u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5536

Division of Clearing and

Intermediary Oversight

February 2, 2011

To:

Attention:

Subject:

All Commodity Pool Operators

Chief Financial Officer

Annual Reporting for Commodity Pools

The Division ofClearing and Intermediary Oversight ("DCIO" or "Division") ofthe

Commodity Futures Trading Commission ("CFTC" or "Commission") is issuing this letter to assist

commodity pool operators ("CPOs") with the preparation and filing of commodity pool annual

financial reports required under the Commodity Exchange Act ("Act") and Commission

regulations. 1 This letter highlights current regulatory changes affecting CPOs with respect to

financial filings and provides reminders ofregulatory requirements in response to common

deficiencies observed in prior years' annual reports. CPOs, including those that operate in non-U.S.

jurisdictions, are encouraged to provide this letter to their public accountants and others assisting in

the preparation of commodity pool annual financial statements.

The Division has issued similar guidance letters in prior years, which are available at the

Commission's website.2 Those letters should be consulted as they contain information relevant for

many commodity pools, including the following topics:

• Reports of Series Funds Structured with a Limitation on Liability Among the Different

Series (2009 letter)

• American Institute ofCertified Public Accountants' ("AICPA") Statement ofPosition

("SOP") 03-04, Reporting Financial Highlights and Schedule ofInvestments by

Nonregistered Investment Partnerships: An Amendment to the Audit andAccounting Guide,

Audits ofInvestment Companies (Accounting Standards Codification (ASC) 946-210-50-4)

(2005 letter); an illustration ofthe investments schedule can be found in Attachment B of

this letter);

• A CPO's reporting obligation when claiming relief under Regulation 4.13 for a pool

1The Act is codified at 7 U.S.C. §1 et seq. The Commission's regulations are found in Title 17 of

the Code of Federal Regulations. The Commission's internet website, www.cftc.gov, provides links

to both the Act and Commission regulations.

2 Prior letters from 1998 forward are available at the Commission's website at

http://www.cftc.gov/industrvoversight/intermediaries/guidancecporeports.htmI.
previously operated without exemptive relief(2006 letter);

• A CPO's obligation to provide notice ofreplacement ofaccountant (2006 letter);

• Notice regarding election of a fiscal year other than the calendar year (2006 letter); and

• Process for requestirig confidential treatment of commodity pool annual reports (2006

letter).

In addition, CFTC interpretations and other staffletters that provide written guidance

concerning the Act and the Commission's regulations are available on the Commission's website.

In particular, an illustrative example regarding Regulation 4.22(e)(2) is available in CFTC

Interpretative Letter 94-3, Special Allocations ofInvestment Partnership Equity.

I. Recent Regulatory Activity

The CFTC issued final forex rules, which became effective on October 18, 2010. Any firm

acting as a counterparty to certain off-exchange forex transactions involving retail persons is

required to register as a Retail Foreign Exchange Dealer. In addition, any individual acting as a

forex solicitor, account manager and/or pool operator is required to register with the Commission as

an Introducing Broker, Commodity Trading Advisor (CTA) or CPO, as appropriate, and to become

a member ofthe National Futures Association (NFA).

NFA also adopted compliance rules applicable to CPOs as follows:

• Rule 2-45 prohibits a CPO from permitting a commodity pool to use any means to make a

direct or indirect loan or advance ofpool assets to the CPO or any person or entity affiliated

with the CPO.

• Rule 2-46 requires each CPO that is a member ofNFA to file, on a quarterly basis, with

NFA, the following information for each pool the CPO operates that is subject to a reporting

requirement under Regulation 4.22 (which includes exempt pools under Commission

Regulation 4.7):

• the identity ofthe pool's administrator, carry broker(s), trading manager(s) and

custodian(s);

• a statement of changes in net asset value for the quarterly reporting period;

• monthly performance for the three months comprising the quarterly reporting period;

and

• a schedule ofinvestments identifying any investment that exceeds 10% ofthe pool's net

asset value at the end ofthe quarterly reporting period.

