```

[Federal Register: March 17, 2003 (Volume 68, Number 51)]
[Proposed Rules]
[Page 12622-12639]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17mr03-25]

=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AB97


Additional Registration and Other Regulatory Relief for Commodity
Pool Operators and Commodity Trading Advisors

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing to amend Rule 4.5, which provides an exclusion from the
definition of the term "commodity pool operator" (CPO) for certain
persons, and Rules 4.13 and 4.14, which provide exemption from CPO and
commodity trading advisor (CTA) registration, respectively, for certain
other persons, so as to expand the availability of the relief provided
by these rules. The Commission also is proposing rule amendments to
facilitate communications by CPOs and CTAs, including proposals that
would: (1) Permit certain communications prior to Disclosure Document
distribution; (2) relieve CPOs from duplicative disclosure and
reporting requirements in the "master/feeder fund" context; (3)
establish criteria for CPOs to distribute periodic Account Statements
electronically; and (4) harmonize the various signature requirements of
Part 4. Further, the Commission is affirming, with certain
modifications, the no-action relief it previously has issued with
respect to the trading criteria of Rule 4.5 for certain persons and the
need to register as a CPO or CTA for certain other persons.

DATES: Comments must be received by May 1, 2003.

ADDRESSES: Comments on the proposed rules should be sent to Jean A.
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be
sent by facsimile transmission to (202) 418-5528, or by email to
[email protected]. Reference should be made to "Proposed Rules for
CPO and CTA Registration and Other Regulatory Relief."

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,
or Christopher W. Cummings, Special Counsel, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, 1155 21st
Street, NW., Washington, DC 20581, telephone number: (202) 418-5450 or
(202) 418-5445, respectively; facsimile number: (202) 418-5536, or
(202) 418-5547, respectively; and electronic mail: [email protected] or
[email protected], respectively.


SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Statutory and Regulatory Authorities
    B. The Prior Rule 4.5 Proposal
    C. The Advance Notice of Proposed Rulemaking (ANPR)
    D. Roundtable on CPO and CTA Issues
II. Comments on the Prior Rulemaking Activities
    A. Comments on the Prior Rule 4.5 Proposal
    B. Comments on the ANPR
III. The Proposals
    A. Proposed Amendment to Rule 4.5: Deleting Trading Criteria for
Exclusion from the CPO Definition
    B. Proposed Amendments to Rule 4.13: Expanding and Adding CPO
Registration Exemptions
    1. Proposed Amendments to Rule 4.13(a)(2): Expanding the current
exemption
    2. Proposed Rule 4.13(a)(3): Adding a limited trading exemption
    3. Proposed Rule 4.13(a)(4): Adding an exemption where pool
participants meet specified sophistication criteria
    4. Additional provisions under Rule 4.13
    5. Alternative proposal for relief
    C. Proposed Amendments to Rule 4.14: Expanding and Adding CTA
Registration Exemptions
    1. Proposed Amendments to Rule 4.14(a)(8)
    a. Exemption for state-registered investment advisers (IAs)
    b. Exemption where advice is provided to foreign funds
    c. Exemption where advice is to Rule 4.13(a)(3) and 4.13(a)(4)
pools
    2. Proposed Rule 4.14(a)(10): Counting Legal Organizations as a
Single "Person"
    D. Proposed Amendments to Rules 4.21, 4.22 and 4.31
    1. Permitting communications prior to Disclosure Document
distribution
    2. Removing duplicative requirements in the "master/feeder
fund" context
    3. Distributing Account Statements electronically
    4. Providing facsimile signatures on Account Statements and
Annual Reports
    5. Conforming signature requirements

[[Page 12623]]

IV. Temporary No-Action Relief
    A. Temporary No-Action Relief for Rule 4.5 Eligible Persons
    B. CPO and CTA Temporary Registration No-Action Relief
    1. Relief for CPOs
    a. In General
    b. CPOs who operate "Funds-of-Funds"
    2. Relief for CTAs
    3. Claim of Registration No-Action Relief
    4. One-Way Disclosure by CPOs and CTAs
    5. Effect of Filing a Claim of No-Action Relief
    a. For CPOs
    b. For CTAs
    C. Other Matters
    1. Effect of Final Rulemaking on No-Action Relief
    2. Continued Availability of No-Action Relief from Commission
Staff
V. Other Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Analysis

I. Background

A. Statutory and Regulatory Authorities

    Section 1a(5) of the Commodity Exchange Act (Act) defines the term
"commodity pool operator" to mean:

[A]ny person engaged in a business that is of the nature of an
investment trust, syndicate, or similar form of enterprise, and who,
in connection therewith, solicits, accepts, or receives from others,
funds, securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market or
derivatives transaction execution facility, * * *.\1\

    \1\ 7 U.S.C. 1a(g) (2000). Section 1a(5) also provides the
Commission with authority to exclude persons from the CPO
definition.
    Commission Rule 4.10(d)(1) correspondingly defines the term
"pool" to mean "any investment trust, syndicate or similar form
of enterprise operated for the purpose of trading commodity
interests." Unless otherwise noted, Commission rules cited to
herein are found at 17 CFR Ch. I (2000). Both the Act and the
Commission's rules issued thereunder can be accessed through the
Commission's Web site: http://www.cftc.gov/LawRegulation/index.htm.
    CFTC Staff Letters from 1995 on can be accessed through the
Commission's Web site http://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.


    Section 4m(1) of the Act \2\ provides, in relevant part, that it is
unlawful for any CPO, "unless registered under [the] Act, to make use
of the mails or any means or instrumentality of interstate commerce"
in connection with its business as a CPO. Thus, except for the narrow
exceptions currently provided in Rules 4.5 and 4.13, the operator of a
collective investment vehicle that trades commodity interest contracts,
whether for bona fide hedging purposes \3\ or otherwise, must be
registered with the CFTC as a CPO.\4\
---------------------------------------------------------------------------

    \2\ 7 U.S.C. 6m(1) (2000).
    \3\ The Commission's definition of bona fide hedging is set
forth in Rule 1.3(z).
    \4\ Rule 4.5 provides an exclusion from the CPO definition for
certain otherwise regulated "eligible persons" with respect to
their operation of certain "qualifying entities," as those terms
are defined in the rule, so long as they restrict the extent of
their non-hedging activity in commodity interests as prescribed by
the rule. As is discussed below, the Commission proposed to amend
Rule 4.5, and by this Federal Register release is proposing further
amendment of Rule 4.5.
    Rule 4.13 provides an exemption from CPO registration for the
operators of essentially "family, club or small pools," as those
pools are described in the rule. See 44 FR 1918, 1919 (Jan. 8,
1979). As is discussed below, the Commission also is proposing to
amend Rule 4.13.
---------------------------------------------------------------------------

    Section 1a(6)(A) of the Act defines the term "commodity trading
advisor" to mean any person who:

    (i) For compensation or profit, engages in the business of
advising others, either directly or through publications, writings
or electronic media, as to the value or the advisability of trading
in--
    (I) Any contract of sale of a commodity for future delivery made
or to be made on or subject to the rules of a contract market or
derivatives transaction execution facility;
    (II) Any commodity option authorized under section 4c; or
    (III) Any leverage transaction authorized under section 19; or
    (ii) For compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning any
of the activities referred to in clause (i).\5\
---------------------------------------------------------------------------

    \5\ 7 U.S.C. 1a(6)(A) (2000).

    Section 1a(6) also excludes certain persons not at issue here from
the CTA definition, and provides the Commission with authority to
exclude additional persons from that definition.
Section 4m(1) of the Act also requires CTAs to register as such with
the Commission and, along with Section 4m(3) and Rule 4.14, provides
exemption from CTA registration.\6\
---------------------------------------------------------------------------

    \6\ As is discussed below, the Commission similarly is also
proposing to amend Rule 4.14.
---------------------------------------------------------------------------

    If a person is exempt from registration as a CPO or CTA, its
associated persons (APs) are not required to register as such. Further,
neither the exempt CPO or CTA, nor any of its APs, is required to
become a member of a registered futures association.
    Generally, CPOs and CTAs who are, or who are required to be,
registered with the Commission, must provide prospective pool
participants or advisory clients, as the case may be, with a Disclosure
Document containing specified information \7\--e.g., the business
background of the CPO or CTA and its principals, past performance, fees
and other expenses, and conflicts of interest--and they must make and
keep specified books and records.\8\ These CPOs also must provide
unaudited periodic financial reports and certified annual reports to
participants in their pools.\9\ Additionally, regardless of
registration status, all persons who come within the CPO or CTA
definition are subject to certain operational \10\ and advertising
requirements \11\ under Part 4, to all other provisions of the Act and
the Commission's rules prohibiting fraud that apply to CPOs and CTAs,
and to all other relevant provisions of the Act and the Commission's
rules that apply to all commodity interest market participants, such as
the prohibitions on manipulation and the trade reporting requirements.
---------------------------------------------------------------------------

    \7\ Rule 4.21 for CPOs and Rule 4.31 for CTAs.
    \8\ Rule 4.23 for CPOs and Rule 4.33 for CTAs.
    \9\ Rule 4.22
    \10\ Rule 4.20 for CPOs and Rule 4.30 for CTAs.
    \11\ Rule 4.41.
    While Rules 4.7 and 4.12(b) provide relief for certain
registered CPOs from the Disclosure Document, periodic and annual
reporting, and recordkeeping requirements of Rules 4.21, 4.22, and
4.23, they do not affect the applicability of Rules 4.20 and 4.41 to
these CPOs. Similarly, CTAs who have claimed relief under Rule 4.7
continue to remain subject to Rules 4.30a nd 4.41.
---------------------------------------------------------------------------

B. The Prior Rule 4.5 Proposal

    Rule 4.5 makes available to certain persons (eligible persons) an
exclusion from the definition of CPO with respect to their operation of
certain entities (qualifying entities) that would otherwise be treated
as commodity pools under the Act, but that are already subject to
extensive operating requirements of another federal or state
regulator.\12\ These eligible persons and their qualifying entities
include: (1) Investment companies registered as such under the
Investment Company Act of 1940 (ICA); (2) state-regulated insurance
companies with respect to their operation of insurance company separate
accounts; (3) state-or federally-regulated financial depository
institutions with respect to their operation of separate units of
investment; and (4) trustees, named fiduciaries and certain designated
fiduciaries of or employers maintaining pension plans subject to Title
I of the Employee Retirement Income Security Act of 1974 with respect
to the operation of such plans.\13\ In order to claim exclusion from
the CPO definition under Rule 4.5, an eligible person must file a
Notice of Eligibility with the National Futures Association (NFA) \14\
and the Commission.\15\ The Notice must

[[Page 12624]]

contain specified representations about how the person will operate the
qualifying entity, including, as is discussed below, a requirement to
restrict the amount of the entity's commodity interest trading with
respect to its non-hedging activity.
---------------------------------------------------------------------------

    \12\ See, generally, 50 FR 15868 (Apr. 23, 1985) for background
information on Rule 4.5.
    \13\ Rules 4.5(a) and (b).
    \14\ NFA is a futures association registered as such with the
Commission under section 17 of the Act, 7 U.S.C. 21 (2000).
    \15\ Rule 4.5(c).
    Additionally, Rule 4.5 provides that certain pension plans are
not commodity pools. Because this exclusion is self-executing, no
notice must be filed to claim it. Accordingly, the amendment to Rule
4.5(c) that the Commission is today proposing does not apply to
these plans or their operation. See Rule 4.5(a)(4)(i)-(iv).
---------------------------------------------------------------------------

    Based upon its staff's experience in administering Rule 4.5, the
Commission has made various revisions to the rule subsequent to the
rule's initial adoption. These revisions have expanded the range of
persons eligible to claim relief under the rule \16\ and the trading
strategies that may be undertaken in accordance with the rule.\17\
Based upon staff's most recent experience with Rule 4.5, the Commission
published for public comment a proposed revision to the non-hedge
operating criteria and, in connection therewith, the Commission issued
temporary no-action relief (Prior Rule 4.5 Proposal).\18\ Based upon
further consideration, and in connection with the CPO registration
exemptions it is proposing below, by this Federal Register release the
Commission is withdrawing the Prior Rule 4.5 Proposal and, in lieu
thereof, is proposing another amendment to Rule 4.5. Pending the
conclusion of the instant rulemaking, the no-action position the
Commission issued in connection with the Prior Rule 4.5 Proposal will,
subject to clarification as discussed below in Section IV of this
release, remain in effect.
---------------------------------------------------------------------------

    \16\ See 58 FR 43791 (Aug. 18, 1993). The Commission also has
expanded the class of persons who are "non-pools" under Rule 4.5.
See 65 FR 24127 (Apr. 25, 2000).
    \17\ See 58 FR (Jan. 28, 1993). The original limitation of the
rule encompassed all commodity interest trading. Currently,
unlimited hedging may be engaged in under the rule, while non-
hedging activity remains limited.
    \18\ 67 FR 65743 (Oct. 28, 2002). Both the Prior Rule 4.5
Proposal and the comment letters the Commission received thereon may
be accused through http://www.cftc.gov/foia/fedreg02/foifedreg02.htm#SECTIONA

C. The Advance Notice of Proposed Rulemaking (ANPR)

    To address certain market developments and changed circumstances
applicable to persons who do not qualify for an exclusion from the CPO
definition under Rule 4.5 or an exemption from CPO or CTA registration
under the existing statutory and regulatory framework, the Commission
issued the ANPR.\19\ As the Commission stated:
---------------------------------------------------------------------------

    \19\ 67 FR 68785 (Nov. 13, 2002). Both the ANPR and the comment
letters the Commission received thereon may be accessed through:
http://www.cftc.gov/foia/fedreg02/foifedreg02.htm#SECTIONA.

