52308 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

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). 

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 

§ 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 § 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). 

9Pursuant to the terms of § 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). 

10 76 FR 7976 (Feb. 11, 2011). 

11See 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. 

counterparty,’’ as such term is used in 

§ 50.50(b), and for purposes of 

§ 50.50(b)(1)(iii)(A), the reporting 

counterparty, as determined pursuant to 

§ 45.8, shall report that an exemption is 

being elected in accordance with this 

section. 

Issued in Washington, DC, on August 13, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Note: The following appendix will not 

appear in the Code of Federal Regulations. 

Appendix to Clearing Exemption for 

Certain Swaps Entered Into by 

Cooperatives—Commission Voting 

Summary 

Appendix 1—Commission Voting Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton, O’Malia, and Wetjen 

voted in the affirmative. 

[FR Doc. 2013–19945 Filed 8–21–13; 8:45 am] 

BILLING CODE 6351–01–P 

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. 

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 §§ 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 § 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 § 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 § 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

In February 2012, the Commission 

adopted modifications to the exclusions 

from the definition of CPO that are 

delineated in § 4.5 (‘‘2012 Final Rule’’).6

Specifically, the Commission amended 

§ 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 § 4.10(d) of the 

Commission’s regulations and § 1a(11) 

of the CEA must register as such with 

the Commission.9

B. Harmonization Proposal 

In response to the Commission’s 

February 2011 proposal to amend the 

§ 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 


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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52309 

12 15 U.S.C. 77a, et seq. 

13 15 U.S.C. 78a, et seq. 

14The 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. 

15See 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 § 4.12 providing exemptive relief 

from §§ 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 thirdparty 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. 

16See, e.g., Comment letter from the Investment 

Company Institute (April 12, 2011) (ICI Letter). 

17See, e.g., Comment letter from the National 

Futures Association (April 12, 2011) (NFA Letter). 

18See Comment letter from Steben & Company, 

Inc. (April 25, 2012) (Steben letter). 

19 7 U.S.C. 6n(3) and (4). 

20See 2012 Final Rule, supra note 6, 77 FR at 

11252, 11255. The Commission exercised its 

authority under §§ 4 and 8a of the CEA, 7 U.S.C. 

6 and 12a, and § 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). 

21The 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)). 

22See 2012 Final Rule, supra note 6, 77 FR at 

11260 (‘‘Entities required to register due to the 

amendments to § 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.’’). 

23 77 FR 11345 (Feb. 24, 2012). 

24The Commission issued its proposal under the 

authority of §§ 4m, 4n, and 8a(5) of the CEA. 7 

U.S.C. 6m, 6n, and 12a(5). 

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

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 

§ 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

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 § 4.27. At the 

same time, consistent with the 

Commission’s authority under § 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

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

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 


tkelley on DSK3SPTVN1PROD with RULES2
52310 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

25See 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. 

26See, e.g., NFA Letter; Comment letter from 

Campbell & Company, Inc. (April 24, 2012) 

(Campbell Letter). 

27See, 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). 

28NFA Letter; Campbell Letter; Comment letter 

from the Managed Funds Association (April 24, 

2012) (MFA Letter). 

29 ICI Letter. 

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 §§ 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 § 4.26, and the oath or affirmation required by 

§ 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 §§ 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. 

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 § 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

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 


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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. 

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). 

33Chamber 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 § 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 § 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 § 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 § 4.5. 

On December 12, 2012, the U.S. District Court for 

the District of Columbia affirmed the 2012 Final 

Rule’s amendments to § 4.5 and adoption of § 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. 

36Comment letter from Katten Muchin Rosenman 

LLP (April 24, 2012) (Katten Letter). 

37SIMFA AMG Letter. 

38Fidelity Letter; NYCBA Letter; ICI Letter. 

39See, 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 

Continued 

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. 

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 §§ 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 § 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 § 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 thirdparty 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. 

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 § 4.5 and § 4.27.32

One commenter said the Proposal is 

unripe and should be withdrawn 

pending the judicial challenge of the 

§ 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 openended 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

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 § 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


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52312 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

https://ecf.dcd.uscourts.gov/cgi-bin/show_public_

doc?2012cv0612-42. 

