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. 05-19 

November 10, 2005 

Exemption 

Division of Clearing and Intermediary Oversight 

 

Re: Rules 4.21, 4.22 and 4.23 

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

reporting requirements in connection with the operation of the “B”. 

Dear: 

This is in response to your letter dated August 12, 2005, to the Division of Clearing and 

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

“Commission”), as supplemented by your letters dated September 28, 2005 and October 4, 2005, 

August 29, 2005 presentation to Commission staff, e-mail messages, and telephone 

conversations with Division staff (the “correspondence”).1 By the correspondence, you request, 

on behalf of “A”, a registered commodity pool operator (“CPO”), in connection with the 

operation by “A” of “B” (the “Fund”), certain relief from Commission Rules 4.21, 4.22 and 4.232

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

to registered CPOs. 

The securities of 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 

 

1

 The August 29, 2005 presentation included contributions from representatives of “C”, the 

“D”) and your law firm describing the proposed structure and operation of the Fund for the 

benefit of staff of the Division, as well as staff of the Division of Market Oversight. 

2

 Commission rules referred to in this letter are found at 17 C.F.R. Ch. I (2005). They can 

be accessed through the Commission’s website: http://www.cftc.gov/cftc/cftclawreg.htm. 

Ananda Radhakrishnan 

 Director 
Page 2 

“Registration Statement”).3 But unlike previous publicly-offered commodity pools, the Shares 

will be listed for trading on the “D”, and it is this fact that causes “A” to seek relief.4

 

Background

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

facts to be as follows. The Fund is being structured, and will be offered and listed, in a manner 

substantially similar to an exchange-traded fund, or ETF.5 The Fund will seek to track the 

performance of a futures index, the “E” (the “Index”), by trading the futures contracts that make 

up the Index, with the same proportionate weighting among contracts as is found in the Index. 

Shares will be issued in the first instance to “Authorized Participants” (certain registered brokerdealers who are also participants in the “F” in blocks of 200,000 Shares (“Baskets”), rather than 

directly to the public. Once the Registration Statement for Shares becomes effective, a retail 

investor will be able to purchase Shares from Authorized Participants or in the secondary market 

by placing an order with the investor’s own registered broker-dealer. 

The initial public offering will involve the sale of Shares, on a maximum/minimum basis, 

to Authorized Participants. Consistent with customary practice in registered public offerings, 

during the period before the SEC declares the Registration Statement effective (the “pre-effective 

period”), Authorized Participants will have solicited interest and will have received purchase 

commitments from investors. Each of those investors will have acknowledged receipt of a 

preliminary prospectus, which will comply in full with the requirements for Disclosure 

 

3

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

with both the National Futures Association (“NFA”) and the SEC. By letter dated September 30, 

2005, NFA stated that it had no further comments on the materials. 

4

 In this regard, you have represented that “D” listing will not affect “A’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: http://www.cftc.gov/cftc/cftclawreg.htm. 

5

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

wholly-owned by the Fund and “A”. 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. 
Page 3 

Documents in Part 4 of the Commission’s rules,6 and which “A” will update in accordance with 

Commission requirements.7

 Upon effectiveness of the Registration Statement, and assuming that 

purchase commitments have been obtained for the minimum number of Shares, Baskets will be 

issued to the Authorized Participants, who will sell the Shares comprising those Baskets to the 

investors who committed to purchase during the pre-effective period. “A” has informed the 

Division that the SEC considers the sale of Shares by the Fund to Authorized Participants and the 

resale of Shares by Authorized Participants to investors to be one offering by the Fund through 

the Authorized Participants, and that the Authorized Participants are acting as underwriters 

within the meaning of the federal securities laws. Accordingly, Authorized Participants selling 

Shares directly to investors under the foregoing scenario (i.e., as underwriters) will be required to 

deliver a final prospectus in connection with each such sale. 

To encourage the trading price of Shares to maintain a stable relationship with the Fund’s 

net asset value, in the period following effectiveness of the Registration Statement, Authorized 

Participants are expected to create or redeem Baskets, depending upon whether purchasing or 

selling of Shares predominates in the secondary market. In addition, after effectiveness of the 

Registration Statement, investors will be able to buy and sell Shares freely on the “D”. 