    When the Commission adopted Rule 4.13, there were fewer than a
dozen designated commodity interest contracts based on stock
indices, interest rates or other financial instruments. Since 1979,
however, the Commission has designated, and trading has commenced
in, more than 180 commodity interest contracts based on various
financial instruments. These contracts frequently have attracted the
interest of operators of collective investment vehicles, some of
whom have registered with the Commission as CPOs so that they can
use commodity interest contracts in their investment and risk
management strategies. Others, however, have avoided participation
in the commodity interest markets. While Rules 4.5 and 4.13 do
provide CPO registration relief, their criteria are too restrictive
for many operators of collective investment vehicles to meet.
    Over time, persons who traditionally gave advice to collective
investment vehicles solely on securities trading have become
interested in providing trading advice to collective investment
vehicles on commodity interest contracts based on various financial
instruments as well. Absent the availability of an exemption, these
persons have had to either register with the Commission as CTAs or
refrain from providing any such commodity interest advice. 67 FR
68785, 68786.

    By the ANPR, the Commission published for public comment two
proposals it had received that would provide additional exemptions from
CPO registration (one of these also would provide an additional
exemption from CTA registration). These proposals were submitted by NFA
and the Managed Funds Association (MFA).\20\ NFA proposed: (1) An
exemption from CPO registration where the operator restricts its pool's
non-hedge commodity interest positions to a limited amount of pool
assets (i.e., it may commit no more than 5 percent of the pool's
liquidation value to establish such positions), and restricts its
pool's participants to "accredited investors" as defined in Rule
501(a) \21\ under the Securities Act of 1933 (Securities Act); \22\ and
(2) an exemption from CTA registration for those persons that advise
pools operated by CPOs that have claimed either an exemption from
registration under the proposed NFA rule or an exclusion from the CPO
definition under Rule 4.5 (NFA Proposal). MFA proposed an exemption
from CPO registration for pool operators that restrict participation in
their pools to certain "qualified eligible persons" (QEPs) as defined
in Rule 4.7 and certain "accredited investors" (MFA Proposal). By the
ANPR the Commission also issued temporary registration no-action relief
for certain CPOs and CTAs.\23\
---------------------------------------------------------------------------

    \20\ MFA is a non-profit membership organization for investment
professionals in the hedge fund, futures and alternative investments
industries.
    \21\ 17 CFR 230.501(a)(2002).
    \22\ 15 U.S.C. 77a et seq. (2002).
    \23\ See 67 FR 68786, 68788-89.
---------------------------------------------------------------------------

    Based upon the comments received on the ANPR,\24\ and as a result
of its own further consideration, the Commission is proposing herein
CPO and CTA registration exemptions based on the NFA and MFA Proposals.
Pending the conclusion of this rulemaking, the CPO and CTA registration
no-action relief that the Commission issued in connection with its
publication of the ANPR will, subject to modification and clarification
as discussed below, remain in effect.
---------------------------------------------------------------------------

    \24\ Section II of the Federal Register release discusses the
comments the Commission received on the ANPR, as well as the
comments the Commission received on the Prior Rule 4.5 Proposal.
---------------------------------------------------------------------------

D. Roundtable on CPO and CTA Issues (Roundtable)

    Section 125 of the Commodity Futures Modernization Act of 2000
(CFMA) \25\ required the Commission to "conduct a study of the [Act]
and the Commission's rules, regulations and orders governing the
conduct of persons required to be registered under the Act." Pursuant
to this directive, the Commission conducted such a study, and in June
2002, issued its findings in a "Report on the Study of the Commodity
Exchange Act and the Commission's Rules and Orders Governing the
Conduct of Registrants under the Act (Report)." \26\ In September
2002, the Commission held a "Roundtable on CPO and CTA Issues" to
address, among others, issues identified in the Report relating to
overlapping regulatory jurisdiction faced by members of the managed
funds industry.\27\ As a result of the testimony provided at the
Roundtable, and also based on prior staff activity in this area, by
this Federal Register release the Commission is proposing additional
regulatory relief for CPOs and CTAs. This relief would: (1) Permit
certain communications by CPOs and CTAs with prospective and existing
pool participants and advisory clients prior to Disclosure Document
distribution; (2) relieve CPOs from duplicative disclosure and
reporting requirements in the "master/feeder fund" context; (3)
establish criteria for CPOs to distribute

[[Page 12625]]

periodic Account Statements electronically; and (4) harmonize the
various signature requirements of Part 4. Each of the proposals is
discussed below.
---------------------------------------------------------------------------

    \25\ Pub. L. No. 106-554, Appendix E, Sec.  125, 114 Stat.
2763A-365 (2000).
    \26\ The Report may be accessed through http://www.cftc.gov/files/opa/opaintermediarystudy.pdf.
    \27\ Comments received in connection with the Roundtable may be
accessed through http://www.cftc.gov/opa/press02/opa4700-02.htm.


II. Comments on the Prior Rulemaking Activities

A. Comments on the Prior Rule 4.5 Proposal

    The Commission received five comment letters in response to the
Prior Rule 4.5 Proposal.\28\ All of the commenters supported the
proposed amendment, with various commenters stating that it would
provide increased trading flexibility under Rule 4.5 in general and
accommodate security futures products in particular. Commenters did,
however, request certain clarifications of the terms and application of
the non-hedge tests employed in the Prior Rule 4.5 Proposal--e.g.,
suggesting that "aggregate notional value" be determined on a net
basis and that, at all times, qualifying entities should be able to
satisfy one test or the other. As is discussed below in this Federal
Register release, the Commission has taken these requests for
clarification into account in both the rules it is proposing and the
no-action positions it is maintaining.
---------------------------------------------------------------------------

    \28\ Letters were submitted by: a registered futures
association; an investment company trade association; a bar
association; a contract market; and an investment adviser.
    One commenter suggestsed that the Commission adopt specified
additional categories of eligible persons and non-pools under Rule
4.5. This suggestion is, however, outside the scope of this proposed
rulemaking. The Commission nonetheless intends to consider it in the
future.
---------------------------------------------------------------------------

B. Comments on the ANPR

    The Commission received twenty-three comment letters in response to
the ANPR.\29\ All of these commenters similarly encouraged Commission
efforts to expand registration exemptions for CPOs and CTAs. While
commenters generally supported both the NFA and MFA Proposals, several
specifically urged adoption of the MFA Proposal, stating that it would
bring more participants into the commodity interest markets.
Additionally, one commenter suggested that the Commission adopt
registration exemptions based on the temporary registration no-action
relief issued in connection with the ANPR, and several commenters
suggested that the Commission adopt the NFA Proposal, the MFA Proposal
and the temporary registration no-action relief. Commenters offered
various recommendations as to CPO and CTA registration exemption rules
the Commission should adopt in furtherance of the ANPR. In particular,
commenters requested clarification of the application of exemptive
relief in the fund-of-funds context. The Commission similarly has taken
these comments into account in the proposals it is making below.
---------------------------------------------------------------------------

    \29\ Letters were submitted by: a registered futures
association; two futures industry trade associations; four hedge
funds and their managers; one exempt CPO; one national securities
exchange; two contract markets; seven law firms; two attorneys; two
bar associations; and one certified public accounting firm.
---------------------------------------------------------------------------

III. The Proposals

    The relief the Commission is proposing today is consistent with the
purpose and intent of the CFMA, and with the input the Commission has
received in connection with its prior initiatives (i.e., the Prior Rule
4.5 Proposal, the ANPR, and the Roundtable). Accordingly, it is
intended to allow greater flexibility and innovation, and to take into
account market developments and the current investment environment, by
modernizing the requirements for determining who should be excluded
from the CPO definition, and who should remain within the CPO and CTA
definitions but be exempt from registration. Thus, this relief is
intended to encourage and facilitate participation in the commodity
interest markets by additional collective investment vehicles and their
advisers, with the added benefit to all market participants of
increased liquidity.

A. Proposed Amendment to Rule 4.5: Deleting Trading Criteria for
Exclusion From the CPO Definition

    Currently, Rule 4.5(c)(2)(i) provides that the Notice of
Eligibility must contain a representation that the eligible person will
operate the qualifying entity such that the entity:

Will use commodity futures or commodity options contracts solely for
bona fide hedging purposes within the meaning and intent of [Rule]
1.3(z)(1); Provided, however, That in addition, with respect to
positions in commodity futures or commodity option contracts which
do not come within the meaning and intent of [Rule] 1.3(z)(1), a
qualifying entity may represent that the aggregate initial margin
and premiums required to establish such positions will not exceed
five percent of the liquidation value of the qualifying entity's
portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; And,
Provided further, That in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount as defined in
[Rule] 190.01(x) may be excluded in computing such 5 percent.

    This representation has come to be known as the "Five Percent
Test."
    Because futures margins have generally been set at levels near or
below 5 percent of contract value, the Five Percent Test has permitted
the notional value of non-hedging commodity futures and option
positions to approximate the liquidation value of an entity's
portfolio. Recently, however, eligible persons and qualifying entities
have expressed concern to Commission staff over the Five Percent Test,
because margin levels for certain stock index futures have come to
significantly exceed 5 percent of contract value, thereby limiting the
use of such contracts in non-hedging strategies to a much greater
extent than other types of contracts with lower margins. They also have
expressed concern that a similar constraint could arise with respect to
security futures contracts, because the required margin for security
futures is 20 percent of contract value.\30\ In response to these
concerns, the Commission proposed to amend Rule 4.5 by adding as an
alternative to the Five Percent Test a limitation based on the notional
value of non-hedge positions, i.e., that:
---------------------------------------------------------------------------

    \30\ See CFTC Rule 41.45(b)(1) and Securities and Exchange
Commission (SEC) Rule 242.403(b)(1), 67 FR 53146, 53174 and 53179,
respectively (Aug. 14, 2002).

the aggregate notional value of [non-hedge commodity interest]
positions does not exceed the liquidation value of the qualifying
entity's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into. For
[this purpose], the term "notional value" shall be calculated for
each such futures position by multiplying the size of the contract,
in contract units, by the current market price per unit and for each
such option position by multiplying the size of the contract, in
contract units, by the strike price per unit.\31\
---------------------------------------------------------------------------

    \31\ 67 FR 65743, 65746.

    However, by this Federal Register release and in furtherance of the
ANPR, the Commission is proposing to provide an additional exemption
from CPO registration relief based solely on pool participant
sophistication, without any requirement that the pool operator must be
subject to another regulatory scheme and without any restriction
whatsoever on the purpose or scope of the pool's commodity interest
trading.\32\ Since the eligible persons and qualifying entities of Rule
4.5 are, as stated in the title of the rule, "otherwise regulated,"
the Commission believes that, like the unregulated CPOs for whom it is
proposing relief below, these persons

[[Page 12626]]

and entities may not need to be subject to any commodity interest
trading criteria to qualify for relief under Rule 4.5. The Commission
further believes that the absence of such criteria may render obsolete
the current disclosure requirement in Rule 4.5(c)(2)(iii).
---------------------------------------------------------------------------

    \32\ The Commission is proposing this relief, which is based on
the MFA Proposal, in new Rule 4.13(a)(4), discussed below.
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing to delete paragraphs
(c)(2)(i) and (c)(2)(iii) from Rule 4.5. This would result in
paragraphs (c)(2)(ii) and (c)(2)(iv) of the rule, which concern the
other representations that the Notice of Eligibility must contain,
being redesignated as paragraphs (c)(2)(i) and (c)(2)(ii),
respectively. Thus, the Rule 4.5 operating criteria would continue to
include: (1) A prohibition against marketing a qualifying entity as a
commodity pool or otherwise as a vehicle to trade commodity interests;
and (2) a requirement to submit to special calls to demonstrate
compliance with eligibility for relief under Rule 4.5. The Commission
believes it is appropriate to maintain the marketing restriction
because, unlike the case with the proposed CPO registration exemption,
members of the retail public may participate in the trading vehicles
subject to Rule 4.5. The Commission nonetheless requests comment on the
merits of maintaining current Rule 4.5(c)(2)(ii) (which would be
redesignated as Rule 4.5(c)(2)(i)).

B. Proposed Amendments to Rule 4.13: Expanding and Adding CPO
Registration Exemptions

1. Proposed Amendments to Rule 4.13(a)(2): Expanding the Current
Exemption
    Rule 4.13(a)(2) currently provides that a person is exempt from
registration as a CPO if:

    (2)(i) The total gross capital contributions it receives for
units of participation in all of the pools that it operates or that
it intends to operate do not in the aggregate exceed $200,000; and
    (ii) None of the pools operated by it has more than 15
participants at any time. For purposes of computing the number of
participants for paragraph (a)(2)(ii) of this section, the following
participants shall be excluded:
    (A) The pool's operator, commodity trading advisor, and the
principals thereof; and
    (B) Any relative, spouse or relative of such spouse living in
the same household as such participant.

    The Commission adopted the exemptive criteria of Rule 4.13(a)(2) in
1981.\33\ In light of the rate of inflation in the more than twenty
years since that time and Commission staff's experience in
administering Rule 4.13(a)(2), the Commission is proposing various
amendments that will update and clarify the rule, making it available
to more persons.
---------------------------------------------------------------------------

    \33\ See 46 FR 26004, 26006 (May 8, 1981).