Such information must be filed with NFA within 45 days ofthe end ofthe quarterly

reporting period, and must be filed using NFA Easyfile electronic filing system.

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NFA also updated the SelfExamination Checklist for CPOs and CTAs as of September

2010. NFA Compliance Rule 2-9 (Supervision) requires members to review their operations on a

yearly basis using the NFA self-examination checklist

II. Filing Deadlines and Procedures for Commodity Pool Annual Reports

Commission regulations establish the dates by which commodity pool annual reports must

be provided to pool participants and received by the NFA.

Specifically, Commission regulations provide that:

• Commodity pool annual reports must be distributed to pool participants and filed

with NFA within 90 calendar days ofthe pool's fiscal year end. The filing date for

annual reports with a year end ofDecember 31, 2010 is March 31, 2011. Copies ofthe

annual reports must be filed with the NFA. A CPO should not file copies ofthe annual

reports with the Commission.

• CPOs must submit annual reports to NFA electronically in accordance with NFA's

EasyFile electronic filing system and procedures.

• An annual report may be distributed in hardcopy or electronically to pool

participants. The CPO, however, must obtain a participant's prior consent to

distribute an annual report in electronic format.

• Applications for an extension oftime to file an annual report must be submitted to

NFA prior to the annual report due date and must include the information required

by Regulation 4.22(t)(1). Any request for an extension oftime that exceeds 90 days

from the original due date must be submitted to the Commission, and a copy filed with

NFA. The Commission generally does not grant extensions that would exceed 90 days

from the original due date.

• CPOs of commodity pools that invest in other collective investment vehicles may

obtain an "automatic" 90-day extension ofthe distribution and filing due date by

submitting the information specified by Regulation 4.22(t)(2) to NFA prior to the

original due date. In subsequent years, the CPO will be presumed to operate the pool as a

fund offunds and continue to qualify for the automatic extension. However, the CPO is

obligated to inform the NFA ifthose circumstances change and to begin filing within the

standard 90-day time frame. In addition, this extension oftime has been made available to

Regulation 4.7 exempt pools, even ifthe report is not audited by a certified public

accountant.

• Draft financial statements. Some CPOs have filed incomplete, or "draft," unaudited

financial statements for pools exempt under Regulation 4.7 to meet the due dates for such

filings. CPOs are reminded that although Regulation 4.7 provides exemption from certain

requirements, including the requirement that financial statements be subject to an audit by a

certified public accountant, annual reports filed with NFA and distributed to pool

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participants must include all required information and be in accordance with U.S. Generally

Accepted Accounting Principles ("GAAP") or, in some instances, International Financial

Reporting Standards ("IFRS") to be considered timely filed. Draft unaudited financial

statements do not satisfy the filing requirements.

III. Master/Feeder and Fund of Funds

Master/Feeder Structures. FASB ASC 946-205-45-6 permits nonpublic feeder pools

either to follow the disclosure and reporting provisions ofFASB ASC 946-210, or to present a

complete set ofmaster financial statements with each feeder financial statement.

Fund of Funds. Year end pool financial statements must disclose specific income and fee

information for investee pools as specified in Regulation 4.22(c)(5). CPOs must disclose amounts

ofincome and fees associated with investments in investment partnerships that exceed five percent

ofthe commodity pool's net assets. Illustrative disclosures are in Attachment B to this letter.

If a commodity pool's annual financial statements are found deficient with respect to

compliance with GAAP, the CPO may be required to revise the commodity pool's financial

statements, distribute the revised statements to participants, and re-file the statements with NFA.

