```

[Federal Register Volume 78, Number 163 (Thursday, August 22, 2013)]
[Rules and Regulations]
[Pages 52308-52335]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19894]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD75

Harmonization of Compliance Obligations for Registered Investment 
Companies Required To Register as Commodity Pool Operators

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting final regulations with respect to certain 
compliance obligations for commodity pool operators (``CPOs'') of 
investment companies registered under the Investment Company Act of 
1940 (``registered investment companies'' or ``RICs'') that are 
required to register due to the recent amendments to its regulations. 
The Commission is also adopting amendments to certain provisions of 
part 4 of the Commission's regulations that are applicable to all CPOs 
and Commodity Trading Advisors (``CTAs'').

DATES: Effective dates: This rule is effective August 22, 2013, except 
the amendments to Sec. Sec.  4.7(b)(4), 4.12(c)(3)(i), 4.23, 4.26, and 
4.36 which are effective September 23, 2013.
    Compliance dates: Registered CPOs seeking exemption under these 
rules shall be required to comply with the conditions adopted in Sec.  
4.12(c)(3)(i) when the associated registered investment company updates 
its prospectus as described in Section II.F., below, and files the 
prospectus with the SEC. Moreover, the publication of these rules 
trigger the conditional compliance date that was established in the 
Commodity Pool Operators and Commodity Trading Advisors: Compliance 
Obligations rulemaking. 77 FR 11252, 11252 (Feb. 24, 2012). With the 
publication of these rules, registered CPOs of RICs must comply with 
Sec.  4.27 on or before October 21, 2013.

FOR FURTHER INFORMATION CONTACT: Amanda Lesher Olear, Associate 
Director, Telephone: (202) 418-5283, Email: aolear@cftc.gov, or Michael 
Ehrstein, Attorney-Advisor, Telephone: 202-418-5957, Email: 
mehrstein@cftc.gov, Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    This rulemaking is related to the final rule adopted under RIN 
3038-AD30.

A. Recent Amendments to Sec.  4.5 as Applicable to RICs

    The Commodity Exchange Act (``CEA'') \1\ provides the Commission 
with the authority to require registration of CPOs and CTAs,\2\ to 
exclude any entity from registration as a CPO or CTA,\3\ and to require 
``[e]very commodity trading advisor and commodity pool operator 
registered under [the CEA] to maintain books and records and file such 
reports in such form and manner as may be prescribed by the 
Commission.'' \4\ The Commission also has the authority to ``make and 
promulgate such rules and regulations as, in the judgment of the 
Commission, are reasonably necessary to effectuate the provisions or to 
accomplish any of the purposes of [the CEA].'' \5\
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    \1\ 7 U.S.C. 1, et seq.
    \2\ 7 U.S.C. 6m.
    \3\ 7 U.S.C. 1a(11) and 1a(12).
    \4\ 7 U.S.C. 6n(3)(A). Under part 4 of the Commission's 
regulations, unless otherwise provided by the Commission, entities 
registered as CPOs have reporting obligations with respect to their 
operated pools. See 17 CFR 4.22.
    \5\ 7 U.S.C. 12a(5).
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    In February 2012, the Commission adopted modifications to the 
exclusions from the definition of CPO that are delineated in Sec.  4.5 
(``2012 Final Rule'').\6\ Specifically, the Commission amended Sec.  
4.5 to modify the exclusion from the definition of ``commodity pool 
operator'' for those entities that are investment companies registered 
as such with the Securities and Exchange Commission (``SEC'') pursuant 
to the Investment Company Act of 1940 (`` '40 Act'').\7\ This 
modification amended the terms of the exclusion available to CPOs of 
RICs to include only those CPOs of RICs that commit no more than a de 
minimis portion of their assets to the trading of commodity interests 
that do not fall within the definition of bona fide hedging and who do 
not market themselves as a commodity pool or other commodity 
investment.\8\ Pursuant to this amendment, any such CPO of a RIC that 
exceeds this level, or markets itself as such, will no longer be 
excluded from the definition of CPO. Accordingly, except for those CPOs 
of RICs who commit no more than a de minimis portion of their assets to 
the trading of commodity interests that do not fall within the 
definition of bona fide hedging and who do not market themselves as a 
commodity pool or other commodity investment, an operator of a RIC that 
meets the definition of ``commodity pool operator'' under Sec.  4.10(d) 
of the Commission's regulations and Sec.  1a(11) of the CEA must 
register as such with the Commission.\9\
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    \6\ 17 CFR 4.5. See 77 FR 11252 (Feb. 24, 2012); correction 77 
FR 17328 (March 26, 2012). Prior to this Amendment, all RICs, and 
the principals and employees thereof, were excluded from the 
definition of ``commodity pool operator,'' by virtue of the RICs 
registration under the Investment Company Act of 1940. The 2012 
amendment to Sec.  4.5 maintained this exclusion for those RICs that 
engage in a de minimis amount of non-bona fide hedging commodity 
interest transactions. See id. Specifically, the amendment to Sec.  
4.5 retained this exclusion for RICs whose non-bona fide hedging 
commodity interest transactions require aggregate initial margin and 
premiums that do not exceed five percent of the liquidation value of 
the qualifying pool's portfolio, or whose non-bona fide hedging 
commodity interest transactions' aggregate net notional value does 
not exceed 100 percent of the liquidation value of the pool's 
portfolio.
    \7\ 15 U.S.C. 80a-1, et seq. ``SEC'' as used herein means the 
Securities and Exchange Commission or its staff, as the context 
requires.
    \8\ 17 CFR 1.3(yy).
    \9\ Pursuant to the terms of Sec.  4.14(a)(4), CPOs are not 
required to register as CTAs if the CPOs' commodity trading advice 
is directed solely to, and for the sole use of, the pool or pools 
for which they are registered as CPOs. 17 CFR 4.14(a)(4).
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B. Harmonization Proposal

    In response to the Commission's February 2011 proposal to amend the 
Sec.  4.5 exclusion with respect to CPOs of RICs,\10\ as well a staff 
roundtable held on July 16, 2011 (``Roundtable''),\11\ and meetings 
with interested parties, the Commission received numerous

[[Page 52309]]

comments expressing concern about the relationship between part 4 of 
the Commission's regulations applicable to CPOs of RICs and the SEC 
rules and guidance under the '40 Act, the Securities Act of 1933 
(``Securities Act''),\12\ and the Securities Exchange Act of 1934 \13\ 
regarding disclosure, reporting and recordkeeping by RICs 
(collectively, ``SEC RIC Rules'').\14\ Commenters asserted variously 
that the two sets of requirements touched upon similar areas, imposed 
undue burdens on CPOs of RICs, or conflicted such that CPOs of RICs 
could not comply with both. On this basis, some commenters argued that 
CPOs of RICs should not be required to comply with the full set of 
requirements under part 4. Several previously received comments, which 
were noted in the Proposal, suggested that the Commission make relief 
available, with respect to document and report distribution, similar to 
that which it has recently adopted with respect to exchange-traded 
funds (``ETFs'').\15\
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    \10\ 76 FR 7976 (Feb. 11, 2011).
    \11\ See Notice of CFTC Staff Roundtable Discussion on Proposed 
Changes to Registration and Compliance Regime for Commodity Pool 
Operators and Commodity Trading Advisors, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.
    \12\ 15 U.S.C. 77a, et seq.
    \13\ 15 U.S.C. 78a, et seq.
    \14\ The Commission understands that that SEC provides guidance 
in a variety of ways to market participants, including interpretive 
guidance, no action letters, frequently asked questions, and staff 
feedback in response to document submissions. The Commission also 
notes that RICs may be subject to separate requirements imposed by 
the Financial Industry Regulatory Authority.
    \15\ See 76 FR 28641 (May 18, 2011). The Commission adopted 
rules to relieve individual CPOs of publicly offered, ETFs of 
certain requirements in part 4 of the Commission's regulations. 
Specifically, the Commission adopted amendments to Sec.  4.12 
providing exemptive relief from Sec. Sec.  4.21, 4.22, and 4.23 for 
operators of ETFs. Such relief includes providing disclosure and 
periodic accounts statements to participants through the Internet 
and permitting the use of third-party service providers for 
recordkeeping obligations. Previously, Commission staff had issued 
relief to ETFs only on a case-by-case basis. ETFs that are also RICs 
may rely on the relief provided herein.
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    Some commenters suggested ways in which the two agencies' 
requirements could be harmonized to eliminate the inconsistencies 
between the two compliance regimes with respect to those entities 
subject to dual registration as a result of the recent amendments to 
Sec.  4.5. Specific areas of focus identified by the commenters 
include: The timing of delivery of Disclosure Documents to prospective 
participants; the signed acknowledgement requirement for receipt of 
Disclosure Documents; the cycle for updating Disclosure Documents; the 
timing of financial reporting to participants; the requirement that a 
CPO maintain its books and records on site; the required disclosure of 
fees; the required disclosure of past performance; the inclusion of 
mandatory certification language; and the SEC-permitted use of a 
summary prospectus for open-ended registered investment companies.
    Commenters advocated different approaches to harmonization. Some 
suggested that where requirements are inconsistent, the Commission 
should defer to SEC requirements.\16\ A few commenters made 
recommendations about the treatment of specific disclosures, such as 
presenting both SEC and CFTC-required fee information and presenting 
certain performance information required by the CFTC in the Statement 
of Additional Information (``SAI'').\17\ One commenter noted that CPOs 
of RICs should be required to comply with all disclosure and other 
requirements applicable to registered CPOs.\18\
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    \16\ See, e.g., Comment letter from the Investment Company 
Institute (April 12, 2011) (ICI Letter).
    \17\ See, e.g., Comment letter from the National Futures 
Association (April 12, 2011) (NFA Letter).
    \18\ See Comment letter from Steben & Company, Inc. (April 25, 
2012) (Steben letter).
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    Sections 4n(3) and (4) of the CEA \19\ authorize the Commission to 
adopt regulations requiring that CPOs maintain books and records and 
file reports with the Commission in the manner and form it prescribes. 
Such compliance obligations for CPOs are set forth in part 4 of the 
Commission's regulations and include a set of requirements that address 
disclosure, recordkeeping, and reporting obligations. The regulations 
are designed to promote market integrity and transparency, facilitate 
necessary Commission oversight, and provide important information to 
prospective participants. The requirement to comply with the full 
panoply of obligations set forth in part 4 of the Commission's 
regulations does not, however, follow inexorably from registration 
under the 2012 Final Rule requiring CPOs of RICs to register. The 
Commission determined, after consideration of the comments received, 
that further consideration was warranted concerning whether and to what 
extent CPOs of RICs ought to be subject to various part 4 requirements, 
and in the 2012 Final Rule suspended the obligations of CPOs of RICs 
with respect to most of the requirements of part 4 until further 
rulemaking.\20\ The Commission's 2012 Final Rule imposed upon CPOs of 
RICs that do not otherwise qualify for an exemption only the 
requirement to register.\21\ The Commission also finalized, but 
suspended compliance with, pending the completion of further 
rulemaking, a requirement that CPOs of RICs file certain information on 
form CPO-PQR, pursuant to Sec.  4.27. At the same time, consistent with 
the Commission's authority under Sec.  4.12(a), the Commission 
commenced a new rulemaking to evaluate the necessity and reasonableness 
of additional requirements and, where possible, to devise ways in which 
the Commission's requirements for CPOs of RICs could be harmonized with 
applicable requirements of the SEC.\22\
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    \19\ 7 U.S.C. 6n(3) and (4).
    \20\ See 2012 Final Rule, supra note 6, 77 FR at 11252, 11255. 
The Commission exercised its authority under Sec. Sec.  4 and 8a of 
the CEA, 7 U.S.C. 6 and 12a, and Sec.  4.12(a) of its regulations 
thereunder, which provides that the Commission may exempt any person 
or class of persons from any or all of part 4 requirements if the 
Commission finds that the exemption is not contrary to the public 
interest or the purposes of the provision from which the exemption 
is sought. 17 CFR 4.12(a).
    \21\ The Commission's regulations also provide for exemptions 
from registration for CPOs of privately offered pools that engage in 
a de minimis amount of commodities trading (17 CFR 4.13(a)(3)), CPOs 
whose total capital contributions for all operated pools do not 
exceed $400,000 and whose total participants do not exceed 15 (17 
CFR 4.13(a)(2)), and CPOs that do not advertise and who do not 
receive any incentive or management fees (17 CFR 4.13(a)(1)).
    \22\ See 2012 Final Rule, supra note 6, 77 FR at 11260 
(``Entities required to register due to the amendments to Sec.  4.5 
shall be subject to the Commission's recordkeeping, reporting, and 
disclosure requirements set forth in part 4 of the Commission's 
regulations within 60 days following the effectiveness of a final 
rule implementing the Commission's proposed harmonization effort 
pursuant to the concurrent proposed rulemaking.'').
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    The Commission therefore published for comment in the Federal 
Register proposed amendments to part 4 of the Commission's regulations 
designed to address potentially conflicting or duplicative compliance 
obligations administered by the Commission and the SEC regarding 
disclosure, reporting and recordkeeping by CPOs of RICs (the 
``Proposal'').\23\ The Commission proposed changes to part 4 designed 
to better harmonize the Commission's compliance obligations for CPOs 
with those of the SEC for entities that are subject to both regimes in 
such a way that would allow the Commission to fulfill its regulatory 
mandate while, at the same time, avoiding unnecessary regulatory 
burdens on dually-regulated CPOs of RICs with respect to disclosure, 
annual and periodic reporting to participants, and Commission 
recordkeeping requirements.\24\
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    \23\ 77 FR 11345 (Feb. 24, 2012).
    \24\ The Commission issued its proposal under the authority of 
Sec. Sec.  4m, 4n, and 8a(5) of the CEA. 7 U.S.C. 6m, 6n, and 
12a(5).
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    The Proposal to harmonize the Commission's regulatory regime with 
that of the SEC as it applies to CPOs of RICs is grounded in the 
concept of substituted compliance. That is, insofar as the disclosure, 
reporting, and recordkeeping regime administered by

[[Page 52310]]

the SEC under SEC RIC Rules were designed to achieve substantially 
similar goals to those of the Commission's part 4 regulations, then 
CPOs of RICs that maintain compliance under the SEC regime would be 
deemed to fulfill their obligations under part 4 of the Commission's 
regulations. At the same time, in the event that a CPO of a RIC fails 
to comply with the SEC administered regime, the CPO will be in 
violation of its obligations under part 4 of the Commission's 
regulations and thus subject to enforcement action by the Commission. 
As such, the Proposal contemplated an alternative means for a CPO of a 
RIC to comply with its obligations under part 4 of the Commission's 
regulations by modifying certain of the requirements. These proposed 
modifications included: The timing of the delivery of Disclosure 
Documents to prospective participants; the signed acknowledgement 
requirement for receipt of Disclosure Documents; the cycle for updating 
Disclosure Documents; the timing of financial reporting to 
participants; the requirement that a CPO maintain its books and records 
on site; the required disclosure of fees; the required disclosure of 
past performance; the inclusion of mandatory certification language; 
and the SEC-permitted use of a summary prospectus for open-ended 
registered investment companies.
    As stated in the 2012 Final Rule, the justification for the 
amendments to Sec.  4.5 was to enable the Commission to adequately 
discharge its duties to oversee the commodity interest markets. 
Therefore, the Commission determined to require the CPOs of RICs that 
exceeded a de minimis threshold of commodity interest trading, 
excluding bona fide hedging, or which marketed themselves as a 
commodity pool or other commodity investment, to register with the 
Commission. The Commission recognizes, however, that its understanding 
of RICs and their use of commodity interests continues to evolve as it 
gains experience regarding RICs, and their regulation and operation. 
Thus, at this time, the Commission believes that the prudent approach 
is to provide a substituted compliance regime based largely upon 
adherence to the regime administered by the SEC as it continues to 
expand its knowledge of RICs and their use of commodity interests.
    Therefore, in this final rule, the Commission has determined to 
broaden the approach set forth in the Proposal. The Commission is 
adopting a substituted compliance regime for CPOs of RICs largely 
premised upon such entities' adherence to the compliance obligations 
under SEC RIC Rules, whereby the Commission will accept compliance by 
such entities with the disclosure, reporting, and recordkeeping regime 
administered by the SEC as substituted compliance with part 4 of the 
Commission's regulations. The Commission has concluded that this is 
appropriate because, as the Commission continues to gain experience 
regulating CPOs of RICs, it believes that general reliance upon the 
SEC's compliance regime, with minor additional disclosure, should 
provide market participants and the general public with meaningful 
disclosure, including for example, with regard to risks and fees, 
provide the Commission with information necessary to its oversight of 
CPOs, and ensure that CPOs of RICs maintain appropriate records 
regarding their operations. As noted, in the event that the operator of 
the RIC fails to comply with the SEC administered regime, the operator 
of the RIC will be in violation of its obligations under part 4 of the 
Commission's regulations and subject to enforcement action by the 
Commission.

C. Comments on the Proposal

    The Commission received 66 comment letters regarding the Proposal 
from a wide range of entities, including trade and public interest 
organizations, family offices, a registered futures association, 
individuals, currently registered CPOs, RICs, and law firms.\25\ 
Generally, commenters favored the Commission's effort to harmonize for 
CPOs of RICs the Commission's part 4 regulations with SEC-administered 
rules.\26\ Commenters particularly focused on disclosure issues, 
including the ``break-even'' disclosure, required statements of risk, 
cycle for updating Disclosure Documents, financial reporting including 
periodic account statements, and books and records requirements.\27\ In 
addition, some commenters advocated modifications to part 4 
requirements that they believed were necessary to maintain suitable 
regulatory requirements for all CPOs.\28\ Commenters also addressed 
potential costs and benefits of harmonizing CFTC and SEC rules 
applicable to RICs.\29\
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    \25\ See http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1161. The Commission notes that it received six 
duplicate comment letters; thus, the Commission received 60 unique 
comments. Of the comments received, many focused on the advisability 
of an exemption for single-family pools (``Family Offices''). The 
Commission's Division of Swap Dealer and Intermediary Oversight 
issued a letter on November 29, 2012, providing that it would not 
recommend enforcement action against the operator of a ``family 
office'' as that term has been defined in the SEC's regulations. 
See, CFTC Staff Letter, 12-37, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-37.pdf. The 
Commission further notes that it has considered additional comments, 
including those received at and following the Roundtable, see supra 
note 11, regarding the harmonization of CFTC and SEC regulation 
applicable to operators of RICs.
    \26\ See, e.g., NFA Letter; Comment letter from Campbell & 
Company, Inc. (April 24, 2012) (Campbell Letter).
    \27\ See, e.g., Comment letter from New York City Bar 
Association (May 30, 2012) (NYCBA Letter); Comment letter from 
Securities Industry and Financial Markets Association Asset 
Management Group (April 24, 2012) (SIFMA AMG Letter); Comment letter 
from Fidelity Management and Research Company (April 24, 2012) 
(Fidelity Letter).
    \28\ NFA Letter; Campbell Letter; Comment letter from the 
Managed Funds Association (April 24, 2012) (MFA Letter).
    \29\ ICI Letter.
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    Beginning in 2011, Commission staff has engaged in ongoing 
substantive discussions with SEC staff regarding possible areas of 
harmonization between the compliance regimes of the two commissions as 
applicable to RICs and their CPOs, including disclosure to prospective 
investors and financial reporting. Such consultations occurred 
throughout the process culminating in this final rule and have informed 
the Commission's understanding of RICs and the SEC's regulation 
thereof.

D. Significant Changes From the Proposal

    In the Proposal, the Commission stated its intent to facilitate 
compliance by CPOs of RICs with the Commission's disclosure, reporting, 
and recordkeeping requirements. As a result, the Commission proposed 
various alternative mechanisms to enable dually registered operators of 
RICs to comply with the Commission's part 4 requirements.\30\ After 
consideration of the comments received and further deliberation, the 
Commission is adopting rules that effectively

[[Page 52311]]

implement a substituted compliance approach for dually registered CPOs 
of RICs, whereby such CPOs, largely through compliance with obligations 
imposed by the SEC, will be deemed compliant with the Commission's 
regulatory regime. This is consistent with the Commission's conclusion 
that substituted compliance is appropriate because it believes that the 
regime administered by the SEC under SEC RIC Rules, with minor 
additional disclosure, should provide market participants with 
meaningful disclosure as required under part 4, enable the Commission 
to discharge its regulatory oversight function with respect to the 
derivatives markets, and ensure that CPOs of RICs maintain appropriate 
records regarding their operations.
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    \30\ In five of the eleven areas of potential redundancy, 
inconsistency, or conflict addressed in the Proposal, the Commission 
proposed allowing substituted compliance by adherence to SEC 
regulations. Under the proposal, CPOs of RICs would be exempt from 
disclosure requirements under Sec. Sec.  4.21, 4.22, and 4.23. See 
Proposal, supra note 23, 77 FR at 11346. CPOs of RICs would also be 
exempt from more frequent disclosures required by Sec.  4.26, and 
the oath or affirmation required by Sec.  4.22(h). Id. For four 
other areas of potential conflict, the Commission proposed allowing 
the requested information to be disclosed instead in SEC filings. 
Specifically, the proposal provides alternative methods of 
satisfying Sec. Sec.  4.24(a), 4.25(d)(5), 4.25(d), and 4.24(i), 
which ordinarily require a cautionary statement, break-even points, 
and disclosure of fees and expenses, and requires that they be 
located in the forepart of the document. With respect to the last 
two areas--the frequency of the provision to customers of account 
statements and the content of disclosures regarding past performance 
of commodity pools less than three years old--the Commission 
proposed maintaining its own standards, but also solicited comments 
on how it could harmonize those last two areas.
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    The Commission is also modifying certain part 4 requirements that 
are applicable to all CPOs to recognize certain technological 
improvements and operational efficiencies that have developed since 
part 4 was last revised. The key changes from the Proposal that the 
Commission is making in the rules it is adopting today are as follows: 
(1) Operators of RICs will be deemed to be in compliance with 
Sec. Sec.  4.21, 4.22(a) and (b), 4.24, 4.25, and 4.26 if they satisfy 
all applicable SEC RIC Rules as well as certain other conditions; (2) 
all CPOs will be permitted to use third-party service providers to 
maintain their books and records; and (3) the signed acknowledgement 
requirement is being rescinded for all CPOs. The reasoning underlying 
each of the enumerated changes is discussed infra.
    Accordingly, a CPO of a RIC may comply with part 4 requirements 
applicable to all CPOs or elect to comply through substituted 
compliance, subject to the conditions specified in amended Sec.  
4.12(c). In the latter case, the CPO of a RIC will be subject to the 
following requirements:
     The CPO of a RIC will be required to file notice of its 
use of the substituted compliance regime outlined in Sec.  4.12 with 
NFA;
     The CPO of a RIC with less than three years operating 
history will be required to disclose the performance of all accounts 
and pools that are managed by the CPO and that have investment 
objectives, policies, and strategies substantially similar to those of 
the offered pool;
     The CPO of a RIC will be required to file the financial 
statements with the National Futures Association (``NFA'') that it 
prepares pursuant to its obligations with respect to the SEC; and
     If the CPO of a RIC uses or intends to use third-party 
service providers for recordkeeping purposes, it will be required to 
file notice with NFA.
