11252 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/ 

LawRegulation/OTCDERIVATIVES/index.htm. 

2 Id. 

3See section 111 of the Dodd-Frank Act. 

4See section 112(a)(1)(A) of the Dodd-Frank Act. 

5See sections 112(a)(2)(A) and 112(d)(1) of the 

Dodd-Frank Act. 

6See section 112(d)(1) of the Dodd-Frank Act. 

7Section 202(a)(29) of the Investment Advisers 

Act of 1940 (‘‘Investment Advisers Act’’) defines the 

term ‘‘private fund’’ as ‘‘an issuer that would be an 

investment company, as defined in section 3 of the 

Investment Company Act of 1940 (15 U.S.C. 80a– 

3), but for section 3(c)(1) or 3(c)(7) of that Act.’’ 15 

U.S.C. 80a–3(c)(1), 80a–3(c)(7). Section 3(c)(1) of 

the Investment Company Act provides an exclusion 

from the definition of ‘‘investment company’’ for 

any ‘‘issuer whose outstanding securities (other 

than short term paper) are beneficially owned by 

not more than one hundred persons and which is 

not making and does not presently propose to make 

a public offering of its securities.’’ 15 U.S.C. 80a– 

3(c)(1). Section 3(c)(7) of the Investment Company 

Act provides an exclusion from the definition of 

‘‘investment company’’ for any ‘‘issuer, the 

outstanding securities of which are owned 

exclusively by persons who, at the time of 

acquisition of such securities, are qualified 

purchasers, and which is not making and does not 

at that time propose to make a public offering of 

such securities.’’ 15 U.S.C. 80a–3(c)(7). The term 

‘‘qualified purchaser’’ is defined in section 2(a)(51) 

of the Investment Company Act. See 15 U.S.C. 80a– 

2(a)(51). 

8The Dodd-Frank Act requires private fund 

adviser registration by amending section 203(b)(3) 

of the Advisers Act to repeal the exemption from 

registration for any adviser that during the course 

of the preceding 12 months had fewer than 15 

clients and neither held itself out to the public as 

an investment adviser nor advised any registered 

investment company or business development 

company. See section 403 of the Dodd-Frank Act. 

There are exemptions from this registration 

requirement for advisers to venture capital funds 

and advisers to private funds with less than $150 

million in assets under management in the United 

States. There also is an exemption for foreign 

advisers with less than $25 million in assets under 

management from the United States and fewer than 

15 U.S. clients and private fund investors. See 

sections 402, 407 and 408 of the Dodd-Frank Act. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 4, 145, and 147 

RIN 3038–AD30 

Commodity Pool Operators and 

Commodity Trading Advisors: 

Compliance Obligations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission is adopting 

amendments to its existing part 4 

regulations and promulgating one new 

regulation regarding Commodity Pool 

Operators and Commodity Trading 

Advisors. The Commission is also 

adopting new data collections for CPOs 

and CTAs that are consistent with a data 

collection required under the DoddFrank Act for entities registered with 

both the Commission and the Securities 

and Exchange Commission. The 

adopted amendments rescind the 

exemption from registration; rescind 

relief from the certification requirement 

for annual reports provided to operators 

of certain pools offered only to qualified 

eligible persons (QEPs; modify the 

criteria for claiming relief); and require 

the annual filing of notices claiming 

exemptive relief under several sections 

of the Commission’s regulations. 

Finally, the adopted amendments 

include new risk disclosure 

requirements for CPOs and CTAs 

regarding swap transactions. 

DATES: Effective dates: This final rule is 

effective on April 24, 2012, except for 

the amendments to § 4.27, which shall 

become effective on July 2, 2012. 

Compliance dates: Compliance with 

§ 4.27 shall be required by not later than 

September 15, 2012, for a CPO having 

at least $5 billion in assets under 

management, and by not later than 

December 14, 2012, for all other 

registered CPOs and all CTAs. 

Compliance with § 4.5 for registration 

purposes only shall be required not later 

than the later of December 31, 2012, or 

60 days after the effective date of the 

final rulemaking further defining the 

term ‘‘swap,’’ which the Commission 

will publish in the Federal Register at 

a future date. Entities required to 

register due to the amendments to § 4.5 

shall be subject to the Commission’s 

recordkeeping, reporting, and disclosure 

requirements pursuant to part 4 of the 

Commission’s regulations within 60 

days following the effectiveness of a 

final rule implementing the 

Commission’s proposed harmonization 

effort pursuant to the concurrent 

proposed rulemaking. CPOs claiming 

exemption under § 4.13(a)(4) shall be 

required to comply with the rescission 

of § 4.13(a)(4) by December 31, 2012; 

however, compliance shall be required 

for all other CPOs on April 24, 2012. 

Compliance with all other amendments, 

not otherwise specified above, shall be 

required by December 31, 2012. 

FOR FURTHER INFORMATION CONTACT: 

Kevin P. Walek, Assistant Director, 

Telephone: (202) 418–5463, Email: 

kwalek@cftc.gov, or Amanda Lesher 

Olear, Special Counsel, Telephone: 

(202) 418–5283, Email: aolear@cftc.gov, 

Michael Ehrstein, Attorney-Advisor, 

Telephone: 202–418–5957, Email: 

mehrstein@cftc.gov, Division of Swap 

Dealer and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Background on the Proposal To 

Amend the Registration and 

Compliance Obligations for CPOs and 

CTAs 

A. Statutory and Regulatory Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’).1 The legislation 

was enacted to reduce risk, increase 

transparency, and promote market 

integrity within the financial system by, 

inter alia, enhancing the Commodity 

Futures Trading Commission’s (the 

‘‘Commission’’ or ‘‘CFTC’’) rulemaking 

and enforcement authorities with 

respect to all registered entities and 

intermediaries subject to the 

Commission’s oversight. 

The preamble of the Dodd-Frank Act 

explicitly states that the purpose of the 

legislation is: 

To promote the financial stability of the 

United States by improving accountability 

and transparency in the financial system, to 

end ‘too big to fail’, to protect the American 

taxpayer by ending bailouts, to protect 

consumers from abusive financial services 

practices, and for other purposes.2

Pursuant to this stated objective, the 

Dodd-Frank Act has expanded the scope 

of federal financial regulation to include 

instruments such as swaps, enhanced 

the rulemaking authorities of existing 

federal financial regulatory agencies 

including the Commission and the 

Securities and Exchange Commission 

(‘‘SEC’’), and created new financial 

regulatory entities. 