Investors will be able to purchase Shares in three different contexts. First, during the preeffective period, Investors who commit to purchase Shares will receive a preliminary prospectus 

and will acknowledge receipt thereof, all prior to actually purchasing their Shares. Second, upon 

effectiveness of the Registration Statement, if Authorized Participants decide to create additional 

Baskets, investors purchasing Shares from those Baskets will receive a prospectus, but after the 

purchase, at the time the investor receives a trade confirmation in accordance with usual custom 

in the securities industry pursuant to applicable provisions of federal securities laws and 

regulations. Third, an investor who purchases Shares on the “D” in the secondary market 

generally will not be provided a prospectus, but the same will be readily available. 

Discussion

Rule 4.21 

Rule 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 the pool. 

Rule 4.21(b) requires a CPO to obtain a signed and dated acknowledgment that a prospective 

 

6

 The Commission has stated that “[i]n those cases where a CPO chooses to provide a 

prospectus to prospective pool participants, the Commission will permit that prospectus to be 

supplemented to comply with the specific requirements of Rule 4.21.” 44 Fed. Reg. 1918, 1922 

(Jan. 8, 1979). You have represented that the Fund’s preliminary prospectus will comply with 

the form and content requirements of Rule 4.21. Thus, for the purpose of this letter, the terms 

“preliminary prospectus,” “prospectus” and “Disclosure Document” are equivalent. 

7

 See, e.g., Rule 4.26, which contains various Disclosure Document updating requirements. 
Page 4 

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 rule’s purpose 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.”8 

The sale of Shares in the initial public offering will be conducted in compliance with 

Rule 4.21. To the extent, if any, that Authorized Participants may subsequently create additional 

Baskets and sell those Shares to investors, you claim that relief is required because investors 

purchasing Shares in these transactions will receive the Fund’s prospectus/Disclosure Document 

after the actual purchase, at the same time that they receive the confirmation in accordance with 

usual custom in the securities industry pursuant to applicable provisions of federal securities 

laws and regulations. With respect to secondary market purchases on the “D”, you conclude that 

“A” is not subject to Rule 4.21, a conclusion with which the Division agrees.9

 

In support of your request for relief from Rule 4.21, you state that the Internet websites 

maintained by “A”, the Fund, the “D” and the SEC (the “Website Sources”) will contain a 

current prospectus/Disclosure Document for the Fund.10 Further in this regard, you state that 

virtually every prospective or actual investor is expected to utilize the services of a registered 

broker-dealer, who will direct them to the relevant website to access the current prospectus, or, 

upon request, will deliver a copy of the current prospectus.11 

Rules 4.22(a) and (b) 

Rule 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. Rule 4.22(b) provides that Account Statements be delivered 

 

8

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

9

 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). 

10 “A” similarly will comply with Rule 4.26 in connection with updating this 

prospectus/Disclosure Document. 

11 The only instances where the services of a registered broker-dealer would not be utilized 

would be where an investor has an account with a bank or trust company that is exempt from the 

requirement to register as a broker-dealer. 
Page 5 

monthly for pools with net assets of more than $500,000 and otherwise at least quarterly.12 The 

purpose of these rules is to “ensure that participants have a reasonably current knowledge of the 

pool’s trading performance and operating costs.”13 

An issuer of exchange-traded securities held in book-entry form through “F” (such as the 

Fund) usually does not readily know the identities of the investors who own those securities. 

You claim that it would be unduly burdensome and costly to require “A” to ascertain on a 

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

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

shareholders in the Fund.14 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 

listing of the Fund’s shares on the “D”, ownership of the Fund’s shares is expected to change 

frequently on a daily basis. 

In support of your request, you note 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 Rule 4.22(h), will be readily available via the Website Sources, of 

which availability the Disclosure Document will advise participants. 15 You further state that the 

expense of delivering an Account Statement is about the same as the expense of delivering the 

Annual Report and that, if the requested relief is granted, the distribution expense of the Fund (an 

expense that is passed on to shareholders) will be approximately 1/12 of what it would be 

otherwise. 

 

12 Rule 4.22(c) requires a registered CPO to distribute a certified Annual Report to pool 

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

operation of the Fund, and, in fact, you represent that “A” will comply with Rule 4.22(c) in 

connection with its operation of the Fund. Delivery of the Annual Report is required once a 

year, whereas delivery of monthly Account Statements requires continuous monitoring of 

changes in ownership of shares. 

13 44 Fed. Reg. at 1922. 

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

secondary market, but also with respect to purchasers in the initial public offering. Once an 

investor has purchased Shares, whether directly from an Authorized Participant or on the “D”, 

they can be freely sold on the secondary market, and the same difficulties will be encountered in 

tracking the current owner. 