40Section 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. 

41Section 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). 

42See, 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). 

43See, Securities Act Rule 285, 17 CFR 230.485. 

44AXA Letter; Steben Letter; IAA Letter. 

45NYCBA Letter SIFMA AMG Letter; AII Letter. 

46SIFMA AMG Letter. 

47 15 U.S.C. 77j–24. 

48 17 CFR 230.485. 

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, § 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 § 4.36(b). These provisions are 

designed to ensure that required 

disclosure materials remain current, 

complete, and accurate over time. 

Similarly, § 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

Additionally, § 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

In the Proposal, to facilitate 

compliance with part 4 requirements for 

CPOs of RICs, the Commission proposed 

amending § 4.26 and § 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 

§ 4.26(c), which governs the time period 

for correcting materially inaccurate or 

incomplete disclosure, and § 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 §§ 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 § 4.26(a)(1) on 

RICs’’ and does not ‘‘address the 

substantial costs these updates would 

impose.’’ 46

After careful consideration, the 

Commission has determined to adopt 

the amendment of §§ 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 §§ 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 § 4.26 and the updating process 

implemented by the SEC pursuant to 

§ 10(a)(3) of the Securities Act 47 and 

SEC Rule 485 48 thereunder. As noted 

above, § 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, § 10(a)(3) of the 

Securities Act and Securities Act Rule 

485 requires open-end RICs to amend 

their registration statements annually 


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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52313 

49SIFMA AMG Letter. 

50ABA Letter. 

51SIFMA AMG Letter. 

52AXA Letter; ABA Letter; Katten Letter; ICI 

Letter; SIFMA AMG Letter. 

53AXA Letter; ABA Letter; NYCBA Letter; ICI 

Letter; SIFMA AMG Letter. 

54AXA Letter; ICI Letter. 

55ABA Letter. 

56SIFMA AMG Letter. 

and provides four months after the end 

of the fiscal year to do so. 

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 § 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 § 4.26.49

Another commenter suggested that 

existing securities law obligations for 

RICs regarding material misstatements 

or omissions should satisfy § 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 § 4.26(a) and (c).51

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 

§ 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 § 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 § 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 

§ 4.26 were concerned that NFA’s 

review process (§ 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 

§ 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

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 §§ 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 § 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, § 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 


tkelley on DSK3SPTVN1PROD with RULES2
52314 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

57Securities Act § 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 § 10(a) of the Securities Act). Openend 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. 

58 Katten Letter; ABA Letter. 

59SIFMA AMG Letter. 

60AII Letter. 

61See, 17 CFR 230.498. 62 Id. 63See, 17 CFR 4.21 (requiring delivery of a 

Disclosure Document concurrent with the delivery 

of a subscription agreement to prospective 

participants). 

64The 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. 

65The 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. 

66 17 CFR 230.498. 

67SIFMA AMG Letter. 

68MFA Letter. 

69ABA Letter; Katten Letter; NYCBA Letter. 

70AXA Letter. 

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

The Commission proposed to modify 

§ 4.12(c) to allow the CPO of a RIC to 

claim relief from § 4.21. The proposed 

revisions to § 4.12(c) would enable 

CPOs of RICs to claim relief from § 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 § 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 § 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

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 § 4.12 

may harm investors by broadly 

disclosing a fund’s trading strategy.60

The Commission has determined to 

deem CPOs of RICs compliant with the 

provisions of § 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 § 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 § 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. 

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 openend 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 § 4.21. 

Additionally, for those funds that are 

organized as series entities with interseries 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. 

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 CFTCrequired 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 § 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

The Commission has determined to 

deem CPOs of RICs compliant with the 

provisions of §§ 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. 


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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52315 

71The 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. 

72Section 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). 

73The 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. 

74 ICI Letter. 

75ABA Letter; Dechert Letter; Fidelity Letter; AII 

Letter; SIFMA AMG Letter. 

76AXA Letter; ABA Letter; Dechert Letter; AII 

Letter. 

77Securities 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). 

80AXA Letter; ABA Letter; Dechert Letter; 

Fidelity Letter; AII Letter; NYCBA Letter; SIFMA 

AMG Letter. 