---------------------------------------------------------------------------

    First, the Commission is proposing to increase the total of the
gross capital contributions criterion under Rule 4.13(a)(2) to $400,000
from $200,000.\34\ This proposed amount ($400,000) reflects adjustments
to the current amount ($200,000) based on the Consumer Price Index
published by the Bureau of Labor Statistics of the United States
Department of Labor.\35\
---------------------------------------------------------------------------

    \34\ One of the commenters on the ANPR suggested a similar
increase.
    \35\ See  href="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://data.bls.gov/cgi-bin/cpicalc.pl" shape="rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://data.bls.gov/cgi-bin/cpicalc.pl, where the "CPI
Inflation Calculator" made available on that page (for values less
than $10,000) determines that $2,000 in 1981 has the same buying
power as $3958.20 in 2002.
---------------------------------------------------------------------------

    Second, the Commission is proposing to expand the range of
participants excluded from the "no more than 15 participants"
limitation of the rule and to clarify that the contributions of these
participants do not count toward the capital contributions limit of the
rule.\36\ This clarification would require a reorganization of Rule
4.13(a)(2) such that, as proposed, the rule would provide that a person
is exempt from CPO registration if:

    \36\ See CFTC Staff Letter 99-41 (Aug. 27, 1999), where, in
permitting a CPO to exlcude the contributions of itself and its
spouse in determining whether the contribution limit (of $200,000)
of Rule 4.13(a)(2) has been met, Commission staff explained:
    Paragraph (a)(2)(i) of Rule 4.13 does not address whether the
gross capital contributions to a pool by its operator or advisor
should be excluded from the $200,000 limit in the rule, even though
a pool's operator, advisor, and the principals thereof specifically
are excluded from the "no more than fifteen participants" limit in
paragraph (a)(2)(ii) of the rule. That paragraph provides that for
the purposes of computing the number of participants allowable in a
pool for which the operator thereof seeks to claim an exemption from
registration under Rule 4.13(a)(2), the pool's operator, advisor and
their principals are excluded. This provision was patterned after
Rule 501(e)(1)(i) under the Securities Act of 1933 (`the '33 Act'),
which provides that for the purposes of computing the number of non-
accredited purchasers allowed to participate in an exempt offering
under Rule 506 under the '33 Act, `the following purchasers shall be
excluded: any relative, spouse or relative of the spouse of a
purchaser who has the same principal residence as the purchaser.'
Since Rule 506 provides an exemption from the registration of
securities otherwise required under the '33 Act for limited offers
and sales without regard to the dollar amount of the offering, the
exemptive rules under the '33 Act need not, and do not, make any
mention of excluding the capital contributions of persons who are
excluded from the computation of non-accredited purchasers.
(Footnotes omitted).

    (2)(i) None of the pools operated by it has more than 15
participants at any time; and
    (ii) The total gross capital contributions it receives for units
of participation in all of the pools it operates or that it intends
to operate do not in the aggregate exceed $400,000.
    (iii) For the purposes of determining eligibility for exemption
under paragraph (a)(2) of this section, the person may exclude the
following participants and their contributions:
    (A) The pool's operator, commodity trading advisor, and the
principals thereof;
    (B) A child, sibling or parent of any of these persons;
    (C) The spouse of any person specified in paragraph
(a)(2)(iii)(A) or (B) of this section; and
    (D) Any relative of a person specified in paragraph
(a)(2)(iii)(A), (B) or (C) of this section, its spouse or a relative
of its spouse, who has the same principal residence as such person.

2. Proposed Rule 4.13(a)(3): Adding a Limited Trading Exemption
    Proposed Rule 4.13(a)(3) is based on the NFA Proposal and also on
the Commission's Prior Rule 4.5 Proposal. It would provide an exemption
from CPO registration where the pool a person operates engages in a
limited amount of commodity interest trading--i.e., by committing a
limited amount of the liquidation value of the pool's portfolio to
establish commodity interest trading positions, whether entered into
for bona fide hedging purposes or otherwise, or where the aggregate net
notional value of the pool's commodity interest trading does not exceed
fifty percent of the pool's liquidation value. The Commission's
proposal does, however, differ from the NFA Proposal in certain
respects. It would limit the amount that could be committed to
establish commodity interest positions to two percent of the
liquidation value of a pool's portfolio, whereas the NFA Proposal would
establish a five percent limit. The Commission believes that the lower
amount it is proposing may be more appropriate than the NFA amount
because it is closer to the "de minimis" level of commodity interest
trading that the rule is intended to encompass, and, further, because
the level of investor qualification proposed under the rule--i.e., that
of an "accredited investor"--is not a particularly high threshold to
meet.\37\ Moreover, the rule would provide, through its alternative
test, another means for CPOs to come within

[[Page 12627]]

its exemptive criteria.\38\ The Commission also believes that, unlike
the NFA Proposal, Rule 4.13(a)(3) should not differentiate between
trading for bona fide hedging and non-hedging purposes, because, as
stated above, the rule is intended to apply to de minimis situations,
where commodity interest trading--regardless of its purpose--is
strictly limited. The Commission notes that two commenters on the ANPR
suggested that the Commission should not distinguish between hedge and
non-hedging positions, claiming that such distinctions between these
two types of trading are difficult to administer. However, one
commenter specifically suggested that the Commission should distinguish
between hedge and non-hedge activity in setting a de minimis standard.
Accordingly, the Commission specifically requests comments on whether
under the rule there should be: (1) A higher percentage of assets that
may be committed to establish commodity interest positions; and (2) any
greater ability to trade commodity interests for bona fide hedging
purposes than for non-hedging purposes, including whether there should
be any restriction whatsoever on trading for hedging purposes. To
assist persons in providing such comments, set forth below is a chart
with examples of the application of the various tests under the NFA's
and the Commission's proposals, with "LV" standing for the pool's
liquidation value and "NT" standing for the notional test.
---------------------------------------------------------------------------

    \37\ Rule 501(a) under the Securities Act defines a natural
person "accredited investor" as:
    (5) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his purchase exceeds
$1,000,000; [or]
    (6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years
and has a reasonable expectation of reaching the same income level
in the current year.
    The chart below illustrates that a significant number of
commodity interest contracts could be established under the proposed
"Two Percent Test."
    \38\ The Commission has patterned this alternative test on the
temporary registration no-action relief it issued for CPOs and CTAs
in the ANPR, which in turn the Commission had based on the Prior
Rule 4.5 Proposal.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Initial
                      Contracts                         LV  ($)     50% LV     5% LV      2% LV    Margin  9/   Settlement       Contract      Contracts    Contracts    Contracts    Contracts
                                                                     ($)        ($)        ($)     26/02 ($)  level  9/25/02    Value  ($)      5%  Test     2% Test         NT       50% LV NT
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S&P..................................................        10m         5m    500,000    200,000     17,813          819.29      204,822.50           28           11           48           24
T-Note...............................................        10m         5m    500,000    200,000      1,755      114,160.00      114,160.00          284          113           87           43
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    In response to comments, the Commission is clarifying in Proposed
Rule 4.13(a)(3)(i) that the pool may at any time meet either of these
tests; compliance with the criteria of a test is determined at the time
the most recent position is established; the criterion of paragraph
(a)(3)(i)(B) applies on a net basis; and the calculation of "notional
value" under paragraph (a)(3)(i)(B) now includes the number of futures
and options contracts and any multiplier specified in those
contracts.\39\ While the Commission believes either criterion is an
appropriate limited trading standard, it nonetheless specifically
requests comment on the proposed "Two Percent Test."
---------------------------------------------------------------------------

    \39\ The Commission also is making these clarifications in the
temporary no-action relief it is maintaining below.
---------------------------------------------------------------------------

    As with the NFA Proposal, this new rule would require that each
participant in the pool is an "accredited investor" and would require
a person claiming relief thereunder to "not market participations in
the pool as or in a vehicle for trading in the commodity futures or
commodity options markets." In response to comments on the ANPR, the
Commission is further clarifying in Proposed Rule 4.13(a)(3) that a CPO
claiming relief thereunder could also operate certain other pools--
i.e., the pools meeting the criteria of Rule 4.13(a)(4), discussed
below--without voiding the availability of the relief under either
rule.\40\
---------------------------------------------------------------------------

    \40\ This provision, and the reciprocal provision of Rule
4.13(a)(4), do not include persons and pools meeting the criteria of
Rule 4.13(a)(1) or 4.13(a)(2). This is because Rule 4.13(a)(1) is
available where, among other things, only one pool is being operated
and Rule 4.13(a)(2) would take the operations of such pools into
account in computing whether the contribution and participant
limitations of the rule had been met.
---------------------------------------------------------------------------

3. Proposed Rule 4.13(a)(4): Adding an Exemption Where Pool
Participants Meet Specified Sophistication Criteria
    Proposed Rule 4.13(a)(4) is based on the MFA Proposal. It provides
that a person is exempt from CPO registration if interests in the pool
for which it seeks to claim relief (1) are exempt from registration
under the Securities Act of 1933, and (2) are offered and sold without
marketing in the United States (U.S.). In addition, the CPO must
reasonably believe that: (1) Natural person participants are
"qualified eligible persons [QEPs]," as that term is defined in Rule
4.7(a)(2);\41\ and (2) non-natural person participants are QEPs under
Rule 4.7 or "accredited investors." While the MFA Proposal would
include any natural person who is a QEP under Rule 4.7, the Commission
does not believe that proposed Rule 4.13(a)(4) needs to be so broad in
light of both the absence of any trading limitations therein and the
other, alternative criteria being proposed in Rule 4.13(a)(3). Thus,
the Commission believes that the Rule 4.7(a)(2) standards for natural
persons--e.g., persons who are "qualified purchasers" under Section
2(a)(51)(A) of the ICA \42\--may be more appropriate for the rule. The
Commission nonetheless specifically requests comment on what investor
qualifications would be appropriate under Rule 4.13(a)(4) and whether
all natural person QEPs should be included for purposes of proposed
Rule 4.13(a)(4).
---------------------------------------------------------------------------

    \41\ Specifically, natural persons who come within the MFA
Proposal but not proposed Rule 4.14(a)(4) include persons who are
"accredited investors" and who meet the Portfolio Requirement of
Rule 4.7(a)(1)(v), in that they own securities having an aggregate
market value of at least $2,000,000, have futures margin and option
premiums on deposit of at least $200,000, or own a portfolio with a
proportionate combination of these two types of assets.
    \42\ 15 U.S.C. 80a-2(a)(51)(A) (2000), which defines a natural
person "qualified purchaser" as:
    (i) any natural person (including any person who holds a joint,
community property, or other similar shared ownership interest in an
issuer that is excepted under section 80a-3(c)(7) of this title with
that person's qualified purchaser spouse) who owns not less than
$5,000,000 in investments, as defined by the [SEC]; or
    (iv) any person, acting for its own account or the accounts of
other qualified purchasers, who in the aggregate owns and invests on
a discretionary basis, not less than $25,000,000 in investments.
    Rule 2a51-1(b) under the ICA defines "investments" generally
to include (when held for investment purposes, as defined in the
rule): securities; real estate; commodity interests; physical
commodities; and cash and cash equivalents. Pursuant to ICA Rule
2a51-1(e), the amount of outstanding indebtedness incurred to
acquire investments must be deducted from the amount of owned and
invested investments when determining if the person is a "qualified
purchaser."
---------------------------------------------------------------------------

    Here, too, and in response to the comments received on the ANPR,
Rule 4.13(a)(4) would make clear that a CPO claiming relief thereunder
could also operate pools meeting the criteria of Rule 4.13(a)(3)
without voiding the availability of the relief under either rule.
4. Additional Provisions Under Rule 4.13
    Under the proposed amendments, Rule 4.13 would also contain
introductory text and certain additional provisions, which would be
based on the provisions of the existing rule, the NFA Proposal, the MFA
Proposal and the comments on the ANPR. Generally speaking, these
provisions concern: certain disclosures that a CPO who has claimed
relief under the rule must make

[[Page 12628]]

to prospective participants (proposed paragraph (a)(5)); the notice of
registration exemption that the CPO would be required to file (proposed
paragraph (b)); \43\ the CPO's obligations with respect to books and
records, special calls, annual reports, and monthly statements \44\
(proposed paragraph (c)); the CPO's obligations in the event it
subsequently applies for registration (proposed paragraph (d)); \45\
and the effect of registration on a CPO who: (1) Is eligible for
exemption under Rule 4.13 but registers as a CPO nonetheless (proposed
paragraph (e)(1)); or (2) operates one or more pools for which it is
required to register, and is registered, as a CPO and one or more pools
for which it is eligible to claim an exemption from registration under
Rule 4.13(a)(3) or 4.13(a)(4) (proposed paragraph (e)(2)).\46\
---------------------------------------------------------------------------

    \43\ In addition to current requirements, the CPO would be
required to provide its main facsimile number and main email
address.
    \44\ Consistent with current Rule 4.13, the requirement to
furnish monthly statements would be applicable solely to CPOs
claiming relief under paragraph (a)(1) or (a)(2) of the rule.
    \45\ Also consistent with the current provisions of Rule 4.13,
the obligation to file an annual report for its pool in the event
the CPO subsequently applies for registration would be applicable to
CPOs claiming relief under paragraph (a)(1) or (a)(2) of the rule.
This obligation would not also be applicable to CPOs claiming relief
under paragraph (a)(3) or (a)(4) of the rule, because the pool's
annual report would not provide information sufficient to determine
whether or not the CPO had been in compliance with the applicable
criteria (i.e., trading limitations and/or investor qualifications)
throughout the pool's fiscal year.