In addition to the expansion of the 

Commission’s jurisdiction to include 

swaps under Title VII of the Dodd-Frank 

Act, Title I of the Dodd-Frank Act 

created the Financial Stability Oversight 

Council (‘‘FSOC’’).3 The FSOC is 

composed of the leaders of various state 

and federal financial regulators and is 

charged with identifying risks to the 

financial stability of the United States, 

promoting market discipline, and 

responding to emerging threats to the 

stability of the country’s financial 

system.4 The Dodd-Frank Act 

anticipates that the FSOC will be 

supported in these responsibilities by 

the federal financial regulatory 

agencies.5 The Commission is among 

those agencies that could be asked to 

provide information necessary for the 

FSOC to perform its statutorily 

mandated duties.6

Title IV of the Dodd-Frank Act 

requires advisers to large private funds 7

to register with the SEC.8 Through this 

registration requirement, Congress 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11253 

9See S. Conf. Rep. No. 111–176, at 38 (2010). 

10 In this release, the term ‘‘private fund adviser’’ 

means any investment adviser that is (i) registered 

or required to be registered with the SEC (including 

any investment adviser that is also registered or 

required to be registered with the CFTC as a CPO 

or CTA) and (ii) advises one or more private funds 

(including any commodity pools that satisfy the 

definition of ‘‘private fund’’). 

11See section 404 of the Dodd-Frank Act. 

12See section 406 of the Dodd-Frank Act. 

13 7 U.S.C. 1, et seq. 

14 7 U.S.C. 6m. 

15 7 U.S.C. 1a(11) and 1a(12). 

16 7 U.S.C. 6n(3)(A). Under part 4 of the 

Commission’s regulations, entities registered as 

CPOs have reporting obligations with respect to 

their operated pools. See 17 CFR. 4.22. Although 

CTAs have recordkeeping obligations under part 4, 

the Commission has not required reporting by 

CTAs, See generally, 17 CFR. part 4. 

17 7 U.S.C. 1a(10), 1a(11), 1a(12). 

18 7 U.S.C. 12a(5). 

19See H.R. Rep. No. 93–975, 93d Cong., 2d Sess. 

(1974), p. 20. 

20See 68 FR 47231 (Aug. 8, 2003). 

21See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 124 

Stat. 1376 (2010). 

22See section 404 of the Dodd-Frank Act. 

23See 76 FR 7976 (Feb. 11, 2011). 

24See 76 FR 8068 (Feb. 11, 2011). Because the 

Commission did not adopt the remainder of 

proposed § 4.27 at the same time as it adopted the 

subsection of § 4.27 implementing Form PF, the 

Commission modified the designation of § 4.27(d) 

to be the sole text of that section. Additionally, the 

Commission made some revisions to the text of 

§ 4.27 to: (1) clarify that the filing of Form PF with 

the SEC will be considered substitute compliance 

with certain Commission reporting obligations and 

(2) allow CPOs and CTAs who are otherwise 

required to file Form PF the option of submitting 

on Form PF data regarding commodity pools that 

are not private funds as substitute compliance with 

certain CFTC reporting obligations. 

sought to make available to the SEC 

‘‘information regarding [the] size, 

strategies and positions’’ of large private 

funds, which Congress believed ‘‘could 

be crucial to regulatory attempts to deal 

with a future crisis.’’ 9 In section 404 of 

the Dodd-Frank Act, Congress amended 

section 204(b) of the Investment 

Advisers Act to direct the SEC to require 

private fund advisers registered solely 

with the SEC10 to file reports containing 

such information as is deemed 

necessary and appropriate in the public 

interest and for investor protection or 

for the assessment of systemic risk. 

These reports and records must include 

a description of certain prescribed 

information, such as the amount of 

assets under management, use of 

leverage, counterparty credit risk 

exposure, and trading and investment 

positions for each private fund advised 

by the adviser.11 Section 406 of the 

Dodd-Frank Act also requires that the 

rules establishing the form and content 

of reports filed by private fund advisers 

that are dually registered with the SEC 

and the CFTC be issued jointly by both 

agencies after consultation with the 

FSOC.12

The Commodity Exchange Act 

(‘‘CEA’’) 13 authorizes the Commission 

to register Commodity Pool Operators 

(‘‘CPOs’’) and Commodity Trading 

Advisors (‘‘CTAs’’),14 exclude any entity 

from registration as a CPO or CTA,15

and require ‘‘[e]very commodity trading 

advisor and commodity pool operator 

registered under [the CEA to] maintain 

books and records and file such reports 

in such form and manner as may be 

prescribed by the Commission.’’ 16 The 

Commission also has the authority to 

include within or exclude from the 

definitions of ‘‘commodity pool,’’ 

‘‘commodity pool operator,’’ and 

‘‘commodity trading advisor’’ any entity 

‘‘if the Commission determines that the 

rule or regulation will effectuate the 

purposes of the CEA.’’ 17 In addition, the 

Commission has the authority to ‘‘make 

and promulgate such rules and 

regulations as, in the judgment of the 

Commission, are reasonably necessary 

to effectuate the provisions or to 

accomplish any of the purposes of [the 

CEA].’’ 18 The Commission’s 

discretionary authority to exclude or 

exempt persons from registration was 

intended to be exercised ‘‘to exempt 

from registration those persons who 

otherwise meet the criteria for 

registration * * * if, in the opinion of 

the Commission, there is no substantial 

public interest to be served by the 

registration.’’ 19 It is pursuant to this 

authority that the Commission has 

promulgated the various exemptions 

from registration as a CPO that are 

enumerated in § 4.13 of its regulations 

as well as the exclusions from the 

definition of CPO that are delineated in 

§ 4.5.20

As stated previously in this release, 

and in the Proposal, Congress enacted 

the Dodd-Frank Act in response to the 

financial crisis of 2007 and 2008.21 That 

Act requires the reporting of certain 

information by investment advisers to 

private funds related to potential 

systemic risk including, but not limited 

to, the amount of assets under 

management, use of leverage, 

counterparty credit risk exposure, and 

trading and investment positions for 

each private fund under the reporting 

entity’s advisement.22 This information 

facilitates oversight of the investment 

activities of funds within the context of 

the rest of a discrete market or the 

economy as a whole. 