81AXA Letter; ABA Letter; Dechert Letter; 

NYCBA Letter; SIFMA AMG Letter; ICI Letter. 

82 Dechert Letter. 

83AXA Letter. 

84AXA Letter; Dechert Letter; SIFMA AMG 

Letter; comment letter from Invesco Advisers, Inc. 

(April 24, 2012) (Invesco Letter); ICI Letter. 

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 (§ 4.24(a)) to 

appear prominently on the cover page of 

the Disclosure Document.71

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 

§ 4.24(b)(1).72

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 

§ 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 SECrequired information in the RIC’s 

prospectus. 

One commenter claimed that the SEC 

must also grant relief to permit 

inclusion of the Cautionary Statement 

mandated in § 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

Other commenters objected to the 

disclosure statements, including the 

Cautionary Statement in § 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

With respect to the prescribed 

cautionary statement required under 

§ 4.24(a), the Commission finds that the 

statement as required by the SEC77

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: 

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 

§ 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. 

In addition, one commenter 

contended that because the risks 

described in § 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

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

The standard risk disclosure 

statement under § 4.24(b) sets forth 

standard disclosures of risks associated 

with the use of commodity interests, 

including generic discussions of 

liquidity, counterparty 


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85 17 CFR 4.24(b). 

86 15 U.S.C. 80a–22(e). 

87Because 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. 

89 ICI Letter. 90Letter 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. 

91Steben Letter. 

92AXA Letter; ABA Letter; Dechert Letter; ICI 

Letter; NYCBA Letter. 

93AXA Letter; ABA Letter; ICI Letter. 

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 § 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 § 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 § 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 

§ 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. 

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 

§ 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. 

The Commission believes that, 

although the CPOs of RICs may elect to 

comply with §§ 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 commodityinterest 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 § 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. 

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 breakeven table should be included in the 

prospectus of an investment company.91

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 breakeven point is necessary or why the fact 

that it does not assume a rate of return 


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94 Dechert Letter. 

95AXA Letter; NYCBA Letter. 

96 ICI Letter. 

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

98AXA Letter; ABA Letter; Dechert Letter; Katten 

Letter; IAA Letter; Fidelity Letter; NYCBA Letter; 

SIFMA AMG Letter. 

99AXA Letter; Dechert Letter; Katten Letter; 

SIFMA AMG Letter; ICI Letter. 

100 Dechert Letter; IAA Letter; Fidelity Letter; 

SIFMA AMG Letter; ABA Letter. 

101 Dechert Letter; Fidelity Letter. 

102ABA Letter; Katten Letter. 

103 Dechert Letter. 

104 ICI Letter. 

105Steben Letter. 

106NFA Letter, Campbell Letter. 

107SIFMA AMG Letter, Dechert Letter. 

108SIFMA AMG Letter. 

109 Dechert Letter. 

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

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, § 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 § 4.24(d)(5) of the 

Commission’s regulations contingent 

upon their compliance with the SEC RIC 

Rules. 

g. Past Performance Disclosure 

Section 4.24(n) requires CPOs to 

disclose past performance information 

in accordance with § 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 § 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

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

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

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

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 openended RICs, which are publiclyoffered.108 Another commenter stated 

that the measurement ‘‘is meaningless to 

fund investors, as subscriptions are 

frequently offset . . . by 

redemptions.’’ 109

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 SECreporting requirements to avoid 

duplicative and confusing information. 

For example, the commenter noted that 

past performance disclosures are 


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110 Id. 

111With 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. 

112 60 FR 38148 (July 25, 1995); see also 68 FR 

42964 (July 21, 2003). 

113See, 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). 

114See, the Commission’s discussion of costs and 

benefits, infra, regarding the costs associated with 

this disclosure requirement. 

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

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 § 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

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 § 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

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. 

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 § 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

Additionally, the Commission has 

determined to deem CPOs of RICs 

compliant with the remainder of § 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 

§ 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 


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115ABA Letter; Dechert Letter; Katten Letter; 

SIFMA AMG Letter. 

116ABA Letter. 

