U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5430 

Facsimile: (202) 418-5547 

aradhakrishnan@cftc.gov

Division of Clearing and 

Intermediary Oversight

CFTC letter No. 06-16 

July 7, 2006 

Exemption 

Division of Clearing and Intermediary Oversight 

 

Re: “A” 

 Regulations 4.21, 4.22 and 4.23 

“B” – Request for relief from certain Disclosure Document, recordkeeping and 

reporting requirements 

“C” 

Regulations 4.31 and 4.36 

“D” – Request for relief from the Disclosure 

Document requirement 

Dear : 

This is in response to your letter dated April 11, 2006, to the Division of Clearing and 

Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the 

“Commission”), as supplemented by your letters dated May 4, 2006 and May 26, 2006, by your 

e-mail messages and by telephone conversations with Division staff (collectively, the 

“correspondence”). By the correspondence, you request, on behalf of “B”, a registered 

commodity pool operator (“CPO”), certain relief from Commission Regulations 4.21, 4.22 and 

4.231

 which concern, respectively, the disclosure, reporting and recordkeeping requirements 

applicable to registered CPOs, in connection with “B” serving as the registered CPO of “A” (the 

“Fund”). You further request, on behalf of “D”, a registered commodity trading advisor 

(“CTA”), relief from Regulations 4.31 and 4.36, which concern, respectively, Disclosure 

Document delivery and filing requirements applicable to registered CTAs, in connection with 

“D” serving as the registered CTA of “C” (the “Investing Pool”). 

Background

 

1

 Commission regulations referred to in this letter are found at 17 C.F.R. Ch. I (2006). 

They can be accessed through the Commission’s website, at: 

http://www.cftc.gov/cftc/cftclawreg.htm. 

Ananda Radhakrishnan 

 Director 
Page 2 

Based upon the representations made in the correspondence, we understand the relevant 

facts to be as follows. Interests in the Fund (“Shares”) will be offered and sold to the public 

pursuant to an effective registration statement filed with the Securities and Exchange 

Commission (“SEC”) (the “Registration Statement”).2 The Shares of the Fund will be both 

publicly-offered and listed for trading on the “D”, and it is this fact that causes “B” to seek 

relief.3 “D” seeks relief on the basis that it is an affiliated entity under common control with 

“B”. 

The Fund is being structured, and will be offered and listed, in a manner substantially 

similar to an exchange-traded fund, or ETF.4

 “B” is the Fund’s CPO, and “D” is the Fund’s 

CTA. The Fund will seek to approximate the investment performance of a futures index, “F” 

(the “Index”), as more fully described in the correspondence. Shares will be issued only in one 

or more blocks of 50,000 Shares (“Baskets”), and in the first instance, only to an initial 

purchaser, anticipated to be “G” (the “Initial Purchaser”), who will commit to purchase the entire 

initial public offering upon effectiveness of the Registration Statement.5

 The Initial Purchaser 

 

2

 Prior to making the instant request, “B” filed the relevant offering materials for review 

with both the National Futures Association (“NFA”) and the SEC. 

3

 Your request states that the Shares constitute securities for purposes of the U.S. federal 

securities laws and will be offered, sold and transferred as such. While we may not necessarily 

agree with your analysis or conclusion on this issue, the Division will not recommend that the 

Commission commence any enforcement action against the Fund or market participants in 

connection with the offer, sale and transfer of Shares in the manner contemplated by your request 

and the Disclosure Document for the Fund. 

 Further, the Division notes the relief it is providing below will not affect “B”’s obligation 

to comply with any other provision of the Commodity Exchange Act (the “Act”) or the 

Commission’s regulations issued thereunder applicable to CPOs in particular or to persons in 

general. The Act is found at 7 U.S.C. § 1, et seq. (2000), and also may be accessed through the 

Commission’s website, at: http://www.cftc.gov/cftc/cftclawreg.htm. 