15 All information in the Fund’s Account Statements will be available on the Fund and “A” 

websites. The “D” website will link to the “A” and Fund websites for other financial 

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

authorized to bind the CPO must sign 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 

Account Statement is accurate and complete. Each online equivalent of the Fund’s Account 

Statement will contain the oath or affirmation required by Rule 4.22(h). 
Page 6 

Rule 4.23 

Rule 4.23 specifies the types of books and records a 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 

rule is “to enable pool participants and the Commission to ascertain whether the CPO is dealing 

properly with pool funds.”16 

You have requested relief from the location requirement of Rule 4.23(a) such that books 

and records of the Fund may be kept by its administrator, the “G”, a banking corporation subject 

to regulation by the “H” and the Federal Reserve Board, and, pursuant to delegation by “G”, by 

“I”, a registered broker-dealer that provides certain distribution-related services to the Fund (with 

respect to records related to Basket creations and redemptions and certain other functions).17 

You ask that “A” be permitted to comply with the location requirement of Rule 4.23 by having 

Fund books and records maintained at the offices of “G” and “I”.18 

You further ask for confirmation that neither “G” nor “I” 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 

 

16 44 Fed. Reg. at 1922.

17 Each of “G” and “I” 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. Included are schedules specifying the classes of books and records, 

by subparagraph of Rule 4.23, that each of “G” and “I” will be keeping. 

18 The full address of “G’s” office at which Fund books and records will be kept is “J”. The 

full address of “I’s” office at which Fund books and records will be kept is “K”. “G” will keep 

the books and records required by Rules 4.23(a)(2), (a)(3), (a)(4), (a)(5), (a)(6), (a)(7), (a)(8), 

(a)(10) and (a)(11). “I” will keep the books and records required by Rule 4.23(a)(9) and books 

and records of Basket creations and redemptions. You state that, for business continuity 

planning, security and general business planning reasons, these books and records may in the 

future be kept at different or additional “G” or “I” addresses. Disclosure of the “G” and “I” 

addresses at which Fund books and records are kept will be made to investors. “A” will keep the 

books and records required by Rule 4.23(a)(1). 
Page 7 

(and to fire) the Fund’s commodity trading advisor, and to select (and to change) the Fund’s 

futures commission merchant.19

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 purpose of the rules 

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

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

Rule 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 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 requirements of Rule 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 the Fund and “A” websites; and (3) the requirement of Rule 4.23 to keep required 

books and records at “A’s” main business office to the extent that such books and records are 

maintained at the offices of “G” or “I”. Consistent with prior practice,20 the exemption from the 

books and records location requirement of Rule 4.23 is subject to the conditions that: (1) “A” 

notify the Division if the location of any of the books and records required to be kept by Rule 

4.23 changes from that as represented to the Division; (2) “A” remain responsible for ensuring 

that all books and records required by Rule 4.23 are kept in accordance with Rule 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, “A” 

will obtain the original books and records from “G’s” offices in “J” or from “I’s” offices in “K”, 

as the case may be, and will provide them for inspection at “A’s” main business office in “J”; (4) 

“A” discloses in the Fund’s prospectus that its books and records required under Commission 

Rule 4.23 are kept at “G’s” offices in “J” and at “I’s” offices in “K”, and further discloses which 

books and records are kept at each location; and (5) “A” remains fully responsible for 

compliance with Rule 4.23. 

This letter exempts “A” from Rules 4.21, 4.22 and 4.23 as stated above. It does not 

excuse “A” from compliance with any other aspect of the Commission’s disclosure, reporting 

 

19 See, 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 No. 98-04 [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,251 (February 21, 

1997) (Co-CPOs were permitted to keep some of their pools’ books and records with an 

administrator, and the administrator was not deemed to be acting as a CPO for those pools.) 

20 See, e.g., CFTC Staff Letter No. 04-30 [Current Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ¶29,912 (Oct. 22, 2004). 
Page 8 

and recordkeeping requirements, nor does it excuse “A” from compliance with any other 

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

thereunder. For example, “A” remains subject to Rule 1.31, and the Commission maintains its 

right under that rule to inspect the required books and records of “A” at “G’s” offices in “J” and 

at “I’s” offices in “K”. Additionally, “A” also remains 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, including the 

failure of the Shares to be listed for trading on the “D”, 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 “A” or the Fund change in any material way from those represented to us. 

 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