117 Dechert Letter. 

118See SEC form N–1A, item 21. 

119See 2012 Final Rule, supra note 6, 77 FR at 

11260. 

120See 2012 Final Rule, supra note 6, 77 FR 

11252 (Feb. 24, 2012) for a discussion of CFCs and 

their use by RICs. 

121NFA Letter. 

122Steben Letter. 

123SIFMA AMG Letter. 

124See 2012 Final Rule, supra note 6, 77 FR at 

11260. 

125See 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). 

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 

§ 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 § 4.24(i)(1), are 

predictive and could be misleading if 

projected expenses are more favorable 

than the actual expenses incurred.117

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 

§ 4.24(d)(5) of the Commission’s 

regulations, provided that they comply 

with the SEC’s required disclosures. 

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 § 4.5, may be required 

to register as CPOs with the 

Commission. 

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

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

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

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

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. 

C. Financial Reporting 

a. Periodic Financial Statements 

Section 4.22 requires that every CPO 

must periodically distribute to each 


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127 15 U.S.C. 80a–22; 17 CFR 270.2a–4; 17 CFR 

270.22c–1(a). 

128See 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). 

129AXA Letter; SIFMA AMG Letter; ICI Letter; 

ABA Letter. 

130NFA Letter; ABA Letter. 

131 Katten Letter. 

132NFA Letter; SIFMA AMG Letter. 

133 Katten Letter; NYCBA Letter. 

134SIFMA AMG Letter; NYCBA Letter; AXA 

Letter. 

135AII Letter. 

136MFA Letter. 

137 17 CFR 4.1(c). 

138MFA Letter; IAA Letter. 

139MFA Letter; IAA Letter; Dechert Letter; ICI 

Letter; SIFMA AMG Letter. 

140See, 17 CFR 270.31a–3 (person maintaining 

required records on behalf of a RIC must agree that 

records are the property of the RIC). 

participant in each pool that it operates 

an Account Statement in the form and 

with the content prescribed therein. 

Further, § 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 semiannual 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

The Commission proposed to exempt 

the CPO of any RIC from the 

distribution requirements of § 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 § 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 § 4.12(c) but 

requested a broader exemption from the 

requirements in § 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 

§ 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 § 4.22, making the CFTC’s 

requirement redundant.133

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 § 4.7 has to prepare and 

distribute quarterly statements from 30 

days to 45 days.136

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 § 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 § 4.22. 

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 § 4.23 to RICs. The relief 

in § 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

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 


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141Certain 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. 

142See 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. 

143ABA Letter. 

144 Katten Letter; ABA Letter; ICI Letter; AII 

Letter. 

145 Dechert Letter; Katten Letter; SIFMA AMG 

Letter. 

146NFA Letter. 

147MFA Letter; IAA Letter; SIFMA AMG Letter; 

Campbell Letter; Steben Letter. 

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 thirdparties with respect to the maintenance 

of books and records. 

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 nonpublic 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

Additionally, § 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. 

Commenters were concerned with the 

ledger requirement in § 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 § 4.23(a)(4). 

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 brokerdealer 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 § 4.23(a)(4). 

The Commission has also determined 

to amend § 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 § 4.12(c)(iii). Therefore, 

the Commission is adopting final 

amendments to § 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 SECregistered 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 

§ 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

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 

§ 4.12(c) to all publicly offered pools, 

regardless of whether such pools are 

traded on an exchange. 


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148See, e.g., 17 CFR 230.501 (‘‘Reg. D); 15 U.S.C. 

77d (‘‘Section 4(2)’’). 

149Commission 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). 

150SIFMA AMG Letter. 

151See supra footnote 149. 

152Comment letter from Managed Futures 

Association (July 17, 2012) (MFA II Letter). 

153See 2012 Final Rule, supra note 6, 77 FR 

11252 (Feb. 24, 2012); correction 77 FR 17328 

(March 26, 2012). 

154The 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. 

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

156See 2011 Investment Company Fact Book, 

Chap. 1 and Data Tables, Investment Company 

Institute (2011), available at http://

www.icifactbook.org/. 

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 

§ 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. 

