rulemaking Regarding Commodity 

Pool Operators, Commodity Trading 

Advisors, and Commodity Pools Operated 

under Regulation 4.7: Updating the 

‘‘Qualified Eligible Person’’ Definition; 

Adding Minimum Disclosure Requirements 

for Pools and Trading Programs; Permitting 

Monthly Account Statements for Funds of 

Funds; Technical Amendments (CPO/CTA 

NPRM), because I am concerned that the 

proposed changes for commodity pool 

operators (CPOs) and commodity trading 

advisors (CTAs) offering to or advising 

sophisticated clients, or ‘‘qualified eligible 

persons’’ (QEPs), are burdensome and 

unnecessary for entities that are already 

subject to extensive CFTC regulation or 

banking, securities, insurance, or other 

financial services regulation.1 I thank staff in 

the Market Participants Division for their 

engagement with my office on the CPO/CTA 

NPRM. 

I reiterate the concerns in my prior dissent 

on the CFTC’s proposed amendments to 

Form PF.2 This CPO/CTA NPRM, like the 

CFTC’s proposed amendments to Form PF, 

seem to impose overly broad obligations that 

would be burdensome and unnecessary for 

sophisticated clients, and would present 

operational challenges and costs without a 

persuasive cost-benefit analysis under the 

Commodity Exchange Act. 

In a time of economic challenges, 

including rising inflation, we must be careful 

when considering proposals that could 

inhibit positive economic activity that 

supports American businesses and jobs. I 

look forward to hearing from commenters as 

to the proposed amendments, including 

practical implementation issues and the 

relative costs and benefits of the proposal. 

[FR Doc. 2023–22324 Filed 10–11–23; 8:45 am] 

BILLING CODE 6351–01–P 


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