    \46\ For the reasons provided above in its discussions of
proposed paragraphs (a)(3) and (a)(4), the Commission has not
included CPOs eligible for relief under paragraph (a)(1) or (a)(2)
in proposed paragraph (e)(2).
---------------------------------------------------------------------------

5. Alternative Proposal for Relief
    As an alternative to the foregoing proposals for certain CPOs, and
the following proposals for certain CTAs, the Commission seeks comment
on adoption of a notice registration scheme. The notice registration
approach would be identical to the proposed exemption approach with
respect to information required to be filed with the Commission and
compliance with Part 4 requirements. Specifically, the Commission seeks
comment on whether a notice registration scheme could make it more
clear to the public and other regulatory authorities that this group of
CPOs and CTAs remains subject to the CFTC's jurisdiction under the CEA,
the Bank Secrecy Act and other statutes, while providing the same
amount of regulatory relief as the proposed exemption.

C. Proposed Amendments to Rule 4.14: Expanding and Adding CTA
Registration Exemptions

1. Proposed Amendments to Rule 4.14(a)(8)
a. Exemption for State-Registered Investment Advisers (IAs)
    Currently, Rule 4.14(a)(8) provides an exemption from CTA
registration for certain IAs registered as such, or excluded from such
registration, under the Investment Advisers Act of 1940 (IAA) \47\ who
provide commodity interest trading advice to Rule 4.5 trading vehicles
and who meet certain other criteria-- e.g., they do not otherwise hold
themselves out as a CTA.
    When the Commission adopted Rule 4.14(a)(8) in 1987,\48\ absent the
availability of an exemption, an IA was required to be registered under
the IAA to be eligible for the CTA registration exemption provided by
the rule. As a result of the National Securities Markets Improvement
Act of 1996 \49\ and SEC rules issued thereunder, IAs may not register
with the SEC unless they have $25 million under management; \50\ IAs
who do not meet this criterion must register with state regulatory
authorities.\51\ To update Rule 4.14(a)(8), and in response to
Roundtable comments, the Commission is proposing to amend the rule so
as to make it equally available to SEC-registered or excluded-from-
registration IAs and state-registered IAs (proposed Rule
4.14(a)(8)(i)). Further, to conform the rule with the changes the
Commission is proposing to make to Rule 4.5, as are discussed above
(e.g., deletion of the existing limitation on non-hedge commodity
interest trading), the Commission is proposing to delete from Rule
4.14(a)(8) the current requirement that the IA's commodity interest
advice "[e]mploys only such strategies as are consistent with
eligibility status under Sec.  4.5."
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 80b-1 et. seq. (2000).
    \48\ See 52 FR 41975 (Nov. 2, 1987).
    \49\ Pub L. No. 104-290, 110 Stat. 3416 (1996).
    \50\ SEC Rule 275.203A-1, 17 CFR 275.203A-1 (2002), provides
that an IA is not required to register with the SEC unless it has at
least $30 million in assets under management, but may register with
the; SEC if if has between $25 million and $30 million in assets
under management.
    \51\ 17 CFR 275.203A-1 (2002).
---------------------------------------------------------------------------

b. Exemption Where Advice Is Provided to Foreign Funds
    Also in response to Roundtable comments, and to acknowledge and
codify Commission staff's activity in this area,\52\ the Commission is
proposing relief from CTA registration for those IAs who provide
commodity interest trading advice to commodity pools organized and
operated outside of the U.S., its territories and possessions that meet
certain criteria--for example, only non-U.S. persons may be pool
participants, except for the pool's operator, advisor and their
principals. (Proposed Rule 4.14(a)(8)(i)(C)(2)).
---------------------------------------------------------------------------

    \52\ See e.g., CFTC Staff Letter No. 00-96 (Oct. 4, 200).
---------------------------------------------------------------------------

c. Exemption Where Advice Is Provided to Rule 4.13(a)(3) and 4.13(a)(4)
Pools
    Further, and based on the NFA Proposal, the Commission is proposing
CTA registration relief for advisors to commodity pools that meet the
requirements of the new exemptions being proposed based upon
participant sophistication or trading limitations. (Proposed Rule
4.14(a)(8)(i)(D)). In response to the comments on the ANPR, the
Commission also has included a proviso in this proposal to make clear
that a person may claim relief from CTA registration if it also advises
the other trading vehicles specified in the rule--e.g., qualifying
entities under Rule 4.5. (Proposed Rule 4.14(a)(8)(i)(A)).
    The foregoing relief would remain subject to compliance with the
existing criteria of Rule 4.14(a)(8)--i.e., that the person provides
commodity interest trading advice solely incidental to its business of
providing securities or other investment advice to the trading vehicles
specified in the rule and that it is not otherwise holding itself out
as a CTA. (Proposed Rules 4.14(a)(8)(ii)(A) and (B)).
    Several commenters on the registration no-action relief issued
through the ANPR noted that, like the NFA Proposal, it only provided
relief in the context of pools. They claimed that CTA registration
relief should be available with respect to accounts that meet the
criteria of Rule 4.14(a)(3) or 4.14(a)(4)--regardless of the form of
the account (i.e., collective trading vehicle or individual account).
In response, the Commission notes that because of the intermediation of
these collective trading vehicles by CPOs to whom the Commission is
herein proposing registration relief, it is appropriate to so restrict
CTA registration relief. The Commission further notes the expanded
availability of the relief from CTA registration in Section 4m(1) of
the Act that it is proposing below.
2. Proposed Rule 4.14(a)(10): Counting Legal Organizations as a Single
"Person'
    Section 4m(1) of the Act provides an exemption from CTA
registration for any person:

who, during the course of the preceding twelve months, has not
furnished commodity

[[Page 12629]]

trading advice to more than fifteen persons and who does not hold
himself out generally to the public as a commodity trading advisor.

Where the "person" is a legal entity, the CFTC has "looked through"
the entity and counted its owners for the purpose of determining
whether the "not more than fifteen persons" criterion has been met.
    Congress patterned Section 4m(1) after Section 203(b)(3) of the
IAA,\53\ which provides an exemption from IA registration for any IA:
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 80b-3(b)(3) (2002).

who, during the course of the preceding twelve months has had fewer
than fifteen clients and who neither holds himself out generally to
the public as an investment adviser nor acts as an investment
---------------------------------------------------------------------------
adviser to [certain trading vehicles].

However, by Rule 203(b)(3) under the IAA,\54\ the SEC has permitted IAs
to count certain non-natural persons as a single client for the purpose
of computing the "fewer than fifteen clients" criterion.
---------------------------------------------------------------------------

    \54\ 17 CFR 275.203(b)(3) (2002).
---------------------------------------------------------------------------

    In response to Roundtable comments on this difference in regulatory
treatment, the Commission is proposing in new Rule 4.14(a)(10) to
provide an exemption from registration for any CTA who meets the
criteria of Section 4m(1) of the Act. (Proposed paragraph (a)(10).) For
the purpose of this exemption, the CTA may deem certain persons a
single person. In making this proposal, the Commission is patterning
the single "persons" specified therein on the single "clients"
specified in SEC Rule 203(b)(3).
3. Additional Provisions Under Rule 4.14
    Under the proposed amendments, Rule 4.14 would also contain
introductory text and certain additional provisions, which would be
based on the provisions of the current rule, the NFA Proposal and the
comments on the ANPR. Generally speaking, these provisions concern: the
notice of registration exemption that a CTA seeking exemption under
paragraph (a)(8) must file (proposed paragraph (a)(8)(iii)); \55\ the
CTA's obligations with respect to books and records and special calls
(proposed paragraph (a)(8)(iv)); and the effect of registration on a
CTA who: (1) is eligible for exemption under Rule 4.14, but registers
as a CTA nonetheless (proposed paragraph (c)(l)); or (2) provides
commodity interest trading advice to one or more clients for which it
is required to register and one or more clients for which it is
eligible to claim an exemption from registration under Rule 4.14(a)(8)
(proposed paragraph (c)).
---------------------------------------------------------------------------

    \55\ In addition to current requirements, the CTA would be
required to provide its main facsimile number and main e-mail
address.
---------------------------------------------------------------------------

D. Proposed Amendments to Rules 4.21, 4.22 and 4.31

1. Permitting Communications Prior to Disclosure Document Distribution
    Commission Rules 4.21 and 4.31 prohibit CPOs and CTAs from
soliciting prospective pool participants or clients prior to providing
a Disclosure Document. However, the Commission has increasingly
received comments, including testimony from Roundtable participants,
that Rules 4.21(a) and 4.31(a) unnecessarily restrict communications by
CPOs and CTAs. In response, the Commission is proposing to amend these
rules to provide that the Disclosure Documents referred to therein must
be delivered by no later than the time a CPO delivers a subscription
agreement for the pool for which it is soliciting or a CTA delivers an
advisory agreement for the trading program for which it is
soliciting.\56\ To ensure compliance with the purpose of the Disclosure
Document--i.e., that prospective investors are fully informed about all
material facts before committing their funds,\57\ and consistent with
the Roundtable comments, these proposed rule amendments would require
that "any material distributed in advance of the delivery of the
Disclosure Document is consistent with or amended by the information
contained in the Disclosure Document and with the obligations of the
[CPO or CTA] under the Act, the Commission's regulations issued
thereunder, and the laws of any other applicable federal or state
authority." \58\
---------------------------------------------------------------------------

    \56\ Because this proposal would obviate the Rule 4.21(a)(2)
"profile document" and "term sheet" exceptions to the current
Disclosure Document delivery requirement of Rule 4.21(a)(1), the
Commission also is proposing to delete these exceptions from the
rule.
    \57\ See, e.g., 44 FR 1918, 1920.
    \58\ See, e.g., Section 4m(2) of the Act, 7 U.S.C. 6m(2) (2000),
which provides in pertinent part that:
    Nothing in this Act shall relieve any person of any obligation
or duty, or affect the availability of any right or remedy available
to the Securities and Exchange Commission or any private party
arising under the Securities Act of 1933 or the Securities Exchange
Act of 1934 governing the issuance, offer, purchase, or sale of
securities of a commodity pool, or of persons engaged in
transactions with respect to such securities, or reporting by a
commodity pool.
---------------------------------------------------------------------------

2. Removing Duplicative Requirements in the "Master/Feeder Fund"
Context
    As explained above, Rule 4.21 requires each person registered (or
required to be registered) as a CPO to deliver a Disclosure Document to
prospective participants in the commodity pool for which it is
soliciting. Rule 4.22 requires the CPO to distribute periodic Account
Statements \59\ and an Annual Report \60\ to the participants in the
pool. Where the prospective or actual participant is another commodity
pool, the CPO need only deliver a Disclosure Document and distribute
periodic Account Statements and an Annual Report to the pool operator
of the other commodity pool; the CPO need not also deliver and
distribute this information to each of the participants in the other
pool.
---------------------------------------------------------------------------

    \59\ Rule 4.22(a).
    \60\ Rule 4.22 (c).
    In addition to the other amendments it is proposing to Rule
4.22, the Commission is proposing to delete from paragraph (c) of
the rule the now obsolete requirement that the "first fiscal year
for which an Annual Report is due shall be the first fiscal year
that begins on or after January 1, 1979."
---------------------------------------------------------------------------

    Commission staff has provided relief on numerous occasions from the
requirements of Rules 4.21 and 4.22 where the CPOs of two pools (i.e.,
a master fund and a feeder fund) were closely affiliated,\61\ a
practice supported by Roundtable comments. Accordingly, the Commission
is proposing to codify this relief in new Rules 4.21(a)(2), 4.22(a)(4)
and 4.22(c)(6). Because Rules 4.7 and 4.12(b) provide relief from
certain of the specific requirements of Rules 4.21 and 4.22, these
proposed new rules would also include references to materials that must
be furnished pursuant to Rule 4.7(b)(1) or 4.12(b)(2)(i), Rule
4.7(b)(2) or 4.12(b)(2)(ii), and Rule 4.7(b)(3) or 4.12(b)(2)(iii),
respectively, thereby further reducing the reporting burdens under
Rules 4.7 and 4.12.
---------------------------------------------------------------------------

    \61\ See, e.g., CFTC Staff Letter No. 02-102 (Aug. 29, 2002).
---------------------------------------------------------------------------

3. Distributing Account Statements Electronically
    The Commission is also proposing to amend Rule 4.22 to establish
the procedures pursuant to which a CPO may distribute periodic Account
Statements to pool participants by electronic means, provided the CPO
obtains the prior consent of each such participant. This proposal is
patterned on the Commission's recent amendments to Rules 1.33 and
1.46,\62\ which permit futures commission merchants to deliver monthly

[[Page 12630]]

statements electronically to their customers. Moreover, it would codify
the Commission's prior interpretation that permitted, and provided
guidance on, electronic distribution of Account Statements.\63\
---------------------------------------------------------------------------

    \62\ See 66 FR 53510 (Oct. 23, 2001).
    \63\ See 62 FR 39104, 39110-39111 (July 22, 1997).