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 § 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 § 4.7 or would 

have been exempt under rescinded 

§ 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

The Commission has determined to 

rescind the signed acknowledgement 

requirement under § 4.21(b) for all 

registered CPOs. Through its expansion 

of § 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 § 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 § 4.21(b) for all 

CPOs. 

One commenter requested that the 

Commission amend § 4.7(b) and 

§ 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. 

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 

§ 4.12, except for § 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 § 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 § 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 §§ 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. 

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 § 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. 

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 


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157 ICI Letter. 

158 Id. 

159 Id. 160Percentage obtained by dividing 551 by 4,188 

surveyed RICs. 161Total of non-surveyed RICs subject to 

registration obtained by multiplying 5552 nonsurveyed RICs by .13. 

162Total obtained by multiplying 9740 by .13. 

163 ICI Letter. 

164See 2012 Investment Company Fact Book at 

13, available at http://www.icifactbook.org/2012_

factbook.pdf. 

165See 2012 Final Rule, supra note 6, 77 FR at 

11272. 

166See 2012 Final Rule, supra note 6, 77 FR at 

11273. 

167See 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. 

response to the Commission’s proposed 

amendments to § 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 § 4.5 as 

amended. This constituted 

approximately 23% of the reported 

registered investment companies. 

The Commission then deducted the 

2,111 registered investment companies 

discussed in the ICI comment letter 

from the 9,719 entities comprising the 

universe of registered investment 

companies, and deducted the 13 

sponsors surveyed by the ICI from the 

universe of 669 fund sponsors to arrive 

at 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 § 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 § 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. 

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 nonsurveyed 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

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. 

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 § 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 § 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 § 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: 

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 § 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 § 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 § 4.5 and the estimates for this 

collection remain unchanged from the 

2012 Final Rule. 

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 


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52324 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

168See 2012 Final Rule, supra note 6, 77 FR at 

11272. 

169The Commission issued its proposal under the 

authority of §§ 4m, 4n, and 8a(5) of the CEA. 7 

U.S.C. 6m, 6n, and 12a(5). 

170See Proposal, supra note 23, 77 FR at 11349, 

finding that 416 entities would be required to 

register under amended § 4.5. 

171See 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. 

172The Commission rounded the average hours 

per response to the second decimal place for ease 

of presentation. 

173This 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 

§§ 4.26 and 4.36. 

174The Commission rounded the average hours 

per response to the second decimal place for ease 

of presentation. 

175See 7 U.S.C. 12. 

176See 5 U.S.C. 552a. 

177To facilitate compliance with part 4 

requirements for CPOs of RICs, the Commission 

amended § 4.26 and § 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. 

response hours for the rulemaking 

resulting from the amendments to 

§ 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: 

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: 

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

Annual reporting burden: 

276,540.3.173

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

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

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 § 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 §§ 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 §§ 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 


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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52325 

178Section 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 §§ 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; . . .’’ 

179 ICI Letter. 

180 ICI Letter. 

181The 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. 

182Section4.12(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. 

183See Items, 4, 9, and 16(b) of Form N–1A; and 

Item 8 and 17 of Form N–2. 

184Section 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. 

amendments to §§ 4.26 and 4.36 to be as 

follows: 

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 

§ 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. 

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 § 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. 

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: 

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 § 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: 

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

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 

§ 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 

§ 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 


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52326 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

185The Commission has previously estimated that 

each CPO that subject to § 4.23 had a burden of 

approximately 50 hours associated with 

recordkeeping obligations and that each CPO 

subject to § 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 

§§ 4.7(b)(4) and 4.23 will be reduced, although the 

reduction cannot be quantified at this time. 

186See 2012 Final Rule, supra note 6, 77 FR at 

11273. 

187See Proposal, supra note 23, 77 FR at 11349. 

188See 5 U.S.C. 601, et seq. 

189 47 FR 18618 (Apr. 30, 1982). 

190See 47 FR 18618, 18619 (Apr. 30, 1982). 

191See 47 FR at 18619–20. 

192See 47 FR at 18620. 

193 17 CFR 4.27. 