IV. Requests for Limited Relieffrom U.S. GAAP Compliance for Certain Offshore

Commodity Pools

Regulation 4.22(d)(2), applicable to year end annual reports, permits CPOs that operate

commodity pools organized under the laws of a non-U.S. jurisdiction to prepare financial statements

for such pools using IFRS, provided that:

• The use ofIFRS does not conflict with any representations made in the pool's offering

memorandum or other operative document;

• The IFRS financial statements contain a condensed schedule ofinvestments as required by

U.S. GAAP (FASB ASC 946-210-50), or, ifrequired, a full schedule ofinvestments;

• The IFRS financial statements report any special allocations ofpartnership equity in

accordance with Commission Regulation 4.22(e)(2); and

• IfIFRS would require that the pool consolidate its financial statements with another entity,

such as a feeder fund consolidating with its master fund, all applicable disclosures required

by U.S. GAAP for the feeder fund must be presented with the reporting pool's consolidated

financial statements.

To claim the reliefto use IFRS accounting standards, the CPO must file a notice with NFA

within 90 days after the end ofthe pool's fiscal year. Furthermore, Regulations 4.22(a)(5) and

4.7(b)(2) permit a CPO to present a pool's periodic account statements and other disclosure

documents on the same basis as that ofits annual report.

In addition, Division staff has, on a case-by-case basis, provided limited reliefto CPOs that

operate offshore pools by allowing such commodity pools to prepare and to present their financial

statements in accordance with another comprehensive basis of accounting other than IFRS, such as

United Kingdom or Irish accounting standards, instead ofU.S. GAAP. In each case, the Division's

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reliefto use accounting standards other than U.S. GAAP was conditioned upon the offshore pool

following the additional elements now required by Regulation 4.22(d)(2)(i).

CPOs seeking to prepare and present their offshore pools' financial statements on another

comprehensive basis of accounting other than IFRS may request relieffrom the U.S. GAAP

requirement by submitting their requests, enumerating compliance with each ofthe elements

specified in Regulation 4.22(d)(2), to the undersigned at the address shown on this letterhead. If

you have any further questions, contact Ronald Carletta, Branch Chief, or Al Goll, Auditor, at the

phone numbers or addresses listed in Attachment A.

v. Reports ofLiquidating Pools

Commission Regulation 4.22(c)(7) provides for the filing and distribution of a final annual

report within 90 days of a pool's permanent cessation oftrading. Alternatively, the CPO ofa

liquidating pool may provide the following information within 90 days ofthe permanent cessation

oftrading in lieu of an otherwise required final annual report:

• Statements ofOperations and Changes in Net Assets for the relevant period as contained in

the regulation; and,

• An explanation ofthe winding down ofthe pool's operations with written disclosure that all

interests in, and assets of, the pool have been redeemed, distributed, or transferred on behalf

ofparticipants; or

• In the event that all interests in, and assets of, the pool have not been distributed, redeemed,

or transferred to participants by the time the final report is issued, the CPO must disclose the

value of assets remaining to be distributed and an approximate timeframe for when the CPO

expects distribution to occur. Ifthe CPO is unable to complete distribution within the

estimated timeframe, the CPO must update the above detailed information to both NFA and

the pool's participants in writing.

Ifthe CPO is not able to liquidate the pool's assets within time to prepare, file, and distribute

the final annual report as prescribed by the regulation, Commission Regulation 4.22(c)(7) requires

the CPO to provide written notice to each participant and NFA, disclosing the following:

• The value of assets remaining to be liquidated, the timeframe within which liquidation is

expected to occur, any impediments to liquidation and any fees or expenses that will be

charged to the pool prior to final distribution;

• Which financial reports the CPO will continue to provide to participants from the time ofthe

cessation oftrading until the final annual report is distributed, and the frequency ofsuch

reports, pursuant to the pool's constitutive documents; and

• The timing ofthe final annual report.

Additionally, a CPO who is availing itself ofthe alternative filing in lieu of a final annual

report may file unaudited information provided that the CPO obtains waivers from all participants

and certifies the same to NFA when the final report is filed.

This relief also is applicable for pools that have claimed an exemption under Regulations 4.7

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or 4.12.