4

 Unlike a typical ETF, however, the Fund will trade indirectly through a second fund 

wholly-owned by the Fund and “B”. The purpose of this two-tiered structure is to permit the 

Fund, which, as a commodity pool, would otherwise have to report its income to direct investors 

on a Form K-1, to provide information on a Form 1099 or substantially similar form, and thus in 

a format more akin to that given to ETF investors. This structure is not expected, however, to 

entail any material additional fees or costs for investors. 

 For the purpose of this letter the Division is treating both funds as a single commodity 

pool. 

5

 The Initial Purchaser, a registered broker-dealer, is the entity that sponsors the Index. As 

such, the Initial Purchaser should have access to all material information concerning the Fund at 
Page 3 

will not solicit or actively seek purchasers for Shares, and no person (other than the Initial 

Purchaser) will have any opportunity to purchase Shares prior to effectiveness of the Registration 

Statement and the listing of the Shares on the “E”.6 Subsequent to effectiveness of the 

Registration Statement, the Initial Purchaser will accept and fill orders for the Shares.7 

Additionally, the Fund may issue Baskets to “Authorized Participants” (certain registered brokerdealers who meet certain other requirements and have entered into a contractual arrangement 

with “B” governing the terms and conditions for creation and redemption of Baskets), rather than 

directly to members of the public. 

Investors will be able to purchase Shares in two different contexts, then. First, upon and 

subsequent to effectiveness of the Registration Statement, investors may purchase Shares from 

the Initial Purchaser and, if Authorized Participants decide to create additional Baskets, investors 

may purchase Shares from those Baskets. Second, investors may purchase Shares on the “E” in 

the secondary market. 

“D” will serve as the Fund’s CTA. “D” and “B” (the Fund’s CPO) are both indirect 

subsidiaries of “H”, and as such, they share several principals. Currently, “D” provides 

commodity interest trading advice pursuant to a claim of exemption under Regulation 4.7.8 As 

such, it is not required to prepare and deliver a Disclosure Document to its prospective clients, 

nor is it required to file a Disclosure Document with NFA. 

Discussion

Regulation 4.21 

Regulation 4.21(a) requires a registered CPO to deliver a Disclosure Document to 

prospective pool participants at or before the time the CPO delivers a subscription agreement for 

 

or prior to the time it purchases Shares. Also, it will have had the opportunity to review and 

comment on successive drafts of the Disclosure Document. 

6

 There will be no “road show” or other selling effort with respect to the Shares prior to the 

Registration Statement’s effectiveness and the Shares’ listing on the “D”. 

7

 The Initial Purchaser will not receive from the Fund, “B” or any of their respective 

affiliates any fee or other compensation in connection with sale of the Shares, although the Initial 

Purchaser may receive commissions and/or fees from investors who purchase the Shares. 

8

 Regulation 4.7 makes available an exemption from CTA Disclosure Document and 

recordkeeping requirements where a CTA advises only “qualified eligible persons” (“QEPs”) as 

that term is defined in the regulation. 

 To date, “D” has advised only QEPs. It filed a notice of claim of exemption under 

Regulation 4.7 on . 
Page 4 

the pool. Regulation 4.21(b) requires a CPO to obtain a signed and dated acknowledgment that a 

prospective pool participant has received a Disclosure Document before the CPO may accept 

money or other property in exchange for shares or other units of interest in the pool. The 

purpose of the regulation is “to protect pool participants – particularly those who are 

unsophisticated in financial matters – by ensuring that they are informed about the material facts 

regarding the pool before they commit their funds.”9 

You request relief from the Disclosure Document delivery requirement of Regulation 

4.21 with respect to: (1) the sale of the initial Baskets to the Initial Purchaser and resale of the 

Shares comprising those Baskets by the Initial Purchaser to the public; and (2) the sale of Shares 

by the Fund to Authorized Participants as part of the creation of additional Baskets and any 

resale of those Shares by Authorized Participants to the public. In support of your request for 

relief, you represent that the “I” Internet website maintained by “B” and its affiliates (www. “I” 