    In light of the requirements applicable to RICs under SEC RIC 
Rules, the Commission has endeavored to harmonize its regulations to 
achieve a reasonable balance that serves the Commission's regulatory 
goals under part 4 of its regulations.\31\ In addition, the Commission 
has determined to modify certain part 4 requirements applicable to all 
CPOs, including CPOs of RICs. In particular, this final rule will 
permit a CPO of a RIC to use a third-party service provider for 
recordkeeping purposes. A CPO electing to do so will be required to 
file a notice with the NFA. Additionally, all CPOs and CTAs will be 
permitted to use a Disclosure Document for up to 12 months.
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    \31\ 7 U.S.C. 19(a). It is the Commission's intent that if any 
portion of this rulemaking is held invalid, such invalidity shall 
not affect other provisions or applications of the Commission's 
regulations which can be given effect without the invalid provision 
or application, including without limitation other amendments to 
part 4 in this or the February 2012 Final Rule, and to this end each 
provision of this final rule is severable.
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II. Discussion

A. Scope and Timing

    The Commission received many comments that pertained to the scope 
and timing of the Proposal. For example, some commenters expressed 
displeasure with the Commission's recent amendments to Sec.  4.5 and 
Sec.  4.27.\32\ One commenter said the Proposal is unripe and should be 
withdrawn pending the judicial challenge of the Sec.  4.5 
amendments.\33\ Another commenter suggested the Commission withdraw its 
Proposal and re-propose harmonized compliance obligations for RICs.\34\ 
Other commenters requested broad exemptions from all part 4 
regulations.\35\ One commenter, for example, suggested that the 
Commission more narrowly tailor the part 4 requirements to those funds 
that use derivatives as a primary investment strategy and exempt from 
registration funds that only use derivatives for diversification and/or 
hedging purposes.\36\ Another commenter contended that the rules must 
take into account the differences between open-ended funds (which 
continuously offer shares and redeem through the company) and closed-
ended funds (which generally have an initial offering and then trade 
shares on an exchange).\37\ Some commenters suggested that the 
Commission work with the SEC in order to more effectively harmonize the 
requirements of the two regimes, and in particular, ensure that 
compliance with the one regulatory regime would not cause a violation 
of the other.\38\
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    \32\ ICI Letter, comment letter from U.S. Chamber of Commerce 
(April 24, 2012) (Chamber Letter); comment letter from Dechert LLP 
and Clients (April 24, 2012) (Dechert Letter).
    \33\ Chamber Letter. This commenter also stated that 
harmonization is unripe because, among other things, regulations 
needed to complete the implementation of Title VII of Dodd-Frank are 
still not finalized. To the extent this commenter was referring to 
the finalization of the Commission and SEC's further definition of 
``swap,'' that definition has now been finalized. This commenter and 
others have stated that the Commission could not, prior to the 
adoption of that final definition, properly consider the costs and 
benefits of the amendments to Sec.  4.5 and proposed, therefore, the 
exclusion of swaps from the thresholds above which the operator of a 
RIC must register as a CPO. As the Commission explained in the 2012 
Final Rule amending Sec.  4.5, however, the costs and benefits were 
sufficiently clear at that time. The Commission explained that swap 
trading above a de minimis threshold implicates its regulatory 
interests, whereas trading below the threshold may not. To permit 
unlimited swap trading without registration would undermine the 
regulatory interest described throughout the 2012 Final Rule 
release. Consistent with the Commission's expectation at the time of 
the 2012 Final Rule amending Sec.  4.5, the 2012 Final Rule further 
defining ``swap'' did not further define the term ``swap'' in a 
manner that would have materially affected the Commission's decision 
to amend Sec.  4.5. On December 12, 2012, the U.S. District Court 
for the District of Columbia affirmed the 2012 Final Rule's 
amendments to Sec.  4.5 and adoption of Sec.  4.27 as applicable to 
CPOs of RICs. The District Court's opinion is available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv0612-42.
    \34\ ICI Letter.
    \35\ ICI Letter; comment letter from American Bar Association 
Federal Regulation of Securities Committee, Business Law Section 
(April 24, 21012) (ABA Letter); comment letter from AXA Equitable 
Funds Management Group, LLC (April 24, 2012) (AXA Letter); comment 
letter from The Association of Institutional Investors (April 24, 
2012) (AII Letter); comment letter from Investment Adviser 
Association (April 24, 2012) (IAA Letter); NYCBA Letter; Fidelity 
Letter.
    \36\ Comment letter from Katten Muchin Rosenman LLP (April 24, 
2012) (Katten Letter).
    \37\ SIMFA AMG Letter.
    \38\ Fidelity Letter; NYCBA Letter; ICI Letter.
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    The Commission is aware that some commenters do not believe that 
CPOs of RICs should be required to register with the Commission. The 
CPO registration requirement in Sec.  4.5, however, is outside the 
scope of this rulemaking. The Commission previously determined that, 
given its new responsibilities under the Dodd-Frank Act, and the 
changes in the markets within the Commission's responsibilities in 
recent years, the operator of a RIC that engages in more than a de 
minimis amount of non-bona fide hedging commodity interest transactions 
or markets itself as a commodity pool or other commodity investment 
must register as a CPO and file form CPO-PQR.\39\
---------------------------------------------------------------------------

    \39\ See, 2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24, 
2012); corrected by 77 FR 17328 (Mar. 26, 2012); affirmed by U.S. 
District Court for the District of Columbia (Dec. 12, 2012), 
available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv0612-42.

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[[Page 52312]]

    Regarding obligations of registered CPOs, the Commission notes the 
concerns of commenters that dual registrants may be unable, or 
encounter substantial difficulty trying, to comply with both the CFTC 
and SEC regulatory regimes were they both required in their current 
state. The Commission believes that harmonization will reduce or 
eliminate such difficulty.
    This rule release is focused on the harmonization of the 
Commission's compliance obligations under part 4 of its regulations 
with the requirements under the SEC RIC Rules. To that end, the 
Commission has considered the various provisions of part 4 and sought 
to address conflict, inconsistency, and duplication with SEC-
administered disclosure, reporting and recordkeeping by RICs. 
Commission staff has also engaged in ongoing discussions with their 
counterparts at the SEC. The Commission believes that, with the final 
rules being adopted today, it has harmonized its compliance obligations 
with those of the SEC to the fullest extent practicable consistent with 
achieving the regulatory objectives of its part 4 regulations and its 
experience to date with CPOs of RICs.

B. Disclosure Requirements

a. Filing and Updating Disclosure Documents
    Currently, Sec.  4.26(a)(2) states that ``[n]o commodity pool 
operator may use a Disclosure Document or profile document dated more 
than nine months prior to the date of its use.'' An identical provision 
applying to CTAs can be found in Sec.  4.36(b). These provisions are 
designed to ensure that required disclosure materials remain current, 
complete, and accurate over time. Similarly, Sec.  10(a)(3) of the 
Securities Act effectively requires an annual update of an open-end 
RIC's registration statement, and provides 4 months after the end of 
the fiscal year in order to do so.\40\
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    \40\ Section 10(a)(3) of the Securities Act provides generally 
that when a prospectus is used more than nine months after the 
effective date of a registration statement, the information 
contained in the prospectus shall be as of a date not more than 
sixteen months prior to its use.
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    Additionally, Sec.  4.26(c) states that if a CPO becomes aware of 
any incompleteness or material inaccuracy in its Disclosure Document, 
the CPO must correct the defect and distribute the correction to 
participants within 21 days of becoming aware of the defect. Section 
4.26(c)(2) lists acceptable means of distributing the correction. The 
federal securities laws prohibit the offer or sale of a security, 
including shares of a RIC, by means of a materially misleading 
prospectus and impose liability for the use of such a prospectus.\41\ 
Section 4.26(d) requires a CPO to submit all Disclosure Documents to 
NFA prior to distributing the document to participants and to submit 
updates to Disclosure Documents to NFA that correct material 
inaccuracies or incompleteness within 21 days of becoming aware of any 
defects. Registration statements for RICs are required to be filed with 
the SEC prior to becoming effective,\42\ and the RIC Rules prescribe 
the timeframes for effectiveness of registration statement amendments 
after filing with the SEC.\43\
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    \41\ Section 12(a)(2) of the Securities Act. See also, Section 
17(a)(2) of the Securities Act (unlawful to obtain money or property 
by means of materially misleading statements and omissions in the 
offer or sale of securities).
    \42\ See, e.g., Section 8(a) of the Securities Act (effective 
date of registration statement shall be the twentieth day after 
filing or an earlier date determined by the SEC).
    \43\ See, Securities Act Rule 285, 17 CFR 230.485.
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    In the Proposal, to facilitate compliance with part 4 requirements 
for CPOs of RICs, the Commission proposed amending Sec.  4.26 and Sec.  
4.36 to allow CPOs and CTAs to use Disclosure Documents up to twelve 
months from the date of the document. In response to comments received, 
the Commission is also addressing in this final rule Sec.  4.26(c), 
which governs the time period for correcting materially inaccurate or 
incomplete disclosure, and Sec.  4.26(d), which requires Disclosure 
Documents and updates to be filed with NFA.
1. Effective Time Period for Disclosure Documents
    Commenters were generally supportive of the Commission's proposed 
amendments to Sec. Sec.  4.26 and 4.36,\44\ but also expressed 
concerns. Regarding the timing of disclosure, for example, some 
commenters suggested that the Commission extend the deadline applicable 
to all CPOs for using Disclosure Documents to sixteen months from the 
date of the document in order to accommodate the SEC's 120-day 
allowance under Rule 8b-16.\45\ One commenter stated that the Proposal 
``provides no rationale for imposing the updating requirements of Sec.  
4.26(a)(1) on RICs'' and does not ``address the substantial costs these 
updates would impose.'' \46\
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    \44\ AXA Letter; Steben Letter; IAA Letter.
    \45\ NYCBA Letter SIFMA AMG Letter; AII Letter.
    \46\ SIFMA AMG Letter.
---------------------------------------------------------------------------

    After careful consideration, the Commission has determined to adopt 
the amendment of Sec. Sec.  4.26(a) and 4.36 as proposed. CPOs and CTAs 
will be permitted to use a Disclosure Document for up to 12 months. In 
addition, for CPOs of RICs, the Commission has determined that 
compliance with the applicable timeframes under the regime administered 
by the SEC under SEC RIC Rules will be deemed to satisfy the timing 
requirements in Sec. Sec.  4.26(a) and 4.36.
    As a general matter of policy, the Commission believes that sixteen 
months is not an optimal time period for providing updated information 
to participants. This is of particular concern with respect to past 
performance information and financial statements. The more distant the 
update of disclosure from the date of the pool's most recent financial 
statements, the less meaningful the information becomes to prospective 
participants deciding whether to invest. The Commission does believe, 
however, that efficiency can be gained by extending the time within 
which CPOs must update their Disclosure Documents from nine months to 
twelve months, as that time period aligns with the time period mandated 
for filing annual financial statements, which must be disclosed within 
the Disclosure Document. In the Commission's judgment, such efficiency 
justifies some delay in updating the Disclosure Document and the 
currency of the information thus available to participants. The 
Commission believes that the information available to participants will 
be sufficiently timely to enable participants to make informed 
investment decisions. Consistent with this determination that a twelve 
month updating cycle provides participants with information in a 
sufficiently timely manner, while also aligning with the larger CPO-
industry twelve month regulatory calendar, the Commission is extending 
to twelve months the Disclosure Document update cycle requirement for 
all CPOs.
    The Commission recognizes, however, that, absent harmonization, 
dual registrants may be required to comply with the disparate deadlines 
applicable under Sec.  4.26 and the updating process implemented by the 
SEC pursuant to Sec.  10(a)(3) of the Securities Act \47\ and SEC Rule 
485 \48\ thereunder. As noted above, Sec.  4.26, as amended, requires a 
CPO to update a pool's Disclosure Document within 12 months of that 
Document's date of first use. As described above, Sec.  10(a)(3) of the 
Securities Act and Securities Act Rule 485 requires open-end RICs to 
amend their registration statements annually

[[Page 52313]]

and provides four months after the end of the fiscal year to do so.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 77j-24.
    \48\ 17 CFR 230.485.
---------------------------------------------------------------------------

    Because the Commission is declining to adopt a sixteen-month update 
period for Disclosure Documents, absent other relief, CPOs of open-end 
RICs would have two different filing deadlines which would limit the 
ability for the CPO to take advantage of operational efficiencies that 
might be available if the Commission's deadlines coincided with those 
of the SEC. The Commission believes that the burden associated with 
requiring CPOs of open-end RICs to comply with two different updating 
schedules for their Disclosure Documents is not justified by the 
benefit of more frequent disclosures. Thus, the Commission has 
determined to permit CPOs of open-end RICs to satisfy these obligations 
through substituted compliance in accordance with the timeframe 
administered by the SEC. The Commission believes that this is 
appropriate because the past performance information required to be 
disclosed by CPOs of open-end RICs will differ from that generally 
required of CPOs, and, as discussed infra, CPOs of open-end RICs will 
not be required to separately submit their disclosures documents for 
review by the NFA.
2. Interim Updating of Disclosure Documents
    Section 4.26(c) requires a CPO to correct material inaccuracies in 
a Disclosure Document within 21-days of the date upon which the CPO 
first becomes aware of the defect. The purpose of the 21-day window in 
which to correct material inaccuracies is to provide participants with 
timely corrected information. As described above, the federal 
securities laws prohibit the offer or sale of the shares of a RIC by 
means of a materially misleading prospectus and impose liability for 
the use of such a prospectus.
    One commenter noted that the 21-day period under Sec.  4.26(c)(1) 
is not required under SEC RIC Rules and that RICs which do not normally 
supplement their prospectuses would be required to do so in order to 
comply with Sec.  4.26.\49\ Another commenter suggested that existing 
securities law obligations for RICs regarding material misstatements or 
omissions should satisfy Sec.  4.26, and thus ``a simple exemption from 
the Part 4 requirements is appropriate.'' \50\ Another commenter 
suggested that RICs that are in compliance with SEC updating rules 
should be deemed compliant with Sec.  4.26(a) and (c).\51\
---------------------------------------------------------------------------

    \49\ SIFMA AMG Letter.
    \50\ ABA Letter.
    \51\ SIFMA AMG Letter.
---------------------------------------------------------------------------

    In light of the substantively similar goals of the two regulatory 
regimes to ensure that participants receive accurate information in a 
timely manner, and recognizing that, absent relief from Sec.  4.26(c), 
CPOs of RICs could be required to provide an additional mailing to 
participants, the Commission has determined to deem CPOs of RICs that 
adhere to the disclosure requirements under SEC RIC Rules compliant 
with Sec.  4.26(c). Subject to additional experience that the 
Commission expects to acquire regarding the operation and oversight of 
CPOs of RICs, the Commission, at this time, believes that correcting 
any inaccuracies within this pre-scheduled and near-term update should 
be considered to be timely. Moreover, the Commission does not believe 
that the schedule for updates imposed by the SEC will impair the 
Commission's regulatory interest in ensuring that prospective and 
current participants in a commodity pool receive accurate and complete 
information. As such, the Commission believes that substituted 
compliance is appropriate with respect to the updating of disclosures 
to participants and, therefore, the Commission has determined to deem 
CPOs of RICs compliant with the provisions of Sec.  4.26, provided that 
they are in compliance with the regime administered by the SEC under 
SEC RIC Rules.
3. Review of Disclosure Documents by NFA
    Many commenters who addressed Sec.  4.26 were concerned that NFA's 
review process (Sec.  4.26(d)) is unnecessary and duplicative, and thus 
should not be required.\52\ Commenters said that this additional review 
process could result in regulatory delays, create investor confusion, 
tax NFA's resources, prevent funds from issuing shares, and potentially 
subject funds to conflicting reviews from securities and derivatives 
regulators.\53\ Some commenters noted that NFA's review process would 
be particularly challenging for RICs that make offerings through 
variable insurance products, as the distribution and updating of 
prospectuses for such RICs must be coordinated with their affiliated 
insurance companies, and that the Proposal does not address this 
issue.\54\ One commenter also requested confirmation that ``sticker'' 
supplements--supplements tacked onto existing Disclosure Documents--
would not be subject to NFA review, as Sec.  4.26(d)(2) provides that 
updates may be filed with NFA at the same time they are distributed to 
participants.\55\ Another commenter stated that the timelines for 
review between the SEC and CFTC requirements are different and 
conflicting. For example, if the NFA requests material changes, a CPO 
of a RIC may have to file the amendment with the SEC, triggering SEC 
review and potentially disrupting the issuance of shares. The commenter 
suggested that, should the CFTC decide to retain the NFA review 
requirement, it should limit the scope of the review to the part 4 
disclosure requirements. This commenter further suggested that the SEC, 
CFTC, and NFA coordinate policies and processes to ``avoid conflicting 
comments and prevent multiple filings and back-and-forth'' during the 
review process.\56\
---------------------------------------------------------------------------

    \52\ AXA Letter; ABA Letter; Katten Letter; ICI Letter; SIFMA 
AMG Letter.
    \53\ AXA Letter; ABA Letter; NYCBA Letter; ICI Letter; SIFMA AMG 
Letter.
    \54\ AXA Letter; ICI Letter.
    \55\ ABA Letter.
    \56\ SIFMA AMG Letter.
---------------------------------------------------------------------------

    The Commission has determined that, although such disclosures must 
be made available to NFA to enable NFA to discharge its duty to monitor 
and examine CFTC registrants during an examination, it will not be 
necessary to file those documents with NFA according to the schedules 
provided in part 4 of the Commission's regulations or concurrent with 
their filing with the SEC, and those documents will not be subject to 
NFA approval. The Commission has decided that CPOs of RICs that take 
advantage of the relief provided under this rule must file a notice 
with NFA so that NFA and the Commission can identify which CPOs are 
claiming such relief and are not required to comply with the specific 
provisions of Sec. Sec.  4.21, 4.24, 4.25, and 4.26. Providing this 
notice to NFA will facilitate compliance by market participants, assist 
the Commission's monitoring of the compliance of its registrants over 
time, and facilitate the enforcement of its rules with respect to all 
CPOs.
    In sum, the Commission has determined to deem CPOs of RICs 
compliant with the provisions of Sec.  4.26, provided that they are in 
compliance with the regime administered by the SEC under SEC RIC Rules.
b. Delivery and Acknowledgement of Disclosure Documents
    Currently, Sec.  4.21 requires a CPO to deliver a Disclosure 
Document to each participant, and obtain from that prospective 
participant a signed acknowledgment of receipt of the Disclosure 
Document before accepting

[[Page 52314]]

or receiving funds from that participant. The federal securities laws 
require delivery of a ``statutory'' prospectus to each RIC investor no 
later than the confirmation of the transaction and do not require 
signed acknowledgment prior to receipt of funds from an investor.\57\
---------------------------------------------------------------------------

    \57\ Securities Act Sec.  5(b)(2) (unlawful to carry through the 
mails or in interstate commerce any security for the purpose of sale 
or delivery after sale unless accompanied or preceded by a 
``statutory'' prospectus, i.e., a prospectus that meets the 
requirements of Sec.  10(a) of the Securities Act). Open-end RICs 
may satisfy the prospectus delivery obligation by sending or giving 
a summary prospectus to investors and providing the statutory 
prospectus on an Internet Web site. Rule 498 under the Securities 
Act. 17 CFR 230.498.
---------------------------------------------------------------------------

    The Commission proposed to modify Sec.  4.12(c) to allow the CPO of 
a RIC to claim relief from Sec.  4.21. The proposed revisions to Sec.  
4.12(c) would enable CPOs of RICs to claim relief from Sec.  4.21 
provided that the Disclosure Document is readily available on the RIC's 
Web site, or that of its designee.
    Some commenters suggested a broad exemption from Sec.  4.21 for all 
CPOs of RICs.\58\ Another commenter noted that a listed, closed-end RIC 
does not normally post its prospectus or annual report online when not 
conducting an offering, and suggested that such funds should be fully 
exempted from Sec.  4.21. This commenter also requested confirmation 
that: (a) the Web site may be the main Web site for the RIC's fund 
family or the RIC's distributor, so long as the Disclosure Document 
page is readily available from the main Web site; (b) password-
protected Web sites (used by privately-offered funds) will remain 
acceptable under the Commission's rules; and (c) the distributor for a 
RIC would be permitted to maintain the Web site for a RIC under the 
Commission's rules.\59\
---------------------------------------------------------------------------

    \58\ Katten Letter; ABA Letter.
    \59\ SIFMA AMG Letter.
---------------------------------------------------------------------------

    One commenter did not support the proposed amendments. This 
commenter claimed that the requirements are duplicative, as the 
information required to be posted on a Web site is already provided to 
investors through various SEC regulations. The commenter also suggested 
that compliance with Sec.  4.12 may harm investors by broadly 
disclosing a fund's trading strategy.\60\
---------------------------------------------------------------------------

    \60\ AII Letter.
---------------------------------------------------------------------------

    The Commission has determined to deem CPOs of RICs compliant with 
the provisions of Sec.  4.21 provided that the CPO provides disclosure 
to participants and prospective participants consistent with the regime 
administered by the SEC under SEC RIC Rules. The SEC RIC Rules permit 
open-end RICs to send or give a summary prospectus, provided that the 
statutory prospectus and other information are available on an Internet 
Web site, the address of which is provided on cover page or at the 
beginning of the summary prospectus.\61\ Any Web site permitted under 
the SEC RIC Rules will also be deemed compliant with the provisions of 
Sec.  4.21 SEC regulations further provide that the RIC must provide 
paper copies of the statutory prospectus, SAI, and shareholder reports 
upon request at no cost to the requestor.\62\ As the SEC RIC rules 
require that a participant receive substantial information about the 
fund (information that, as discussed above, would be deemed compliant 
with Commission regulations under part 4), the Commission believes that 
this SEC requirement is commensurate with the provisions of Sec.  4.21 
in that it provides a mechanism through which information about the 
investment in the RIC is disseminated to prospective participants. 
Under both part 4 of the Commission's regulations and the SEC's 
disclosure regime, information is made readily available to prospective 
investors in the pools. Therefore, the Commission believes it is 
appropriate to deem entities that comply with SEC disclosure delivery 
requirements to be compliant with their disclosure delivery obligation 
under part 4.
---------------------------------------------------------------------------

    \61\ See, 17 CFR 230.498.
    \62\ Id.
---------------------------------------------------------------------------

    With respect to closed-end funds, under the Commission's 
regulations, CPOs are not required to maintain a current Disclosure 
Document for a pool if they are not soliciting participants for that 
pool.\63\ Consistent with the Commission's reasoning regarding open-end 
RICs, provided that the closed-end fund is operated consistent with its 
obligations under SEC RIC Rules, the Commission believes that it is 
appropriate to deem CPOs of closed-end funds compliant with the 
requirements of Sec.  4.21.
---------------------------------------------------------------------------

    \63\ See, 17 CFR 4.21 (requiring delivery of a Disclosure 
Document concurrent with the delivery of a subscription agreement to 
prospective participants).