The sources of risk delineated in the 

Dodd-Frank Act with respect to private 

funds are also presented by commodity 

pools. To provide the Commission with 

similar information to address these 

risks, the Commission has determined 

to require registration of certain 

previously exempt CPOs and to further 

require reporting of information 

comparable to that required in Form PF, 

which the Commission has previously 

adopted jointly with the SEC. To 

implement this enhanced oversight, the 

Commission proposed, and has now 

determined to adopt, the revision and 

rescission of certain discretionary 

exemptions that it previously granted. 

B. The Proposal 

Following the recent economic 

turmoil, and consistent with the tenor of 

the provisions of the Dodd-Frank Act, 

the Commission reconsidered the level 

of regulation that it believes is 

appropriate with respect to entities 

participating in the commodity futures 

and derivatives markets. Therefore, on 

January 26, 2011, the Commission 

proposed amendments and additions to 

its existing regulatory regime for CPOs 

and CTAs and the creation of two new 

data collection instruments, Forms 

CPO–PQR and CTA–PR (‘‘Proposal’’).23

In a concurrent joint proposal with the 

SEC, the Commission also proposed 

§ 4.27(d) and sections 1 and 2 of Form 

PF.24

In the Proposal, the Commission 

specifically proposed the following 

amendments: (A) to require the periodic 

reporting of data by CPOs and CTAs 

regarding their direction of commodity 

pool assets; (B) to identify certain 

proposed filings with the Commission 

as being afforded confidential treatment; 

(C) to revise the requirements for 

determining which persons should be 

required to register as a CPO under 

§ 4.5; (D) to require the filing of certified 

annual reports by all registered CPOs; 

(E) to rescind the exemptions from 

registration under §§ 4.13(a)(3) and 

(a)(4); (F) to require annual affirmation 

of claimed exemptive relief for both 

CPOs and CTAs; (G) to require an 

additional risk disclosure statement 

from CPOs and CTAs that engage in 

swaps transactions; and (H) to make 

certain conforming amendments to the 

Commission’s regulations in light of the 

proposed amendments. 

In describing the rationale for the 

Proposal, the Commission stated: 

[T]o ensure that necessary data is collected 

from CPOs and CTAs that are not operators 

or advisors of private funds, the Commission 

is proposing a new § 4.27, which would 

require quarterly reports from all CPOs and 

CTAs to be electronically filed with NFA. 

The Commission is promulgating proposed 

§ 4.27 pursuant to the Commission’s 

authority to require the filing of reports by 

registered CPOs and CTAs under section 4n 

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11254 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

25 76 FR 7976, 7977–78 (Feb. 11, 2011). 

26Additionally, the Commission received six 

comments that were not pertinent to the substance 

of the Proposal. Three concerned position limits in 

silver, one consisted of a web address; one was an 

advertisement; and one simply said ‘‘nice.’’ 

27 76 FR 7976, 7983 (Feb. 12, 2011). The 

Commission determined to propose amendments to 

§ 4.5 following the submission of a petition for 

rulemaking by the National Futures Association, to 

which the Commission has delegated much of its 

direct oversight activities relating to CPOs, CTAs, 

and commodity pools. See, 75 FR 56997 (Sept. 17, 

2010). 

28 Id. at 7984. 

29 Id. 

30Comment letter from the Investment Company 

Institute (April 12, 2011) (‘‘ICI Letter’’); comment 

letter from the Mutual Fund Directors Forum (April 

12, 2011) (‘‘MFDF Letter’’). 

31See H.R. Rep. No. 565 (Part 1), 97th Cong., 2d 

Sess. 48 (1982), S. Rep. No. 384, 97th Cong., 2d 

Sess. 111 (1982). See also, 48 FR 14933 (Apr. 6, 

1983). 

of the CEA. In an effort to eliminate 

duplicative filings, proposed § 4.27(d) would 

allow certain CPOs and/or CTAs that are also 

registered as private fund advisers with the 

SEC pursuant to the securities laws to satisfy 

certain of the Commission’s systemic 

reporting requirements by completing and 

filing the appropriate sections of Form PF 

with the SEC with respect to advised private 

funds. 

In order to ensure that the Commission can 

adequately oversee the commodities and 

derivatives markets and assess market risk 

associated with pooled investment vehicles 

under its jurisdiction, the Commission is reevaluating its regulation of CPOs and CTAs. 

Additionally, the Commission does not want 

its registration and reporting regime for 

pooled investment vehicles and their 

operators and/or advisors to be incongruent 

with the registration and reporting regimes of 

other regulators, such as that of the SEC for 

investment advisers under the Dodd-Frank 

Act. (Footnotes omitted).25

C. Comments on the Proposal 

The Commission received 61 

comment letters in response to the 

Proposal. The commenters represented a 

diversity of market participants. Seven 

commenters were registered investment 

companies or registered investment 

advisers; five commenters were 

registered or exempt CPOs; and three 

commenters were registered investment 

companies or registered investment 

advisers that also claimed exemption 

from registration as a CPO under § 4.13. 

The Commission also received 20 

comments from law firms; 14 comments 

from trade organizations; two comments 

from individual interested parties; a 

comment from a compliance service 

provider; and a comment from a 

registered futures association.26 The 

majority of the comments received 

opposed the adoption of the proposed 

amendments to § 4.5 and the rescission 

of §§ 4.13(a)(3) and (a)(4). 

Having considered these comments, 

the Commission has decided to adopt 

most of the amendments to part 4 that 

it proposed, with some modifications. In 

addition, the Commission has decided 

not to rescind the exemption in 

§ 4.13(a)(3) for entities engaged in a de 

minimis amount of derivatives trading. 

The Commission’s amendments to part 

4, and the modifications to its Proposal 

are discussed below. 

The scope of this Federal Register 

release generally is restricted to the 

comments received in response to the 

Proposal and to the changes to, and the 

clarifications of, the Proposal that the 

Commission is making in response 

thereto. The Commission encourages 

interested persons to read the Proposal 

for a fuller discussion of the purpose of 

each of the amendments contained in 

the Proposal. 

D. Significant Changes From the 

Proposal 

The significant changes from the 

Proposal that the Commission is making 

in the rules it is adopting today are as 

follows: (1) The marketing restriction in 

§ 4.5 no longer contains the clause ‘‘(or 

otherwise seeking investment exposure 

to)’’; (2) § 4.5 will be amended to 

include an alternative trading threshold 

test based on the net notional value of 

a registered investment company’s 

derivatives positions; (3) annual notices 

for exemptions and exclusions will be 

filed on an annual calendar year end 

basis rather than on the anniversary of 

the filing date; and (4) changes have 

been made to the substance of Forms 

CPO–PQR and CTA–PR and the filing 

timelines for both forms. 