.com), the “E”’s website and the SEC’s EDGAR database (collectively, the “Website Sources”) 

will contain a current Disclosure Document for the Fund.10 You further state that “B” expects 

that prospective or actual investors will utilize the services of a registered broker-dealer, who 

will either inform them where they can obtain the current Disclosure Document, or, upon 

request, will deliver a copy of the current Disclosure Document.11 

With respect to secondary market purchases on the “E”, you conclude that “B” is not 

subject to Regulation 4.21. The Division agrees with this conclusion.12 

 

9

 44 Fed. Reg. 1918, 1920 (Jan. 8, 1979). 

10 “B” will comply with Regulation 4.26 (which contains various Disclosure Document 

updating requirements) in connection with updating this Disclosure Document. 

11 “B” expects that the instances where the services of a registered broker-dealer would not 

be utilized would be limited to cases where the party with whom the investor is dealing (such as 

a bank or trust company, or in the case of a foreign investor, a foreign broker-dealer) is exempt 

from the requirement to register as a broker-dealer. In such cases, however, the exempt entity 

would be expected to have acquired Shares from the Initial Purchaser, an Authorized Participant, 

or another registered broker-dealer. 

12 The CPO’s obligation to deliver a Disclosure Document (and the requirement to obtain a 

signed acknowledgment of receipt) extends to the direct purchaser of units of participation, and 

not to persons who purchase from that purchaser. In this regard, the Commission has stated that, 

with respect to the transfer of a participation unit in a commodity pool, the CPO of the pool “is 

not required to provide a Disclosure Document (Rule 4.21) to a person who purchases a unit of 

participation or interest in the pool from a pool participant if the pool operator did not solicit the 

purchase.” 44 Fed. Reg. 25658, 25659 (May 2, 1979). 
Page 5 

Regulations 4.22(a) and (b) 

Regulation 4.22(a) requires a registered CPO to deliver to pool participants periodic 

unaudited Account Statements, which must include, among other information, Statements of 

Income (Loss) and of Changes in Net Asset Value. Regulation 4.22(b) provides that Account 

Statements be delivered monthly for pools with net assets of more than $500,000 and otherwise 

at least quarterly.13 The purpose of these regulations is to “ensure that participants have a 

reasonably current knowledge of the pool’s trading performance and operating costs.”14 

An issuer of exchange-traded Shares held in book-entry form through the Depository 

Trust Company (such as the Fund) typically does not readily know the identities of its ultimate 

beneficial owners. You request relief from the Account Statement delivery requirement on the 

grounds that that it would be unduly burdensome and costly to require “B” to ascertain on a 

monthly basis the identities of purchasers of Shares in the secondary market in order to comply 

with the requirement under Regulations 4.22(a) and (b) to deliver monthly Account Statements 

to participants in the Fund.15 In this regard, you explain that, while publicly-offered commodity 

pools typically provide for redemption of shares no more frequently than monthly, because of the 

secondary market for the Fund’s shares on the “E”, ownership of the Fund’s shares is expected to 

change frequently on a daily basis. 

In support of your request, you represent that the same information that would otherwise 

be provided in the Fund’s monthly Account Statements, including the Fund’s net asset value and 

the certification required by Regulation 4.22(h), will be readily available on the “I” website, of 

which availability the Disclosure Document will advise participants.16 

 

13 Regulation 4.22(c) requires a registered CPO to distribute a certified Annual Report to 

pool participants. You have not requested any relief from Regulation 4.22(c) in connection with 

the operation of the Fund, and the Division understands that “B” will comply with Regulation 

4.22(c) in connection with its operation of the Fund. You state in this regard that the burden of 

ascertaining beneficial ownership once annually is significantly less than having to do so on a 

monthly basis. 

14 44 Fed. Reg. at 1922. 

15 You make this request not only with respect to investors purchasing Shares in the 

secondary market, but also with respect to those purchasing from the Initial Purchaser or from an 

Authorized Participant. Once an investor has purchased Shares, whether directly from the Initial 

Purchaser, from an Authorized Participant, or on the “E”, the Shares can be freely sold on the 

secondary market, and the same difficulties will be encountered in tracking the current owner. 