---------------------------------------------------------------------------

    Additionally, for those funds that are organized as series entities 
with inter-series limitation of liability, the SEC permits multiple 
series to be included in a single registration statement, but permits 
reporting and disclosure to be accomplished on a series by series 
basis. Under the Commission's regulations, the pool is considered to be 
the discrete legal entity.\64\ As such, the Commission's regulations 
would require any such filings to be prepared at the legal entity 
level, not at the series level. The Commission recognizes that under 
part 4, RICs would be required to undertake substantial efforts to 
reorganize their filings to comply with both regimes.\65\ However, 
because the Commission has already determined to accept compliance with 
the regime administered by the SEC as substituted compliance with the 
Commission's compliance program, the Commission believes that such 
entities will continue to be able to make such filings consistent with 
SEC guidance regarding the same.
---------------------------------------------------------------------------

    \64\ The Commission has determined that, per Regulation 
4.20(a)(1), a pool is considered to be a separately cognizable legal 
entity. See, CFTC Staff Interpretative letter 10-29, available at 
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/10-29.pdf.
    \65\ The Commission reaffirms its position with respect to the 
entity qualification of ``pool'' as embodied in CFTC Staff 
Interpretative letter 10-29, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/10-29.pdf.
---------------------------------------------------------------------------

c. Use of the Summary Prospectus
    Commenters also expressed concern about continuing to use the 
Summary Prospectus adopted by the SEC.\66\ Because the SEC limits the 
information allowed in the Summary Prospectus, a commenter requested 
clarification that the CFTC is not requiring that any of the specific 
part 4 disclosure requirements be included in that document.\67\ 
Another commenter suggested that the Commission allow registrants the 
option of providing a combined document or maintaining separate SEC- 
and CFTC-required disclosures.\68\ Several commenters urged the 
Commission to provide assurances to CPOs of RICs that Summary 
Prospectus documents may still be utilized by funds in the format they 
currently use.\69\ Another commenter expressed concern that requiring 
RICs to highlight new and amended disclosures under Sec.  4.26 ``would 
add unnecessary costs to the update process and could prove confusing 
to RIC shareholders'' because such requirements are ``not consistent 
with past practices.'' \70\
---------------------------------------------------------------------------

    \66\ 17 CFR 230.498.
    \67\ SIFMA AMG Letter.
    \68\ MFA Letter.
    \69\ ABA Letter; Katten Letter; NYCBA Letter.
    \70\ AXA Letter.
---------------------------------------------------------------------------

    The Commission has determined to deem CPOs of RICs compliant with 
the provisions of Sec. Sec.  4.24 and 4.25, provided that they are in 
compliance with the disclosure requirements of the Securities Act, the 
'40 Act, and the applicable SEC RIC Rules. By deeming such CPOs 
compliant, the ability to use a statutory prospectus and/or Summary 
Prospectus in a format recognizable to both funds and their 
participants has not been disturbed.

[[Page 52315]]

d. Risk Statements and Legends
    Section 4.24(a)-(b) details specific disclosure statements that 
must appear in a CPO's Disclosure Document. The Commission requires a 
specific Cautionary Statement (Sec.  4.24(a)) to appear prominently on 
the cover page of the Disclosure Document.\71\
---------------------------------------------------------------------------

    \71\ The Cautionary Statement reads as follows: THE COMMODITY 
FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF 
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE 
ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
---------------------------------------------------------------------------

    The Commission also requires certain Risk Disclosure Statements to 
be displayed immediately following any disclosures required to appear 
on the cover page. The disclosures most relevant to this rulemaking are 
found in Sec.  4.24(b)(1).\72\
---------------------------------------------------------------------------

    \72\ Section 4.24(b)(1) reads as follows:
    YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION 
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU 
SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO 
LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY 
REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF 
YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS 
MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
    FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES 
FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY 
FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE 
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF 
THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE 
DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT (insert page 
number) AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK 
EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT 
PAGE (insert page number).
---------------------------------------------------------------------------

1. The Standard Cautionary Statement
    The Commission proposed that, in lieu of the standard Cautionary 
Statement, the cover page of the RIC's prospectus may contain a 
statement that combines the language required by Sec.  4.24(a) and Rule 
481(b)(1) under the Securities Act.\73\ The Proposal required the Risk 
Disclosure Statements to be presented concomitantly with SEC-required 
information in the RIC's prospectus.
---------------------------------------------------------------------------

    \73\ The proposed rules provided suggested language in two 
examples; for instance, one example states: ``The Securities and 
Exchange Commission and the Commodity Futures Trading Commission 
have not approved or disapproved these securities or this pool, or 
passed upon the adequacy or accuracy of this prospectus. Any 
representation to the contrary is a criminal offense.'' See 
Proposal, supra note 23, 77 FR at 11351.
---------------------------------------------------------------------------

    One commenter claimed that the SEC must also grant relief to permit 
inclusion of the Cautionary Statement mandated in Sec.  4.24(a) on the 
cover page of a prospectus; the commenter suggested the Commission 
ensure that the SEC has issued such relief before imposing the combined 
statement requirement.\74\
---------------------------------------------------------------------------

    \74\ ICI Letter.
---------------------------------------------------------------------------

    Other commenters objected to the disclosure statements, including 
the Cautionary Statement in Sec.  4.24(a), as being ``boilerplate,'' 
``technical,'' and ``duplicative.'' \75\ Commenters stated that such 
language is inconsistent with the SEC's ``Plain English'' disclosure 
requirements, which are designed to make prospectuses easier for 
investors to read, and thus their inclusion may create investor 
confusion.\76\
---------------------------------------------------------------------------

    \75\ ABA Letter; Dechert Letter; Fidelity Letter; AII Letter; 
SIFMA AMG Letter.
    \76\ AXA Letter; ABA Letter; Dechert Letter; AII Letter.
---------------------------------------------------------------------------

    With respect to the prescribed cautionary statement required under 
Sec.  4.24(a), the Commission finds that the statement as required by 
the SEC \77\ performs a similar function as that required by the 
Commission, and has concluded that the cautionary statement prescribed 
in SEC Rule 481 under the Securities Act,\78\ with minor modifications, 
addresses the Commission's concerns regarding the need for CPOs to 
adequately apprise investors that the Commission has not approved a 
particular disclosure that is provided to prospective participants. 
Therefore, the Commission has determined that it would be acceptable 
for CPOs of RICs to include the CFTC in the statement prescribed by the 
SEC under Securities Act Rule 481,\79\ such that the statement would 
read either:
---------------------------------------------------------------------------

    \77\ Securities Act Rule 481 (17 CFR 230.481) requires that the 
outside front cover page of a prospectus contain a legend that 
indicates that the SEC has not approved or disapproved the 
securities or passed upon the accurace or adequacy of the disclosure 
in the prospectus and that any contrary representation is a criminal 
offense. The legend may be one of the two following statements in 
clear and concise language:
    The Securities and Exchange Commission has not approved or 
disapproved these securities or passed upon the adequacy of this 
prospectus. Any representation to the contrary is a criminal 
offense; or
    The Securities and Exchange Commission has not approved or 
disapproved these securities or determined if this prospectus is 
truthful or complete. Any representation to the contrary is a 
criminal offense.
    \78\ 17 CFR 230.481(b)(1).
    \79\ 17 CFR 230.481(b)(1).

    The Securities and Exchange Commission and the Commodity Futures 
Trading Commission have not approved or disapproved these securities 
or passed upon the adequacy of this prospectus. Any representation 
---------------------------------------------------------------------------
to the contrary is a criminal offense.

    or

    The Securities and Exchange Commission and the Commodity Futures 
Trading Commission have not approved or disapproved these securities 
or determined if this prospectus is truthful or complete. Any 
representation to the contrary is a criminal offense.
2. The Standard Risk Disclosure Statement
    Commenters also objected to the inclusion of the standard Risk 
Disclosure Statements found in Sec.  4.24(b).\80\ Several commenters 
remarked that the CFTC-required disclosures, designed for commodity 
pools, are not appropriate for funds because (a) SEC regulations 
prohibit a fund from maintaining high degrees of leverage; and/or (b) 
SEC regulations do not allow funds to restrict redemption rights.\81\ 
These commenters contended that requiring such ``inappropriate'' 
disclosures would be misleading and confusing for investors.
---------------------------------------------------------------------------

    \80\ AXA Letter; ABA Letter; Dechert Letter; Fidelity Letter; 
AII Letter; NYCBA Letter; SIFMA AMG Letter.
    \81\ AXA Letter; ABA Letter; Dechert Letter; NYCBA Letter; SIFMA 
AMG Letter; ICI Letter.
---------------------------------------------------------------------------

    In addition, one commenter contended that because the risks 
described in Sec.  4.24(b) are non-principal risks for most mutual 
funds, and because the SEC has indicated that only principal risks 
should be disclosed in the summary prospectus, RICs should be exempt 
from these requirements. This commenter also noted that ``[e]xhaustion 
of a fund's assets is essentially impossible'' under the '40 Act.\82\ 
Another commenter requested clarification about the placement of 
required disclosures. Specifically, the commenter noted that putting 
the standard CFTC risk disclosures in a RIC's summary prospectus may 
violate SEC Rule 498, which prohibits information other than that 
prescribed by that Rule from inclusion in the summary prospectus.\83\
---------------------------------------------------------------------------

    \82\ Dechert Letter.
    \83\ AXA Letter.
---------------------------------------------------------------------------

    Commenters also requested that the Commission allow RICs to use the 
term ``fund'' instead of ``pool'' in the Cautionary Statement as well 
as any mandated disclosure statements, as fund investors are unfamiliar 
with the term ``pool'' and may be confused by such language.\84\
---------------------------------------------------------------------------

    \84\ AXA Letter; Dechert Letter; SIFMA AMG Letter; comment 
letter from Invesco Advisers, Inc. (April 24, 2012) (Invesco 
Letter); ICI Letter.
---------------------------------------------------------------------------

    The standard risk disclosure statement under Sec.  4.24(b) sets 
forth standard disclosures of risks associated with the use of 
commodity interests, including generic discussions of liquidity, 
counterparty

[[Page 52316]]

creditworthiness, and limits on the ability to alter the terms of 
certain swap agreements.\85\ Because open-end RICs are required to 
honor redemption requests within 7 days,\86\ the Commission believes 
that, absent information to the contrary, the generic discussion of 
risks required as part of the standard risk disclosure statement under 
Sec.  4.24(b) may differ with respect to RICs, in that investor 
liquidity is necessarily required as a function of fulfilling the 
redemption obligations under the '40 Act. Therefore, the risk that a 
participant will be unable to redeem in a timely manner appears to be 
mitigated. Further, with respect to closed-end funds, because interests 
in such funds are generally not redeemed directly from the fund, but 
rather are traded in the secondary market, it would appear that the 
risks discussed in the prescribed risk disclosure statement under Sec.  
4.24(b) may not be precisely applicable to their operation. For the 
foregoing reasons, the Commission believes that the specific risks 
delineated in the prescribed cautionary statement may not reflect those 
associated with investment in a RIC, and therefore, has determined not 
to require CPOs of RICs to include the standard risk disclosure 
statement required under Sec.  4.24(b).\87\ Having considered the 
comments received as well as the redemption requirements of RICs under 
the '40 Act, the Commission has determined to deem CPOs of RICs 
compliant with the requirements of Sec.  4.24(a) and (b) provided that 
the CPO complies with the related regime administered by the SEC 
pursuant to the SEC RIC Rules, including disclosure requirements in 
Section 10 of the Securities Act and other provisions of the Securities 
Act and '40 Act,, Rule 498 \88\ under the Securities Act, and forms N-
1A and N-2.

---------------------------------------------------------------------------

    \85\ 17 CFR 4.24(b).
    \86\ 15 U.S.C. 80a-22(e).
    \87\ Because the Commission has determined not to require CPOs 
of RICs to include the Standard Risk Disclosure statement in their 
Disclosure Documents, the Commission does not have to address the 
issue of using the term ``fund'' in lieu of ``pool'' within the risk 
disclosure statement.
    \88\ 17 CFR 230.498.
---------------------------------------------------------------------------

e. Risk Disclosure
    Section 4.24(g) requires a discussion of the principal risk factors 
of participation in the offered pool. It further requires that the 
discussion must include, without limitation, risks relating to 
volatility, leverage, liquidity, and counterparty creditworthiness, as 
applicable to the trading programs followed, trading structures used, 
and investment activities of the offered pool.
    One commenter suggested that the risks required to be disclosed 
pursuant to the SEC's disclosure requirements provide comparable 
information to that mandated by the Commission's regulations.\89\ That 
commenter also suggested that the Commission should exempt CPOs of RICs 
from the risk disclosure requirements set forth in Sec.  4.24(g) 
because they are generic and are required to appear in a single section 
of the Disclosure Document rather than in various sections of the 
disclosure as permitted by the SEC.
---------------------------------------------------------------------------

    \89\ ICI Letter.
---------------------------------------------------------------------------

    The Commission believes that, although the CPOs of RICs may elect 
to comply with Sec. Sec.  4.24, 4.25 and 4.26 through substituted 
compliance, the disclosure provided by CPOs of RICs to prospective 
participants should include true, accurate, and complete information 
describing the commodity-interest activities of the pool, including a 
discussion of the material risks of those assets and activities. The 
Commission understands that SEC forms N-1A and N-2 require disclosure 
of the principal risks associated with investment in the RIC and that, 
to the extent that the use of commodity interests creates such a risk, 
it must be disclosed to prospective investors. This is consistent with 
the requirements set forth in Sec.  4.24(g), which also requires the 
disclosure of the principal risks of investing in the pool, and which 
mandates that such disclosures be appropriately tailored to reflect the 
risks associated with the investment strategy and instruments traded by 
the offered pool. Moreover, the Commission does not believe that the 
fact that the disclosures may appear in multiple places under the SEC's 
disclosure requirements is inconsistent with the Commission's 
regulations, as such regulations do not require that such disclosures 
appear in a single section of the Disclosure Document. The Commission 
believes that the disclosure requirements on SEC forms N-1A and N-2, 
consistent with guidance from SEC staff, including the letter issued by 
the Division of Investment Management in 2010,\90\ should satisfy the 
Commission's concern that participants receive complete and accurate 
disclosure about the risks associated with investment in commodity 
interests. CPOs of RICs must likewise comply with any applicable SEC 
guidance, including guidance that may be issued hereafter, concerning 
these disclosure requirements, which the Commission will evaluate for 
consistency with its own regulatory interests. The Commission 
understands, for example, that the Division of Investment Management at 
the SEC intends to issue additional guidance to RICs regarding 
compliance with certain aspects of the SEC RIC Rules.

---------------------------------------------------------------------------

    \90\ Letter from the Division of Investment Management, 
Securities and Exchange Commission, to the Investment Company 
Institute, July 30, 2010, available at http://www.sec.gov/divisions/investment/guidance/ici073010.pdf.
---------------------------------------------------------------------------

f. Break Even Disclosure
    Section 4.24(d)(5) requires CPOs to include in the forepart of the 
Disclosure Document the break-even point per unit of initial 
investment. Section 4.10(j) defines the break-even point as ``the 
trading profit that a pool must realize in the first year of a 
participant's investment to equal all fees and expenses such that such 
participant will recoup its initial investment, as calculated pursuant 
to rules promulgated by a registered futures association pursuant to 
section 17(j) of the Act.''
    The Commission proposed to consider the ``forepart'' of the 
document to be the section immediately following all disclosures 
required by SEC form N-1A. The Commission did not propose to relieve 
RICs of the requirement to provide the break-even point disclosure, 
however, stating that ``[the] Commission continues to believe that the 
inclusion of . . . the break-even point . . . is a necessary disclosure 
because, among other requirements, it mandates a greater level of 
detail regarding brokerage fees and does not assume a specific rate of 
return.''
    One commenter supported the Commission's position that the break-
even table should be included in the prospectus of an investment 
company.\91\
---------------------------------------------------------------------------

    \91\ Steben Letter.
---------------------------------------------------------------------------

    However, other commenters generally believed that RICs should be 
exempt from disclosing the break-even point.\92\ Some commenters 
claimed that the break-even point and analysis serves the same purpose 
as the tabular presentation of fees required by SEC regulations, and 
thus including such information would be duplicative and 
unnecessary.\93\ One commenter believed that the current SEC-required 
disclosures are better suited to funds ``given that they are 
continually offered and have daily changing asset levels.'' This 
commenter also believed that the CFTC did not identify why the break-
even point is necessary or why the fact that it does not assume a rate 
of return

[[Page 52317]]

makes the disclosure more meaningful for investors.\94\ Some commenters 
contended that including the break-even point and analysis may 
undermine the SEC's goal of providing comparable disclosures and make 
it harder for potential investors to compare information across 
funds.\95\ Another commenter argued that the Commission is incorrect in 
suggesting that the SEC's fee table requirements are based on assumed 
rate of return, as form N-1A requirements for fee disclosure in general 
do not assume a specific rate of return.\96\
---------------------------------------------------------------------------

    \92\ AXA Letter; ABA Letter; Dechert Letter; ICI Letter; NYCBA 
Letter.
    \93\ AXA Letter; ABA Letter; ICI Letter.
    \94\ Dechert Letter.
    \95\ AXA Letter; NYCBA Letter.
    \96\ ICI Letter.
---------------------------------------------------------------------------

    The Commission understands that the same types of fees and costs 
are disclosed through SEC-required disclosures, even if in a different 
format.\97\ For example, Sec.  4.24(i) requires a full and complete 
discussion of all management fees. Form N-1A, item 3 requires similar 
disclosure. The Commission is persuaded by the commenters that the 
information required by the SEC achieves substantially the same 
purposes as the break-even point analysis. The Commission has concluded 
that the disclosure required by the SEC is sufficient to communicate 
the fees and costs associated with a RIC that engages in derivatives. 
Therefore, the Commission has determined to deem the CPOs of RICs 
compliant with the requirements under Sec.  4.24(d)(5) of the 
Commission's regulations contingent upon their compliance with the SEC 
RIC Rules.
---------------------------------------------------------------------------

    \97\ See generally SEC form N-1A, Item 3.
---------------------------------------------------------------------------

g. Past Performance Disclosure
    Section 4.24(n) requires CPOs to disclose past performance 
information in accordance with Sec.  4.25. Section 4.25(a) requires 
various disclosures, including, but not limited to: aggregate gross 
capital subscriptions to the pool; the pool's current net asset value; 
the largest monthly draw-down during the most recent five calendar 
years and year-to-date; the worst peak-to-valley draw-down during the 
most recent five calendar years and year-to-date; and the annual and 
year-to-date rate of return for the pool for the most recent five 
calendar years and year-to-date, including a bar graph depicting such 
rates of return. Similar information is required for each account 
traded by the CPO or CTA on behalf of a client.
    Section 4.25(c) states that when the offered pool has less than a 
three-year operating history, the CPO must disclose the past 
performance of each other pool it operates. By contrast, the SEC's 
regulations do not require RICs to disclose past performance for any 
fund other than the offered fund. Most of the other performance-related 
disclosures are similar between the two regulatory regimes. However, 
some information is presented in a different manner. For example, 
whereas Sec.  4.25 requires disclosure of the pool's performance for 
the year-to-date and the most recent five calendar years, Item 
4(b)(2)(iii) of Form N-1A requires disclosure of average annual total 
returns for the previous year, five years, and ten years (or the life 
of the fund, if shorter than five or ten years).
    The Commission proposed to maintain the past performance disclosure 
requirements, but requested comment on the advisability of doing so. 
Most commenters suggested that the Commission exempt RICs from 
disclosing past performance information.\98\ Some commenters claimed 
that the SEC generally does not permit disclosure of the past 
performance of funds other than the offered fund, and that the CFTC's 
requirement to do so would cause funds to be in a position of having to 
choose which regulator's rules to violate.\99\
---------------------------------------------------------------------------

    \98\ AXA Letter; ABA Letter; Dechert Letter; Katten Letter; IAA 
Letter; Fidelity Letter; NYCBA Letter; SIFMA AMG Letter.
    \99\ AXA Letter; Dechert Letter; Katten Letter; SIFMA AMG 
Letter; ICI Letter.
---------------------------------------------------------------------------

    Numerous commenters highlighted a footnote in the Proposal that 
said the Commission had had preliminary discussions with the SEC 
regarding past performance disclosures and that the SEC may consider 
no-action relief for dually-registered RIC/CPOs. These commenters 
argued that it would unreasonable for the CFTC to expect hundreds of 
funds (according to one commenter) to apply for no-action relief, 
stressing the inefficiencies and burdens for RICs and for the SEC to 
comply with such a volume of requests.\100\ Some commenters noted that 
the SEC is under no obligation to grant such relief, and that even if 
it did, no-action letters are typically non-binding.\101\ Other 
commenters noted that even if the SEC does grant no-action relief for 
this provision, such an action may create disparate treatment between 
RICs and RIC/CPOs that would confuse investors who are accustomed to 
the SEC's provisions on performance disclosure. These commenters 
further noted that the dual requirements may complicate the 
registration process for RICs subject to the dual disclosure 
requirement, which could operate to their competitive 
disadvantage.\102\
---------------------------------------------------------------------------

    \100\ Dechert Letter; IAA Letter; Fidelity Letter; SIFMA AMG 
Letter; ABA Letter.
    \101\ Dechert Letter; Fidelity Letter.
    \102\ ABA Letter; Katten Letter.
---------------------------------------------------------------------------

    One commenter expressed concern that this provision does not 
accomplish the CFTC's stated objective of providing material 
information while reducing duplicative disclosure.\103\ Another 
commenter suggested that funds with fewer than three years' performance 
should be required to disclose information only for other funds with 
substantially similar objectives and strategies that are managed by the 
same adviser.\104\
---------------------------------------------------------------------------

    \103\ Dechert Letter.
    \104\ ICI Letter.
---------------------------------------------------------------------------

    Other commenters disagreed. One commenter suggested that while 
allowing CPOs of RICs to show only the results of similar pools (as 
permitted by the SEC) would lessen the burden on such firms, it ``would 
also create interpretive questions'' and allow funds to exclude the 
performance of relevant pools.\105\ Another commenter recommended that 
the Commission maintain the requirement, but limit the scope of the 
disclosure to include past performance information only for other 
commodity pools listed with NFA by the RIC/CPO. This commenter 
suggested that the Commission encourage the SEC to provide no-action 
relief and to do so on a ``global'' basis, as opposed to a case-by-case 
basis.\106\
---------------------------------------------------------------------------

    \105\ Steben Letter.
    \106\ NFA Letter, Campbell Letter.
---------------------------------------------------------------------------

    Some commenters suggested that the CFTC exempt RICs from the 
requirement to disclose aggregate gross capital subscriptions.\107\ One 
commenter stated that such a requirement is not practicable for open-
ended RICs, which are publicly-offered.\108\ Another commenter stated 
that the measurement ``is meaningless to fund investors, as 
subscriptions are frequently offset . . . by redemptions.'' \109\
---------------------------------------------------------------------------

    \107\ SIFMA AMG Letter, Dechert Letter.
    \108\ SIFMA AMG Letter.
    \109\ Dechert Letter.
---------------------------------------------------------------------------

    One commenter believed that the differences in how the charts 
required by SEC and CFTC regulations are calculated could result in an 
additional preparation burden for RICs and additional confusion for 
investors, and suggested that the CFTC harmonize this requirement to 
the SEC's disclosure. Similarly, the commenter suggested the Commission 
harmonize the different methodologies of the CFTC- and SEC-reporting 
requirements to avoid duplicative and confusing information. For 
example, the commenter noted that past performance disclosures are

[[Page 52318]]

required for different timeframes (the SEC requires 1, 5, and 10 year 
disclosure; the CFTC requires each of the most recent 5 years to be 
disclosed).\110\
---------------------------------------------------------------------------

    \110\ Id.