II. Responses to Comments on the 

Proposal 

A. Comments Regarding Proposed 

Amendments to § 4.5 

As part of the Proposal, the 

Commission proposed amendments to 

§ 4.5(c)(2)(iii), reinstating a trading 

threshold and marketing restriction for 

registered investment companies 

claiming exclusion from the definition 

of CPO under that section. In support of 

the Proposal, the Commission stated 

that it became aware that certain 

registered investment companies were 

offering interests in de facto commodity 

pools while claiming exclusion under 

§ 4.5.27 The Commission further stated 

that it believed that registered 

investment companies should not 

engage in such activities without 

Commission oversight and that such 

oversight was necessary to ensure 

consistent treatment of CPOs regardless 

of their status with respect to other 

regulators.28 The Commission also 

recognized that operational issues may 

exist regarding the ability of registered 

investment companies to comply with 

the Commission’s compliance regime.29

The Commission received numerous 

comments regarding the proposed 

amendments to § 4.5. The comments can 

be broadly categorized into eight 

categories: (1) General comments as to 

the advisability of making such a change 

and the Commission’s justification for 

doing so; (2) the trading threshold; (3) 

the inclusion of swaps within the 

trading threshold; (4) the proposed 

marketing restriction; (5) harmonization 

of compliance obligations with those of 

the SEC; (6) the appropriate entity to 

register as the registered investment 

company’s CPO; (7) the use and 

permissibility of controlled foreign 

corporations by registered investment 

companies; and (8) the timeline for 

implementation. 

1. General Comments on Proposed 

Amendments to § 4.5 

Certain comments argued against the 

adoption of any change to § 4.5 and 

questioned the Commission’s 

justification for doing so.30 Most 

commenters generally opposed the 

change because they claimed that 

requiring registration and compliance 

with the Commission’s regulatory 

regime would provide no tangible 

benefit to the Commission or investors 

because registered investment 

companies are already subject to 

comprehensive regulation by the SEC. 

The Commission believes that 

registration with the Commission 

provides two significant benefits. First, 

registration allows the Commission to 

ensure that all entities operating 

collective investment vehicles 

participating in the derivatives markets 

meet minimum standards of fitness and 

competency.31 Second, registration 

provides the Commission and members 

of the public with a clear means of 

addressing wrongful conduct by 

individuals and entities participating in 

the derivatives markets. The 

Commission has clear authority to take 

punitive and/or remedial action against 

registered entities for violations of the 

CEA or of the Commission’s regulations. 

Moreover, the Commission has the 

ability to deny or revoke registration, 

thereby expelling an individual or entity 

from serving as an intermediary in the 

industry. Members of the public also 

may access the Commission’s 

reparations program or National Futures 

Association’s (‘‘NFA’’) arbitration 

program to seek redress for wrongful 

conduct by a Commission registrant 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11255 

32See ICI Letter; comment letter from Vanguard 

(April 12, 2011) (‘‘Vanguard Letter’’); comment 

letter from Reed Smith LLP (April 12, 2011) (‘‘Reed 

Smith Letter’’); comment letter from 

AllianceBernstein Mutual Funds (April 12, 2011) 

(‘‘AllianceBernstein Letter’’); comment letter from 

United States Automobile Association (April 12, 

2011) (‘‘USAA Letter’’); comment letter from 

Principal Management Corporation (April 12, 2011) 

(‘‘PMC Letter’’); comment letter from Investment 

Adviser Association (April 12, 2011) (‘‘IAA Letter’’); 

comment letter from Dechert LLP and clients (April 

12, 2011) (‘‘Dechert II Letter’’); comment letter from 

Janus Capital Management LLC (April 12, 2011) 

(‘‘Janus Letter’’); comment letter from Security 

Traders Association (April 12, 2011) (‘‘STA 

Letter’’); comment letter from Invesco Advisers, Inc. 

(April 12, 2011) (‘‘Invesco Letter’’); and comment 

letter from Equinox Fund Management, LLC (July 

28, 2011) (‘‘Equinox Letter’’). 

33See ICI Letter. 

34 Id. 

35For example, the SEC recently issued a concept 

release seeking comment on use of derivatives by 

investment companies, noting: ‘‘The dramatic 

growth in the volume and complexity of derivatives 

investments over the past two decades, and funds’ 

increased use of derivatives, have led the 

[Securities and Exchange] Commission and its staff 

to initiate a review of funds’ use of derivatives 

under the Investment Company Act. (footnotes 

omitted)’’ 76 FR 55237, 55238 (Sep. 7, 2011). 

36 76 FR 55237, 55239 (Sept. 7, 2011). See, Press 

Release, Securities and Exchange Commission, SEC 

Seeks Public Comment on Use of Derivatives by 

Mutual Funds and Other Investment Companies 

(Aug. 31, 2011), available at http://www.sec.gov/ 

news/press/2011/2011-175.htm (‘‘ ‘The derivatives 

markets have undergone significant changes in 

recent years, and the Commission is taking this 

opportunity to seek public comment and ensure 

that our regulatory approach and interpretations 

under the Investment Company Act remain current, 

relevant, and consistent with investor protection,’ ’’ 

said SEC Chairman Mary Shapiro.’’). 

37Chairman Mary Shapiro, Opening Statement at 

SEC Open Meeting Item 1—Use of Derivatives by 

Funds (Aug. 31, 2011), available at http:// 

www.sec.gov/news/speech/2011/spch083111mlsitem1.htm (‘‘The current derivatives review gives us 

the opportunity to re-think our approach to 

regulating funds’ use of derivatives. We are 

engaging in this review with a holistic perspective, 

in the wake of the financial crisis, and in light of 

the new comprehensive regulatory regime for swaps 

being developed under the Dodd-Frank Act.’’). 

and/or NFA member. Therefore, the 

Commission continues to believe that its 

registration requirements further critical 

regulatory objectives and serve 

important public policy goals. 

A number of commenters who 

expressed general opposition also 

acknowledged that if the Commission 

determined to proceed with its 

proposed changes to § 4.5, certain areas 

of harmonization with SEC 

requirements should be addressed. To 

that end, concurrently with the issuance 

of this rule, the Commission plans to 

issue a notice of proposed rulemaking 

detailing its proposed modifications to 

part 4 of its regulations to harmonize the 

compliance obligations that apply to 

dually registered investment companies. 