---------------------------------------------------------------------------

    As proposed, before a CPO could electronically distribute Account
Statements to a participant, new paragraph (b)(2) of Rule 4.22 would
require the CPO to obtain a signed consent from the participant
acknowledging that the CPO had disclosed the following information to
it: the participant's right to receive Account Statements in paper form
or electronically; the electronic medium or source through which the
CPO will distribute the Account Statements; the duration of the period
during which the consent to receive Account Statements electronically
will be effective; any charges for electronic distribution; and the
participant's right to revoke consent to electronic distribution at any
time. For a participant that is not an "institutional customer," \64\
the CPO would be required to obtain the participant's signed consent
acknowledging the disclosures, prior to the transmission of any Account
Statement by means of electronic media. Institutional customers would
not need to provide written consent. New paragraph (h)(4) of Rule 4.22
would establish the signature requirements for an Account Statement
distributed electronically, by providing that "for each pool for which
the CPO distributes an Account Statement by means of electronic media,
the CPO must make and keep * * * a manually signed copy" of the oath
or affirmation required under Rule 4.22(h).\65\
---------------------------------------------------------------------------

    \64\ Rule 1.3(g) defines "institutional customer" to have the
same meaning as "eligible contract participant" as defined in
Section 1a(12) of the Act.
    \65\ See 61 FR 42146, 42158 n.91 (Aug. 14, 1996), after which
the Commission has patterned this proposal.
---------------------------------------------------------------------------

    The Commission understands that there may be special concerns
surrounding the electronic distribution of Annual Reports that are
required to be certified by an independent public accountant and, in
particular, surrounding the attachment of the certification itself that
the public accountant provides with the report.\66\ Accordingly, the
Commission is not now proposing any criteria pursuant to which a CPO
may distribute the Annual Report electronically but, instead, the
Commission is seeking comment on what those criteria should be.
---------------------------------------------------------------------------

    \66\ Rule 4.7(b)(3) permits a CPO who has claimed relief under
the rule to distribute an Annual Report that is not certified, but
that nonetheless must be presented and computed in accordance with
generally accepted accounting principles consistently applied.
---------------------------------------------------------------------------

4. Providing Facsimile Signatures on Account Statements and Annual
Reports
    In the preamble of the Federal Register release announcing the
adoption of the oath or affirmation requirement of Rule 4.22(h), the
Commission explained that "a facsimile signature would be
appropriate," provided the CPO maintains the Account Statement or
Annual Report containing the manual signature from which the facsimile
signature was made, and that an Annual Report that is filed with the
Commission contains the manual signature.\67\ The Commission is
proposing to codify this explanation in new paragraph (h)(4)(i) of Rule
4.22. Inasmuch as the Commission recently has delegated to NFA the
review of, among other documents, pool Annual Reports,\68\ this
provision would refer to the Annual Report that the CPO files with a
registered futures association.
---------------------------------------------------------------------------

    \67\ See 46 FR 26004, 26011 (May 8, 1981).
    \68\ See 67 FR 77470 (Dec. 18, 2002).
---------------------------------------------------------------------------

5. Conforming Signature Requirements
    Certain Part 4 rules, including several of the rules being proposed
in this Federal Register release, provide that the various documents
required thereunder must be signed by CPOs and CTAs. In particular,
Rules 4.7(d), 4.12(b), 4.13(b), and 4.22(h) provide that the documents
required thereunder must be signed by a CPO or CTA as follows: if it is
a sole proprietorship, by the sole proprietor; if a partnership, by a
general partner; and if a corporation, by the chief executive officer
or chief financial officer.
    Upon review of this list of permitted signatories, the Commission
believes that it may be unnecessarily restrictive in that it leaves no
room for other organizational structures under which CPOs and CTAs
operate--e.g., limited liability companies. Accordingly, the Commission
is proposing to amend Rules 4.7(d), 4.12(b) and 4.13(b) to provide that
the documents required thereunder "must be signed by a duly authorized
representative" of the CPO or CTA. This would be consistent with
existing signature requirements under Rules 4.5 and 4.14.\69\ And, as
the Commission stated in connection with the adoption of Rule 4.5, a
"duly authorized representative" is "a representative who has been
authorized to bind the person on whose behalf [a document is produced]
to the information and the representations contained in [the
document]." \70\ However, because the document required under Rule
4.22(h) pertains to the accuracy and completeness of certain financial
reports (i.e., commodity pool Account Statements and Annual Reports),
the Commission specifically is proposing that this oath or affirmation
be signed "by a representative duly authorized to bind the pool
operator."
---------------------------------------------------------------------------

    \69\ See also, 67 FR 38869 (June 6, 2002), wherein the
Commission adopted a similar signatory provision in connection with
amendments to its registration rules to facilitate on-line
registration.
    \70\ 50 FR 15868, 15874.
---------------------------------------------------------------------------

IV. Temporary No-Action Relief

    By this Federal Register release, the Commission is, with certain
modifications and clarifications made in response to comments on both
the Prior Rule 4.5 Proposal and the ANPR, confirming the temporary no-
action relief it issued in the Prior Rule 4.5 Proposal and the
ANPR.\71\ Specifically, in addition to providing temporary no-action
relief where the pool a CPO operates engages in a limited amount of
commodity interest trading, the Commission is clarifying that: at any
time, either the limited trading or notional test must be met;
compliance with the criterion of a test is determined at the time the
most recent position is established; the notional test criterion
applies on an aggregate net basis; and the calculation of "notional
value" includes the number of futures and options contracts and any
multiplier specified in those contracts.
---------------------------------------------------------------------------

    \71\ See 67 FR 65743, 65745 and 67 FR 68785, 68788-89,
respectively, and the examples provided therein.
---------------------------------------------------------------------------

A. Temporary No-Action Relief for Rule 4.5 Eligible Persons

    The Commission will not commence any enforcement action against an
eligible person for failure to register as a CPO in accordance with
Section 4m(1) of the Act, where the eligible person operates a
qualifying entity such that at any time, with respect to non-hedge
positions in commodity futures or commodity option contracts, either of
the following tests is met:

    (i) The aggregate initial margin and premiums required to
establish such positions, determined at the time the most recent
position was established, does not exceed five percent of the
liquidation value of the qualifying entity's portfolio, after taking
into account unrealized profits and unrealized losses on any such
contracts it has entered into; Provided, That in the case of an
option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Rule 190.01(x) may be excluded in
computing such five percent; or
    (ii) The aggregate net notional value of such positions,
determined at the time the

[[Page 12631]]

most recent position was established, does not exceed the
liquidation value of the qualifying entity's portfolio, after taking
into account unrealized profits and unrealized losses on any such
contracts it has entered into. For this purpose, the term "notional
value" should be calculated for each such futures position by
multiplying the size of the contract, in contract units (taking into
account any multiplier specified in the contract), by the current
market price per unit and for each such option position by
multiplying the size of the contract, in contract units (taking into
account any multiplier specified in the contract), by the strike
price per unit.

    Neither eligible persons who have claimed relief under Rule 4.5 nor
eligible persons who claim such relief in the future need to take any
additional action to operate their qualifying entities in accordance
with the notional test. Rather, making the representations currently
required by the rule in a Notice filed with the NFA and the
Commission--including the representation concerning the Five Percent
Test--is all that is required.
    This relief will remain in effect until such time as the Commission
takes final action on the amendment to Rule 4.5 it is proposing herein.
This relief is, however, subject to the condition that, upon adoption
of any amendment to Rule 4.5, the eligible person must comply in full
with the terms of any amendment the Commission may adopt. When the
Commission adopts a final rule, it will, if necessary, provide affected
eligible persons and qualifying entities with sufficient time within
which to comply with the rule adopted or to liquidate positions entered
into in accordance with the no-action relief.

B. CPO and CTA Temporary Registration No-Action Relief

1. Relief for CPOs
a. In General
    The Commission will not commence any enforcement action against a
CPO for failure to register as a CPO under Section 4m(1) of the Act,
where each pool for which the CPO claims registration no-action relief
hereunder meets and remains in compliance with the following criteria:

    a. Participation in the pool is restricted to: "accredited
investors" as defined in Rule 501(a) under the Securities Act;
"knowledgeable employees" as defined in Rule 3c-5 under the
Investment Company Act of 1940; \72\ Non-U.S. persons as defined in
CFTC Rule 4.7(a)(1)(iv); and the persons described in CFTC Rule
4.7(a)(2)(viii)(A); and
---------------------------------------------------------------------------

    \72\ 17 CFR 270.3c-5 (2002).
---------------------------------------------------------------------------

    (ii) At any time, the pool's commodity interest trading, whether
entered into for bona fide hedging purposes or otherwise,\73\ meets
either of the following tests:
---------------------------------------------------------------------------

    \73\ See Rule 1.3(z).
---------------------------------------------------------------------------

    (A) The aggregate initial margin and premiums required to
establish commodity interest positions, determined at the time the
most recent position was established, does not exceed two percent of
the liquidation value of the pool's portfolio, after taking into
account unrealized profits and unrealized losses on any such
positions it has entered into; Provided, That in the case of an
option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Rule 190.01(x) may be excluded in
computing such two percent; or
    (B) The aggregate net notional value of the pool's commodity
interest positions, determined at the time the most recent position
was established, does not exceed fifty percent of the liquidation
value of the pool's portfolio, after taking into account unrealized
profits and unrealized losses on any such positions it has entered
into. For this purpose, the term `notional value' should be
calculated for each such futures position by multiplying the number
of contracts by the size of the contract, in contract units (taking
into account any multiplier specified in the contract), by the
current market price per unit and for each such option position by
multiplying the number of contracts by the size of the contract, in
contract units (taking into account any multiplier specified in the
contract), by the strike price per unit.
b. CPOs Who Operate "Funds-of-Funds"
    In a footnote to the ANPR, the Commission addressed the situation
where a commodity pool indirectly trades commodity interests as a
"fund of funds." \74\ As the Commission stated:
---------------------------------------------------------------------------

    \74\ See 67 FR at 68788, n. 15.

    The operator of a `fund of funds' (an Investor Fund) that
indirectly trade[s] commodity interests through participation in one
or more funds that directly trades commodity interests (each an
Investee Fund) could claim exemption from registration under the No-
Action Relief where that Investor Fund trades commodity interests
solely through participation in one or more Investee Funds, and the
CPO of each such Investee Fund has itself claimed the No-Action
Relief. The operator of an Investor Fund that additionally directly
trades commodity interests could also claim the no-action relief, so
long as the portion of the Investor Fund that directly trades
---------------------------------------------------------------------------
commodity interests does not exceed the limit referred to above.

The Commission provided the following example of this situation:

    For example, assume that the Investor Fund has a liquidation
value of $1 million, four-fifths of which is invested in four
Investee Funds whose operators have claimed the No-Action Relief.
With the remaining one-fifth of liquidation value, or $200,000, the
operator of the Investor Fund may have the Fund directly trade
commodity interests, provided that the notional value of the Fund's
commodity interest positions does not exceed fifty percent of the
Fund's liquidation value, adjusted for unrealized profits and
unrealized losses on positions directly entered into by the Fund.

The Commission went on to state that:

    If, however, the notional value of those positions exceeded
fifty percent of the liquidation value of $200,000, the operator
would only be able to claim the No-Action Relief if the operator
knew that the notional value of all of the Investor Fund's commodity
interest positions (i.e., those held outright and those held through
investment in the four Investee Funds) was fifty percent of the
Investor Fund's liquidation value. To be in possession of such
information, the operator would need to have direct knowledge of,
and immediate access to, the notional value of the commodity
interest positions of each Investee Fund. The operator of the
Investor Fund could have this knowledge and access where, for
example, it was the same person as, or an affiliate of, the CPOs of
the Investee Funds.

    In response to these examples, the Commission received two sets of
comments. One set claimed that, under these examples, it appeared that
fund-of-funds CPOs wishing to claim the no-action relief could invest
only in pools operated by CPOs who had themselves already claimed the
no-action relief, to the disadvantage of registered CPOs. The other set
of comments claimed that the requirements for "direct knowledge of"
and "immediate access to" Investee Funds set unnecessarily high
standards. The Commission believes these comments have merit.
Accordingly, by this Federal Register release the Commission confirms
that: (1) The CPO of a fund-of-funds may claim the registration no-
action relief provided herein if the CPO of each of the Investee Funds
into which the fund-of-funds invests either has registered with the
Commission as a CPO or has claimed the no-action relief with respect to
the Investee Fund; and (2) regardless of whether the CPO of the
Investee Fund was an unregistered CPO that had claimed the registration
no-action relief or a registered CPO, in each case the Investor Fund's
CPO would be entitled to rely upon a representation by the Investee
Fund's CPO that the CPO was operating the Investee Fund in compliance
with the requirements of the no-action relief. Additionally, by this
Federal Register release, the Commission generally seeks comment on how
to treat "funds-of-funds" in the context of CPO registration and Rule
4.13.
2. Relief for CTAs
    The Commission will not commence enforcement action against a CTA
for failure to register as a CTA under Section 4m(1) of the Act, where
the CTA

[[Page 12632]]

meets and remains in compliance with the following criteria:

    a. It claims relief from CPO registration under the no-action
relief provided herein and its commodity interest trading advice is
directed solely to, and for the sole use of, the pool or pools that
it operates; \75\ or
---------------------------------------------------------------------------

    \75\ This provision is patterned after Rule 4.14(a)(5).
---------------------------------------------------------------------------

    b. It is registered as an investment adviser under the
Investment Advisers Act of 1940 or with the applicable securities
regulatory agency of any State, or it is exempt from such
registration, or it is excluded from the definition of the term
"investment adviser" pursuant to section 202(a)(2) or 202(a)(11)
of the Investment Advisers Act of 1940, provided that:
    (A) The person's commodity interest trading advice:
    (1) Is directed solely to, and for the sole use of, pools
operated by CPOs who are eligible to claim relief from CPO
registration under the no-action relief;
    (2) Is solely incidental to its business of providing securities
advice to each such pool;
    (3) Is consistent with the criteria of the CPO registration no-
action relief; \76\ and
---------------------------------------------------------------------------

    \76\ In response to comments received by the Commission, this
provision was simplified by replacing the words "Employs only
strategies that are" with "Is."