---------------------------------------------------------------------------

    After consideration, and in light of the comments received, the 
Commission has determined to deem CPOs of RICs with less than three 
years of performance history to be compliant with Sec.  4.25(c), 
provided that the CPO disclose the performance of all accounts and 
pools that are managed by the CPO and that have investment objectives, 
policies, and strategies substantially similar to the offered 
pool.\111\
---------------------------------------------------------------------------

    \111\ With respect to the commenter that suggested requiring the 
disclosure of other pools that trigger registration as a CPO with 
the Commission, the Commission is concerned that it may result in 
requiring the CPO of a RIC to disclose the performance of a pool or 
account that does not have investment objective, policies, and 
strategies substantially similar to those of offered pool, thereby 
causing the CPO of the RIC to violate the restrictions imposed by 
the SEC.
---------------------------------------------------------------------------

    The requirements for disclosure of commodity pools' past 
performance exist because the Commission, drawing on its experience, 
believes they provide prospective participants with useful information. 
The markets for commodity interests are highly complex and require 
specialized knowledge to manage funds effectively. The Commission 
continues to believe that the presentation of past performance provides 
investors with information regarding the experience of a CPO of a 
relatively new pool. A prospective investor will, as a result of this 
requirement, be better able to assess the experience and expertise of 
the CPO as a result of this disclosure. As summarized by participants 
in the rulemaking process in which the Commission adopted Sec.  4.25, 
while ``past performance data alone are not directly predictive of 
future trading results, . . . past performance data provide information 
that is important in evaluating a contemplated pool offering or trading 
program. For example, patterns of volatility and other trading patterns 
in various market conditions may be evident.'' \112\
---------------------------------------------------------------------------

    \112\ 60 FR 38148 (July 25, 1995); see also 68 FR 42964 (July 
21, 2003).
---------------------------------------------------------------------------

    Although the SEC does not mandate the disclosure of the performance 
of other funds and accounts, guidance provided by the SEC's Division of 
Investment Management indicates that a RIC is permitted to show the 
performance of funds and accounts that are managed by the same 
investment adviser as the RIC and that have investment objectives, 
policies, and strategies substantially similar to those of the 
RIC.\113\ Recognizing that the SEC approaches this issue differently, 
and would not allow the performance disclosures of each other pool the 
CPO operates, the Commission understands that the SEC's Division of 
Investment Management would permit a subset of that information to be 
disclosed. Notably, it would permit all the disclosure of past 
performance that is most germane to that of the offered pool and 
provide precisely the information that a prospective investor would 
need to evaluate the historical behavior of the markets and instruments 
in which the offered pool invests. As such, the Commission has made the 
judgment to confine this requirement for CPOs of RICs with less than 
three years operating history to disclose information concerning pools 
or accounts that are managed by the CPO and that have substantially 
similar investment objectives, policies, and strategies because it 
provides prospective participants with additional information regarding 
the historical performance of accounts and pools traded pursuant to the 
trading strategy used by the offered pool, and provides data regarding 
the experience of the CPO trading substantially similar instruments and 
trading strategies.
---------------------------------------------------------------------------

    \113\ See, e.g., ITT Hartford Mutual Funds (pub. avail. Feb. 7, 
1997) (fund may include in marketing materials performance 
information for other funds managed by the same adviser with 
investment objectives, policies, and strategies substantially 
similar to those of the fund); Nicolas-Applegate Mutual Funds (pub. 
avail. Aug. 6, 1996) (fund may include in prospectus information for 
private accounts managed by the fund's adviser with investment 
objectives, policies, and strategies substantially similar to those 
of the fund).
---------------------------------------------------------------------------

    The Commission believes that this requirement appropriately 
addresses the Commission's concerns about ensuring that prospective 
participants have the information that the Commission believes is 
essential to making informed decisions, prior to investing in a 
commodity pool, while respecting the limitations on disclosure imposed 
by the SEC. CPOs of RICs with less than 3 years performance history 
will be required to identify which other accounts and pools have 
investment objectives, policies, and strategies substantially similar 
to those of the offered pool. In contrast to Sec.  4.25 as applied to 
CPOs generally, the Commission's acceptance of substituted compliance 
for CPOs of RICs introduces a mildly subjective element that is 
otherwise absent under the regulation. The Commission believes that any 
such subjectivity is tightly constrained due to the guidance that SEC 
staff has provided in this area. The Commission believes that the 
result will be reasonably tailored to provide prospective participants 
with materially useful information that otherwise would not be 
mandatorily disclosed under the SEC's regulatory regime.\114\
---------------------------------------------------------------------------

    \114\ See, the Commission's discussion of costs and benefits, 
infra, regarding the costs associated with this disclosure 
requirement.
---------------------------------------------------------------------------

    Additionally, the Commission has determined to deem CPOs of RICs 
compliant with the remainder of Sec.  4.25, which includes the 
requirement to disclose aggregate gross capital subscriptions, to the 
extent that the CPOs comply with applicable SEC Rules. The Commission 
has reached this decision after considering the requirements imposed by 
the SEC and concluding that the compliance obligations, with the 
limited exception noted above for CPOs of RICs with less than three 
years of performance history, generally achieve the same disclosure 
objective. For example, although the timeframes for performance 
disclosure differ, with the Commission requiring 5 years of 
performance, whereas the SEC requires up to 10 years performance, the 
Commission believes that the disclosure required by the SEC provides a 
reasonable means for ensuring effective disclosure of a pool's past 
performance to a prospective participant as the information provided 
under the SEC's regulatory regime includes that required under part 4 
of the Commission's regulations. Additionally, the Commission 
recognizes the challenges that a continuously offered RIC might face in 
determining its aggregate gross capital subscriptions. It may not be 
possible for the CPO of a continuously offered RIC to make such a 
determination given the continually variable number of subscriptions 
and redemptions. Therefore, the Commission is deeming CPOs of RICs 
compliant with the requirements of Sec.  4.25 subject to compliance 
with the regime set forth under SEC RIC Rules, with the exception of 
those pools which have a less than three year operating history, the 
CPO of which must make the additional disclosures as discussed supra.
h. Fee Disclosure
    Section 4.24(i) requires CPOs to include in the Disclosure Document 
a complete description of each fee, commission, and other expense which 
the CPO knows has been incurred or expects to be incurred. This 
description must include management fees, brokerage fees and 
commissions, any fees and commissions paid for trading advice, fees 
incurred within investments in investee pools and

[[Page 52319]]

funds, incentive fees, any allocations paid out to the CPO, commissions 
or other benefits paid to any person in connection with soliciting 
participation in the pool, administrative fees and expenses, offering 
expenses, and clearance, exchange, and SRO fees, along with certain 
other fees as applicable.
    Many of these fees are disclosed by RICs in SEC form N-1A. Item 3 
of that form requires a table of fees to be presented. The Commission 
proposed to require any such expenses not included in the fee table in 
Item 3 of Form N-1A to be disclosed in the prospectus in addition to 
those fees and expenses required by both the CFTC and the SEC.
    Commenters generally contended that the CFTC's requirement under 
Sec.  4.24(i)(2)(ii) to disclose brokerage fees and commissions should 
not apply to RICs as such disclosures may be misleading and/or 
confusing for fund investors.\115\ One commenter noted that if RICs 
decide that the inconsistent disclosures warrant changing existing 
practices, the process of separating out prospectuses would carry 
``inevitable initial and ongoing operational, legal, compliance, and 
marketing costs.'' \116\ Another commenter stated that the SEC has 
determined its fee disclosure regime to be adequate and that the CFTC 
has not identified any reason why additional disclosure is necessary to 
protect investors. This commenter also noted that expected fees, 
required to be disclosed under Sec.  4.24(i)(1), are predictive and 
could be misleading if projected expenses are more favorable than the 
actual expenses incurred.\117\
---------------------------------------------------------------------------

    \115\ ABA Letter; Dechert Letter; Katten Letter; SIFMA AMG 
Letter.
    \116\ ABA Letter.
    \117\ Dechert Letter.
---------------------------------------------------------------------------

    The Commission understands that the same types of fees and costs 
are disclosed through SEC-required disclosures, although perhaps in a 
different format, as discussed supra, with respect to the break-even 
information. The Commission, moreover, is persuaded by the commenters 
that the information required under its break-even point and table is 
not meaningfully different from what the SEC already requires. For 
example, the SEC-required disclosure permits brokerage fees to be 
included in the cost of securities, whereas the Commission requires 
such fees to be disclosed separately. In both cases, information 
regarding such fees is being provided to the investor. Moreover, item 
21 of SEC form N-1A requires a discussion of brokerage commissions paid 
by the RIC during its three most recent fiscal years.\118\ The 
Commission believes that the disclosure required by the SEC is 
sufficient to communicate the fees and costs associated with a RIC that 
engages in derivatives, notwithstanding the fact that the format is 
different from that generally prescribed by the Commission with respect 
to CPOs and CTAs. Therefore, the Commission has determined to deem the 
CPOs of RICs compliant with the requirements under Sec.  4.24(d)(5) of 
the Commission's regulations, provided that they comply with the SEC's 
required disclosures.
---------------------------------------------------------------------------

    \118\ See SEC form N-1A, item 21.
---------------------------------------------------------------------------

i. Controlled Foreign Corporations (CFCs)
    In the 2012 Final Rule, the Commission explained its position on 
the use of CFCs by RICs, stating that, although the Commission does not 
oppose the use of CFCs by RICs, it nevertheless believes that CFCs that 
fall within the statutory definition of commodity pool may necessitate 
the registration of a CPO.\119\ As such, operators of such entities, 
whether or not the RIC that owns the CFC may be excluded under Sec.  
4.5, may be required to register as CPOs with the Commission.
---------------------------------------------------------------------------

    \119\ See 2012 Final Rule, supra note 6, 77 FR at 11260.
---------------------------------------------------------------------------

    As stated in the 2012 Final Rule, the Commission understands that a 
RIC may invest up to 25 percent of its assets in a CFC, which then 
engages in actively managed derivatives strategies, either on its own 
or under the direction of one or more CTAs.\120\
---------------------------------------------------------------------------

    \120\ See 2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24, 
2012) for a discussion of CFCs and their use by RICs.
---------------------------------------------------------------------------

    One commenter agreed with the Commission's position that RICs 
should be permitted to use CFCs under appropriate circumstances. This 
commenter further articulated their belief that in certain situations 
additional disclosures regarding CFCs may be necessary, as the 
relationship between a RIC and related CFCs is ``significantly 
different than a typical fund-of-funds structure.'' The commenter 
suggested that the Commission clarify that the RIC's Disclosure 
Document must contain a full discussion of this relationship and the 
impact of the CFC on the pool/RIC, including on the performance of the 
pool/RIC.\121\
---------------------------------------------------------------------------

    \121\ NFA Letter.
---------------------------------------------------------------------------

    Another commenter noted that a CFC may constitute a major investee 
pool and, as such, the CPO of a RIC would have to include certain 
disclosures regarding the CFC in its Disclosure Document pursuant to 
the Commission's regulations. However, this commenter suggested the 
Commission require additional ``extensive, particularized disclosure 
regarding [CFCs] used by investment companies'' and claimed that 
``[s]uch information is needed . . . to help investors and regulators 
identify and understand the expenses . . . and risks'' associated with 
CFCs.\122\
---------------------------------------------------------------------------

    \122\ Steben Letter.
---------------------------------------------------------------------------

    One commenter requested that the Commission exempt a CFC that is 
wholly owned by a RIC from the detailed disclosure and reporting 
requirements under part 4 because the only recipients of such 
information would be the RIC that owns the CFC.\123\
---------------------------------------------------------------------------

    \123\ SIFMA AMG Letter.
---------------------------------------------------------------------------

    The Commission reaffirms its earlier statements in the 2012 Final 
Rule that RICs may continue to use CFCs and that such CFCs, depending 
on their investment activities, may fall within the statutory and 
regulatory definitions of ``commodity pool.'' \124\ The provisions of 
SEC forms N-1A and N-2 require a discussion of the investment 
strategies of the offered funds and the principal risk factors 
associated with investment in the fund.\125\ The Commission understands 
that if a RIC is using a CFC to effectuate its investment strategy, the 
RIC is required to disclose in its prospectus filed with the SEC 
information about the RIC's investment in the CFC and the principal 
risks associated with the CFC investment, including those related to 
swaps and other commodity interests. Accordingly, the Commission has 
determined that, if the RIC provides full disclosure of material 
information regarding the activities of its CFC through its obligations 
to the SEC, the CFC will not be required to separately prepare a 
Disclosure Document that complies with part 4 of the Commission's 
regulations. Moreover, provided that the RIC consolidates the financial 
statements of the CFC with those of the RIC in the financial statements 
that are filed by the RIC with the NFA, the CFC will not be required to 
file separate financial statements.\126\ Given the foregoing, the 
Commission does not believe that additional relief pertaining to CFCs 
is necessary.
---------------------------------------------------------------------------

    \124\ See 2012 Final Rule, supra note 6, 77 FR at 11260.
    \125\ See Items, 4, 9, and 16(b) of SEC form N-1A; and Item 8 
and 17 of SEC form N-2.
    \126\ 17 CFR 4.22(c)(8).
---------------------------------------------------------------------------

C. Financial Reporting

a. Periodic Financial Statements
    Section 4.22 requires that every CPO must periodically distribute 
to each

[[Page 52320]]

participant in each pool that it operates an Account Statement in the 
form and with the content prescribed therein. Further, Sec.  4.22(b) 
requires that Account Statements must be distributed at least monthly 
for pools with net assets greater than $500,000 and at least quarterly 
for all other pools.
    The '40 Act requires open-end RICs to sell and redeem their shares 
based on the current net asset values of those shares,\127\ and these 
net asset values may be posted on the RIC's Web site or otherwise made 
available to investors. RICs are also required to furnish semi-annual 
and annual reports, including financial statements, to investors, as 
well as to file quarterly schedules of portfolio holdings and semi-
annual and annual reports, including financial statements, with the SEC 
(which are publicly available to investors via the EDGAR system).\128\
---------------------------------------------------------------------------

    \127\ 15 U.S.C. 80a-22; 17 CFR 270.2a-4; 17 CFR 270.22c-1(a).
    \128\ See 17 CFR 270.30b1-5 (quarterly schedule of portfolio 
holdings on Form N-Q); 17 CFR 270.30b2-1 (semi-annual and annual 
reports on Form N-CSR); 17 CFR 270.30e-1 (semi-annual and annual 
reports to shareholders).
---------------------------------------------------------------------------

    The Commission proposed to exempt the CPO of any RIC from the 
distribution requirements of Sec.  4.22, provided the Account 
Statements are readily accessible on the RIC's Web site. The Commission 
also proposed to exempt such entities from the requirement under Sec.  
4.26(b) to attach the Account Statements to the Disclosure Document, 
again provided such materials are readily accessible on the RIC's Web 
site. The Commission did not propose to alter the requirement that 
Account Statements be distributed at least monthly.
    Commenters generally appreciated the proposed relief under Sec.  
4.12(c) but requested a broader exemption from the requirements in 
Sec.  4.22(a)-(b), which require monthly statements to be prepared and 
provided to participants.\129\ Alternatively, others suggested that the 
Commission allow RICs to file quarterly statements, rather than 
monthly, as such a requirement is more in line with the SEC's 
requirements under the federal securities laws.\130\ One commenter 
suggested that the Commission permit RICs to satisfy the requirements 
of Sec.  4.22(a)-(b) by posting on its public Web site all reports to 
shareholders in compliance with and as required by SEC RIC Rules.\131\ 
Some commenters noted that RIC investors have ready access to daily 
performance information, which, according to one commenter, achieves 
the ``key purpose of the Account Statement'' on a more current 
basis.\132\ Some commenters noted that there are significant 
similarities between the publicly available disclosures required by the 
SEC and the information required in Sec.  4.22, making the CFTC's 
requirement redundant.\133\
---------------------------------------------------------------------------

    \129\ AXA Letter; SIFMA AMG Letter; ICI Letter; ABA Letter.
    \130\ NFA Letter; ABA Letter.
    \131\ Katten Letter.
    \132\ NFA Letter; SIFMA AMG Letter.
    \133\ Katten Letter; NYCBA Letter.
---------------------------------------------------------------------------

    Several commenters contended that requiring Account Statements 
would create a substantial burden on RICs that would ultimately be 
passed on to shareholders without any corresponding benefit.\134\ 
Another commenter was concerned that CPOs will now be required to 
create and maintain an online reporting regime to provide information 
that is already available to investors.\135\ One commenter recommended 
that the Commission change the number of days that a CPO registered 
under Sec.  4.7 has to prepare and distribute quarterly statements from 
30 days to 45 days.\136\
---------------------------------------------------------------------------

    \134\ SIFMA AMG Letter; NYCBA Letter; AXA Letter.
    \135\ AII Letter.
    \136\ MFA Letter.
---------------------------------------------------------------------------

    The Commission has been persuaded by commenters and has concluded 
that providing relief to CPOs of RICs from the requirement to send 
monthly financial statements is appropriate, provided that the RIC's 
current net asset value per share is available to investors, and 
provided that the RIC furnishes semi-annual and annual reports to 
investors and files periodic reports with the SEC as required by the 
SEC. When current net asset value per share is available to investors, 
coupled with more detailed periodic reports as described above, the 
Commission believes that the decision not to require monthly statements 
would not reduce the transparency available to investors. Importantly, 
a fund investor could calculate his/her position in the fund using the 
current net asset value per share.
    The Commission does not believe that its interest in ensuring that 
financial information is provided to pool participants is negatively 
impacted if such information is made available through the Web site of 
the RIC or its designee. This is consistent with Sec.  4.1(c) of the 
Commission's regulations, wherein the Commission permits the 
distribution of information to participants through electronic 
means.\137\ In accordance with the permitted use of electronic 
distribution, the Commission does not believe that electronic delivery 
meaningfully changes the information available to participants and may, 
in fact, make the information more readily accessible to participants 
and the public in general. The Commission also believes that such 
relief will eliminate the costs of preparing monthly financial 
statements and thereby eliminate any marginal impact on CPOs of RICs 
related to compliance with Sec.  4.22.
---------------------------------------------------------------------------

    \137\ 17 CFR 4.1(c).
---------------------------------------------------------------------------

D. Books and Records

a. Location of Records
    Sections 4.23 and 4.7(b)(4) require that all CPOs maintain full 
books and records at the main business office of the CPO. Such books 
and records must include the following: a detailed and itemized daily 
record of each commodity interest transaction of the pool; all receipts 
and disbursements of money, securities, and other property; a 
participant ledger; copies of each confirmation of a commodity interest 
transaction; and other relevant records.
    The records of RICs are often maintained by third parties, such as 
administrators. Because of this, the Commission proposed extending the 
same type of relief currently available to ETFs through Sec.  4.23 to 
RICs. The relief in Sec.  4.23 allows maintenance of records at certain 
third party sites, such as those of an administrator or custodian.
    Commenters suggested that the Commission extend the proposed relief 
to include not only RICs but all CPOs and CTAs, including private pools 
or funds; these commenters claimed such an extension would be more 
consistent with prevailing technologies, current market practices, and 
SEC requirements.\138\ Commenters also suggested that the Commission 
remove the limitation on which entities are permitted to maintain books 
and records, because SEC rules permit a wider range of entities to do 
so.\139\
---------------------------------------------------------------------------

    \138\ MFA Letter; IAA Letter.
    \139\ MFA Letter; IAA Letter; Dechert Letter; ICI Letter; SIFMA 
AMG Letter.
---------------------------------------------------------------------------

    The Commission understands the current practice for RICs, as well 
as many other CPOs, to maintain their books and records with a third 
party vendor, or other such record-keeper, to be part of efficient 
management practices regarding such records.\140\ Such practice allows 
the CPO to avail itself of the lower cost and increased record security 
of a third party vendor, as such vendors often specialize in such 
services. The Commission

[[Page 52321]]

acknowledges that its requirement to keep such books and records at the 
main business address of a CPO is rooted in the timely and certain 
access of that data. However, to the extent that such data is readily 
accessible to a CPO, the Commission believes that the requirement that 
such data be maintained at the main business address of a CPO is 
similarly met so long as timely and complete access to that data is 
available. Further, as suggested by the comments, the Commission 
believes that the advantages of such recordkeeping practices are 
applicable to all CPOs. Accordingly, the Commission has determined that 
so long as at the time that such CPO registers with the Commission, or 
delegates its recordkeeping obligations, whichever is later, the CPO 
files a statement with the Commission describing the delegated record 
keeper, and maintains timely access to those records in such manner as 
set forth by the Commission, that CPO will be permitted to utilize the 
services of third-parties with respect to the maintenance of books and 
records.
---------------------------------------------------------------------------

    \140\ See, 17 CFR 270.31a-3 (person maintaining required records 
on behalf of a RIC must agree that records are the property of the 
RIC).
---------------------------------------------------------------------------

b. Other Recordkeeping Obligations
    Section 4.23 also requires that a CPO's books and records be made 
available to participants for inspection and/or copying at the request 
of the participant.\141\ The Commission did not propose altering this 
requirement. The SEC does not have a comparable requirement. Indeed, 
disclosure of non-public information to some, but not all, participants 
is prohibited where inconsistent with the antifraud provisions of the 
federal securities laws and the fund's or adviser's fiduciary duties 
(``selective disclosure'').\142\
---------------------------------------------------------------------------

    \141\ Certain confidential or proprietary information, including 
participants' personal information and subscription information as 
well as the records of the CPO's personal investments, are not 
required to be made available for inspection by pool participants.
    \142\ See SEC Regulation FD (17 CFR 243.100-103) (with respect 
to closed-end RICs); Items 9(d) and 16(f) of SEC form N-1A (open-end 
RICs required to disclose policies and procedures with respect to 
disclosure of portfolio securities and ongoing arrangements to make 
available information about portfolio securities.
---------------------------------------------------------------------------

    Additionally, Sec.  4.23(a)(4) requires a ledger (or other record) 
to be kept for each participant in the pool that shows the 
participant's name, address, and all funds received from or distributed 
to the participant.
    One commenter noted that the investor access provision is 
inconsistent with SEC regulations, which the commenter claimed are 
sufficient to provide investors with information.\143\ Some commenters 
suggested the Commission exempt RICs from the requirement to make 
available a CPO's books and records at the request of an investor.\144\ 
These commenters noted the possibility of investors accessing trading 
and position information to use in trading against the pool/fund, 
leading to unfair competition and front-running.
---------------------------------------------------------------------------

    \143\ ABA Letter.
    \144\ Katten Letter; ABA Letter; ICI Letter; AII Letter.
---------------------------------------------------------------------------

    Commenters were concerned with the ledger requirement in Sec.  
4.23(a)(4) because they noted that most shares are held in omnibus 
accounts or through intermediaries and that transfer agents typically 
keep records of investors.\145\ These commenters requested 
clarification that a transfer agent's maintenance of records and/or a 
list of relevant intermediaries would be deemed to satisfy the 
information requirements regarding pool participants under Sec.  