16 Further, the “E” website will link to the “I” website for other financial information, 

including the Account Statements. Pursuant to Regulation 4.22(h), a representative duly 

authorized to bind the CPO must sign an oath or affirmation that, to the best of the knowledge 
Page 6 

Regulation 4.23 

Regulation 4.23 specifies the types of books and records a registered CPO must make in 

the course of operating a pool, and requires that those books and records be kept at the CPO’s 

main business address. The books and records must be available to pool participants for 

inspection and copying during normal business hours, and must be open and available for 

inspection by any representative of the Commission or the United States Department of Justice. 

The purpose of the regulation is “to enable pool participants and the Commission to ascertain 

whether the CPO is dealing properly with pool funds.”17 

You request relief from the location requirement of Regulation 4.23(a) such that “B” may 

comply with the location requirement of that regulation by having books and records of the Fund 

maintained at the offices of “J”, a national banking association affiliated with “B”; “K”, the 

Fund’s administrator, a Massachusetts banking corporation; and “L”, at their respective 

addresses as specified in your April 11, 2006 letter.18 

You further ask for confirmation that neither “J”, “K”, nor “L” will be deemed to be 

acting as a CPO solely by reason of keeping Fund records in the manner described in your 

correspondence, which the Division hereby so confirms. In this regard, the Division notes that 

neither firm will be acting in the manner contemplated by the statutory definition of a 

“commodity pool operator” – e.g., neither will be promoting the pool by soliciting, accepting or 

receiving from others property for the purpose of commodity interest trading, and neither will 

have the authority to hire (and to fire) the Fund’s commodity trading advisor, and to select (and 

to change) the Fund’s futures commission merchant.19

 

and belief of the individual making the oath or affirmation, the information contained in the 

Account Statement is accurate and complete. 

17 44 Fed. Reg. at 1922.

18 Each of “J”, “K” and “L” has provided the Division with signed acknowledgments that 

Fund books and records may be inspected and copied by any representative of the Commission 

or the United States Department of Justice and may be inspected and copied during normal 

business hours by Fund participants. The acknowledgments specify, by subparagraph of 

Regulation 4.23, the respective classes of books and records that each of “J”, “K” and “L” will 

be keeping. 

19 See, e.g., 49 Fed. Reg. 4778, 4780 (Feb. 2, 1984) (Commission acknowledged staff 

practice of employing these criteria in determining whether a person is, or is not, a CPO); and 

CFTC Staff Letter 05-19 [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶30,164 

(November 10, 2005) (Division granted a CPO an exemption to keep pool books and records 

with the pool’s administrator and its distributor, neither of which was thereby deemed to be 

acting as a CPO of the pool). 
Page 7 

Regulations 4.31 and 4.36 

Regulations 4.31 and 4.36 respectively require each registered CTA to provide a 

Disclosure Document for the trading program pursuant to which the advisor seeks to direct or 

guide a prospective client’s account to the prospective client by no later than the time the CTA 

delivers to the prospective client the advisory agreement, and to file the Disclosure Document 

with NFA. Where the CTA’s prospective client is a commodity pool, the CTA provides the 

Disclosure Document to the CPO of the pool. In turn, the CPO utilizes the information in the 

CTA’s Document in preparing the Disclosure Document that the CPO delivers to prospective 

participants in its pool. However, although “D” is a registered CTA, because it has claimed 

exemption under Regulation 4.7 from the requirements of Regulation 4.31, “D” is not currently 

required to prepare and deliver a Disclosure Document.20 

Thus, you have requested relief from Regulations 4.31 and 4.36, such that “D” would not 

have to deliver a Disclosure Document to “B”, its corporate affiliate. In support of your request, 

you note that: (1) “B” and “D” are both indirect subsidiaries of “M”; and (2) they share certain 

management personnel. In further support of your request, you represent that “D” will make 

available to “B” all of the information that “B” needs in order to prepare the Fund’s Disclosure 

Document in accordance with Regulation 4.21. 