---------------------------------------------------------------------------

    (B) The person is not otherwise holding itself out as a CTA.

    By this Federal Register release, the Commission similarly confirms
that, regardless of whether a pool to which the CTA sought to provide
commodity interest trading advice was operated by an unregistered CPO
that had claimed registration no-action relief or a registered CPO, in
each case the CTA would be entitled to rely upon a representation by
the CPO that the CPO was operating the pool in compliance with the
requirements of the CPO registration no-action relief stated above.
3. Claim of Registration No-Action Relief
    As stated in the ANPR, this registration no-action relief for CPOs
and CTAs is not self-executing. Rather, a CPO or CTA eligible for the
no-action relief must file a Claim to perfect the relief and must make
a one-way disclosure to its participants and clients, respectively,
whether prospective or existing. A Claim of Registration No-Action
Relief will be effective upon filing, so long as the Claim is
materially complete.
    Specifically, the Claim of Registration No-Action Relief must:
    a. State the name, main business address, and main business
telephone number of the CPO or CTA claiming the relief;
    b. State the capacity (i.e., CPO, CTA or both) and, where
applicable, the name of the pool(s), for which the Claim is being
filed;
    c. Represent that the CPO and CTA qualifies for the no-action
relief, that it will comply with the criteria of the no-action relief,
and that it will provide the CFTC-specified disclosure, set forth
below;
    d. Be signed by a duly authorized representative of the CPO or CTA;
and
    e. Be filed with the NFA at its headquarters office in Chicago,
Illinois (Attn: Director of Compliance), with a copy to the Commission
at its headquarters office in Washington, DC (Attn: Division of
Clearing and Intermediary Oversight, Audit and Financial Review
Section), prior to the date upon which the CPO or CTA first engages in
business that otherwise would require registration as such.
4. One-Way Disclosure by CPOs and CTAs
    a. For CPOs: To comply with the terms of a Claim of Registration
No-Action Relief that it has filed, a CPO must provide the following
disclosure to prospective and existing participants in each pool it
operates or intends to operate prior to engaging in activities that
otherwise would require it to register as a CPO:

    Pursuant to No-Action Relief issued by the Commodity Futures
Trading Commission, [Name of CPO] is not required to register, and
is not registered, with the Commission as a CPO. Among other things,
the No-Action Relief requires this CPO to file a Claim of No-Action
Relief with the National Futures Association and the Commission. It
also requires that at all times either: (a) The aggregate initial
margin and premiums required to establish commodity interest
positions does not exceed two percent of the liquidation value of
the pool's portfolio; or (b) the aggregate net notional value of
this pool's commodity interest positions does not exceed fifty
percent of the liquidation value of the pool's portfolio.
    You should also know that this registration No-Action Relief is
temporary. In the event the Commission ultimately adopts a
registration exemption rule that differs from the No-Action Relief,
[Name of CPO] must comply with that rule to be exempt from CPO
registration. If [Name of CPO] determines not to comply with that
rule, it must either register with the Commission or cease having
this pool trade commodity interests. A reasonable opportunity to
trade for liquidation only will be provided.

    b. For CTAs: To comply with the terms of a Claim of Registration
No-Action Relief that it has filed, a CTA must provide the following
disclosure to each pool it advises or intends to advise prior to
engaging in activities that otherwise would require it to register as a
CTA:

    Pursuant to No-Action Relief issued by the Commodity Futures
Trading Commission, [Name of CTA] is not required to register, and
is not registered, with the Commission as a CTA. Among other things,
the No-Action Relief requires this CTA to file a claim of No-Action
Relief with the National Futures Association and the Commission. It
also requires that this CTA provide advice solely to pools whose
CPOs have filed a corresponding claim of No-Action Relief.
    You should also know that this registration No-Action Relief is
temporary. In the event the Commission ultimately adopts a
registration exemption rule that differs from the No-Action Relief,
[Name of CTA] must comply with that rule to be exempt from CTA
registration. If [Name of CTA] determines not to comply with that
rule, it must either register with the Commission or cease providing
commodity interest trading advice to this pool. A reasonable
opportunity to trade for liquidation only will be provided.
5. Effect of Filing a Claim of No-Action Relief
    Persons that have filed a Claim of No-Action Relief will be exempt
from Commission registration requirements under Section 4m(1) of the
Act. Such persons will remain subject, however, to prohibitions in the
Act and the Commission's rules against fraud that apply to all CPOs and
CTAs regardless of registration status. They also will remain subject
to all other relevant provisions of the Act and the Commission's rules
that apply to all commodity interest market participants, such as the
prohibitions on manipulation and the trade reporting requirements.

C. Other Matters

1. Effect of Final Rulemaking on No-Action Relief
    The no-action relief the Commission is announcing today by this
Federal Register release will remain in effect until such time as the
Commission takes final action on the related rules it is proposing
herein. Any final rules that the Commission adopts as a result of this
proposed rulemaking will supersede this no-action relief. In the event
final rules differ from the requirements of the no-action relief, the
Commission will provide affected eligible persons, CPOs and CTAs with
sufficient time within which to comply with such requirements, or, in
the event an eligible person, CPO or CTA is unable or unwilling to so
comply, with sufficient time to register with the Commission (or, if
applicable, to withdraw a previously filed Claim of No-Action Relief)
and to cease engaging in business as a CPO or CTA. Following

[[Page 12633]]

the effective date of final rules, no new positions may be entered into
in accordance with the no-action relief, but the Commission will, if
necessary, provide a reasonable opportunity to liquidate previously-
entered positions if a person does not wish to comply with the
exemptions provided or register under the Act.
2. Continued Availability of No-Action Relief From Commission Staff
    The Commission is aware that there may be persons that do not meet
the criteria of the no-action relief under Rule 4.5 for eligible
persons or Section 4m(1) of the Act for CPOs and CTAs but that
nonetheless, under their particular facts or circumstances, merit
relief. The Commission also is aware that, in the past, its staff has
provided no-action relief from the criteria of Rule 4.5 and from the
registration requirement of Section 4m(1) of the Act on a case-by-case
basis. Consistent with that practice, the Commission directs its staff
to continue to issue such relief in appropriate cases.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \77\ requires that agencies,
in proposing rules, consider the impact of those rules on small
businesses. The Commission has previously established certain
definitions of "small entities" to be used by the Commission in
evaluating the impact of its rules on such entities in accordance with
the RFA.\78\ With respect to CPOs, the Commission has previously
determined that a CPO is a small entity if it meets the criteria for
exemption from registration under current Rule 4.13(a)(2).\79\
Therefore, the requirements of the RFA do not apply to CPOs who do not
meet those criteria. With respect to CTAs, the Commission has
previously stated that it would evaluate within the context of a
particular rule proposal whether all or some affected CTAs would be
considered to be small entities and, if so, the economic impact on them
of the proposal.\80\ The Commission believes that the instant proposed
rules will not place any burdens, whether new or additional, on CPOs
and CTAs who would be affected hereunder. This is because the instant
proposals, if adopted, would provide registration relief for more CPOs
and CTAs and, for CPOs and CTAs who are not eligible for that relief,
they would reduce, streamline and simplify existing requirements.
---------------------------------------------------------------------------

    \77\ 5 U.S.C. 601 et seq.
    \78\ 47 FR 18618 (April 30, 1982).
    \79\ Id. at 18619-20.
    \80\ Id. at 18620.
---------------------------------------------------------------------------

    The Commission's definitions of small entities do not address the
persons and qualifying entities set forth in Rule 4.5 because, by the
very nature of the rule, the operations and activities of such persons
and entities generally are regulated by federal and state authorities
other than the Commission. Assuming, arguendo, that Rule 4.5 eligible
persons or qualifying entities would be small entities for purposes of
the RFA, the Commission believes that the proposed amendment to Rule
4.5 would not have a significant economic impact on them because it
would permit greater operational flexibility for persons currently
claiming relief under the rule, and it would make relief under the rule
available to more persons (each of whom would only have to file a
notice to be relieved from the requirement to register as a CPO and
from the disclosure, reporting and recordkeeping requirements
applicable to registered CPOs).
    Accordingly, the Chairman, on behalf of the Commission, certifies
pursuant to Section 605(b) of the RFA \81\ that the proposed rules will
not have a significant economic impact on a substantial number of small
entities. However, the Commission invites the public to comment on this
finding.
---------------------------------------------------------------------------

    \81\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    This proposed rulemaking affects information collection
requirements. As required by the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), the Commission has submitted a copy of this section to
the Office of Management and Budget for its review.

Collection of Information

    Rules Relating to the Operations and Activities of Commodity Pool
Operators and Commodity Trading Advisors and to Monthly Reporting by
Futures Commission Merchants, OMB Control Number 3038-0005.
    The expected effect of the proposed amended rules will be to reduce
the burden previously approved by OMB for this collection of
information by 31,025.97 hours because, while it will result in an
increase in the number of filings under Rules 4.5, 4.13 and 4.14, it
will result in a larger decrease in the information collection
requirements under the disclosure, reporting and recordkeeping rules
that otherwise would be applicable.
    Specifically:
    The burden associated with Commission Rule 4.5 is expected to be
increased by 25 hours:
    Estimated number of respondents: 325.
    Annual responses by each respondent: 2.
    Estimated average hours per response: .5.
    Annual reporting burden: 325 hours.
    This annual reporting burden of 325 hours represents an increase of
25 hours as a result of the proposed amendment to Rule 4.5.
    The burden associated with Commission Rule 4.13 is expected to be
increased by 187.5 hours:
    Estimated number of respondents: 600.
    Annual responses by each respondent: 1.
    Estimated average hours per response: .5.
    Annual reporting burden: 300.
    This annual reporting burden of 300 hours represents an increase of
187.5 hours as a result of the proposed amendments to Rule 4.13.
    The burden associated with Commission Rule 4.14 is expected to be
increased by 5 hours:
    Estimated number of respondents: 60.
    Annual responses by each respondent: 1.
    Estimated average hours per response: .5.
    Annual reporting burden: 30.
    This annual reporting burden of 30 hours represents an increase of
5 hours as a result of the proposed amendments to Rule 4.14.
    The burden associated with Commission Rule 4.21 is expected to be
decreased by 1540 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 2.
    Estimated average hours per response: 2.8.
    Annual reporting burden: 560.
    This annual reporting burden of 560 hours represents a decrease of
1,540 hours as a result of the proposed amendments to Rules 4.5, 4.13
and 4.21.
    The burden associated with Commission Rule 4.22(a) is expected to
be decreased by 7,796.25 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 9.
    Estimated average hours per response: 3.85.
    Annual reporting burden: 3,465.
    This annual reporting burden of 3,465 hours represents a decrease
of 7,796.25 hours as a result of the proposed amendments to Rules 4.5,
4.13 and 4.22.

[[Page 12634]]

    The burden associated with Commission Rule 4.22(c) is expected to
be reduced by 4,050 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 2.
    Estimated average hours per response: 9.
    Annual reporting burden: 1,800.
    This annual reporting burden of 1,800 hours represents a decrease
of 4,050 hours as a result of the proposed amendments to Rules 4.5,
4.13 and 4.22.
    The burden associated with Commission Rule 4.23 is expected to be
reduced by 11,700 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 52.
    Annual reporting burden: 5,200
    This annual reporting burden of 5,200 hours represents a decrease
of 11,700 hours as a result of the proposed amendments to Rules 4.5,
4.13 and 4.22.
    The burden associated with Commission Rule 4.31 is expected to be
reduced by 577.22 hours:
    Estimated number of respondents: 310.
    Annual responses by each respondent: 1.33.
    Estimated average hours per response: 1.4.
    Annual reporting burden: 577.22.
    This annual reporting burden of 577.22 hours represents a decrease
of 577.22 hours as a result of the proposed amendments to Rule 4.14.
    The burden associated with Commission Rule 4.33 is expected to be
reduced by 29,880 hours:
    Estimated number of respondents: 310.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 18.
    Annual reporting burden: 5,580.
    This annual reporting burden of 5,580 hours represents a decrease
of 5,580 hours as a result of the proposed amendments to Rule 4.14.
    As stated, these changes will result in an overall reduction of
31,025.97 hours in burden for this collection.
    Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed
collection of information in--
    [sbull] Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
    [sbull] Evaluating the accuracy of the Commission's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
    [sbull] Enhancing the quality, usefulness, and clarity of the
information to be collected; and
    [sbull] Minimizing the burden of collection of information on those
who are to respond, including through the use of appropriate automated
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission of responses.
    OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed regulations.
    Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street NW.,
Washington, DC 20581, (202) 418-5160.

C. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its action before issuing a new regulation under
the Act. By its terms, Section 15(a) does not require the Commission to
quantify the costs and benefits of a new regulation or to determine
whether the benefits of the proposed regulation outweigh its costs.
Rather, Section 15(a) simply requires the Commission to "consider the
costs and benefits" of its action.
    Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
Protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
    The proposed amendments are intended to facilitate increased
flexibility and consistency, and to rationalize application of
Commission regulations to entities subject to other regulatory
frameworks. The Commission is considering the costs and benefits of
these rules in light of the specific provisions of Section 15(a) of the
Act:
1. Protection of Market Participants and the Public
    While certain of the proposed amendments are expected to lessen the
burden imposed upon CPOs and CTAs, any exclusion or exemption of
persons from regulatory requirements would be based on such factors as
financial sophistication of pool participants and advisory clients or a
low level of exposure to commodity interest markets. Accordingly, the
proposed amendments should have no effect on the Commission's ability
to protect market participants and the public.