Commenters did not question, however, 

that the Commission has a regulatory 

interest in overseeing entities engaging 

in derivatives trading. Rather, they 

argued that the SEC currently provides 

adequate oversight of their activities. 

The Commission disagrees with the 

arguments presented by those 

commenters who argued against the 

adoption of any change to § 4.5. The 

Commission continues to believe that 

entities operating collective investment 

vehicles that engage in more than a de 

minimis amount of derivatives trading 

should be required to register with the 

Commission. The Commission believes 

that because Congress empowered the 

Commission to oversee the derivatives 

market, the Commission is in the best 

position to oversee entities engaged in 

more than a limited amount of nonhedging derivatives trading. 

Several commenters also asserted that 

modifying § 4.5 would result in a 

significant burden to entities required to 

register with the Commission without 

any meaningful benefit to the 

Commission.32 The Commission 

believes, as discussed throughout this 

release, that entities that are offering 

services substantially identical to those 

of a registered CPO should be subject to 

substantially identical regulatory 

obligations. The Commission also 

recognizes that modification to § 4.5 

may result in costs for registered 

investment companies. For that reason, 

as stated above, in conjunction with 

finalizing the proposed amendments to 

§ 4.5, the Commission has proposed to 

adopt a harmonized compliance regime 

for registered investment companies 

whose activities require oversight by the 

Commission. Although the Commission 

believes the modifications to § 4.5 

enhance the Commission’s ability to 

effectively oversee derivatives markets, 

it is not the Commission’s intention to 

burden registered investment companies 

beyond what is required to provide the 

Commission with adequate information 

it finds necessary to effectively oversee 

the registered investment company’s 

derivatives trading activities. Through 

this harmonization, the Commission 

intends to minimize the burden of the 

amendments to § 4.5. 

Second, the Commission disagrees 

with the commenters’ assertion that the 

Commission would not receive any 

meaningful benefit from a modification 

to § 4.5. As stated above, the 

Commission disagrees that such 

registration and oversight is redundant, 

and emphasizes that it is in the best 

position to adequately oversee the 

derivatives trading activities of entities 

in which the Commission has a 

regulatory interest. As discussed above, 

the Commission is charged with 

administering the Commodity Exchange 

Act to protect market users and the 

public from fraud, manipulation, 

abusive practices and systemic risk 

related to derivatives that are subject to 

the Act, and to foster open, competitive, 

and financially sound markets. The 

Commission’s programs are structured 

and its resources deployed in service of 

that mission. 

One commenter questioned the 

Commission’s reasoning for choosing to 

impose additional requirements on 

registered investment companies but not 

proposing to impose such requirements 

on other categories of entities.33 This 

commenter also stated that the 

Commission was required to detail its 

reasoning under the Administrative 

Procedure Act.34 As stated in the 

Proposal, the Commission remains 

concerned that registered investment 

companies are offering managed futures 

strategies, either in whole or in part, 

without Commission oversight and 

without making the disclosures to both 

the Commission and investors regarding 

the pertinent facts associated with the 

investment in the registered investment 

company. The Commission is focused 

on registered investment companies 

because it is aware of increased trading 

activity in the derivatives area by such 

entities that may not be appropriately 

addressed in the existing regulatory 

protections, including risk management 

and recordkeeping and reporting 

requirements. The SEC has also noted 

this increased trading activity and is 

reviewing the use of derivatives by 

investment companies.35 In its recent 

concept release regarding the use of 

derivatives by registered investment 

companies, the SEC noted that although 

its staff had addressed issues related to 

derivatives on a case-by-case basis, it 

had not developed a ‘‘comprehensive 

and systematic approach to derivatives 

related issues.’’ 36 As aptly noted by the 

Chairman of the SEC, ‘‘The controls in 

place to address fund management in 

traditional securities can lose their 

effectiveness when applied to 

derivatives. This is particularly the case 

because a relatively small investment in 

a derivative instrument can expose a 

fund to potentially substantial gain or 

loss—or outsized exposure to an 

individual counterparty.’’ 37 Despite the 

commenter’s assertion, the Commission 

is unaware of other classes of entities 

that are excluded from the definition of 

CPO engaging in significant derivatives 

trading. Of course, if the Commission 

becomes aware of any other categories 

of excluded entities engaging in similar 

levels of derivatives trading, it will 

consider appropriate action to ensure 

that such entities and their derivatives 

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11256 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

38See Invesco Letter; ICI Letter; Vanguard Letter; 

Reed Smith Letter; AllianceBernstein Letter; AII 

Letter; STA Letter; Janus Letter; PMC Letter; USAA 

Letter; comment letter from Fidelity Management 

and Research Co. (April 12, 2011) (‘‘Fidelity 

Letter’’); comment letter from Securities Industry 

and Financial Markets Association (April 12, 2011) 

(‘‘SIFMA Letter’’); comment letter from Dechert LLP 

(July 26, 2011) (‘‘Dechert III Letter’’); comment letter 

from Rydex/SGI Morgan, Lewis & Bockius LLP 

(April 12, 2011) (‘‘Rydex Letter’’); comment letter 

from the United States Chamber of Commerce 

(April 12, 2011) (‘‘USCC Letter’’); comment letter 

from Sidley Austin LLP (April 12, 2011) (‘‘Sidley 

Letter’’); comment letter from the National Futures 

Association (April 12, 2011) (‘‘NFA Letter’’); 

comment letter from Campbell & Company, Inc. 

(April 12, 2011) (‘‘Campbell Letter’’); comment 

letter from AQR Capital Management, LLC (April 

12, 2011) (‘‘AQR Letter’’); comment letter from 

Steben & Company, Inc. (April 12, 2011) (‘‘Steben 

Letter’’); comment letter from the Investment 

Company Institute (July 28, 2011) (‘‘ICI II Letter’’); 

and comment from the Association of Institutional 

Investors (April 12, 2011) (‘‘AII Letter’’). 

39 76 FR 7976, 7989 (Feb. 11, 2011). 

40 17 CFR 4.13(a)(3). 

41 68 FR 47221, 47225 (Aug. 8, 2003). 

42See Rydex Letter; Invesco Letter; ICI Letter. 

43 7 U.S.C. 2. 

44See Invesco Letter; ICI Letter; Vanguard Letter; 

Reed Smith Letter; AllianceBernstein Letter; IAA 

Letter; Janus Letter; and STA Letter. 