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: 

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 

§§ 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 § 4.5 and § 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 thirdparty service providers, the Commission 

estimates that all CPOs will take 

advantage of the amendments to the 

record-keeping requirements under 

§ 4.23 and § 4.7.185 With respect to the 

filing of the notice under revised § 4.23 

to permit the use of third-party 

recordkeepers, the Commission 

estimates the burden to be as follows: 

For CPOs of RICs subject to § 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 § 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 § 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 

§ 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. 

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

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 § 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 § 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. 

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 § 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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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52327 

194 7 U.S.C. 19(a). 

195 7 U.S.C. 19(a)(2). 

196The 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. 

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 § 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 

§ 4.5 retained this exclusion for RICs whose nonbona 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 nonbona 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). 

200Pursuant to the terms of § 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). 

201See 2012 Final Rule, supra note 6, 77 FR at 

11252, 11255. The Commission exercised its 

authority under § 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). 

202See, Proposal, supra note 23. 

203As 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 

Continued 

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

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 § 15(a) public 

interest considerations.196

1. Background 

In February 2012, the Commission 

adopted modifications to the exclusions 

from the definition of CPO that are 

delineated in § 4.5.197 Specifically, the 

Commission amended § 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 § 4.10(d) of the 

Commission’s regulations and § 1a(11) 

of the CEA must register as such with 

the Commission.200

In promulgating the revisions to § 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 § 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

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


tkelley on DSK3SPTVN1PROD with RULES2
52328 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

RICs will satisfy the obligations to provide periodic 

account statements pursuant to § 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. 204 7 U.S.C. 19(a)(2). 

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 §§ 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 § 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 § 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 §§ 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 

§§ 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 

§§ 4.23(c) and 4.7(b)(4). The 

Commission has also determined to 

rescind the signed acknowledgement 

requirement in § 4.21(b). Finally, the 

Commission has amended §§ 4.26(a)(2) 

and 4.36(b) to allow the use of 

Disclosure Documents for a twelvemonth 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

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 


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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52329 

205The 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. 206There currently is no source of reliable 

information regarding the general use of derivatives 

Continued 

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 § 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 §§ 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 § 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 § 4.26 for CPOs and § 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 

§ 4.26 and § 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 §§ 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 §§ 4.21, 

4.22(a) and (b), 4.23, 4.24, 4.25, and 4.26 

under the amendments to § 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 


tkelley on DSK3SPTVN1PROD with RULES2
52330 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

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 § 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 § 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. 

207The Commission calculates this amount as 

follows: (3 pools per sponsor) × (2 hours per pool) 

× ($76.93 per hour) = $461.58. 

208The Commission calculates this amount as 

follows: ($461.58 per sponsor) × (418 sponsors) = 

$192,940.44. 

209The Commission also received several 

comments regarding the costs of the amendments to 

§ 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 

§ 4.5 in the rules adopting such amendments and 

such comments are outside the scope of this 

rulemaking. 

210See, ICI Letter; Dechert Letter; Katten Letter; 

NYCBA Letter; ABA Letter; Fidelity Letter; AII 

letter; Invesco Letter; SIFMA AMG Letter; AXA 

Letter. 

211See, e.g., ICI Letter; SIFMA AMG Letter. 

212 Katten Letter; Dechert Letter; Fidelity Letter; 

NYCBA Letter. 

213ABA Letter; Dechert Letter; Invesco Letter; 

Katten Letter; SIFMA AMG Letter; AXA Letter: AII 

Letter. 

214See, 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 § 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 

§ 4.25 as follows: (18 hours per fund for initial 

compliance) × ($227 per initial compliance hour) = 

$4,086 per fund. ICI also calculated the ongoing 

costs of prior performance disclosure required for 

all funds under § 4.25 as follows: (9.5 hours per 

fund for ongoing compliance) × ($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) × (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) × (551 surveyed funds) = $1,177,800. 

With respect to the preparation of account 

statements under § 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) × ($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) × (551 surveyed 

funds) = $3,957,300. 

ICI calculated the costs for each fund associated 

with preparing and distributing account statements 

per § 4.22(a) and (b) as follows: (5.75 hours per 

fund) × ($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) × (551 

surveyed funds) × (12 monthly statements) = 

$4,653,800. 