4.23(a)(4).
---------------------------------------------------------------------------

    \145\ Dechert Letter; Katten Letter; SIFMA AMG Letter.
---------------------------------------------------------------------------

    The Commission recognizes the concerns that, if a participant were 
to inspect such books and records of a pool, SEC requirements may then 
compel the pool to publicly disclose such information to avoid 
prohibitions against selective disclosure. Even in the absence of wide 
disclosure of such positions, which would at a minimum require 
substantial effort to compile and distribute such information to all 
fund participants at unplanned intervals, disclosure of transaction 
level data on a real time or near real-time basis to even a single 
participant may make such a pool vulnerable to front-running or market 
manipulation. Accordingly, to remove these risks, a registered CPO that 
operates a RIC will not be required to make its records available for 
inspection and copying.
    The Commission recognizes that the practice of many RICs to hold 
account shares in an omnibus account, with such records of participant 
information being kept by a transfer agent or financial intermediary, 
such as a broker-dealer or bank, would make the requirement that the 
CPO keep custody of such records both duplicative and unduly burdensome 
on the CPO of a RIC. Because a subsidiary ledger of largely the form 
and substance required by the Commission is kept by those transfer 
agents and financial intermediaries, the Commission agrees that in such 
instances, the maintenance of these records by a transfer agent or 
financial intermediary, in such form that complies with that as set 
forth by the Commission, shall satisfy the requirement of Sec.  
4.23(a)(4).
    The Commission has also determined to amend Sec.  4.23 to permit 
all CPOs to use third-party service providers to maintain their books 
and records. The Commission believes that expansion of the relief 
previously limited to exchange traded funds appropriately recognizes 
technological advances in recordkeeping and the ability to make books 
and records readily available to regulatory agencies. The Commission 
will continue to require CPOs of RICs to file with the NFA (1) a notice 
providing information about the third-party service provider, and (2) a 
statement from the service provider agreeing to maintain the pool's 
books and records consistent with the Commission's regulations. This 
requirement is identical to the notices previously required under Sec.  
4.12(c)(iii). Therefore, the Commission is adopting final amendments to 
Sec.  4.23 permitting all registered CPOs to use third party service 
providers to maintain their books and records.

E. Broader Applicability

    The Commission proposed harmonization of compliance obligations for 
CPOs of RICs only. The Commission did not propose extending relief to 
other CPOs or other SEC-registered entities, such as investment 
advisers to private funds. However, the Commission did request comment 
on whether it should consider applying any of the harmonization 
provisions to operators of pools that are not RICs.
    One commenter supported the Commission's proposal to amend Sec.  
4.12(c) to extend relief to RICs similar to the relief granted to ETFs, 
as well as the Commission's proposal to extend the same relief to 
operators of all publicly offered pools, regardless of whether they are 
traded on a securities exchange.\146\ Several commenters requested the 
Commission extend relief under 4.12(c) to privately offered pools.\147\
---------------------------------------------------------------------------

    \146\ NFA Letter.
    \147\ MFA Letter; IAA Letter; SIFMA AMG Letter; Campbell Letter; 
Steben Letter.
---------------------------------------------------------------------------

    The Commission believes that publicly offered pools that are not 
traded on an exchange should be afforded the same relief as ETFs. Both 
are subject to regulation under the Securities Act, and therefore, 
required to comply with certain disclosure and reporting obligations. 
Accordingly, the Commission adopts as final the proposed extension of 
relief under Sec.  4.12(c) to all publicly offered pools, regardless of 
whether such pools are traded on an exchange.

[[Page 52322]]

    Unlike publicly offered pools, privately offered pools avail 
themselves of an exemption from registration under the Securities 
Act.\148\ Ownership interests in privately offered pools are not 
subject to the same types of regulatory obligations under the 
securities laws as publicly offered pools. As a result, CPOs of 
privately offered pools are not subject to the prospect of being 
required to comply with two different compliance regimes. Therefore, 
the Commission will not extend the full scope of the exemptions 
provided under Sec.  4.12(c) to all CPOs. However, the Commission has 
determined to liberalize the third party recordkeeping and document 
distribution requirements under part 4 of the Commission's regulations, 
as discussed supra, for all CPOs.
---------------------------------------------------------------------------

    \148\ See, e.g., 17 CFR 230.501 (``Reg. D); 15 U.S.C. 77d 
(``Section 4(2)'').
---------------------------------------------------------------------------

    With respect to the specific compliance obligations under part 4, 
one commenter requested that the Commission extend the relief from the 
Disclosure Document delivery and acknowledgment requirements in Sec.  
4.21 to any CPO of a private pool/fund, so long as the pool/fund has an 
investment advisor registered with the SEC and is either registered 
under Sec.  4.7 or would have been exempt under rescinded Sec.  
4.13(a)(4).\149\ The commenter noted that because the participants in 
these private pools would be sophisticated investors, the Commission 
should not deny these pools the same relief granted to CPOs of RICs, 
whose investors are less sophisticated retail investors.\150\
---------------------------------------------------------------------------

    \149\ Commission Regulation 4.7 and former Regulation 4.13(a)(4) 
provide for an exemption of certain Part 4 requirements, or an 
exemption from registration as a CPO, respectively, for, among other 
things, operating a pool of which all the participants therein are 
qualified eligible persons. 17 CFR 4.7 and 17 CFR 4.13(a)(4). See 
2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24, 2012); 
correction 77 FR 17328 (March 26, 2012).
    \150\ SIFMA AMG Letter.
---------------------------------------------------------------------------

    The Commission has determined to rescind the signed acknowledgement 
requirement under Sec.  4.21(b) for all registered CPOs. Through its 
expansion of Sec.  4.12(c) to exempt all publicly offered funds, the 
Commission has recognized that publicly offered pools that are not 
exchange traded are similarly situated with respect to the requirements 
under Sec.  4.21 as ETFs. The Commission believes that because 
participants in privately offered pools are not retail participants but 
are sophisticated persons, the concerns underlying the signed-
acknowledgment requirement are not present. Moreover, the elimination 
of this requirement would align the Commission's requirements regarding 
the offering of ownership interests in commodity pools with the 
requirements imposed on the offerings of interests in other types of 
funds. Therefore, the Commission is rescinding the signed 
acknowledgement requirement under Sec.  4.21(b) for all CPOs.
    One commenter requested that the Commission amend Sec.  4.7(b) and 
Sec.  4.13(a)(3) \151\ in response to the Jumpstart Our Business 
Startups Act (``JOBS Act''), which eliminates the prohibition on 
general solicitation in connection with private funds.\152\ The JOBS 
Act amends certain sections of the Securities Act, but does not change 
similar provisions in the CEA or under part 4 of the Commission's 
regulations. The commenter contended that this disparity will create a 
situation in which private funds may market to the public but private 
pools may not.
---------------------------------------------------------------------------

    \151\ See supra footnote 149.
    \152\ Comment letter from Managed Futures Association (July 17, 
2012) (MFA II Letter).
---------------------------------------------------------------------------

    The Commission recognizes that there may be some disparity between 
the treatment of privately offered funds under the securities laws and 
the Commission's regulations; however, this issue was not included in 
the Proposal and was not subject to notice and comment. Therefore, the 
Commission does not believe that this final rule is the appropriate 
mechanism for addressing the difference between the two regimes. The 
Commission has directed Commission staff to evaluate the issue and make 
recommendations to the Commission for future action.

F. Effective Dates and Implementation

    The harmonized compliance obligations for CPOs of RICs under Sec.  
4.12, except for Sec.  4.12(c)(3)(i), will become effective upon 
publication in the Federal Register.
    Section 4.12(c)(3)(i) will become effective 30 days after 
publication in the Federal Register. Compliance will be required with 
the conditions adopted herein in Sec.  4.12(c)(3)(i) for open-end RICs 
beginning when a RIC files with the SEC an initial registration 
statement on form N-1A or, for an existing RIC, its first post-
effective amendment that is an annual update to an effective 
registration statement on form N-1A. For CPOs of closed-end RICs, 
compliance will be required when the closed-end RIC files an initial 
registration statement with the SEC, or, for existing closed-end RICs, 
when the closed-end RIC is required to update its registration 
statement. Consistent with the Commission's statements in the 2012 
Final Rule, CPOs of RICs must begin to comply with Sec.  4.27, which 
implements Commission forms CPO-PQR and CTA-PR, 60 days following the 
effective date of this rulemaking.\153\ Accordingly, initial reporting 
on forms CPO-PQR for CPOs of RICs will begin October 21, 2013.\154\ 
Section 4.21 will become effective upon publication in the Federal 
Register. With respect to the amendments to Sec. Sec.  4.7(b)(4), 4.23, 
4.26, and 4.36 that are applicable to all registered CPOs, these 
amendments will become effective 30 days after publication in the 
Federal Register and CPOs may comply upon the effective date.
---------------------------------------------------------------------------

    \153\ See 2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24, 
2012); correction 77 FR 17328 (March 26, 2012).
    \154\ The instructions for form CPO-PQR specify different dates 
by which CPOs must file the form, depending on the amount of assets 
under management by the pool operator. 77 FR at 11288. CTAs must 
file form CTA-PR annually. 77 FR at 11339.
---------------------------------------------------------------------------

III. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') imposes certain requirements 
on Federal agencies in connection with their conducting or sponsoring 
any collection of information as defined by the PRA.\155\ An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number from the Office of Management and Budget (``OMB''). This final 
release affects OMB Control Numbers 3038-0023 and 3038-0005 to reflect 
the obligations associated with the registration of new CPOs that were 
previously excluded from registration under Sec.  4.5. Specifically, 
this final release is amending Collection 3038-0005 to accommodate the 
modified compliance obligations under part 4 of the Commission's 
regulations.
---------------------------------------------------------------------------

    \155\ See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

a. Estimated Number of Affected Entities
    In the Proposal, the Commission derived the number of estimated 
entities affected and the number of burden hours associated with this 
proposal through the use of statistical analysis. According to the 
single and limited source of data available to the Commission, in 2010, 
there were 669 sponsors of 9,719 registered investment companies, 
including mutual funds, closed end funds, exchange traded funds, and 
unit investment trusts.\156\ In the comment letter submitted by the 
Investment Company Institute (``ICI'') in

[[Page 52323]]

response to the Commission's proposed amendments to Sec.  4.5, the ICI 
stated that it surveyed its membership and 13 sponsors responded 
representing 2,111 registered investment companies. Of those 2,111 
registered investment companies, the 13 sponsors estimated that 485 
would trigger registration and compliance obligations under Sec.  4.5 
as amended. This constituted approximately 23% of the reported 
registered investment companies.
---------------------------------------------------------------------------

    \156\ See 2011 Investment Company Fact Book, Chap. 1 and Data 
Tables, Investment Company Institute (2011), available at http://www.icifactbook.org/.
---------------------------------------------------------------------------

    The Commission then deducted the 2,111 registered investment 
companies discussed in the ICI comment letter from the 9,719 entities 
comprising the universe of registered investment companies, and 
deducted the 13 sponsors surveyed by the ICI from the universe of 669 
fund sponsors to arrive at a balance of 656 fund sponsors operating 
7,608 registered investment companies. This resulted, for the 
calculated remainder, in an average of 11.6 registered investment 
companies being offered per sponsor.
    The Commission then calculated 23% of the 7,608 registered 
investment companies not covered by the ICI survey, resulting in 1,750 
additional registered investment companies that the Commission would 
expect to trigger registration under amended Sec.  4.5. The Commission 
then divided this number by the previously calculated average number of 
registered investment companies operated per sponsor to which it added 
the 13 sponsors from the ICI survey to reach 164 sponsors expected to 
be required to register under amended Sec.  4.5. Because the Commission 
could not state with certainty that only 164 entities would be required 
to register the Commission indicated that the number of sponsors or 
advisors required to register were somewhere between 164 and 669 
entities. For PRA purposes, the Commission concluded that it was 
appropriate to use the midpoint between the outer bounds of the range, 
which was 416 entities.
    Pursuant to the request for comments on the Proposal, the 
Investment Company Institute (``ICI'') submitted a comment letter in 
response which provided additional and differing information that it 
obtained through a further survey of its membership.\157\ In its 
letter, the ICI stated that in its return, 42 advisers reported 
operating 4,188 funds, which constituted 43 percent of the universe of 
RICs.\158\ Therefore, the total universe of RICs can be calculated to 
equal 9,740.
---------------------------------------------------------------------------

    \157\ ICI Letter.
    \158\ Id.
---------------------------------------------------------------------------

    The ICI further stated that of these 42 advisers, 33 stated that 
they operated 551 funds that would trigger registration.\159\ 
Therefore, according to the ICI's data, 13 percent of the surveyed 
funds would trigger registration of their operators.\160\ Applying this 
percentage to the total universe of RICs less the 4188 surveyed RICs, 
results in an estimated 5552 non-surveyed RICs and an estimated total 
of 722 non-surveyed RICs with operators required to register.\161\ The 
total number of surveyed and non-surveyed RICs with operators required 
to register is approximately 1,266.\162\
---------------------------------------------------------------------------

    \159\ Id.
    \160\ Percentage obtained by dividing 551 by 4,188 surveyed 
RICs.
    \161\ Total of non-surveyed RICs subject to registration 
obtained by multiplying 5552 non-surveyed RICs by .13.
    \162\ Total obtained by multiplying 9740 by .13.
---------------------------------------------------------------------------

    As stated above, the ICI also noted that 33 advisers would be 
required to register as CPOs due to the activities of 551 RICs.\163\ 
According to the 2012 ICI Fact Book, there were 713 advisers to RICs in 
2011.\164\ The Commission deducted the 42 surveyed advisers from the 
total universe of 713 advisers to find a total of 671 non-surveyed 
advisers. When the Commission compared the number of non-surveyed RICs 
with the number of non-surveyed advisers, the Commission determined 
that each adviser advises an average of 8 RICs. The Commission then 
applied the average of 8 RICs per adviser to the 722 estimated number 
of non-surveyed RICs required to register, and obtained an estimate of 
90 non-surveyed advisers being required to register. The Commission 
then added the 33 surveyed advisers to its estimate, and determined 
that an estimated 123 advisers may be required to register. Because the 
Commission cannot state with certainty that only 123 entities would be 
required to register, the Commission believes that the number of 
sponsors or advisors required to register to be somewhere between 123 
and 713 entities, the midpoint of which is 418 entities.
---------------------------------------------------------------------------

    \163\ ICI Letter.
    \164\ See 2012 Investment Company Fact Book at 13, available at 
http://www.icifactbook.org/2012_factbook.pdf.
---------------------------------------------------------------------------

b. OMB Control Number 3038-0023
    On February 24, 2012, the Commission finalized amendments to 
Collection 3038-0023, titled ``Part 3--Registration,'' to allow for an 
increase in response hours for the rulemaking resulting from the 
amendments to Sec.  4.5 that the Commission recently adopted.\165\ 
Collection 3038-0023 affects part 3 of the Commission's regulations 
that concern registration requirements. The Commission amended existing 
Collection 3038-0023 to reflect the obligations associated with the 
registration of new entrants, i.e., CPOs that were previously exempt 
from registration under Sec.  4.5 that had not previously been required 
to register.\166\ Because the registration requirements are in all 
respects the same as for current registrants, the collection was 
amended only insofar as it concerns the estimated increase in the 
number of respondents and the corresponding estimated annual burden. 
These burdens were associated with the 2012 Final Rule amending Sec.  
4.5, which was published in the Federal Register on February 24, 2012. 
Responses to this collection of information are mandatory. The total 
burden associated with registration including the registration of 
operators of RICs was as follows:
---------------------------------------------------------------------------

    \165\ See 2012 Final Rule, supra note 6, 77 FR at 11272.
    \166\ See 2012 Final Rule, supra note 6, 77 FR at 11273.
---------------------------------------------------------------------------

    Estimated number of respondents: 75,425.
    Annual responses by each respondent: 75,932.
    Estimated average hours per response: 0.09.
    Annual reporting burden: 6,833.9.
    In the Proposal, the Commission published a proposed amendment to 
Collection 3038-0023 that inadvertently reflected an additional 
amendment to the collection arising from the registration of additional 
CPOs that were previously excluded from the definition of CPO under 
Sec.  4.5.\167\ As stated above, the Commission amended existing 
Collection 3038-0023 in the 2012 Final Rule to reflect the obligations 
associated with the registration of new CPOs that were previously 
excluded from registration under Sec.  4.5. Thus, these entities were 
already included in the Commission's final amendment to Collection 
3038-0023 associated with the 2012 Final Rule, and therefore, the 
additional amendments to Collection 3038-0023 in the Proposal resulted 
in those entities being erroneously double counted. Accordingly, the 
burden hours previously estimated for Collection 3038-0023 in the 2012 
Final Rule that amended Sec.  4.5 and the estimates for this collection 
remain unchanged from the 2012 Final Rule.
---------------------------------------------------------------------------

    \167\ See Proposal, supra note 23, 77 FR at 1349. The Proposal 
stated that there were 75,841 estimated number of respondents, 
76,350 annual responses by each respondent and 6,871.6 annual 
reporting burden.
---------------------------------------------------------------------------

c. OMB Control Number 3038-0005
    Also, on February 24, 2012, the 2012 Final Rule amended Collection 
3038-0005 to allow for an increase in

[[Page 52324]]

response hours for the rulemaking resulting from the amendments to 
Sec.  4.5.\168\ Collection 3038-0005 affects part 4 of the Commission's 
regulations that concern compliance obligations of CPOs and CTAs, and 
the circumstances under which they may be exempted or excluded from 
registration. The estimated average time spent per response was not 
altered in the 2012 Final Rule; however, adjustments were made to the 
collection to account for the new burden expected under the rulemaking. 
The total burden associated with Collection 3038-0005, in the 
aggregate, was as follows:
---------------------------------------------------------------------------

    \168\ See 2012 Final Rule, supra note 6, 77 FR at 11272.
---------------------------------------------------------------------------

    Estimated number of respondents: 43,168.
    Annual responses for all respondents: 61,868.
    Estimated average hours per response: 8.77.
    Annual reporting burden: 257,635.8.
    In the Proposal, the Commission proposed changes to part 4 that 
were designed to better harmonize the Commission's compliance 
obligations for CPOs and minimize the burden imposed on those dually-
regulated by the Commission and the SEC while still enabling the 
Commission to fulfill its regulatory goals.\169\ The Proposal was 
designed to, where possible, minimize the regulatory burden on these 
entities with respect to disclosure, annual and periodic reporting to 
participants and the Commission, recordkeeping requirements, and ensure 
that requirements among the SEC and CFTC did not conflict such that 
compliance with one regime would cause a violation of another. With 
respect to the PRA, the Proposal increased the number of estimated 
entities that would be subject to the compliance obligations of CPOs 
and CTAs,\170\ which are part of Collection 3038-0005.\171\ The 
Proposal specifically added the following burden with respect to 
compliance obligations other than Form CPO-PQR:
---------------------------------------------------------------------------

    \169\ The Commission issued its proposal under the authority of 
Sec. Sec.  4m, 4n, and 8a(5) of the CEA. 7 U.S.C. 6m, 6n, and 
12a(5).
    \170\ See Proposal, supra note 23, 77 FR at 11349, finding that 
416 entities would be required to register under amended Sec.  4.5.
    \171\ See Proposal, supra note 23, 77 FR at 11349, which, to 
account for the increased number of entities, proposed that the 
total burden associated with Collection 3038-0005, in the aggregate, 
including the burden imposed by regulations that were not proposed 
to be amended by that rulemaking, was expected to be, as follows:
    Estimated number of respondents: 44,142.
    Annual responses by each respondent: 62,121.
    Estimated average hours per response: 4.22.
    Annual reporting burden: 262,347.8.
---------------------------------------------------------------------------

    Estimated number of respondents: 416.
    Annual responses by each respondent: 5.
    Estimated average hours per response: 2.
    Annual reporting burden: 4160.
    As further discussed below, the Commission in this final release is 
amending Collection 3038-0005 to accommodate the modified compliance 
obligations under part 4 of the Commission's regulations resulting from 
these revisions. The title for this collection is ``Part 4--Commodity 
Pool Operators and Commodity Trading Advisors'' (OMB Control number 
3038-0005). Responses to this collection of information will be 
mandatory. The new total burden associated with Collection 3038-0005, 
in the aggregate, including the burden imposed by regulations that are 
not being amended by this rulemaking, is as follows:
    Estimated number of respondents: 49,008.
    Annual responses for all respondents: 69,382.
    Estimated average hours per response: 3.99.\172\
---------------------------------------------------------------------------

    \172\ The Commission rounded the average hours per response to 
the second decimal place for ease of presentation.
---------------------------------------------------------------------------

    Annual reporting burden: 276,540.3.\173\
---------------------------------------------------------------------------

    \173\ This total estimate for Collection 3038-0005, in the 
aggregate, has been increased from the Proposal to accurately 
reflect the average under Collection 3038-0005. While the total 
annual reporting burden has increased, the total annual reporting 
burden reflects the decreased burden associated with the preparation 
of Disclosure Documents by CPOs under the amendments to Sec. Sec.  
4.26 and 4.36.
---------------------------------------------------------------------------

    The new total burden associated with Collection 3038-0005, as a 
result of the amendments adopted in this rulemaking, is as follows:
    Estimated number of respondents: 5,894.
    Annual responses for all respondents: 7,694.
    Estimated average hours per response: 2.66.\174\
---------------------------------------------------------------------------

    \174\ The Commission rounded the average hours per response to 
the second decimal place for ease of presentation.
---------------------------------------------------------------------------

    Annual reporting burden: 20,464.5
    The Commission will protect proprietary information according to 
the Freedom of Information Act (``FOIA'') and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the CEA strictly prohibits the Commission, unless specifically 
authorized by the CEA, from making public ``data and information that 
would separately disclose the business transactions or market position 
of any person and trade secrets or names of customers.'' \175\ The 
Commission is also required to protect certain information contained in 
a government system of records according to the Privacy Act of 
1974.\176\
---------------------------------------------------------------------------

    \175\ See 7 U.S.C. 12.
    \176\ See 5 U.S.C. 552a.
---------------------------------------------------------------------------

d. Changes Resulting From Harmonization and Additional Information 
Provided by CPOs and CTAs
1. OMB Control Number 3038-0023
    This rule does not impact the burden hours previously estimated for 
Collection 3038-0023 in the 2012 Final Rule that amended Sec.  4.5 and 
the estimates for this collection have not been changed by this rule.