45 76 FR 7976, 7989 (Feb. 11, 2011). 

46 76 FR 7976, 7984 (Feb. 11, 2011). 

47 7 U.S.C. 6a(c); 76 FR 71626, 71643 (Nov. 18, 

2011). 

48 76 FR 71626, 71644 (Nov. 18, 2011). 

49The Commission notes that § 4.5 references the 

definition of bona fide hedging for exempt and 

agricultural commodities under § 151.5 as well as 

the definition of bona fide hedging for excluded 

commodities under § 1.3(z). Market participants 

should not construe either § 151.5 or § 1.3(z) as 

trading activities are brought under the 

Commission’s regulatory oversight. As 

stated previously, the Commission 

continues to believe that entities that are 

offering services substantially identical 

to those of a registered CPO should be 

subject to substantially identical 

regulatory obligations. 

2. Comments on the Proposed Trading 

Threshold 

The Commission also received 

numerous comments on the proposed 

addition of a trading threshold to the 

exclusion under § 4.5.38 The proposed 

trading threshold provided that 

derivatives trading could not exceed 

five percent of the liquidation value of 

an entity’s portfolio, without 

registration with the Commission. The 

Proposal excluded activity conducted 

for ‘‘bona fide hedging’’ purposes.39

Most commenters stated that a five 

percent threshold was far too low in 

light of the Commission’s determination 

to include swaps within the measured 

activities and the limited scope of the 

Commission’s bona fide hedging 

definition, but no data was provided to 

support this assertion. The Commission, 

in its adoption of the exemption under 

§ 4.13(a)(3),40 previously determined 

that five percent is an appropriate 

threshold to determine whether an 

entity warrants oversight by the 

Commission.41

Despite the views of some 

commenters, the Commission believes 

that the five percent threshold continues 

to be the appropriate percentage for 

exemption or exclusion based upon an 

entity’s limited derivatives trading. Five 

percent remains the average required for 

futures margins, although the 

Commission acknowledges that margin 

levels for securities product futures are 

significantly higher and the levels for 

swaps margining may be as well. The 

Commission believes, however, that 

trading exceeding five percent of the 

liquidation value of a portfolio 

evidences a significant exposure to the 

derivatives markets. The Commission 

believes that such exposure should 

subject an entity to the Commission’s 

oversight. Moreover, the Commission 

believes that its adoption of an 

alternative net notional test to 

determine eligibility for exclusion from 

the definition of CPO, as discussed 

infra, provides flexibility to registered 

investment companies in consideration 

of the fact that initial margin for certain 

commodity interest products may not 

permit compliance with the five percent 

threshold. 

Commenters also recommended that 

the Commission exclude from the 

threshold calculation various 

instruments including broad-based 

stock index futures, security futures 

generally, or financial futures contracts 

as a whole.42 The Commission does not 

believe that exempting any of these 

instruments from the threshold 

calculation is appropriate. The 

Commission does not believe that there 

is a meaningful distinction between 

those security or financial futures and 

other categories of futures. The 

Commission believes that its oversight 

of the use of security or financial futures 

is just as essential as its oversight of 

physical commodity futures. Congress 

granted the Commission authority over 

all futures in § 2 of the CEA.43 The 

Commission believes that it is in the 

best position to assess investor and 

market risks posed by entities trading in 

derivatives regardless of type. Therefore, 

the Commission has decided not to 

modify the scope of the threshold from 

what was proposed in order to exclude 

security futures or financial futures from 

the trading threshold. 

Commenters requested that the 

Commission expand its definition of 

bona fide hedging as it appears in 

§ 1.3(z) to include risk management as a 

recognized bona fide hedging activity 

for purposes of § 4.5.44 The Proposal 

excluded activity conducted for ‘‘bona 

fide hedging’’ purposes as that term was 

defined in § 1.3 as it existed at the time 

of the proposal.45 Further, the Proposal 

noted that the Commission anticipated 

that the definition of ‘‘bona fide 

hedging’’ would be modified through 

future rulemakings,46 which were open 

for comments from the public. 

The Commission recently adopted 

final rules regarding position limits and, 

through that rulemaking, implemented a 

new statutory definition of bona fide 

hedging transactions for exempt and 

excluded commodity transactions as 

part of new § 151.5.47 This statutory 

definition limits the scope of bona fide 

hedging transactions for exempt and 

agricultural commodities, and does not 

provide for a risk management 

exemption for position limits 

purposes.48 With regard to position 

limits and bona fide hedging 

transactions for excluded commodities, 

the Commission amended the pre-DoddFrank definition of bona fide hedging in 

§ 1.3(z) to only apply to excluded 

commodities. Further, the Commission 

allowed DCMs and SEFs that are trading 

facilities to provide for a risk 

management exemption from position 

limits for excluded commodity 

transactions. 

The Commission does not believe that 

it is appropriate to exclude risk 

management transactions from the 

trading threshold. The Commission 

believes that an important distinction 

between bona fide hedging transactions 

and those undertaken for risk 

management purposes is that bona fide 

hedging transactions are unlikely to 

present the same level of market risk as 

they are offset by exposure in the 

physical markets. Additionally, the 

Commission is concerned that in the 

context of exclusion under § 4.5, a risk 

management exclusion would permit 

registered investment companies to 

engage in a greater volume of 

derivatives trading than other entities 

which are engaged in similar activities, 

but which are otherwise required to 

register as CPOs. This could result in 

disparate treatment among similarly 

situated entities. Moreover, there was no 

consensus among the commenters as to 

the appropriate definition of risk 

management transactions. Thus, the 

Commission believes that it may be 

difficult in this context to properly limit 

the scope of such exclusion as objective 

criteria are not universally recognized, 

which would make such exclusion 

onerous to enforce.49

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11257 

permitting a risk management exemption for 

purposes of determining compliance with the 

trading threshold in § 4.5. 

50See Notice of CFTC Staff Roundtable 

Discussion on Proposed Changes to Registration 

and Compliance Regime for Commodity Pool 

Operators and Commodity Trading Advisors, 

available at http://www.cftc.gov/PressRoom/Events/ 

opaevent_cftcstaff070611. 

51See Transcript of CFTC Staff Roundtable 

Discussion on Proposed Changes to Registration 

and Compliance Regime for Commodity Pool 

Operators and Commodity Trading Advisors 

(‘‘Roundtable Transcript’’), at 19, 25, 30, 76–77, 87– 

90, available at http://www.cftc.gov/ucm/groups/

public/@swaps/documents/dfsubmission/

dfsubmission27_070611-trans.pdf. 