VI. Accounting Resources

A. FASB Accounting Standards Codification

On July 1, 2009 the Financial Accounting Standards Board (FASB) launched the FASB Accounting

Standards Codification (the Codification) as the single source of authoritative nongovernmental

U.S. GAAP. Although the FASB does not provide guidance in how specific requirements ofGAAP

are referred to in footnotes offinancial statements, it notes that prior to the issuance ofthe

Codification it was not unusual for footnotes to refer to specific standard numbers (for example, "as

required by Statement 133"). Because these references are no longer the source ofGAAP, such

references will change. The FASB encourages the use ofplain English to describe broad Topic

references in the future. For example, to refer to the requirements ofthe Derivatives and Hedging

Topic, they suggest a reference similar to "as required by the Derivatives and Hedging Topic ofthe

FASB Accounting Standards Codification" and not use the specific numeric reference.

B. AICPA Commodities Audit Practice Aid

The AICPA Audit Practice Aid, Audits ofFutures Commission Merchants, Introducing

Brokers, and Commodity Pools Second Edition (product number 006639), is a useful tool for

auditors and accountants of commodity entities. It can be purchased at the AICPA website:

http://www.CPA2biz.com. CPOs and public accountants should also ensure that they monitor the

Commission for recent developments which may not be reflected in the Audit Practice Aid.

C. AICPA Audit Risk Alert

The AICPA 2010 Audit Risk Alert ("ARA") Financial Institutions Industry Developments,

Including Depository and Lending Institutions and Brokers and Dealers in Securities contains

sections on the commodities industry. The ARA can be purchased at the AICPA website:

http://www.CPA2biz.com.

D. FASB ASC Topic 820 (Formerly FAS 157, Fair Value Measurements)

Resources that may be helpful in understanding and applying FASB ASC Topic 820 are:

• Measurements ofFair Value in Illiquid (or Less Liquid) Markets, issued by the AICPA

Center for Audit Quality available at

http://www.thecag.org/resources/pdfslMeasurementsIlliguidMarkets.pdf

• ASC 275-10-50, Risks and Uncertainties (AICPA Statement ofPosition 94-6, Disclosure of

Certain Significant Risks and Uncertainties, when auditing financial statements that contain

complex fair value measurements);

• ASC 820-10, Fair Value Measurements and Disclosure: Investments in Certain Entities

That Calculate Net Asset Value per Share (or Its Equivalent) - (guidance that generally the

net asset value reported by investee investment companies will continue to be an acceptable

fair value indicator, with certain exceptions.)

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E. AICPA Technical Guidance

Beginning at paragraph 8.23, the AICPA Audit and Accounting Guide, Investment

Companies (May 1, 2010 edition) discusses organization and offering costs. The AICPA issued

technical guidance regarding accounting treatment ofoffering costs incurred by investment

partnerships.3 This guidance:

• Provides that investment partnerships that continually offer interests should defer offering

costs incurred prior to commencement ofoperations and then amortize such costs,

generally on straight-line basis, over the time period that it continually offers interests, up

to a maximum of 12 months; and

• Defines the phrase "continually offer interests."

Registrants are reminded that organization costs are not affected by this guidance and must

be charged to expense as incurred as required by FASB Codification Section 720-15-25-1 (AICPA

SOP No. 98-5, Reporting on the Costs ofStart-up Activities.) However, ifappropriately disclosed

to investors and potential investors, net asset value used to compute investment entrance and exit

values, may be adjusted to amortize such costs differently, but generally not to exceed a period of

60 months.

IX. DeIO and NFA Contact Information

If a CPO, a public accountant, or other member ofthe public has any questions on the

foregoing, please feel free to contact the DCIO staffor NFA stafflisted in Attachment A to this

letter.

Very truly yours,

3See paragraph 8.33 ofthe AICPA Audit and Accounting Guide, Investment Companies (May 1,

2010 edition).