2. OMB Control Number 3038-0005
    The Commission is amending Collection 3038-0005 to increase the 
estimated total number of respondents, total annual responses for all 
respondents, and annual reporting burden from the estimates that 
appeared in the Proposal. These amendments are in response to comments 
that the Commission received regarding the burdens imposed by the 
Proposal and also reflect the differences between the Proposal and the 
final rule. Thus, the new total burden in the 2012 Final Rule 
associated with Collection 3038-0005, listed in the aggregate above, 
has increased to account for the burdens associated with the various 
information collections in this final rule, as discussed below.
i. Amendments to Timeframe for Updating Disclosure Documents
    In this release, the Commission is finalizing the collection of 
information regarding the frequency with which CPOs and CTAs must 
update their Disclosure Documents under Sec. Sec.  4.26 and 4.36, 
respectively. While the total annual reporting burden has increased to 
account for the total annual reporting by CPOs for the various 
information collections in this final release, the Commission believes 
that the amendments to Sec. Sec.  4.26 and 4.36 will result in a 
reduction of the burden on CPOs and CTAs.\177\ The Commission estimates 
the burden associated with the

[[Page 52325]]

amendments to Sec. Sec.  4.26 and 4.36 to be as follows:
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    \177\ To facilitate compliance with part 4 requirements for CPOs 
of RICs, the Commission amended Sec.  4.26 and Sec.  4.36 to extend 
the period that CPOs and CTAs may use Disclosure Documents from nine 
months to twelve months from the date of the document. Section 
4.26(a)(2) in this final release now provides that no commodity pool 
operator may use a Disclosure Document or profile document dated 
more than twelve months prior to the date of its use. Section 
4.36(b) provides that no commodity trading advisor may use a 
Disclosure Document dated more than twelve months prior to the date 
of its use.
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    Section 4.26:
    Estimated number of respondents: 160.
    Annual responses by each respondent: 1.8.
    Estimated average hours per response: 3.25
    Total Annual reporting burden hours: 936.
    Section 4.36:
    Estimated number of respondents: 450.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 1.85.
    Total Annual reporting burden hours: 832.5.
ii. Past Performance for Pools With Less Than Three Years Performance
    The Commission is adopting a rule in Sec.  4.12(c) of this release 
that would require operators of RICs with less than three years 
performance history to disclose the performance of all pools and 
accounts that are managed by the CPO and that have investment 
objectives, policies, and strategies substantially similar to those of 
the offered pool.\178\ Not all RICs will fall into this category and 
therefore, not all RICs will be subject to this disclosure requirement.
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    \178\ Section 4.12(c)(3)(i) states that ``The commodity pool 
operator of a pool whose units of participation meet the criteria of 
paragraph (c)(1)(ii) of this section may claim the following relief: 
(i) The pool operator of an offered pool will be exempt from the 
requirements of Sec. Sec.  4.21, 4.24, 4.25, and 4.26; Provided, 
that (A) The pool operator of an offered pool with less than a 
three-year operating history discloses the performance of all 
accounts and pools that are managed by the same pool operator and 
that have investment objectives, policies, and strategies 
substantially similar to those of the offered pool; . . .''
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    Based on information provided by the ICI in its comment letter, of 
the 551 RICs in the survey that would trigger registration of their 
advisor, 159 of those RICs had less than three years operating 
history.\179\ This constitutes approximately 30 percent of the RICs in 
the survey whose CPOs would not be excluded under Sec.  4.5. The RICs 
with less than three years operating history that would require 
registration in the ICI survey were operated by 29 of the 33 advisers 
that expected to register, which constitutes 88 percent of the surveyed 
sponsors expecting to register. Applying these percentages to the 
Commission's estimated number of 418 sponsors required to register, the 
Commission expects approximately 368 pool operators to be subject to 
the disclosure requirements for substantially similar accounts and 
funds with respect to 380 pools. The Commission is not aware of any 
source of data to assist it in estimating the number of operators of 
RICs with substantially similar pools or accounts or to assist in 
estimating the number of those substantially similar pools or accounts 
that do not independently have regulatory obligations requiring the 
preparation of past performance data. To be conservative, therefore, 
the Commission will assume that all operators of RICs with less than 
three years operating history will have multiple pools or accounts that 
are substantially similar in all material respects and that such 
substantially similar pools or accounts do not have separate compliance 
obligations requiring preparation of past performance information.
---------------------------------------------------------------------------

    \179\ ICI Letter.
---------------------------------------------------------------------------

    The ICI, in its comment letter, estimated that costs associated 
with prior performance disclosure required under the Proposal for funds 
with less than a three year operating history would amount to 34 hours 
per fund initially, and 25.5 hours per fund each year in ongoing 
compliance requirements.\180\ The ICI's estimates are based on the 
requirement in the Proposal to include past performance information for 
all other funds operated by the sponsor of the fund with less than a 
three year operating history. As noted supra, the Commission has 
altered this provision to require disclosure of only those funds and 
accounts that are substantially similar in all material respects to the 
fund with less than a three year operating history. In so doing, the 
Commission believes that it has significantly reduced the requirements 
regarding past performance disclosure. As such, the Commission believes 
it can reasonably reduce the number of hours required both initially 
and in ongoing compliance. The Commission anticipates initial and 
ongoing cost of approximately 15 hours per fund.\181\ The Commission 
believes that 15 hours is a reasonable estimate for the preparation of 
past performance information for a substantially similar pool or 
account. The total burden associated with the past performance 
assessment and disclosure is:
---------------------------------------------------------------------------

    \180\ ICI Letter.
    \181\ The burden estimate assumes that all RICs with less than 
three years performance are newly formed and have no performance 
history, whereas some of these RICs likely have anywhere from no 
past performance to just less than three full years. Therefore, the 
Commission believes that this calculation overestimates the ongoing 
burden to these CPOs.
---------------------------------------------------------------------------

    Estimated number of respondents: 368.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 15.
    Total Annual reporting burden hours: 5,520.
iii. Notice To Claim Substituted Compliance
    This final rule requires a notice to be filed for operators of RICs 
to claim relief under revised Sec.  4.12(d) to enable the Commission to 
know which entities are claiming this relief.\182\ The notice is 
effective upon submission and must only be filed once per pool. The 
Commission estimates the burden associated with this filing to be as 
follows:
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    \182\ Section4.12(d)(1)(iv) requires pool operators to specify 
the relief sought under paragraph (b)(2), (c)(2), or (c)(3) of this 
section, as the case may be.
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    Estimated number of respondents: 418.
    Annual responses by each respondent: 3.
    Estimated average hours per response: 2.
    Total Annual reporting burden hours: 2,508.
    The Commission does not believe that the requirement that operators 
of RICs discuss the risks associated with the derivative activities of 
the operated pools as adopted by this final rule imposes a burden 
beyond that already imposed by the Securities and Exchange Commission 
through SEC forms N-1A and N-2.\183\
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    \183\ See Items, 4, 9, and 16(b) of Form N-1A; and Item 8 and 17 
of Form N-2.
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iv. Filing Annual Financial Statements by CPOs of RICs
    The final rule requires that operators of RICs file annual 
financial statements with the NFA, pursuant to the terms of Sec.  
4.22(c),\184\ which is applicable to all CPOs. It permits operators of 
RICs to file the same financial statements that it prepares for its 
compliance obligations with the SEC. The Commission anticipates that 
the additional requirement imposed by the rule in Sec.  4.22(c) 
necessitates only addressing any potential formatting changes--i.e. 
making sure the document is in PDF form as required by NFA--and 
uploading the document via NFA's Easy File system (to which advisers 
should already have access by virtue of their registration). Thus, the 
Commission anticipates at most 2 hours per fund per

[[Page 52326]]

sponsor. With respect to the filing of annual financial statements by 
operators of RICs with the NFA, the Commission estimates the burden to 
be as follows:
---------------------------------------------------------------------------

    \184\ Section 4.22(c) has not been amended by this rule. The 
information collection is being amended only to reflect the increase 
in the numbers of new CPOs registering.
---------------------------------------------------------------------------

    Estimated number of respondents: 418.
    Annual responses by each respondent: 3.
    Estimated average hours per response: 2.
    Total Annual reporting burden hours: 2,508.
    v. Notice of Use of Third-Party Record Keepers
    The final rule adopts amendments to Sec. Sec.  4.7(b)(4) and 4.23 
to permit the use of third-party recordkeepers by any CPO that files a 
notice with NFA. The estimated number of respondents is derived from 
the estimates finalized as part of the 2012 Final Rule adopting 
amendments to Sec.  4.5 and Sec.  4.13, and reflects the additional 
registrants expected due to the changes in those rules. Because the 
Commission cannot be sure how many CPOs will use third-party service 
providers, the Commission estimates that all CPOs will take advantage 
of the amendments to the record-keeping requirements under Sec.  4.23 
and Sec.  4.7.\185\ With respect to the filing of the notice under 
revised Sec.  4.23 to permit the use of third-party recordkeepers, the 
Commission estimates the burden to be as follows:
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    \185\ The Commission has previously estimated that each CPO that 
subject to Sec.  4.23 had a burden of approximately 50 hours 
associated with recordkeeping obligations and that each CPO subject 
to Sec.  4.7(b)(4) had a burden of approximately 40 hours associated 
with recordkeeping obligations. Because the Commission is estimating 
that all registered CPOs will use third-party service providers for 
recordkeeping purposes, the Commission expects that burdens 
associated with Sec. Sec.  4.7(b)(4) and 4.23 will be reduced, 
although the reduction cannot be quantified at this time.
---------------------------------------------------------------------------

    For CPOs of RICs subject to Sec.  4.23:
    Estimated number of respondents: 418.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 2.
    Total Annual reporting burden: 836.
    For all other CPOs subject to Sec.  4.23:
    Estimated number of respondents: 160.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 2.
    Total Annual reporting burden: 320.
    With respect to the filing of the notice under revised Sec.  
4.7(b)(4) to permit the use of third-party recordkeepers, the 
Commission estimates the burden to be as follows:
    Estimated number of respondents: 3,502.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 2.
    Total Annual reporting burden: 7,004.
vi. Compliance With Form CPO-PQR by CPOs of RICs
    CPOs of RICs were not required to comply with its filing 
obligations under Sec.  4.27 or file form CPO-PQR until the 
finalization of this rulemaking. The reporting obligations for CPOs of 
RICs with respect to form CPO-PQR under the PRA and the costs and 
benefits were addressed in the 2012 Final Rule,\186\ and restated in 
the Proposal only for informational purposes.\187\ To the extent that 
this rule does not impact the burden hours previously estimated in the 
2012 Final Rule for Form CPO-PQR, the estimates for Collection 3038-
0005 associated with form CPO-PQR have not been changed by this rule.
---------------------------------------------------------------------------

    \186\ See 2012 Final Rule, supra note 6, 77 FR at 11273.
    \187\ See Proposal, supra note 23, 77 FR at 11349.
---------------------------------------------------------------------------

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \188\ requires that agencies, 
in proposing rules, consider the impact of those rules on small 
entities. The Commission has previously established certain definitions 
of ``small entities'' to be used by the Commission in evaluating the 
impact of its rules on such entities in accordance with the RFA.\189\
---------------------------------------------------------------------------

    \188\ See 5 U.S.C. 601, et seq.
    \189\ 47 FR 18618 (Apr. 30, 1982).
---------------------------------------------------------------------------

    CPOs: The Commission has previously determined that registered CPOs 
are not small entities for the purpose of the RFA.\190\ With respect to 
CPOs exempt from registration, the Commission has determined that a CPO 
is a small entity if it meets the criteria for exemption from 
registration under current Sec.  4.13(a)(2).\191\ Based on the 
requisite level of sophistication needed to comply with the SEC's 
regulatory regime for registered investment companies, and the fact 
that registered investment companies are generally intended to serve as 
retail investment vehicles and do not qualify for exemption under Sec.  
4.13(a)(2), the Commission believes that registered investment 
companies are generally not small entities for purposes of the RFA 
analysis. Moreover, this final rule will reduce the burden of complying 
with part 4 for CPOs of registered investment companies. The Commission 
has determined that the final rule will not create a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \190\ See 47 FR 18618, 18619 (Apr. 30, 1982).
    \191\ See 47 FR at 18619-20.
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    CTAs: The Commission has previously decided to evaluate, within the 
context of a particular rule proposal, whether all or some CTAs should 
be considered to be small entities, and if so, to analyze the economic 
impact on them of any such rule.\192\ The sole aspect of the final rule 
that affects CTAs that are registered with the Commission is the 
timeframe that permits Disclosure Documents to be used for 12 months 
rather than 9 months, thereby reducing the frequency with which updates 
must be prepared. While the Commission considers the reduced frequency 
with which these CTAs must prepare updates to their Disclosure 
Documents as reducing the overall burden on affected entities, it is of 
the view of the Commission that the reduction in updates mitigates the 
rule's economic impact. Over the course of three calendar years, the 
change from a 9 month update period to a 12 month update period 
eliminates 1 filing per CTA. This results in a change from 1.33 filings 
per year to 1 filing per year. In addition, because the eliminated 
filing would be an update of a document that was already prepared and 
reviewed by NFA, the Commission does not believe that the eliminated 
filing would result in a significant economic impact. As indicated 
above, it would reduce any impact that the rule would otherwise have. 
Moreover, the amended time period for updating Disclosure Documents for 
CTAs also aligns this requirement with other regulatory obligations 
that registered CTAs must comply with, including the filing of form 
CTA-PR pursuant to Sec.  4.27 of the Commission's regulations.\193\ The 
Commission believes that this will enable registered CTAs to avail 
themselves of operational efficiencies in satisfying its regulatory 
obligations as the information required under form CTA-PR is relevant 
to the preparation or updating of Disclosure Documents. Therefore, the 
Commission has determined that the final rule will not create a 
significant economic impact on a substantial number of small entities. 
Accordingly, the Chairman, on behalf of the Commission hereby certifies 
pursuant to 5 U.S.C. 605(b) that the final rule will not have a 
significant impact on a substantial number of small entities.
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    \192\ See 47 FR at 18620.
    \193\ 17 CFR 4.27.

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[[Page 52327]]

C. Cost Benefit Analysis

a. Consideration of Costs and Benefits
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the Act or issuing certain orders.\194\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations.\195\
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    \194\ 7 U.S.C. 19(a).
    \195\ 7 U.S.C. 19(a)(2).
---------------------------------------------------------------------------

    Generally, the Commission believes that, by avoiding the imposition 
of potentially duplicative, inconsistent, or conflicting regulatory 
requirements on CPOs of RICs subject to federal securities laws and SEC 
rules, the final harmonization rule should generate important benefits 
while mitigating the costs on market participants.
    In the following discussion, the Commission summarizes the key 
aspects of the final rule, and considers the benefits and costs, taking 
account of public comments received in response to the Proposal and the 
February Final Rule regarding harmonizing the compliance regime of the 
Commission with that of the SEC. The Commission then evaluates the 
final rule in light of the aforementioned Sec.  15(a) public interest 
considerations.\196\
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    \196\ The discussion of costs and benefits in this section 
should be read in conjunction with the discussion of the effects of 
the rule and the choices made by the Commission in the remainder of 
this preamble, all of which entered into the Commission's 
consideration of costs and benefits in connection with its decision 
to promulgate this rule.
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1. Background
    In February 2012, the Commission adopted modifications to the 
exclusions from the definition of CPO that are delineated in Sec.  
4.5.\197\ Specifically, the Commission amended Sec.  4.5 to modify the 
exclusion from the definition of ``commodity pool operator'' for those 
entities that are investment companies registered as such with the SEC 
pursuant to the '40 Act.\198\ This modification amended the terms of 
the exclusion available to CPOs of RICs to include only those CPOs of 
RICs that commit no more than a de minimis portion of their assets to 
the trading of commodity interests that do not fall within the 
definition of bona fide hedging and who do not market themselves as a 
commodity pool or other commodity investment.\199\ Pursuant to this 
amendment, any such CPO of a RIC that exceeds this level will no longer 
be excluded from the definition of CPO. Accordingly, except for those 
CPOs of RICs who commit no more than a de minimis portion of their 
assets to the trading of commodity interests that do not fall within 
the definition of bona fide hedging and who do not market themselves as 
a commodity pool or other commodity investment, an operator of a RIC 
that meets the definition of ``commodity pool operator'' under Sec.  
4.10(d) of the Commission's regulations and Sec.  1a(11) of the CEA 
must register as such with the Commission.\200\
---------------------------------------------------------------------------

    \197\ 17 CFR 4.5. See 2012 Final Rule, supra note 6, 77 FR 11252 
(Feb. 24, 2012); correction 77 FR 17328 (March 26, 2012). Prior to 
this Amendment, all RICs, and the principals and employees thereof, 
were excluded from the definition of ``commodity pool operator,'' by 
virtue of the RICs registration under the Investment Company Act of 
1940. The 2012 amendment to Sec.  4.5 maintained this exclusion for 
those RICs that engage in a de minimis amount of non-bona fide 
hedging commodity interest transactions. See id. Specifically, the 
amendment to Sec.  4.5 retained this exclusion for RICs whose non-
bona fide hedging commodity interest transactions require aggregate 
initial margin and premiums that do not exceed five percent of the 
liquidation value of the qualifying pool's portfolio, or whose non-
bona fide hedging commodity interest transactions' aggregate net 
notional value does not exceed 100 percent of the liquidation value 
of the pool's portfolio.
    \198\ 15 U.S.C. 80a-1, et seq.
    \199\ 17 CFR 1.3(yy).
    \200\ Pursuant to the terms of Sec.  4.14(a)(4), CPOs are not 
required to register as CTAs if the CPOs' commodity trading advice 
is directed solely to, and for the sole use of, the pool or pools 
for which they are registered as CPOs. 17 CFR 4.14(a)(4).
---------------------------------------------------------------------------

    In promulgating the revisions to Sec.  4.5, the Commission received 
numerous comments that operators of RICs that also would be required to 
register as CPOs would be subject to duplicative, inconsistent, and 
possibly conflicting disclosure and reporting obligations. The 
Commission determined, after consideration of the comments received, 
that further consideration was warranted concerning whether and to what 
extent CPOs of RICs ought to be subject to various part 4 requirements, 
and in the 2012 Final Rule suspended the obligations of CPOs of RICs 
with respect to most of the requirements of part 4 until further 
rulemaking.\201\ Therefore, concurrent with the 2012 Final Rule that 
amended Sec.  4.5, the Commission issued the Proposal which was 
designed to address potentially conflicting or duplicative compliance 
obligations administered by the Commission and the SEC regarding 
disclosure, reporting and recordkeeping by CPOs of RICs.\202\
---------------------------------------------------------------------------

    \201\ See 2012 Final Rule, supra note 6, 77 FR at 11252, 11255. 
The Commission exercised its authority under Sec.  4.12(a), which 
provides that the Commission may exempt any person or class of 
persons from any or all of part 4 requirements if the Commission 
finds that the exemption is not contrary to the public interest or 
the purposes of the provision from which the exemption is sought. 17 
CFR 4.12(a).
    \202\ See, Proposal, supra note 23.
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    As set forth in the Proposal, the harmonization rulemaking sought 
to address a number of areas identified by commenters, including: the 
timing of the delivery of disclosure documents to prospective 
participants; the signed acknowledgement requirement for receipt of 
disclosure documents; the cycle for updating disclosure documents; the 
timing of financial reporting to participants; the requirement that a 
CPO maintain its books and records on site; the required disclosure of 
fees; the required disclosure of past performance; the inclusion of 
mandatory certification language; and the SEC-permitted use of a 
summary prospectus for open-ended registered investment companies.
    In the Proposal, the Commission considered the costs and benefits 
of harmonizing the Commissions' regimes and requested comment on its 
considerations of costs and benefits, including a description of any 
cost or benefit the Commission had not considered.
    After consideration of the comments received and further 
deliberation, the Commission is adopting rules that effectively 
implement a substituted compliance approach for dually registered CPOs 
of RICs, whereby such CPOs, largely through compliance with obligations 
imposed by the SEC, will be deemed compliant with the Commission's 
regulatory regime. This is consistent with the Commission's conclusion, 
based on the information currently available, that substituted 
compliance is appropriate because it believes that the regime 
administered by the SEC under SEC RIC Rules, with minor additional 
disclosure, should provide market participants with meaningful 
disclosure as required under part 4, enable the Commission to discharge 
its regulatory oversight function with respect to the derivatives 
markets, and ensure that CPOs of RICs maintain appropriate records 
regarding their operations.\203\
---------------------------------------------------------------------------

    \203\ As discussed further below, the Commission has determined, 
in light of public comments, to modify certain elements of the 
Proposal. For example, the Commission is adopting a substituted 
compliance regime with respect to providing disclosures to 
prospective participants, whereby, with minor modification, the CPO 
of a RIC can rely upon the disclosures made pursuant to the SEC RIC 
Rules as satisfying its obligations under the Commission's 
regulations. Additionally, CPOs of RICs will satisfy the obligations 
to provide periodic account statements pursuant to Sec.  4.22, 
provided that the RIC's current net asset value per share is 
available to investors, and provided that the RIC furnishes semi-
annual and annual reports to investors and files periodic reports 
with the SEC as required by the SEC.

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[[Page 52328]]

2. Summary of the Final Rules
    As discussed in greater detail in this section, the Commission 
believes that the rules finalized herein enable the Commission to 
discharge its regulatory oversight function with respect to the 
commodity interest markets and ensure that CPOs of RICs maintain 
appropriate records regarding their operations in a manner that avoids 
imposing unnecessary costs on such entities.
    The final rules represent several significant changes from the 
Proposal. The Commission is allowing CPOs of RICs to elect to comply 
with the majority of the provisions under Sec. Sec.  4.21, 4.22(a) and 
(b), 4.23, 4.24, 4.25 and 4.26 through a system of substituted 
compliance. That is, subject to certain conditions as delineated in 
Sec.  4.12(c)-(d), a CPO of a RIC may be deemed compliant with those 
enumerated portions of the CFTC's regulatory regime through compliance 
with obligations already imposed by the SEC.
    Although the final rule relies primarily on a substituted 
compliance approach, it imposes certain obligations on CPOs of RICs 
beyond what is otherwise required by the federal securities laws and 
SEC rules. These are as follows:
     The CPO of a RIC will be required to file notice of its 
use of the substituted compliance regime outlined in Sec.  4.12 with 
NFA;
     The CPO of a RIC with less than three years operating 
history will be required to disclose the performance of all accounts 
and pools that are managed by the CPO and that have investment 
objectives, policies, and strategies substantially similar to those of 
the offered pool; and
     The CPO of a RIC will be required to file the financial 
statements that it prepares pursuant to its obligations with respect to 
the SEC with NFA and may file notice requesting an extension to align 
the Commission's filing deadline with that of the SEC.
    In addition, the Commission has, after consideration of the issues 
presented in the comment letters, determined to modify three provisions 
of part 4 for all CPOs, including CPOs of RICs. Specifically, the 
Commission is deleting a provisions in Sec. Sec.  4.23 and 4.7(b)(4) 
that require books and records to be kept at the ``main business 
location'' of the CPO. The Commission is updating Sec. Sec.  4.23 and 
4.7(b)(4) to allow all CPOs to use third-party service providers to 
manage their recordkeeping obligations, provided that each CPO electing 
to do so notifies the Commission through NFA as required under amended 
Sec. Sec.  4.23(c) and 4.7(b)(4). The Commission has also determined to 
rescind the signed acknowledgement requirement in Sec.  4.21(b). 
Finally, the Commission has amended Sec. Sec.  4.26(a)(2) and 4.36(b) 
to allow the use of Disclosure Documents for a twelve-month cycle, 
rather than the current nine-month cycle, for both CPOs and CTAs.
    In the following sections, the Commission considers the benefits 
and costs of the final rules, as well as the comments received 
regarding the costs and benefits associated with the Proposal, and 
evaluates the final rules in light of the five factors enumerated in 
Section 15(a)(2) of the CEA.\204\
---------------------------------------------------------------------------

    \204\ 7 U.S.C. 19(a)(2).