52 Id. 

53 Dechert III Letter. 

54 17 CFR 4.13(a)(3)(ii)(B). 

55See Roundtable Transcript at 69–71. 

56See Roundtable Transcript at 70. 

57 67 FR 65743 (Oct. 28, 2002). 

58 67 FR 65743, 65744–45. 

59 67 FR 65743, 65745. 

60 68 FR 12622 (Mar. 17, 2003); 68 FR 47221 

(Aug. 8, 2003). 

61 68 FR 12622, 12625–26 (noting that although 

entities excluded under § 4.5 could solicit retail 

participants, as compared to those entities exempt 

under § 4.13(a)(4), which may only offer to certain 

high net worth entities and individuals, the 

Commission stated that the fact that the § 4.5 

entities were otherwise regulated supported 

consistent criteria for relief). 

62The net notional test as it appears in 

§ 4.13(a)(3) will be amended by this rulemaking to 

provide guidance regarding the ability to net 

cleared swaps. 

63 17 CFR 4.13(a)(3)(ii)(B). 

64 Id. 

65See discussion of amendments to 

§ 4.13(a)(3)(ii)(B) infra. 

During numerous meetings with 

commenters, the commenters noted that 

most registered investment companies 

use derivatives for risk management 

purposes, namely to offset the risk 

inherent in positions taken in the 

securities or bond markets, or to 

equitize cash efficiently. Although the 

Commission recognizes the importance 

of the use of derivatives for risk 

management purposes, it does not 

believe that transactions that are not 

within the bona fide hedging definition 

should be excluded from the 

determination of whether an entity 

meets the trading threshold for 

registration and oversight. Therefore, 

the Commission has decided not to 

exclude risk management activities by 

registered investment companies from 

the trading threshold for purposes of 

§ 4.5. 

Several panelists at the Commission’s 

staff roundtable held on July 6, 201150

(‘‘Roundtable’’) suggested that, instead 

of a trading threshold that is based on 

a percentage of margin, the Commission 

should focus solely on entities that offer 

‘‘actively managed futures’’ strategies.51

The panelist defined ‘‘actively managed 

futures’’ strategies as those in which the 

entity or its investment adviser made its 

own decisions as to which derivatives to 

take positions in, as compared to the 

‘‘passive’’ use of an index, wherein the 

entity’s investments simply track those 

held by an index.52

The Commission does not believe that 

it is proper to exclude from the 

Commission’s oversight those entities 

that are using an index or other socalled ‘‘passive’’ means to track the 

value of other derivatives. Establishing 

‘‘active’’ versus ‘‘passive’’ use of 

derivatives as a criterion for entitlement 

to the exclusion would introduce an 

element of subjectivity to an otherwise 

objective standard and make the 

threshold more difficult to interpret, 

apply, and enforce. It also could have 

the undesirable effect of encouraging 

funds to structure their investment 

activities to avoid regulation. Moreover, 

the use of an index or other passive 

investment vehicle by a large number of 

investment companies can amplify the 

market assumptions built into an index 

or other vehicle. Thus, the Commission 

has decided not to adopt the panelist’s 

suggestion that the Commission focus 

on whether an entity offers an actively 

managed futures strategy. 

One commenter suggested that the 

Commission should consider the 

adoption of an alternative test that 

would be identical to the aggregate net 

notional value test that is currently 

available under § 4.13(a)(3)(ii)(B).53

Section 4.13(a)(3)(ii)(B) provides that an 

entity can claim exemption from 

registration if the net notional value of 

its fund’s derivatives trading does not 

exceed one hundred percent of the 

liquidation value of the fund’s 

portfolio.54

Conversely, several panelists at the 

Roundtable opposed such a test, stating 

that it was not a reliable means to 

measure an entity’s exposure in the 

market.55 Specifically, certain panelists 

asserted that the net notional value of 

positions may not provide a reliable 

measure of the risk posed by certain 

entities in the market.56

The Commission first considered the 

addition of an alternative net notional 

trading threshold when it proposed to 

amend § 4.5 in 2002.57 In support of its 

proposal, the Commission stated that 

the alternative test provided otherwise 

regulated entities that use certain 

classes of futures with higher initial 

margin requirements with an 

opportunity to also receive exclusionary 

relief from the definition of CPO.58 The 

Commission further stated that the 

inclusion of an alternative test enabled 

entities seeking exclusion to rely on 

whichever test was less restrictive based 

on their futures positions.59 In 2003, the 

Commission proposed and adopted final 

rules amending § 4.5, which eliminated 

the five percent trading threshold and 

did not adopt the alternative net 

notional test.60 In stating its rationale for 

rescinding the five percent threshold 

test and declining to adopt the 

alternative net notional test, the 

Commission stated that because it was 

simultaneously proposing, and 

ultimately adopting, an exemption from 

registration in § 4.13(a)(4), which did 

not impose any trading restriction, the 

Commission would remove the trading 

restrictions from § 4.5 as well to provide 

consistent treatment.61

The Commission no longer believes 

that its prior justification for 

abandoning the alternative net notional 

test is persuasive. By the adoption of 

this final rule, the Commission will 

reinstate the five percent trading 

threshold in § 4.5 for registered 

investment companies and rescind the 

exemption in § 4.13(a)(4), which 

reverses the regulatory conditions in 

existence in 2003. The Commission 

believes that the appropriate criteria for 

exclusion through the use of a net 

notional test is delineated in 

§ 4.13(a)(3)(ii)(B),62 commonly known 

as the ‘‘de minimis exemption,’’ albeit 

with the addition of allowing unlimited 

use of futures, options, or swaps for 

bona fide hedging purposes, which is 

not permitted under § 4.13(a)(3). 

As stated previously, the net notional 

test, as set forth under § 4.13(a)(3)(ii)(B), 

permits entities to claim relief if the 

aggregate net notional value of the 

entity’s commodity interest positions 

does not exceed 100 percent of the 

liquidation value of the pool’s 

portfolio.63 Notional value is defined by 

asset class. For example, the notional 

value of futures contracts is derived by 

multiplying the number of contracts by 

the size of the contract, in contract 

units, and then multiplying by the 

current market price for the contract.64

The notional value of a cleared swap, 

however, will be determined consistent 

with the provisions of part 45 of the 

Commission’s regulations. The ability to 

net positions is also determined by asset 

class, with entities being able to net 

futures contracts across designated 

contract markets or foreign boards of 

trade, whereas swaps may only be 

netted if cleared by the same designated 

clearing organization (‘‘DCO’’) and it is 

otherwise appropriate.65

The Commission believes that the 

adoption of an alternative net notional 

test will provide consistent standards 

for relief from registration as a CPO for 

entities whose portfolios only contain a 

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11258 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

66See NFA Letter, Campbell Letter, AQR Letter, 

Steben Letter. 