2. Efficiency and Competition
    The proposed amendments are expected to benefit efficiency and
competition by removing barriers to participation in the commodity
interest markets, resulting in greater liquidity and market efficiency.
3. Financial Integrity of Futures Markets and Price Discovery
    The proposed amendments should have no effect, from the standpoint
of imposing costs or creating benefits, on the financial integrity or
price discovery function of the commodity futures and options markets.
4. Sound Risk Management Practices
    The proposed amendments should increase the available range of risk
management alternatives for Rule 4.5 eligible persons, as well as for
CTAs and CPOs.
5. Other Public Interest Considerations
    The proposed amendments will also take into account certain effects
of legislative changes (e.g., in the case of exemption for registered
investment advisers) and the passage of time (e.g., revising the
contribution limit for the small commodity pool exemption and
permitting electronic delivery of pool Account Statements).
    After considering these factors, the Commission has determined to
propose the amendments discussed above. The

[[Page 12635]]

Commission invites public comment on its application of the cost-
benefit provision. Commenters also are invited to submit any data that
they may have quantifying the costs and benefits of the proposal with
their comment letters.

List of Subjects in 17 CFR Part 4

    Advertising, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.

    For the reasons presented above, the Commission hereby proposes to
amend Chapter I of Title 17 of the Code of Federal Regulations as
follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6(c), 6l, 6m, 6n, 6o, 12a and
23.

    2. Section 4.5 is proposed to be amended by:
    a. deleting paragraph (c)(2)(i);
    b. redesignating paragraph (c)(2)(ii) as paragraph (c)(2)(i);
    c. deleting paragraph (c)(2)(iii); and
    d. redesignating paragraph (c)(2)(iv) as paragraph (c)(2)(ii).
    3. Section 4.7 is proposed to be amended by revising paragraph
(d)(1)(vii) to read as follows:


Sec.  4.7  Exemption from certain part 4 requirements for commodity
pool operators with respect to offerings to qualified eligible persons
and for commodity trading advisors with respect to advising qualified
eligible clients.

* * * * *
    (d) * * *
    (1) * * *
    (vii) Be manually signed by a duly authorized representative of the
commodity pool operator or commodity trading advisor;
* * * * *
    4. Section 4.12 is proposed to be amended by revising paragraph
(b)(3)(vi) to read as follows:


Sec.  4.12  Exemption from provisions of part 4.

* * * * *
    (b) * * *
    (3) * * *
    (vi) Be manually signed by a duly authorized representative of the
pool operator; and
* * * * *
    5. Section 4.13 is proposed to be amended by:
    a. adding introductory text;
    b. deleting the "or" at the end of paragraph (a)(1)(iv);
    c. revising paragraph (a)(2);
    d. adding new paragraphs (a)(3), (a)(4) and (a)(5);
    e. revising paragraph (b);
    f. redesignating paragraphs (c) and (d) as paragraphs (d) and (e)
and revising the redesignated paragraphs; and
    g. adding a new paragraph (c), to read as follows:


Sec.  4.13  Exemption from registration as a commodity pool operator.

    This section is organized as follows: Paragraph (a) specifies the
criteria that must be met to qualify for exemption from registration
under this section; paragraph (b) governs the notice that must be filed
to claim exemption from registration; paragraph (c) sets forth the
continuing obligations of a person who has claimed exemption under this
section; paragraph (d) specifies information certain persons must
provide if they subsequently register; and paragraph (e) specifies the
effect of registration on a person who has claimed an exemption from
registration under this section or who is eligible to claim an
exemption from registration under this section.
    (a) * * *
    (2)(i) None of the pools operated by it has more than 15
participants at any time; and
    (ii) The total gross capital contributions it receives for units of
participation in all of the pools it operates or that it intends to
operate do not in the aggregate exceed $400,000.
    (iii) For the purpose of determining eligibility for exemption
under paragraph (a)(2) of this section, the person may exclude the
following participants and their contributions:
    (A) The pool's operator, commodity trading advisor, and the
principals thereof;
    (B) A child, sibling or parent of any of these persons;
    (C) The spouse of any person specified in paragraph (a)(2)(iii)(A)
or (B) of this section; and
    (D) Any relative of a person specified in paragraph (a)(2)(iii)(A),
(B) or (C) of this section, its spouse or a relative of its spouse, who
has the same principal residence as such person;
    (3)(i) At any time, each pool for which the operator claims
exemption from registration under this paragraph (a)(3) meets either of
the following tests with respect to its commodity interest positions,
whether entered into for bona fide hedging purposes or otherwise:
    (A) The aggregate initial margin and premiums required to establish
such positions, determined at the time the most recent position was
established, will not exceed two percent of the liquidation value of
the pool's portfolio, after taking into account unrealized profits and
unrealized losses on any such positions it has entered into; Provided,
That in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount as defined in Sec.  190.01(x) of this
chapter may be excluded in computing such two percent; or
    (B) The aggregate net notional value of such positions, determined
at the time the most recent position was established, does not exceed
fifty percent of the liquidation value of the pool's portfolio, after
taking into account unrealized profits and unrealized losses on any
such positions it has entered into. For the purpose of this paragraph,
the term "notional value" shall be calculated for each such futures
position by multiplying the number of contracts by the size of the
contract, in contract units (taking into account any multiplier
specified in the contract), by the current market price per unit, and
for each such option position by multiplying the number of contracts by
the size of the contract, in contract units (taking into account any
multiplier specified in the contract), by the strike price per unit;
    (ii) It reasonably believes, at the time of investment (or, in the
case of an existing pool, at the time of conversion to a pool meeting
the criteria of paragraph (a)(3) of this section), that each person who
participates in the pool is an "accredited investor," as that term is
defined in Sec.  230.501 of this title; Provided, That nothing in
paragraph (a)(3) of this section will prohibit the person from claiming
an exemption under this section if it additionally operates one or more
pools for which it meets the criteria of paragraph (a)(4) of this
section; and
    (iii) It does not market participations in the pool as or in a
vehicle for trading in the commodity futures or commodity options
markets; or
    (4) For each pool for which the operator claims exemption from
registration under this paragraph (a)(4):
    (i) Interests in the pool are exempt from registration under the
Securities Act of 1933, and such interests are offered and sold without
marketing to the public in the United States;
    (ii) It reasonably believes, at the time of investment (or, in the
case of an existing pool, at the time of conversion to a pool meeting
the criteria of paragraph (a)(4) of this section), that:
    (A) Each natural person participant (including the person's self-
directed employee benefit plan, if any), is a "qualified eligible
person," as that term is defined in Sec.  4.7(a)(2); and

[[Page 12636]]

    (B) Each non-natural person participant is a "qualified eligible
person," as that term is defined in Sec.  4.7, or an "accredited
investor," as that term is defined in Sec.  230.501(a)(1) through (3),
(a)(7) and (a)(8) of this title; Provided, That nothing in paragraph
(a)(4) of this section will prohibit the person from claiming an
exemption under this section if it additionally operates one or more
pools that meet the criteria of paragraph (a)(3) of this section.
    (5)(i) Eligibility for exemption under this section is subject to
the commodity pool operator furnishing in writing to each prospective
participant in the pool:
    (A) A statement that the pool operator is exempt from registration
with the Commission as a commodity pool operator and that therefore,
unlike a registered commodity pool operator, it is not required to
deliver a Disclosure Document and a certified annual report to
participants in the pool; and
    (B) A description of the criteria pursuant to which it qualifies
for such exemption from registration.
    (ii) The pool operator must make these disclosures by no later than
the time it delivers a subscription agreement for the pool to a
prospective participant in the pool.
    (b)(1) A commodity pool operator who desires to claim the relief
from registration provided by this section must file a notice of
exemption from commodity pool operator registration with the National
Futures Association (Attn: Director of Compliance). The notice must:
    (i) Provide the name, main business address, main business
telephone number, main facsimile number and main email address of the
pool operator claiming the exemption and the name of the pool for which
it is claiming exemption;
    (ii) Contain the section number pursuant to which the operator is
filing the notice (i.e., Sec.  4.13(a)(1), (a)(2), (a)(3), (a)(4), or
both (a)(3) and (a)(4)) and represent that the pool will be operated in
accordance with the criteria of that paragraph or paragraphs; and
    (iii) Be signed by a duly authorized representative of the pool
operator.
    (2) The commodity pool operator must file the notice by no later
than the time it delivers a subscription agreement for the pool to a
prospective participant in the pool; Provided, That where the operator
is registered with the Commission as a commodity pool operator, it must
notify its pool's participants in writing that it intends to withdraw
from registration and claim the exemption, and it must provide each
such participant with a right to redeem its interest in the pool prior
to the operator filing a notice of exemption from registration.
    (3) The notice will be effective upon filing, provided the notice
is materially complete.
    (4) A commodity pool operator who has filed a notice of exemption
from registration under this section must, in the event that any of the
information contained or representations made in the notice becomes
inaccurate or incomplete, file a supplemental notice with the National
Futures Association to that effect which, if applicable, includes such
amendments as may be necessary to render the notice accurate and
complete. This supplemental notice must be filed within 15 business
days after the pool operator becomes aware of the occurrence of such
event.
    (c)(1) Each commodity pool operator who has filed a notice of
exemption from registration under this section must:
    (i) Make and keep all books and records prepared in connection with
its activities as a pool operator for a period of five years from the
date of preparation;
    (ii) Keep such books and records readily accessible during the
first two years of the five-year period. All such books and records
must be available for inspection upon the request of any representative
of the Commission, the United States Department of Justice, or any
other appropriate regulatory agency; and
    (iii) Submit to such special calls as the Commission may make to
demonstrate eligibility for and compliance with the applicable criteria
for exemption under this section.
    (2) In the event the pool operator distributes an annual report to
participants in the pool for which it has filed the notice, the annual
report must be presented and computed in accordance with generally
accepted accounting principles consistently applied and, if certified
by an independent public accountant, so certified in accordance with
Sec.  1.16 of this chapter as applicable.
    (3) Each commodity pool operator who has filed a notice of
exemption from registration pursuant to paragraph (a)(1) or (a)(2) of
this section must:
    (i) Promptly furnish to each participant in the pool a copy of each
monthly statement for the pool that the pool operator received from a
futures commission merchant pursuant to Sec.  1.33 of this chapter; and
    (ii) Clearly show on such statement, or on an accompanying
supplemental statement, the net profit or loss on all commodity
interests closed since the date of the previous statement.
    (d) Each person who applies for registration as a commodity pool
operator subsequent to claiming relief under paragraph (a)(1) or (a)(2)
of this section must include with its application the financial
statements and other information required by Sec.  4.22(c)(1) through
(5) for each pool that it has operated as an operator exempt from
registration. That information must be presented and computed in
accordance with generally accepted accounting principles consistently
applied. If the person is granted registration as a commodity pool
operator, it must comply with the provisions of this part with respect
to each such pool.
    (e)(1) Subject to the provisions of paragraph (e)(2) of this
section, if a person who is eligible for exemption from registration as
a commodity pool operator under this section nonetheless registers as a
commodity pool operator, the person must comply with the provisions of
this part with respect to each commodity pool identified on its
registration application or supplement thereto.
    (2) If a person operates one or more commodity pools described in
paragraph (a)(3) or (a)(4) of this section, and one or more commodity
pools for which it must be, and is, registered as a commodity pool
operator, the person is exempt from the requirements applicable to a
registered commodity pool operator with respect to the pool or pools
described in paragraph (a)(3) or (a)(4) of this section; Provided, That
the person:
    (i) Furnishes in writing to each prospective participant in a pool
described in paragraphs (a)(2), (a)(3) or (a)(4) of this section that
it operates:
    (A) A statement that it will operate the pool as if the person was
exempt from registration as a commodity pool operator;
    (B) A description of the criteria pursuant to which it will so
operate the pool; and
    (ii) Complies with paragraph (c) of this section.
    6. Section 4.14 is proposed to be amended by:
    a. adding introductory text;
    b. revising paragraph (a)(8);
    c. removing the period and adding a semi-colon followed by the word
"or" at the end of paragraph (a)(9)(ii);
    d. adding new paragraph (a)(10); and
    e. revising paragraph (c), to read as follows:


Sec.  4.14  Exemption from registration as a commodity trading advisor.

    This section is organized as follows: Paragraph (a) specifies the
criteria that

[[Page 12637]]

must be met to qualify for exemption from registration under this
section, including the notice of exemption from registration and
continuing obligations of persons who have claimed exemption under
paragraph (a)(8) of this section; paragraph (b) concerns "cash market
transactions"; and paragraph (c) specifies the effect of registration
on a person who has claimed an exemption from registration under this
section or who is eligible to claim an exemption from registration
under this section.
    (a) * * *
    (8) It is registered as an investment adviser under the Investment
Advisers Act of 1940 or with the applicable securities regulatory
agency of any State, or it is exempt from such registration, or it is
excluded from the definition of the term "investment adviser"
pursuant to the provisions of sections 202(a)(2) and 202(a)(11) of the
Investment Advisers Act of 1940, Provided, That:
    (i) The person's commodity interest trading advice is directed
solely to, and for the sole use of, one or more of the following:
    (A) "Qualifying entities," as that term is defined in Sec.