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ATTACHMENT A

CFTC DIVISION OF CLEARING AND INTERMEDIARY OVERSIGHT CONTACT

INFORMATION

Regional Office Locations Contacts Location of

CPO's

Principal

Office

Eastern Region

140 Broadway, 19th Floor Ronald A. Carletta All states east of

New York, NY 10005- Phone: (646)-746-9726 the Mississippi

1146 E-Mail: rcarletta@cftc.gov River, except

Illinois, Indiana,

Al 0011 Michigan, Ohio,

Phone: (646)-746-9723 and Wisconsin.

E-Mail: agol1@cftc.gov Any location

outside ofthe

Fax: (646)-746-9937 United States

Central Region

525 West Monroe Street Lisa M. Marlow Illinois, Indiana,

Suite 1100 Phone: 312-596-0566 Michigan, Ohio,

Chicago, IL 60661 Fax: 312-596-0711 and Wisconsin

E-Mail: lmarlow@cftc.gov

Southwestern Region

Two Emanuel Cleaver II Kurt Harms All states west

Boulevard, Suite 300 Phone: 816-960-7711 ofthe

Kansas City, MO 64112 Fax: 816-960-7750 Mississippi

E-Mail: khamls@cftc.gov River

National Futures Association Contact Information

National Futures Association Tracy Hunt, Senior Manager, Compliance

300 South Riverside Plaza, Phone: 312-781-1284 Fax: 312-559-3453

Suite 1800 E-Mail: thunt({i)nfa.futures.org

Chicago, IL 60606

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ATTACHMENT B

ILLUSTRATION - Fund ofFunds Additional Disclosures

Note X. Investments

As of December 31, 200X, ABC Fund invested in other funds, none ofwhich were related parties.

The following table summarizes ABC Fund's investments in other funds as ofDecember 31, 200X. Funds in

which ABC Fund invested more than 5% ofits net assets are individually identified, while smaller

investments in three other funds are aggregated. The management agreements ofthe investee funds provide

for compensation to the managers in the form offees ranging from 1% to 3% annually of net assets and

performance incentive fees ranging from 5% to 25% of net profits earned.

% ofABC's Income Fees Investment Redemptions

Investment Net Assets Fair Value (Loss) Mgmt Incentive Objective Permitted·

Airjo Fund 5.1 $ 2,550,000 $200,000 $ 25,000 $ 30,000 Emerging market Quarterly

Ltd.

Carron 5.2 2,600,000 210,000 26,000 42,000 Sector investment Monthly

Int'l Fund

Vital Fund 5.6 2,800,000 (30,000) 28,000 ° International equity Semi-Annual

NV

Other 4.2 2,100,000 100,000 24,000 25,000 Other Monthly-Annually

funds:

Total 2.O.J.% $10.050000 $480.000 $103000 $97000

An alternative illustrative table, for unusual cases, where the fee information cannot be obtained is shown

below:

% ofABC's

Investment Net Assets Fair Value

Income

(Loss)

Fees

Mgmt Incentive

Investment

Objective

Redemptions

Permitted.

Airjo Fund 5.1 $ 2,550,000

Ltd.

$200,000 $ 25,000 $ 30,000 Emerging market Quarterly

Monthly

Semi-Annual

Other Monthly-Annually

International

equity

Sector investment

*

42,000

25,000

$97.000

*

24,000

26,000

$75.000

100,000

510,000

(30,000l

210,000

2,100,000

7,200,000

2,800,000

5.2 2,600,000

14.4

5.6

Carron

Int'l Fund

Other

funds:

Subtotal

Vital Fund

NV

Total 20 J% $10.050.000 $480.000

*=The fund operator is not able to obtain the specific fee amounts for this fund and does not know what

those amounts are. However, management fees are computed based on 1% per year of net asset balances at

the beginning of each month; incentive fees are computed based on 20% per year of net income.

• Note any funds in which redemptions have been suspended.

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