In total, for all § 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) × 

($215 per hour) × (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) × ($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) × (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) × ($195 per hour) = 

$3,022.50 per fund. ICI calculated the aggregate 

ongoing cost for all surveyed funds as follows: (551 

surveyed funds) × ($3,022.50 cost per fund) = 

$1,665,400. 

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. 

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

In adopting a broad substituted 

compliance regime wherein CPOs of 

RICs will be deemed compliant with 

§§ 4.21, 4.22(a) and (b), 4.23, 4.24, 4.25, 

and 4.26 under the amendments to 

§ 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 § 4.24; (2) performance disclosure 

requirements under § 4.25; and (3) 

financial reporting requirements under 

§ 4.22(a) and (b).215 ICI also provided 

estimated costs associated with revising 

registration statements to include CFTCrequired disclosures under the Proposal 

and costs associated with filing 

prospectuses with NFA.216

The final rules provide in § 4.12(c) 

that CPOs of RICs may take advantage 

of the Commission’s substituted 

compliance provisions for all 

requirements under §§ 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 

§§ 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 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52331 

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. 

221NYCBA Letter; Dechert Letter; AXA Letter; 

ABA Letter; SIFMA AMG Letter. 

222SIFMA AMG Letter. 

223 Id. 

224 Id. 

225 Id. 226 ICI Letter. 

227Based 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 § 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. 

228The Commission calculates the amount as 

follows: (1 RIC per CPO) × (15 hours per RIC) × 

($265 initial costs per hour) = $3,975. 

229The Commission calculates the amount as 

follows: (1 RIC per CPO) × (15 hours per RIC) × 

($233 ongoing costs per hour) = $3,495. 

230The Commission calculates the amount as 

follows: ($3,975 estimated initial cost per CPO) × 

(368 estimated number of CPOs of RICs with less 

than 3 years performance) = $1,462,800. 

231The Commission calculates the amount as 

follows: ($3,495 estimated ongoing cost per CPO) × 

(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 

Continued 

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

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

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 

§§ 4.21, 4.22(a) and (b), 4.23, 4.24, 4.25, 

and 4.26 under the amendments to 

§ 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 § 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


tkelley on DSK3SPTVN1PROD with RULES2
52332 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

a lower total cost. The Commission’s estimate 

therefore may overstate the actual costs that past 

performance disclosure entails. 

232The 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. 

233See, supra note 205. 

234The Commission calculates the amount as 

follows: (6 hours per entity) × ($76.93 average salary 

cost per hour) = $461.58. 

235The Commission calculates this amount as 

follows: (6 hours per entity) × ($76.93 average salary 

cost per hour) = $461.58. 

236See supra note 206. 

237The Commission calculates this amount as 

follows: ($461.58 estimated initial cost per CPO) × 

(418 estimated number of CPOs of RICs) = 

$192,940.44. 

238The Commission calculates this amount as 

follows: ($461.58 estimated ongoing cost per CPO) 

× (418 estimated number of CPOs of RICs) = 

$192,940.44. 

239The Commission has previously estimated that 

each CPO that subject to § 4.23 had costs associated 

with approximately 50 hours associated with 

recordkeeping obligations and that each CPO 

subject to § 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 thirdparty service providers for recordkeeping purposes, 

the Commission expects that costs associated with 

§§ 4.7(b)(4) and 4.23 will be reduced, although the 

reduction cannot be quantified at this time. 

240The Commission calculates this amount as 

follows: (2 estimated hours per notice) × ($76.93 

estimated cost per hour) = $153.86. 

241The Commission calculates this amount as 

follows: ($153.86 estimated cost per notice) × (4,080 

estimated total number of registered CPOs) = 

$627,748.80. 

242The 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, § 4.12 = (3 

pools per sponsor) × (2 hours per pool) × ($76.93 

per hour) = $461.58. 

Inclusion of Past Performance, § 4.25 = (1 pool 

per sponsor) × (15 hours per pool) × ($265 per hour) 

= $3,975.00. 

Submission of Annual Report, § 4.22(c) = (3 pools 

per sponsor) × (2 hours per pool) × ($76.93 per 

hour) = $461.58. 