4.5(b), for which a notice of eligibility has been filed;
    (B) Collective investment vehicles that are excluded from the
definition of the term commodity "pool" under Sec.  4.5(b); and
    (C) Commodity pools that are organized and operated outside of the
United States, its territories or possessions, where:
    (1) The commodity pool operator of each such pool has not so
organized and is not so operating the pool for the purpose of avoiding
commodity pool operator registration;
    (2) With the exception of the pool's operator, advisor and their
principals, solely "Non-United States persons," as that term is
defined in Sec.  4.7(a)(1)(iv), will contribute funds or other capital
to, and will own beneficial interests in, the pool;
    (3) No person affiliated with the pool conducts any marketing
activity for the purpose of, or that could reasonably have the effect
of, soliciting participation from other than Non-United States persons;
and
    (4) No person affiliated with the pool conducts any marketing
activity from within the United States, its territories or possessions;
and
    (D) A commodity pool operator who has claimed an exemption from
registration under Sec.  4.13(a)(3) or 4.13(a)(4), or, if registered as
a commodity pool operator, who may treat each pool it operates that
meets the criteria of Sec.  4.13(a)(3) or 4.13(a)(4) as if it were not
so registered;
    (ii) The person:
    (A) Provides commodity interest trading advice solely incidental to
its business of providing securities or other investment advice to
qualifying entities, collective investment vehicles and commodity pools
as described in paragraph (a)(8)(i) of this section; and
    (B) Is not otherwise holding itself out as a commodity trading
advisor.
    (iii)(A) A commodity trading advisor who desires to claim the
relief from registration provided by this paragraph (a)(8) must file a
notice of exemption from commodity trading advisor registration with
the National Futures Association (ATTN: Director of Compliance). The
notice must:
    (1) Provide the name, main business address, main business
telephone number, main facsimile number and main email address of the
trading advisor claiming the exemption;
    (2) Contain the section number pursuant to which the advisor is
filing the notice (i.e., Sec.  4.14(a)(8)(i)or (a)(8)(ii), or both
(a)(8)(i) and (a)(8)(ii)) and represent that it will provide commodity
interest advice to its clients in accordance with the criteria of that
paragraph or paragraphs; and
    (3) Be signed by a duly authorized representative of the trading
advisor.
    (B) The commodity trading advisor must file the notice by no later
than the time it delivers an advisory agreement for the trading program
pursuant to which it will offer commodity interest advice to a client;
Provided, That where the advisor is registered with the Commission as a
commodity trading advisor, it must notify its clients in writing that
it intends to withdraw from registration and claim the exemption and
must provide each such client with a right to terminate its advisory
agreement prior to the advisor filing a notice of exemption from
registration.
    (C) The notice will be effective upon filing, provided the notice
is materially complete.
    (D) A commodity trading advisor who has filed a notice of
registration exemption under this section must, in the event that any
of the information contained or representations made in the notice
becomes inaccurate or incomplete, file a supplemental notice with the
National Futures Association to that effect which, if applicable,
includes such amendments as may be necessary to render the notice
accurate and complete. This supplemental notice must be filed within 15
business days after the trading advisor becomes aware of the occurrence
of such event.
    (iv) Each commodity trading advisor who has filed a notice of
registration exemption under this paragraph (a)(8) must:
    (A)(1) Make and keep all books and records prepared in connection
with its activities as a trading advisor, including all books and
records demonstrating eligibility for and compliance with the
applicable criteria for exemption under this section, for a period of
five years from the date of preparation; and
    (2) Keep such books and records readily accessible during the first
two years of the five-year period. All such books and records must be
available for inspection upon the request of any representative of the
Commission, the United States Department of Justice, or any other
appropriate regulatory agency; and
    (B) Submit to such special calls as the Commission may make to
demonstrate eligibility for and compliance with the applicable criteria
for exemption under this section;
* * * * *
    (10) During the course of the preceding 12 months, it has not
furnished commodity trading advice to more than 15 persons and it does
not hold itself out generally to the public as a commodity trading
advisor.
    (i) For the purpose of paragraph (a)(10) of this section, the
following are deemed a single person:
    (A) A natural person, and:
    (1) Any minor child of the natural person;
    (2) Any relative, spouse, or relative of the spouse of the natural
person who has the same principal residence;
    (3) All accounts of which the natural person and/or the persons
referred to in paragraph (a)(10)(i)(A) of this section are the only
primary beneficiaries; and
    (4) All trusts of which the natural person and/or the persons
referred to in paragraph (a)(10)(i)(A) of this section are the only
primary beneficiaries;
    (B)(1) A corporation, general partnership, limited partnership,
limited liability company, trust (other than a trust referred to in
paragraph (a)(10)(i)(A)(4) of this section), or other legal
organization (any of which are referred to elsewhere in this section as
a "legal organization") that receives commodity interest trading
advice based on its investment objectives rather than the individual
investment objectives of its shareholders, partners, limited partners,
members, or beneficiaries (any of which are referred to elsewhere in
this section as an "owner"); and
    (2) Two or more legal organizations referred to in paragraph
(a)(10)(i)(B)(1) of this section that have identical owners.

[[Page 12638]]

    (ii) Special rules. For the purpose of paragraph (a)(10) of this
section:
    (A) An owner must be counted in its own capacity as a person if the
commodity trading advisor provides advisory services to the owner
separate and apart from the advisory services provided to the legal
organization; Provided, That the determination that an owner is a
client will not affect the applicability of paragraph (a)(10) of this
section with regard to any other owner;
    (B)(1) A general partner of a limited partnership, or other person
acting as a commodity trading advisor to the partnership, may count the
limited partnership as one person; and
    (2) A manager or managing member of a limited liability company, or
any other person acting as a commodity trading advisor to the company,
may count the limited liability company as one person.
    (C) A commodity trading advisor that has its principal office and
place of business outside of the United States, its territories or
possessions must count only clients that are residents of the United
States, its territories and possessions; a commodity trading advisor
that has its principal office and place of business in the United
States or in any territory or possession thereof must count all
clients.
    (iii) Holding Out. Any commodity trading advisor relying on
paragraph (a)(10) of this section shall not be deemed to be holding
itself out generally to the public as a commodity trading advisor,
within the meaning of section 4m(1) of the Act, solely because it
participates in a non-public offering of interests in a collective
investment vehicle under the Securities Act of 1933.
* * * * *
    (c)(1) Subject to the provisions of paragraph (c)(2) of this
section, if a person who is eligible for exemption from registration as
a commodity trading advisor under this section nonetheless registers as
a commodity trading advisor, the person must comply with the provisions
of this part with respect to those clients for which it could have
claimed an exemption from registration under this section.
    (2) If a person provides commodity interest trading advice to a
client described in paragraph (a) of this section and to a client for
which it must be, and is, registered as a commodity trading advisor,
the person is exempt from the requirements applicable to a registered
commodity trading advisor with respect to the clients so described;
Provided, That the person furnishes in writing to each prospective
client described in paragraph (a) of this section a statement that it
will provide commodity interest trading advice to the client as if it
was exempt from registration as a commodity trading advisor.
    7. Section 4.21 is proposed to be amended by revising paragraph (a)
to read as follows:


Sec.  4.21  Required delivery of pool Disclosure Document.

    (a)(1) Subject to the provisions of paragraph (a)(2) of this
section, each commodity pool operator registered or required to be
registered under the Act must deliver or cause to be delivered to a
prospective participant in a pool that it operates or intends to
operate a Disclosure Document for the pool prepared in accordance with
Sec. Sec.  4.24 and 4.25 by no later than the time it delivers to the
prospective participant a subscription agreement for the pool;
Provided, That any material distributed in advance of the delivery of
the Disclosure Document is consistent with or amended by the
information contained in the Disclosure Document and with the
obligations of the commodity pool operator under the Act, the
Commission's regulations issued thereunder, and the laws of any other
applicable federal or state authority.
    (2) For the purpose of the Disclosure Document delivery
requirement, including any offering memorandum delivered pursuant to
Sec.  4.7(b)(1) or 4.12(b)(2)(i), the term "prospective pool
participant" does not include a commodity pool operated by a pool
operator that is the same as, or that controls, is controlled by, or is
under common control with, the pool operator of the offered pool.
* * * * *
    8. Section 4.22 is proposed to be amended by:
    a. revising paragraph (a) introductory text;
    b. adding new paragraph (a)(4),
    c. redesignating paragraph (b) as paragraph (b)(1),
    d. adding a new paragraph (b)(2),
    e. revising paragraph (c) introductory text,
    f. adding a new paragraph (c)(6),
    g. revising paragraph (h)(1),
    h. revising paragraph (h)(3), and
    i. adding new paragraph (h)(4), to read as follows:


Sec.  4.22  Reporting to pool participants.

    (a) Except as provided in paragraph (a)(4) of this section, each
commodity pool operator registered or required to be registered under
the Act must periodically distribute to each participant in each pool
that it operates, within 30 calendar days after the last date of the
reporting period prescribed in paragraph (b) of this section, an
Account Statement, which shall be presented in the form of a Statement
of Income (Loss) and a Statement of Changes in Net Asset Value, for the
prescribed period. These financial statements must be presented and
computed in accordance with generally accepted accounting principles
consistently applied. The Account Statement must be signed in
accordance with paragraph (h) of this section.
* * * * *
    (4) For the purpose of the Account Statement delivery requirement,
including any Account Statement distributed pursuant to Sec.  4.7(b)(2)
or 4.12(b)(2)(ii), the term "participant" does not include a
commodity pool operated by a pool operator that is the same as, or that
controls, is controlled by, or is under common control with, the pool
operator of a pool in which the commodity pool has invested.
    (b)(1) * * *
    (2)(i) The Account Statement may be distributed to a pool
participant by means of electronic media if the participant so
consents; Provided, That a commodity pool operator must, prior to the
transmission of any Account Statement by means of electronic media,
disclose: The right of the participant to receive the Account Statement
in paper form or by means of electronic delivery; the electronic media
through which the Account Statement will be delivered; the duration,
whether indefinite or not, of the period during which consent will be
effective; any charges for electronic delivery; and that consent to
electronic delivery may be revoked by the participant at any time.
    (ii) The pool operator must obtain a signed consent acknowledging
disclosure of the information set forth in paragraph (b)(2)(i) of this
section prior to the transmission of any Account Statement by
electronic media to any participant who does not qualify as an
institutional customer under Sec.  1.3(g) of this chapter.
    (c) Except as provided in paragraph (c)(6) of this section, each
commodity pool operator registered or required to be registered under
the Act must distribute an Annual Report to each participant in each
pool that it operates, and must file two copies of the Report with the
Commission, within 90 calendar days after the end on the pool's fiscal
year or the permanent cessation of trading, whichever is earlier, but
in no event longer than 90 days after funds are returned to pool
participants; Provided, however, That if during any calendar year the
commodity pool operator did

[[Page 12639]]

not operate a commodity pool, the pool operator must so notify the
Commission within 30 calendar days after the end of such calendar year.
The Annual Report must be signed pursuant to paragraph (h) of this
section and must contain the following:
* * * * *
    (6) For the purpose of the Annual Report distribution requirement,
including any annual report distributed pursuant to Sec.  4.7(b)(3) or
4.12(b)(2)(iii), the term "participant" does not include a commodity
pool operated by a pool operator that is the same as, or that controls,
is controlled by, or is under common control with, the pool operator of
a pool in which the commodity pool has invested; Provided, That the
Annual Report of such investing pool contain financial statements that
include such information as the Commission may specify concerning the
operations of the pool in which the commodity pool has invested.
* * * * *
    (h)(1) Each Account Statement and Annual Report, including an
account statement or annual report provided pursuant to Sec.  4.7(b) or
4.12(b), must contain an oath or affirmation that, to the best of the
knowledge and belief of the individual making the oath or affirmation,
the information contained in the document is accurate and complete;
Provided, however, That it shall be unlawful for the individual to make
such oath or affirmation if the individual knows or should know that
any of the information in the document is not accurate and complete.
* * * * *
    (3) Subject to the provisions of paragraph (h)(4) of this section,
the oath or affirmation must be manually signed by a representative
duly authorized to bind the pool operator.
    (4)(i) An Account Statement or Annual Report may contain a
facsimile signature, Provided, That:
    (A) The CPO maintains in accordance with Sec.  4.23 the Account
Statement or Annual Report containing the manual signature from which
the facsimile signature was made; and
    (B) The Annual Report the CPO files with a registered futures
association is manually signed.
    (ii) For each pool for which the CPO distributes an Account
Statement by means of electronic media, the CPO must make and keep in
accordance with Sec.  4.23 a manually signed copy of the Statement.
    9. Section 4.31 is proposed to be amended by revising paragraph (a)
to read as follows:


Sec.  4.31  Required delivery of Disclosure Document to prospective
clients.

    (a) Each commodity trading advisor registered or required to be
registered under the Act must deliver or cause to be delivered to a
prospective client a Disclosure Document containing the information set
forth in Sec. Sec.  4.34 and 4.35 for the trading program pursuant to
which the trading advisor seeks to direct the client's commodity
interest account or to direct the client's commodity interest trading
by means of a systematic program that recommends specific transactions
by no later than the time the trading advisor delivers to the
prospective client an advisory agreement to direct or guide the
client's account; Provided, That any material distributed in advance of
the delivery of the Disclosure Document is consistent with or amended
by the information contained in the Disclosure Document and with the
obligations of the commodity trading advisor under the Act, the
Commission's regulations issued thereunder, and the laws of any other
applicable federal or state authority.
* * * * *

    Issued in Washington, DC, on March 10, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-6180 Filed 3-14-03; 8:45 am]
BILLING CODE 6351-01-P
```