---------------------------------------------------------------------------

3. Benefits
    As explained throughout this release, the basic approach the 
Commission has taken to harmonization of disclosure and recordkeeping 
requirements for CPOs of RICs under the securities and commodities laws 
is substituted compliance. With very limited exceptions, a CPO of a RIC 
will satisfy its disclosure and recordkeeping obligations by 
maintaining compliance with applicable securities law requirements and 
SEC regulations. This approach offers benefits over possible 
alternatives, which, though not readily reduced to a dollar amount, the 
Commission believes are significant.
    The Commission will benefit from the information gathered from the 
annual financial statements submitted to NFA. Though the reports filed 
with the SEC are publicly available and could be manually accessed by 
the Commission, the Commission believes that requiring CPOs of RICs to 
file a copy of their annual financial statements with NFA is a more 
efficient and expedient means of gathering required information 
necessary to monitor CPO activity and the markets. By having all CPO 
financial statements in one centralized database, the Commission will 
be better able to quickly and effectively access information about all 
CPOs trading in the markets overseen by the Commission, allowing for a 
faster and better informed response to any concerns that may arise 
regarding the trading of CPOs in derivatives markets. The submission of 
annual financial statements to NFA will also enable the Commission to 
gain a broader understanding of the financial stability and status of 
the RICs that use derivatives markets in a significant way.
    NFA will also benefit from the information submitted by CPOs of 
RICs as part of their annual financial statements. This information 
will assist NFA in allocating its examinations resources more 
effectively through the scheduling of examinations based upon risk 
analysis of the annual financial data.
    The Commission also believes that requiring CPOs of RICs to comply 
either with the full panoply of provisions in part 4 of the 
Commission's regulations or the substituted compliance regime adopted 
in this release will provide the Commission with additional information 
that it needs to monitor participants in markets subject to its 
oversight and enforce both the CEA and the Commission's regulations. 
This ability will not only provide investors with better access to a 
post-incident remedy, but will also act as a deterrent to behavior that 
is violative of the CEA and/or the Commission's regulations, and may 
reduce the frequency with which investors are harmed.
    The Commission also believes that investors in RICs that hold 
commodity interests will benefit from this final rule as well. The 
Commission believes that the disclosure of prior performance for 
similar funds and accounts by CPOs of RICs with less than a three year 
operating history provides valuable information to investors. Pursuant 
to SEC guidance, RICs are currently permitted, but not required, to 
report past performance information for funds and accounts with 
investment objectives, policies, and strategies substantially similar 
to those of the offered RIC in the disclosure required by the SEC, 
therefore, many entities may not be accustomed to reporting such 
information. However, the Commission believes that for funds with less 
than three years of operating history, the disclosure of past 
performance information to potential investors is necessary for a 
comprehensive understanding of the risks of investing in a fund that 
trades above a de minimis amount in commodity interests. Derivative 
markets are highly complex and require specialized knowledge in order 
to manage funds effectively. The Commission continues to believe that 
the presentation of past performance provides investors with important 
information regarding the experience of the adviser of a relatively new 
fund. A prospective investor will, as a result of this requirement, be 
better able to assess the prior performance of other funds the adviser 
has managed. The Commission believes that this additional information

[[Page 52329]]

will give prospective investors a more complete sense of the ability of 
the adviser to trade in derivatives markets. For these reasons, the 
Commission is requiring prior performance of a CPO of a RIC with less 
than three years operating history to be disclosed as permitted by SEC 
disclosure regulations and guidance.
    The CPO industry will also benefit from the amendments that the 
Commission has made to provisions applicable to all CPOs. First, the 
Commission removed the requirement in Sec.  4.21 that a CPO receive a 
signed acknowledgement of receipt of a Disclosure Document before 
accepting funds from a new participant. Given the electronic and web-
based solicitation strategies used by most entities today, the 
Commission believes that that requirement may be outdated, and extended 
the exemption proposed for registered investment companies to include 
all CPOs.
    Second, the Commission removed the requirement in Sec. Sec.  4.23 
and 4.7(b)(4) that all books and records must be maintained at the main 
business office of the CPO. Originally intended to ensure that books 
and records were readily accessible to the Commission, if necessary, 
the Commission believes that this requirement, in the age of electronic 
recordkeeping, may also be outdated. Eliminating that requirement 
should relieve costs for market participants without compromising the 
Commission's regulatory objectives. The notice filing under Sec.  4.23 
allows the Commission to have accurate information on hand should it 
need to access the books and records of any CPO (including CPOs of 
RICs).
    Finally, the Commission has determined to finalize the proposed 
amendments regarding the cycle for updating Disclosure Documents, 
outlined in Sec.  4.26 for CPOs and Sec.  4.36 for CTAs, to allow for a 
twelve-month cycle instead of the current nine-month cycle. In the 
Commission's opinion, the additional operational and cost efficiencies 
gained by these amendments justify the three-month delay for investors 
in receiving updated disclosure information. The Commission believes 
that the information provided in the Disclosure Document will be 
sufficiently timely for pool participants to make informed investment 
decisions. At the same time, the extended cycle allows Disclosure 
Document reporting to align with annual financial statement reporting. 
Further, with a nine-month cycle, a CPO or CTA would need to file and 
distribute two Disclosure Documents in the same calendar year 
approximately once every three years. The Commission believes the 
changes finalized within Sec.  4.26 and Sec.  4.36 eliminate the need 
to file more than one Disclosure Document in any given year, reducing 
the costs on CPOs and CTAs.
    Overall, the Commission believes the final regulations will benefit 
CPOs of RICs by permitting these entities to rely on the filings made 
with the SEC to comply with many Commission regulations. Further, the 
Commission believes that all CPOs and CTAs will benefit from the 
amendments to requirements under Sec. Sec.  4.7(b)(4), 4.21, 4.23, 
4.26(b), and 4.36(b). The Commission also believes that the final 
regulations provide the public with additional information that is 
vital to informed participation in derivative markets through 
investment in RICs. Because many participants in RICs are retail 
participants, the Commission believes that participants in RICs should 
be given additional information to help gauge the risks associated with 
derivatives trading and relevant past performance information in order 
for them to make better informed decisions. As at least one commenter 
remarked, these vehicles are important investment vehicles for many 
retirement plans, college savings plans, and other investment goals. 
The Commission believes that the final rules provide flexibility and 
cost-efficiency for dual registrants at the same time that the rules 
increase the ability for investors to participate in these vehicles in 
a more informed and responsible manner. As such, the Commission 
believes the final rules achieve the goal enumerated in the Proposal: 
to mitigate the costs associated with compliance without compromising 
the effectiveness of the Commission's regulatory regime.
4. Costs
i. Costs Associated With Substituted Compliance
    In this final rule, the Commission has determined to adopt a 
substituted compliance regime for CPOs of RICs. The Commission is 
adopting a compliance regime for CPOs of RICs largely premised upon 
such entities' adherence to the compliance obligations under SEC RIC 
Rules, whereby the Commission will accept compliance by such entities 
with the disclosure, reporting, and recordkeeping regime administered 
by the SEC as substituted compliance with part 4 of the Commission's 
regulations. The Commission has concluded that this is appropriate 
because it believes that general reliance upon the SEC's compliance 
regime, with minor additional disclosure, should provide market 
participants and the general public with meaningful disclosure, 
including for example, with regard to risks and fees, provide the 
Commission with information necessary to its oversight of CPOs, and 
ensure that CPOs of RICs maintain appropriate records regarding their 
operations. As noted, in the event that the operator of the RIC fails 
to comply with the SEC administered regime, the operator of the RIC 
will be in violation of its obligations under part 4 of the 
Commission's regulations and subject to enforcement action by the 
Commission.
    The substituted compliance regime adopted by the Commission in 
these final rules provides that a CPO of a RIC will be deemed compliant 
with Sec. Sec.  4.21, 4.22(a) and (b), 4.23, 4.24, 4.25, and 4.26 under 
the amendments to Sec.  4.12, provided that the CPO comply with all 
applicable SEC RIC Rules.
    Section 4.12 also provides that an entity must file a notice with 
the NFA to take advantage of the Commission's substituted compliance 
program for CPOs of RICs. The notice is effective upon submission and 
must only be filed once per pool. For purposes of calculating costs of 
the final rule, the Commission has estimated that each pool may require 
2 hours to complete the notice and file the notice with NFA at an 
average salary cost of $76.93 per hour.\205\ The Commission further 
estimates that 418 sponsors may be affected, \206\ each with an average 
of 3

[[Page 52330]]

pools subject to the notice requirement. On this basis, the Commission 
anticipates a one-time cost per-entity of approximately $500.\207\ 
Across all affected entities, the Commission estimates a total one-time 
cost of approximately $192,900.\208\ The Commission believes that this 
is the extent of the costs associated with the substituted compliance 
regime.
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    \205\ The Commission staff's estimates concerning the wage rates 
are based on 2011 salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association (``SIFMA''). The $76.93 per hour is derived from figures 
from a weighted average of salaries across different professions 
from the SIFMA Report on Management & Professional Earnings in the 
Securities Industry 2011, modified to account for an 1800-hour work-
year, adjusted to account for the average rate of inflation in 2012, 
and multiplied by 1.3 to account for overhead and other benefits. 
The Commission anticipates that compliance with the part 4 
provisions would require the work of an information technology 
professional (to provide necessary information); a compliance 
manager (to determine whether or not an entity is eligible for an 
exemption in accordance with the Commission's regulations); and an 
associate general counsel (to prepare notices of exemption). Thus, 
the wage rate is a weighted national average of salary for 
professionals with the following titles (and their relative weight); 
``programmer (senior)'' (30% weight), ``compliance manager'' (45%), 
and ``assistant/associate general counsel'' (25%). The Commission 
uses this wage estimate in estimating costs for provisions that were 
not included in commenters' assessments of costs and benefits; for 
provisions that were included in the commenters' assessments of 
costs and benefits, the Commission utilizes the estimates provided 
by the commenters. All estimates have been rounded to the nearest 
hundred dollars.
    \206\ There currently is no source of reliable information 
regarding the general use of derivatives by registered investment 
companies. Because of this lack of information, in the Proposal, the 
Commission derived the estimated entities affected and the number of 
burden hours associated with this proposal through the use of 
statistical analysis.
    The Commission estimated that 1,266 pools would require 418 
entities to register as CPOs due to the amendments to Sec.  4.5. To 
determine the average number of pools per entity, the Commission 
divided the estimated number of pools by the estimated number of 
entities to arrive at about 3 pools per entity. The methodology used 
to determine this estimate is fully explained supra in this release. 
The Commission understands from NFA that as of February 1, 2013, 
there were six new registered CPOs and five CPOs whose registration 
pre-dates the amendments to Sec.  4.5 that have compliance 
obligations for 149 RICs that are commodity pools. Due to 
limitations on this data arising from other actions taken by the 
Commission or divisions thereof, the Commission does not believe 
that the data is sufficiently finalized to use as the basis for its 
PRA or cost benefit calculations. Therefore, the Commission has 
determined to use the numbers derived through the methodology used 
in the Proposal. Notwithstanding the limitations in the data to 
date, the Commission believes that these numbers are useful in 
considering the likely impact on the final rule on industry.
    \207\ The Commission calculates this amount as follows: (3 pools 
per sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.
    \208\ The Commission calculates this amount as follows: ($461.58 
per sponsor) x (418 sponsors) = $192,940.44.
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    The Commission received many comments regarding the costs of the 
Proposal.\209\ Generally, commenters expressed concern about the cost 
imposed by the Proposal with respect to the compliance obligations of 
RICs and the Commission's consideration thereof.\210\ Specifically, 
commenters stated that RICs were already subject to extensive 
regulation, and that additional compliance obligations required of CPOs 
under part 4 of the Commission's regulations may conflict with, or 
potentially be duplicative of, requirements under the SEC RIC 
Rules.\211\ Commenters further cited specific market problems that may 
occur as a result of the rule, including reduced liquidity and 
potential price impacts should funds determine to reduce their 
positions in derivatives in order to avoid additional compliance 
obligations.\212\ Commenters also stated that RIC shareholders would 
bear many of the costs of these rules in several ways, including but 
not limited to, higher fees and lower returns.\213\
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    \209\ The Commission also received several comments regarding 
the costs of the amendments to Sec.  4.5 that were finalized in the 
February Final Rule and asserting that the Commission should not 
have considered the costs of compliance separately from those of 
registration. See, SIFMA AMG Letter, Dechert Letter, ICI Letter, 
Invesco Letter. The Commission notes that it considered those costs 
related to the registration of CPOs of RICs under Sec.  4.5 in the 
rules adopting such amendments and such comments are outside the 
scope of this rulemaking.
    \210\ See, ICI Letter; Dechert Letter; Katten Letter; NYCBA 
Letter; ABA Letter; Fidelity Letter; AII letter; Invesco Letter; 
SIFMA AMG Letter; AXA Letter.
    \211\ See, e.g., ICI Letter; SIFMA AMG Letter.
    \212\ Katten Letter; Dechert Letter; Fidelity Letter; NYCBA 
Letter.
    \213\ ABA Letter; Dechert Letter; Invesco Letter; Katten Letter; 
SIFMA AMG Letter; AXA Letter: AII Letter.
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    In adopting a broad substituted compliance regime wherein CPOs of 
RICs will be deemed compliant with Sec. Sec.  4.21, 4.22(a) and (b), 
4.23, 4.24, 4.25, and 4.26 under the amendments to Sec.  4.12, provided 
that the CPO comply with all SEC RIC Rules, the Commission expects that 
it has reduced or eliminated any impetus for RICs to reduce their 
positions in markets overseen by the Commission and subsequently any 
negative impact on market quality indicators. The Commission also 
believes it has greatly reduced, and in many cases eliminated, the 
costs CPOs of RICs face, which could be passed through to investors in 
such RICs.
    The Commission also received comments from ICI and Invesco 
regarding the costs associated with discrete provisions in part 4 that 
would have been imposed under the Proposal.\214\ These letters 
enumerated specific costs associated with three general areas addressed 
in the Proposal: (1) General disclosure requirements under Sec.  4.24; 
(2) performance disclosure requirements under Sec.  4.25; and (3) 
financial reporting requirements under Sec.  4.22(a) and (b).\215\ ICI 
also provided estimated costs associated with revising registration 
statements to include CFTC-required disclosures under the Proposal and 
costs associated with filing prospectuses with NFA.\216\
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    \214\ See, ICI Letter; Invesco Letter. The Commission believes 
that the industry survey conducted by ICI provides useful insight 
about potential costs associated with various part 4 requirements, 
and as described further therein, has used the results in its 
consideration of costs associated with the final rules.
    \215\ ICI Letter. ICI reported that of the 42 advisers who 
responded to their survey, 33 advisers representing 551 funds with 
total net assets of $773 billion anticipated having to register 
under the newly amended Sec.  4.5. ICI rounded all of its aggregate 
cost estimates to the nearest $100.
    ICI calculated the initial costs of prior performance disclosure 
required for all funds under Sec.  4.25 as follows: (18 hours per 
fund for initial compliance) x ($227 per initial compliance hour) = 
$4,086 per fund. ICI also calculated the ongoing costs of prior 
performance disclosure required for all funds under Sec.  4.25 as 
follows: (9.5 hours per fund for ongoing compliance) x ($225 per 
ongoing compliance hour) = $2,137.50 per fund.
    ICI calculated the aggregate initial costs for the surveyed 
funds as follows: ($4,086 initial cost per fund) x (551 surveyed 
funds) = $2,251,400. ICI also calculated the aggregate ongoing costs 
for the surveyed funds as follows: ($2,137.50 ongoing costs per 
fund) x (551 surveyed funds) = $1,177,800.
    With respect to the preparation of account statements under 
Sec.  4.22(a) and (b), ICI calculated a one-time cost associated 
with the separate calculation of brokerage commissions as follows: 
(42 hours per fund) x ($171 per hour) = $ 7,182 per fund. ICI 
calculated the aggregate costs associated with brokerage commissions 
for all surveyed funds as follows: ($7,182 cost per fund) x (551 
surveyed funds) = $3,957,300.
    ICI calculated the costs for each fund associated with preparing 
and distributing account statements per Sec.  4.22(a) and (b) as 
follows: (5.75 hours per fund) x ($122.40 average cost per hour) = 
$703.84 per fund per statement. ICI calculated that the aggregate 
costs associated with the preparation and distribution of account 
statements for all surveyed funds as follows: ($703.84 costs per 
fund) x (551 surveyed funds) x (12 monthly statements) = $4,653,800.
    In total, for all Sec.  4.24 provisions, ICI estimated the 551 
responsive funds would incur a cost of $5.8 million initially and 
$2.4 million annually. This was derived from hour and cost estimates 
for 5 different categories of disclosure that ICI developed from its 
survey data. For the industry as a whole, ICI estimated that these 
costs could be as high as $13.3 million initially and $5.5 million 
on an ongoing annual basis.
    \216\ ICI Letter. ICI calculated a one-time cost associated with 
the revision of prospectuses for all surveyed funds as follows: (15 
hours per fund) x ($215 per hour) x (551 surveyed funds) = 
$1,777,000 to revise their prospectuses. ICI also calculated the 
initial cost of filing prospectuses with NFA as follows: (29.5 hours 
per fund) x ($199 per hour) = $5,870.50 per fund. ICI calculated the 
aggregate initial cost for the surveyed funds as follows: ($5,870.50 
cost per fund) x (551 surveyed funds) = $3,234,600. ICI calculated 
the ongoing cost of filing prospectuses with NFA per fund as 
follows: (15.5 hours per fund) x ($195 per hour) = $3,022.50 per 
fund. ICI calculated the aggregate ongoing cost for all surveyed 
funds as follows: (551 surveyed funds) x ($3,022.50 cost per fund) = 
$1,665,400.
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    The final rules provide in Sec.  4.12(c) that CPOs of RICs may take 
advantage of the Commission's substituted compliance provisions for all 
requirements under Sec. Sec.  4.24, 4.25, and 4.22(a) and (b). The 
final rules do not require the disclosures contemplated under the 
Proposal nor do they require CPOs of RICs to file Disclosure Documents 
with NFA for review. Because the Commission anticipates that all CPOs 
of RICs will take advantage of the substituted compliance program to 
avoid any additional cost, the Commission estimates that none of the 
costs identified by commenters that are associated with complying with 
Sec. Sec.  4.24, 4.25, and 4.22(a) and (b) will be incurred by CPOs of 
RICs.
    ICI, as well as other commenters, also identified the following 
additional costs of the Proposal: (1) Costs to registrants if, because 
of complications associated with a different review process and/or more 
than one reviewing entity, their

[[Page 52331]]

Disclosure Documents are not approved in a timely fashion and the RIC 
must temporarily stop issuing shares; \217\ (2) costs associated with 
seeking relief from the SEC, CFTC, or NFA to comply with CFTC 
disclosure and reporting regulations, where conflicts exist; \218\ (3) 
costs to the CFTC, SEC, and NFA of reviewing the additional filings, 
including the potential for multiple reviews of each filing in the 
early stages, as registrants seek to develop disclosures that are 
acceptable to all regulators; (4) likely significant investor confusion 
due to inconsistent and at times inapplicable disclosures; \219\ and 
(5) costs associated with undoing decades of effort by the SEC to 
develop its fund disclosure regime for RICs.\220\ Commenters also 
raised concerns about the costs associated with modifications to their 
internal compliance controls and additional systems that may be 
necessary to comply with the provisions of the Proposal.\221\
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    \217\ ICI Letter. See also, Katten Letter; ABA Letter; AXA 
Letter; NYCBA Letter.
    \218\ ICI Letter. See also, Dechert Letter; IAA Letter; Fidelity 
Letter; SIFMA AMG Letter; ABA Letter; Katten Letter; AXA Letter; 
NYCBA Letter.
    \219\ ICI Letter. See, MFA Letter.
    \220\ ICI Letter. See, AXA Letter.
    \221\ NYCBA Letter; Dechert Letter; AXA Letter; ABA Letter; 
SIFMA AMG Letter.
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    Additionally, one commenter stated that the legal conflicts and 
operational costs that would result from the application of the 
Proposal to CPOs of RICs would be substantial.\222\ According to that 
commenter, many RICs belong to large fund families that may include 
dozens, if not hundreds, of funds.\223\ This commenter further stated 
that significant economies of scale exist with respect to compliance 
with SEC regulations, because the advisers to these fund families are 
able to operate multiple funds on similar timetables and comply with 
similar filing and disclosure requirements.\224\ The commenter 
contended that complying with the CFTC rules as described in the 
Proposal would not only impose significant new costs on the RICs that 
are subject to such rules, but also impede the ability of advisers to 
efficiently manage other funds that are not subject to CFTC 
requirements.\225\
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    \222\ SIFMA AMG Letter.
    \223\ Id.
    \224\ Id.
    \225\ Id.
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    The Commission does not anticipate these qualitative concerns to be 
applicable as a result of the substituted compliance regime provided in 
the final rules. Registrants will not be required to submit to multiple 
review processes, eliminating the costs associated with (1)-(3) above. 
The items that will be required of CPOs of RICs in addition to what is 
required by the SEC, which are discussed infra, will be disclosed in 
accordance with SEC regulations, which are familiar to investors and 
should largely eliminate any costs associated with (4) and (5) above. 
Moreover, because the Commission has adopted in these final rules a 
substituted compliance regime wherein CPOs of RICs will be deemed 
compliant with Sec. Sec.  4.21, 4.22(a) and (b), 4.23, 4.24, 4.25, and 
4.26 under the amendments to Sec.  4.12, provided that the CPO comply 
with all SEC RIC Rules, the Commission does not believe that 
significant modifications to CPOs of RICs' compliance and disclosure 
infrastructures will be necessary.
ii. Costs Associated With Certain Additional Requirements for CPOs of 
RICs and Other Amendments
    Although the final rule largely adopts a substituted compliance 
approach, the Commission acknowledges that there will be some costs 
associated with the final rule that will be borne by dually registered 
entities. In particular, CPOs of RICs with less than a three-year 
operating history will also have to provide disclosure regarding the 
past performance of all accounts and pools that are managed by the CPO 
and that have investment objectives, policies, and strategies 
substantially similar to those of the offered pool in accordance with 
SEC regulations and guidance. Additionally, CPOs of RICs will still be 
subject to Sec.  4.22(c) and (d), requiring the CPO of a RIC to submit 
to NFA a copy of the annual financial statements the RIC provides to 
the SEC. Finally, all CPOs that use a third-party provider to maintain 
books and records are required to submit a notice with NFA with the 
name of the third-party provider, among other details, to ensure that 
the Commission has full access to the books and records of the CPO.