Notice of Third Party Record-keeper, §§ 4.23, 

4.7(b)(4) = (2 hours per sponsor) × ($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. 

243The 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, § 4.12 = 

(461.58 per sponsor) × (418 sponsors) = 

$192,940.44. 

Inclusion of Past Performance, § 4.25 = ($3,975.00 

per sponsor) × (368 sponsors) = $1,462,800.00. 

Submission of Annual Report, § 4.22(c) = 

($461.58 per sponsor) × (418 sponsors) = 

$192,940.44. 

Notice of Third Party Record-keeper, §§ 4.23, 

4.7(b)(4) = ($153.86 per operator) × (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. 

244The 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, § 4.25 = (1 pool 

per sponsor) × (15 hours per pool) × ($233 per hour) 

= $3,475.00. 

Submission of Annual Report, § 4.22(c) = (3 pools 

per sponsor) × (2 hours per pool) × ($76.93 per 

hour) = $461.58. 

Total per-entity ongoing cost = ($3,475.00) + 

($461.58) = $3956.55. 

See supra notes 235 and 238. 

245The 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, § 4.25 = ($3,475.00 

per sponsor) × (368 sponsors) = $1,286,160.00. 

Submission of Annual Report, § 4.22(c) = 

($461.58 per sponsor) × (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. 

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 

§ 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 § 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 

§ 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. 

Finally, the Commission anticipates a 

small burden to be incurred by all CPOs, 

including registered investment 

companies required to be registered as 

CPOs under § 4.5, that wish to keep 

their books and records with a thirdparty service provider. Under §§ 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 

§ 4.23 and § 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 onetime estimated cost of $627,700 for all 

CPOs.241

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

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 


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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 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 

■ 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. 

■ 2. In § 4.7, revise paragraph (b)(4) and 

add paragraph (b)(5) to read as follows: 

§ 4.7 Exemption from certain part 4 

requirements for commodity pool operators 

with respect to offerings to qualified eligible 

persons and for commodity trading 

advisors with respect to advising qualified 

eligible persons. 

* * * * * 

(b) * * * 

(4) Recordkeeping relief. Exemption 

from the specific requirements of § 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 § 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 

§ 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 

§ 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 § 1.31 of this chapter. 

■ 3. In § 4.12 

■ a. Revise paragraphs (c)(1) and (2) 

introductory text; 

■ b. Remove paragraph (c)(2)(iii); 

■ c. Add paragraph (c)(3); and 

■ d. Revise paragraphs (d)(1)(iii) and 

(iv). 

The revisions and addition read as 

follows: 

§ 4.12 Exemption from provisions of part 

4. 

* * * * * 

(c) Exemption from Subpart B for 

certain commodity pool operators based 

on registration under the Securities Act 

of 1933 or the Investment Company Act 


tkelley on DSK3SPTVN1PROD with RULES2
52334 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

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 §§ 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 

§§ 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 

§ 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; 

* * * * * 

■ 4. Add § 4.17 to read as follows: 

§ 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. 

§ 4.21 [Amended] 

■ 5. Amend § 4.21 by removing and 

reserving paragraph (b). 

■ 6. Amend § 4.23 by revising the 

introductory text and paragraph (a)(4) 

and adding paragraph (c) to read as 

follows: 

§ 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 

§ 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 

§ 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 


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Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 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 

§ 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 § 1.31 of this chapter 

and to make such required books and 

records available to pool participants in 

accordance with this section. 

■ 7. Amend § 4.26 by revising paragraph 

(a)(2) to read as follows: 

§ 4.26 Use, amendment and filing of 

Disclosure Document. 

(a) * * * 

(2) No commodity pool operator may 

use a Disclosure Document or profile 

document dated more than twelve 

months prior to the date of its use. 

* * * * * 

■ 8. Amend § 4.36 by revising paragraph 

(b) to read as follows: 

§ 4.36 Use, amendment and filing of 

Disclosure Document. 

* * * * * 

(b) No commodity trading advisor 

may use a Disclosure Document dated 

more than twelve months prior to the 

date of its use. 

* * * * * 

Issued in Washington, DC, on 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 


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