Conclusion

Based upon the representations made in the correspondence, the Division believes that 

granting your request would not be contrary to the public interest and to the purposes of the 

regulations at issue. Accordingly, pursuant to the authority delegated in Regulation 140.93(a)(1), 

the Division hereby exempts “B” in connection with the operation of the Fund from: (1) the 

requirement of Regulation 4.21(b) to obtain a signed acknowledgment of receipt of a Disclosure 

Document before accepting funds, securities or property from a prospective pool participant with 

respect to sales of Shares to the Initial Purchaser and sales by the Initial Purchaser, or sales of 

Shares to Authorized Participants and sales by Authorized Participants when Authorized 

Participants create additional Baskets, subsequent to effectiveness of the Registration Statement, 

provided that the information required to be contained in the Disclosure Document is maintained 

and kept current on the Website Sources; (2) the requirement of Regulation 4.22 to deliver 

monthly Account Statements to purchasers of Shares, provided that the information that would 

otherwise be contained in such reports is maintained on “B”’s “I” website; and (3) the 

requirement of Regulation 4.23 to keep required books and records at “B”’s main business office 

to the extent that such books and records are maintained at the offices of “J”, “K” and “L”. 

Consistent with prior practice,21 the exemption from the books and records location requirement 

 

20 See n. 8, supra. 

21 See, e.g., CFTC Staff Letter No. 05-19. 
Page 8 

of Regulation 4.23 is subject to the conditions that: (1) “B” notify the Division if the location of 

any of the books and records required to be kept by Regulation 4.23 changes from that as 

represented to the Division; (2) “B” remain responsible for ensuring that all books and records 

required by Regulation 4.23 are kept in accordance with Regulation 1.31 and for assuring the 

availability of such books and records to the Commission, NFA, and any other agency authorized 

to review such books and records in accordance with the Act and Commission regulations; (3) 

within forty-eight hours after a request by a representative of the foregoing, “B” obtain the 

original books and records from the offices of “J”, “K” or “L”, as the case may be, and will 

provide them for inspection at “B”’s main business office in San Francisco, California; (4) “B” 

disclose in the Fund’s Disclosure Document the location of its books and records that are 

required under Commission Regulation 4.23; and (5) “B” remain fully responsible for 

compliance with Regulation 4.23. 

Further, pursuant to the authority delegated in Regulation 140.93(a)(1), the Division 

hereby exempts “D” from the Disclosure Document requirements of Regulation 4.31 and 4.36 in 

connection with providing commodity interest trading advice to the Fund. 

This letter exempts “B” from Regulations 4.21, 4.22 and 4.23, and “D” from Regulations 

4.31 and 4.36, as stated above. It does not excuse “B” or “D” from compliance with any other 

aspect of the Commission’s disclosure, reporting and recordkeeping requirements applicable to 

registered CPOs and CTAs, nor does it excuse “B” or “D” from compliance with any other 

applicable requirements contained in the Act or in the Commission’s regulations issued 

thereunder. For example, “B” and “D” remain subject to Regulation 1.31, and the Commission 

maintains its right under that regulation to inspect the required books and records of “B” at the 

offices of “J”, “K” or “L”, at the addresses provided in the correspondence. Additionally, “B” 

and “D” remain subject to all antifraud provisions of the Act and the Commission’s regulations, 

to the reporting requirements for traders set forth in Parts 15, 18 and 19 of the Commission’s 

regulations, and to all other applicable provisions of Part 4. 

 This letter is based upon the representations made to us and is subject to the conditions 

set forth above. Any different, changed or omitted material facts or circumstances might render 

this letter and the exemptions granted herein void. In this connection, you must notify us 

immediately in the event that the operations of “B”, “D” or the Fund change in any material way 

from those represented to us. 
Page 9 

 If you have any questions concerning this correspondence, please contact me or 

Christopher W. Cummings, Special Counsel, at (202) 418-5445. 

 Very truly yours, 

 Ananda Radhakrishnan 

 Director 

CWC: cc 

cc: Regina Thoele, National Futures Association 

 Stephen Obie, New York Regional Office