    The Commission anticipates that CPOs of RICs will incur costs to 
disclose past performance information for substantially similar funds 
and accounts, if the fund has been in operation for less than three 
years. The ICI, in its estimates of costs and benefits, estimated that 
costs associated with prior performance disclosure for funds with less 
than a three year operating history would amount to 34 hours per fund 
at $265 per hour initially, and 25.5 hours per fund at $233 per hour 
each year in ongoing compliance requirements.\226\ The ICI's estimates 
are based on the requirement in the Proposal to include past 
performance information for all other funds operated by the sponsor of 
the fund with less than a three year operating history. As noted above, 
the Commission has altered this provision to require disclosure of only 
those pools and accounts that are managed by the CPO and that have 
investment objectives, policies, and strategies substantially similar 
to those of the offered pool with less than a three year operating 
history. In so doing, the Commission has significantly reduced the 
requirements regarding past performance disclosure. As such, the 
Commission believes it can reasonably reduce the number of hours 
required both initially and in ongoing compliance. The Commission 
anticipates initial and ongoing cost of approximately 15 hours per 
fund. The Commission anticipates that 368 sponsors will need to provide 
additional past performance disclosure for an average of 1 fund per 
sponsor at 15 hours per fund.\227\ Using ICI's hourly cost estimates, 
described above, the Commission estimates an initial annual cost of 
$4,000 per entity \228\ and an ongoing annual cost of $3,500 per 
entity.\229\ Across all affected entities, the Commission estimates an 
initial annual cost of $1,462,800 \230\ and an ongoing annual cost of 
$1,286,200.\231\
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    \226\ ICI Letter.
    \227\ Based on information provided by the ICI in its comment 
letter, of the 551 surveyed funds that would trigger registration of 
their advisor, 159 of those funds had less than three years 
operating history. This constitutes approximately 30 percent of the 
surveyed funds that would not be excluded under Sec.  4.5. The funds 
were operated by 29 of the 33 sponsors that expected to register, 
which constitutes 88 percent of the surveyed sponsors expecting to 
register. Applying these percentages to the Commission's estimated 
number of 1,266 pools and 418 sponsors, the Commission expects 
approximately 368 pool operators to be subject to the disclosure 
requirements for substantially similar accounts and funds with 
respect to 380 pools. With respect to the estimated hours required 
to prepare the past performance disclosure, the Commission has made 
an informed estimate premised upon the information provided by ICI 
and that it believes reflects the reduced disclosure obligations 
under the final rule as compared to the Proposal.
    \228\ The Commission calculates the amount as follows: (1 RIC 
per CPO) x (15 hours per RIC) x ($265 initial costs per hour) = 
$3,975.
    \229\ The Commission calculates the amount as follows: (1 RIC 
per CPO) x (15 hours per RIC) x ($233 ongoing costs per hour) = 
$3,495.
    \230\ The Commission calculates the amount as follows: ($3,975 
estimated initial cost per CPO) x (368 estimated number of CPOs of 
RICs with less than 3 years performance) = $1,462,800.
    \231\ The Commission calculates the amount as follows: ($3,495 
estimated ongoing cost per CPO) x (368 estimated number of CPOs of 
RICs with less than 3 years performance) = $1,286,160. This ongoing 
cost estimate assumes that all RICs with less than three years 
performance are newly formed and have no performance history. Many 
RICs subject to the disclosure requirement, however, may have 
operated for one or two years and thus incur a lower total cost. The 
Commission's estimate therefore may overstate the actual costs that 
past performance disclosure entails.

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[[Page 52332]]

    The Commission also anticipates that CPOs of registered investment 
companies will incur small costs for each fund due to the requirement 
that the CPO of each registered investment company must submit a copy 
of the fund's annual financial statements to the Commission via 
NFA.\232\ The Commission anticipates that the cost to submit each 
fund's financial statements to be relatively small because the 
Commission is requiring only a copy of the statements required to be 
submitted to the SEC under the SEC RIC Rules to be submitted to NFA. 
The Commission anticipates that the additional requirement imposed by 
the rule in Sec.  4.22 necessitates only addressing any potential 
formatting changes--i.e. making sure the document is in PDF form as 
required by NFA--and uploading the document via NFA's Easy File system 
(to which advisers should already have access by virtue of their 
registration). Thus, the Commission anticipates that CPOs of RICs will 
require no more than 2 hours per fund to comply with Sec.  4.22. The 
Commission estimates that each CPO has an average of 3 RICs. Thus, at a 
rate of $76.93 per hour,\233\ the Commission estimates an initial cost 
of approximately $500 \234\ and an annual ongoing cost of approximately 
$500.\235\ As described in the PRA section of this release, the 
Commission estimates that approximately 418 sponsors will register as a 
result of the amendments to Sec.  4.5.\236\ Using this figure, the 
Commission anticipates a total initial cost of $192,900 \237\ and an 
annual total ongoing cost of $192,900.\238\ The Commission believes 
this to be a conservative estimate, allowing for the maximum amount of 
time necessary to upload the fund's financial statements and submit 
them to NFA.
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    \232\ The Commission notes that all CPOs are required to submit 
an annual report to NFA. Though the reports filed with the SEC are 
public domain could be manually accessed by the Commission, the 
Commission believes that requiring a copy of said reports to be 
filed with NFA is a more efficient and expedient means of gathering 
required information. By having all CPO financial statements in one 
centralized database, the Commission will be better able to quickly 
and effectively access information about all CPOs trading in the 
markets overseen by the Commission, allowing for a faster and better 
informed response to any concerns that may arise regarding the 
trading of CPOs in derivatives markets.
    \233\ See, supra note 205.
    \234\ The Commission calculates the amount as follows: (6 hours 
per entity) x ($76.93 average salary cost per hour) = $461.58.
    \235\ The Commission calculates this amount as follows: (6 hours 
per entity) x ($76.93 average salary cost per hour) = $461.58.
    \236\ See supra note 206.
    \237\ The Commission calculates this amount as follows: ($461.58 
estimated initial cost per CPO) x (418 estimated number of CPOs of 
RICs) = $192,940.44.
    \238\ The Commission calculates this amount as follows: ($461.58 
estimated ongoing cost per CPO) x (418 estimated number of CPOs of 
RICs) = $192,940.44.
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    Finally, the Commission anticipates a small burden to be incurred 
by all CPOs, including registered investment companies required to be 
registered as CPOs under Sec.  4.5, that wish to keep their books and 
records with a third-party service provider. Under Sec. Sec.  4.23 and 
4.7(b)(4), such entities must file a notice with NFA to inform the 
Commission and NFA of the entity's intent to utilize a third-party 
service provider as well as the name and contact information of the 
third party. Because the Commission cannot be sure how many CPOs will 
use third-party service providers, the Commission estimates that all 
CPOs will take advantage of the amendments to the record-keeping 
requirements under Sec.  4.23 and Sec.  4.7.\239\ The Commission 
estimates that CPOs, including registered investment companies, will 
incur a one-time per-entity cost of $200.\240\ The Commission 
anticipates that most CPOs will take advantage of this provision, and 
thus estimates a one-time estimated cost of $627,700 for all CPOs.\241\
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    \239\ The Commission has previously estimated that each CPO that 
subject to Sec.  4.23 had costs associated with approximately 50 
hours associated with recordkeeping obligations and that each CPO 
subject to Sec.  4.7(b)(4) had costs associated with approximately 
40 hours associated with recordkeeping obligations. Because the 
Commission is estimating that all registered CPOs will use third-
party service providers for recordkeeping purposes, the Commission 
expects that costs associated with Sec. Sec.  4.7(b)(4) and 4.23 
will be reduced, although the reduction cannot be quantified at this 
time.
    \240\ The Commission calculates this amount as follows: (2 
estimated hours per notice) x ($76.93 estimated cost per hour) = 
$153.86.
    \241\ The Commission calculates this amount as follows: ($153.86 
estimated cost per notice) x (4,080 estimated total number of 
registered CPOs) = $627,748.80.
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    The Commission expects that all dually-registered entities will 
take advantage of the substituted compliance regime available under the 
final regulations. The Commission thus expects that the total initial 
costs associated with the final rules will be $5,100 per entity \242\ 
and $2,476,400 in the aggregate.\243\ Likewise, the Commission expects 
annual ongoing costs associated with the final rules to be $4,000 per 
entity \244\ and $1,479,100 in the aggregate.\245\
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    \242\ The Commission calculates the per-entity initial cost by 
summing the per-entity initial costs of the provisions described 
supra. Estimates may not sum to total due to rounding effects.
    Notice of Substituted Compliance, Sec.  4.12 = (3 pools per 
sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.
    Inclusion of Past Performance, Sec.  4.25 = (1 pool per sponsor) 
x (15 hours per pool) x ($265 per hour) = $3,975.00.
    Submission of Annual Report, Sec.  4.22(c) = (3 pools per 
sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.
    Notice of Third Party Record-keeper, Sec. Sec.  4.23, 4.7(b)(4) 
= (2 hours per sponsor) x ($76.93 per hour) = $153.86.
    Total per-entity initial cost = ($461.58) + ($3,975.00) + 
($461.58) + ($115.40) + ($153.86) = $5,061.02.
    See supra notes 207, 228, 234, and 240.
    \243\ The Commission calculates the aggregate initial cost by 
summing the aggregate initial costs of the provisions described 
supra. Estimates may not sum to total due to rounding effects.
    Notice of Substituted Compliance, Sec.  4.12 = (461.58 per 
sponsor) x (418 sponsors) = $192,940.44.
    Inclusion of Past Performance, Sec.  4.25 = ($3,975.00 per 
sponsor) x (368 sponsors) = $1,462,800.00.
    Submission of Annual Report, Sec.  4.22(c) = ($461.58 per 
sponsor) x (418 sponsors) = $192,940.44.
    Notice of Third Party Record-keeper, Sec. Sec.  4.23, 4.7(b)(4) 
= ($153.86 per operator) x (4,080 operators) = $627,748.80.
    Total aggregate initial cost = ($192,940.44) + ($1,462,800.00) + 
($192,940.44) + ($48,235.11) + ($627,748.80) = $2,476,429.68.
    See supra notes 208, 229, 237, and 241.
    \244\ The Commission calculates the per-entity ongoing cost by 
summing the per-entity ongoing costs of the provisions described 
supra. Estimates may not sum to total due to rounding effects.
    Inclusion of Past Performance, Sec.  4.25 = (1 pool per sponsor) 
x (15 hours per pool) x ($233 per hour) = $3,475.00.
    Submission of Annual Report, Sec.  4.22(c) = (3 pools per 
sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.
    Total per-entity ongoing cost = ($3,475.00) + ($461.58) = 
$3956.55.
    See supra notes 235 and 238.
    \245\ The Commission calculates the aggregate ongoing cost by 
summing the aggregate ongoing costs of the provisions described 
supra. Estimates may not sum to total due to rounding effects.
    Inclusion of Past Performance, Sec.  4.25 = ($3,475.00 per 
sponsor) x (368 sponsors) = $1,286,160.00.
    Submission of Annual Report, Sec.  4.22(c) = ($461.58 per 
sponsor) x (418 sponsors) = $192,940.44.
    Total aggregate ongoing cost = ($1,286,160.00) + ($192,940.44) = 
$1,479,100.44.
    See supra notes 235 and 242.
---------------------------------------------------------------------------

b. Section 15(a) Considerations
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
1. Protection of Market Participants and the Public
    The Commission believes the rules promulgated in this release 
protect market participants by mitigating the costs associated with 
compliance. The rules maintain the effectiveness of the consumer 
protections of the

[[Page 52333]]

Commission's regulatory regime while reducing costs for dually-
registered entities. Though some costs are anticipated as a result of 
the final rules in order to provide additional information beyond that 
required by the SEC, the Commission believes such costs are necessary 
because the information the Commission is requiring of CPOs of RICs 
should provide additional insight for potential investors in deciding 
whether to invest in a fund that commits more than a de minimis portion 
of its assets to derivative trading.
    In addition, the Commission believes the final rules provide a 
benefit to all CPOs by updating and modernizing certain provisions that 
may be outdated in the electronic age. CPOs will not be required to 
incur costs to comply with regulations that, in the absence of 
information to the contrary and in light of the Commission's current 
understanding, may not be necessary to ensure the effectiveness of the 
Commission's regulatory regime.
    Furthermore, by lessening the regulatory costs RICs face, 
shareholders of these vehicles should not see much of an increase in 
fees or a decrease in returns, protecting the viability of these 
vehicles that are utilized by millions of families for their investment 
needs.
2. Efficiency, Competitiveness, and Financial Integrity of Markets
    In light of the fact that these harmonizing regulations will not 
pose significant costs on CPOs of RICs, the Commission does not believe 
that these regulations will have a negative impact on the efficiency, 
competitiveness, or financial integrity of markets.
3. Price Discovery
    The Commission has not identified a specific effect on price 
discovery as a result of these harmonizing regulations.
4. Sound Risk Management
    The Commission has not identified a specific effect on sound risk 
management as a result of these harmonizing regulations.
5. Other Public Interest Considerations
    The Commission has not identified other public interest 
considerations related to the costs and benefits of these harmonizing 
regulations.

List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Commodity trading advisors, Consumer protection, Reporting and 
recordkeeping requirements.

    Accordingly, CFTC amends 17 CFR part 4 as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
1. Revise the authority citation for part 4 to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, 
and 23.

0
2. In Sec.  4.7, revise paragraph (b)(4) and add paragraph (b)(5) to 
read as follows:

Sec.  4.7  Exemption from certain part 4 requirements for commodity 
pool operators with respect to offerings to qualified eligible persons 
and for commodity trading advisors with respect to advising qualified 
eligible persons.

* * * * *
    (b) * * *
    (4) Recordkeeping relief. Exemption from the specific requirements 
of Sec.  4,23; Provided, That the commodity pool operator must maintain 
the reports referred to in paragraphs (b)(2) and (3) of this section 
and all books and records prepared in connection with his 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 Sec.  1.31.
    (5) If the pool operator does not maintain its books and records at 
its main business office, the pool operator shall:
    (i) At the time it registers with the Commission or delegates its 
recordkeeping obligations, whichever is later, file a statement that:
    (A) Identifies the name, main business address, and main business 
telephone number of the person(s) who will be keeping required books 
and records in lieu of the pool operator;
    (B) Sets forth the name and telephone number of a contact for each 
person who will be keeping required books and records in lieu of the 
pool operator;
    (C) Specifies, by reference to the respective paragraph of this 
section, the books and records that such person will be keeping; and
    (D) Contains representations from the pool operator that:
    (1) It will promptly amend the statement if the contact information 
or location of any of the books and records required to be kept by this 
section changes, by identifying in such amendment the new location and 
any other information that has changed;
    (2) It remains responsible for ensuring that all books and records 
required by this section are kept in accordance with Sec.  1.31;
    (3) Within 48 hours after a request by a representative of the 
Commission, it will obtain the original books and records from the 
location at which they are maintained, and provide them for inspection 
at the pool operator's main business office; Provided, however, that if 
the original books and records are permitted to be, and are maintained, 
at a location outside the United States, its territories or 
possessions, the pool operator will obtain and provide such original 
books and records for inspection at the pool operator's main business 
office within 72 hours of such a request; and
    (4) It will disclose in the pool's Disclosure Document the location 
of its books and records that are required under this section.
    (ii) The pool operator shall also file electronically with the 
National Futures Association a statement from each person who will be 
keeping required books and records in lieu of the pool operator wherein 
such person:
    (A) Acknowledges that the pool operator intends that the person 
keep and maintain required pool books and records;
    (B) Agrees to keep and maintain such records required in accordance 
with Sec.  1.31 of this chapter; and
    (C) Agrees to keep such required books and records open to 
inspection by any representative of the Commission, the National 
Futures Association, or the United States Department of Justice in 
accordance with Sec.  1.31 of this chapter.

0
3. In Sec.  4.12
0
a. Revise paragraphs (c)(1) and (2) introductory text;
0
b. Remove paragraph (c)(2)(iii);
0
c. Add paragraph (c)(3); and
0
d. Revise paragraphs (d)(1)(iii) and (iv).
    The revisions and addition read as follows:

Sec.  4.12  Exemption from provisions of part 4.

* * * * *
    (c) Exemption from Subpart B for certain commodity pool operators 
based on registration under the Securities Act of 1933 or the 
Investment Company Act

[[Page 52334]]

of 1940. (1) Eligibility. Subject to compliance with the provisions of 
paragraph (d) of this section, any person who is registered as a 
commodity pool operator, or has applied for such registration, may 
claim any or all of the relief available under paragraph (c)(2) of this 
section if, with respect to the pool for which it makes such claim:
    (i) The units of participation will be offered and sold pursuant to 
an effective registration statement under the Securities Act of 1933; 
or
    (ii) The pool is registered under the Investment Company Act of 
1940.
    (2) Relief available to pool operator claiming relief under 
paragraph (c)(1)(i). The commodity pool operator of a pool whose units 
of participation meet the criteria of paragraph (c)(1)(i) if this 
section may claim the following relief:
* * * * *
    (3) Relief available to pool operator claiming relief under 
paragraph (c)(1)(ii). The commodity pool operator of a pool whose units 
of participation meet the criteria of paragraph (c)(1)(ii) of this 
section may claim the following relief:
    (i) The pool operator of an offered pool will be exempt from the 
requirements of Sec. Sec.  4.21, 4.24, 4.25, and 4.26; Provided, that
    (A) The pool operator of an offered pool with less than a three-
year operating history discloses the performance of all accounts and 
pools that are managed by the pool operator and that have investment 
objectives, policies, and strategies substantially similar to those of 
the offered pool; and,
    (B) The disclosure provided with respect to the offered pool 
complies with the provisions of the Investment Company Act of 1940, the 
Securities Act of 1933, the Securities Exchange Act of 1934, the 
regulations promulgated thereunder, and any guidance issued by the 
Securities and Exchange Commission or any division thereof.
    (ii) Exemption from the Account Statement distribution requirement 
of Sec. Sec.  4.22(a) and (b); Provided, however, that the pool 
operator:
    (A) Causes the current net asset value per share to be available to 
participants;
    (B) Causes the pool to clearly disclose:
    (1) That the information will be readily accessible on an Internet 
Web site maintained by the pool operator or its designee or otherwise 
made available to participants and the means through which the 
information will be made available; and
    (2) The Internet address of such Web site, if applicable; and
    (iii) Exemption from the provisions of Sec.  4.23 that require that 
a pool operator's books and records be made available to participants 
for inspection and/or copying at the request of the participant.
    (d)(1) * * *
    (iii) Contain representations that:
    (A) The pool will be operated in compliance with paragraph 
(b)(1)(i) of this section and the pool operator will comply with the 
requirements of paragraph (b)(1)(ii) of this section;
    (B) The pool will be operated in compliance with paragraph (c)(1) 
of this section and the pool operator will comply with the requirements 
of paragraph (c)(2) of this section; or
    (C) The pool will be operated in compliance with paragraph (c)(1) 
of this section and the pool operator will comply with the requirements 
of paragraph (c)(3) of this section;
    (iv) Specify the relief sought under paragraph (b)(2), (c)(2), or 
(c)(3) of this section, as the case may be;
* * * * *

0
4. Add Sec.  4.17 to read as follows:

Sec.  4.17  Severability.

    If any provision of this part, or the application thereof to any 
person or circumstances, is held invalid, such invalidity shall not 
affect other provisions or application of such provision to other 
persons or circumstances which can be given effect without the invalid 
provision or application.

Sec.  4.21  [Amended]

0
5. Amend Sec.  4.21 by removing and reserving paragraph (b).

0
6. Amend Sec.  4.23 by revising the introductory text and paragraph 
(a)(4) and adding paragraph (c) to read as follows:

Sec.  4.23  Recordkeeping.

    Each commodity pool operator registered or required to be 
registered under the Act must make and keep the following books and 
records in an accurate, current and orderly manner. 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. All 
books and records shall be maintained in accordance with Sec.  1.31. 
All books and records required by this section except those required by 
paragraphs (a)(3), (a)(4), (b)(1), (b)(2) and (b)(3) must be made 
available to participants for inspection and copying during normal 
business hours. Upon request, copies must be sent by mail to any 
participant within five business days if reasonable reproduction and 
distribution costs are paid by the pool participant. If the books and 
records are maintained at the commodity pool operator's main business 
office that is outside the United States, its territories or 
possessions, then upon the request of a Commission representative, the 
pool operator must provide such books and records as requested at the 
place in the United States, its territories or possessions designated 
by the representative within 72 hours after the pool operator receives 
the request.
    (a) * * *
    (4) A subsidiary ledger or other equivalent record for each 
participant in the pool showing the participant's name and address and 
all funds, securities and other property that the pool received from or 
distributed to the participant. This requirement may be satisfied 
through a transfer agent's maintenance of records or through a list of 
relevant intermediaries where shares are held in an omnibus account or 
through intermediaries.
* * * * *
    (c) If the pool operator does not maintain its books and records at 
its main business office, the pool operator shall:
    (1) At the time it registers with the Commission or delegates its 
recordkeeping obligations, whichever is later, file a statement that:
    (i) Identifies the name, main business address, and main business 
telephone number of the person(s) who will be keeping required books 
and records in lieu of the pool operator;
    (ii) Sets forth the name and telephone number of a contact for each 
person who will be keeping required books and records in lieu of the 
pool operator;
    (iii) Specifies, by reference to the respective paragraph of this 
section, the books and records that such person will be keeping; and
    (iv) Contains representations from the pool operator that:
    (A) It will promptly amend the statement if the contact information 
or location of any of the books and records required to be kept by this 
section changes, by identifying in such amendment the new location and 
any other information that has changed;
    (B) It remains responsible for ensuring that all books and records 
required by this section are kept in accordance with Sec.  1.31;
    (C) Within 48 hours after a request by a representative of the 
Commission, it will obtain the original books and records from the 
location at which they are maintained, and provide them for inspection 
at the pool operator's main

[[Page 52335]]

business office; Provided, however, that if the original books and 
records are permitted to be, and are maintained, at a location outside 
the United States, its territories or possessions, the pool operator 
will obtain and provide such original books and records for inspection 
at the pool operator's main business office within 72 hours of such a 
request; and
    (D) It will disclose in the pool's Disclosure Document the location 
of its books and records that are required under this section.
    (2) The pool operator shall also file electronically with the 
National Futures Association a statement from each person who will be 
keeping required books and records in lieu of the pool operator wherein 
such person:
    (i) Acknowledges that the pool operator intends that the person 
keep and maintain required pool books and records;
    (ii) Agrees to keep and maintain such records required in 
accordance with Sec.  1.31 of this chapter; and
    (iii) Agrees to keep such required books and records open to 
inspection by any representative of the Commission or the United States 
Department of Justice in accordance with Sec.  1.31 of this chapter and 
to make such required books and records available to pool participants 
in accordance with this section.

0
7. Amend Sec.  4.26 by revising paragraph (a)(2) to read as follows:

Sec.  4.26  Use, amendment and filing of Disclosure Document.

    (a) * * *
    (2) No commodity pool operator may use a Disclosure Document or 
profile document dated more than twelve months prior to the date of its 
use.
* * * * *

0
8. Amend Sec.  4.36 by revising paragraph (b) to read as follows:

Sec.  4.36  Use, amendment and filing of Disclosure Document.

* * * * *
    (b) No commodity trading advisor may use a Disclosure Document 
dated more than twelve months prior to the date of its use.
* * * * *

    Issued in Washington, DC, on August 12, 2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.

Appendix to Final Rule on Harmonization of Compliance Obligations for 
Registered Investment Companies Required to Register as Commodity Pool 
Operators--Commission Voting Summary

    Note:  The following appendix will not appear in the Code of 
Federal Regulations

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton, 
O'Malia, and Wetjen voted in the affirmative.
[FR Doc. 2013-19894 Filed 8-21-13; 8:45 am]
BILLING CODE 6351-01-P
```