67See AQR Letter. 

68See Janus Letter; Reed Smith Letter; 

AllianceBernstein Letter; USAA Letter; ICI Letter; 

PMC Letter; Invesco Letter; IAA Letter; Dechert II 

Letter; AII Letter; and SIFMA Letter. 

69Effective Date for Swap Regulation, 76 FR 

42508 (issued and made effective by the 

Commission on July 14, 2011; published in Federal 

Register on July 19, 2011). 

70See Janus Letter; Reed Smith Letter; 

AllianceBernstein Letter; USAA Letter; ICI Letter; 

PMC Letter; Invesco Letter; IAA Letter; Dechert II 

Letter; AII Letter; and SIFMA Letter. 

71 7 U.S.C. 1a(10); 1a(11). 

72Any reference to a de minimis level of swaps 

activities by registered investment companies only 

applies in the context of CPO registration by 

registered investment companies. 

73 76 FR 7976, 7989 (Feb. 12, 2011). 

74See Rydex Letter; Fidelity Letter; SIFMA Letter; 

AII Letter; ICI Letter; Vanguard Letter; Reed Smith 

Letter; AllianceBernstein Letter; USAA Letter; PMC 

Letter; Invesco Letter; Janus Letter; STA Letter; 

comment letter from the Managed Futures 

Association regarding proposed amendments to 

§ 4.5 (April 12, 2011) (‘‘MFA II Letter’’); Dechert II 

Letter; NFA Letter; comment letter from Alston & 

Bird, LLP (April 12, 2011) (‘‘Alston Letter’’); 

Campbell Letter; AQR Letter; Steben Letter; and 

Dechert III Letter. 

75See, e.g., ICI Letter; Alston Letter; Rydex Letter; 

and Vanguard Letter. 

76See ICI Letter; MFA II Letter; Dechert II Letter; 

Invesco Letter; NFA Letter; Campbell Letter; Steben 

Letter; and AQR Letter. 

limited amount of derivatives positions 

and will afford registered investment 

companies with additional flexibility in 

determining eligibility for exclusion. 

Therefore, the Commission will adopt 

an alternative net notional test, 

consistent with that set forth in 

§ 4.13(a)(3)(ii)(B) as amended herein, for 

registered investment companies 

claiming exclusion from the definition 

of CPO under § 4.5. 

The Commission also received several 

comments supporting both the 

imposition of a trading threshold in 

general and the five percent threshold 

specifically.66 At least one commenter 

suggested, however, that the 

Commission consider requiring 

registered investment companies that 

exceed the threshold to register, but not 

subjecting them to the Commission’s 

compliance regime beyond requiring 

them to be subject to the examination of 

their books and records, and 

examination by the National Futures 

Association.67 In effect, this commenter 

requested that the Commission subject 

such registrant to ‘‘notice registration.’’ 

The Commission believes that adopting 

the commenter’s approach would not 

materially change the information that 

the Commission would receive 

regarding the activities of registered 

investment companies in the derivatives 

markets, which is one of the 

Commission’s purposes in amending 

§ 4.5. Moreover, a type of notice 

registration would not provide the 

Commission with any real means for 

engaging in consistent ongoing 

oversight. Notwithstanding such notice 

registration, the Commission would still 

be deemed to have regulatory 

responsibility for the activities of these 

registrants. In the Commission’s view, 

notice registration does not equate to an 

appropriate level of oversight. For that 

reason, the Commission has determined 

not to adopt the notice registration 

system proposed by the commenter. The 

Commission is adopting the amendment 

to § 4.5 regarding the trading threshold 

with the addition of an alternative net 

notional test for the reasons stated 

herein and those previously discussed 

in the Proposal. 

3. Comments on the Inclusion of Swaps 

in the Trading Threshold 

The Commission also received 

numerous comments opposing its 

decision to include swaps within the 

threshold test discussed above.68

Several commenters expressed concern 

that the Commission would require 

inclusion of swaps within the threshold 

prior to its adoption of final rules 

further defining the term ‘‘swap’’ and 

explaining the margining requirements 

for such instruments. The Commission 

agrees that it should not implement the 

inclusion of swaps within the threshold 

test prior to the effective date of such 

final rules. Therefore, it is the 

Commission’s intention to establish the 

compliance date of the inclusion of 

swaps within the threshold calculation 

as 60 days after the final rules regarding 

the definition of ‘‘swap’’ and the 

delineation of the margin requirement 

for such instruments are effective.69 The 

Commission believes that such 

compliance date will provide entities 

with sufficient time to assess the impact 

of such rules on their portfolios and to 

make the determination as to whether 

registration with the Commission is 

required. 

The Commission also received a 

comment asking for additional 

clarification regarding its decision to 

include swaps within the threshold.70

The Dodd-Frank Act amended the 

statutory definition of the terms 

‘‘commodity pool operator’’ and 

‘‘commodity pool’’ to include those 

entities that trade swaps.71 If the 

Commission were to adopt the trading 

threshold and only include futures and 

options as the basis for calculating 

compliance with the threshold, the 

swaps activities of the registered 

investment companies would still 

trigger the registration requirement 

notwithstanding the exclusion of swaps 

from the calculus. That is, the purpose 

of the threshold test is to define a de 

minimis amount of trading activity that 

would not trigger the registration 

requirement. If swaps were excluded, 

any swaps activities undertaken by a 

registered investment company would 

result in that entity being required to 

register because there would be no de 

minimis exclusion. As a result, one 

swap contract would be enough to 

trigger the registration requirement. For 

that reason, if the Commission wants to 

permit some de minimis level of swaps 

activity by registered investment 

companies without registration with the 

Commission, it must do so explicitly in 

the exclusion.72 Because the 

Commission has determined that de 

minimis activity by registered 

investment companies does not 

implicate the Commission’s regulatory 

concerns, the Commission has decided 

to include swaps as a component of the 

trading threshold. 

4. Comments on the Proposed Marketing 

Restriction 

The marketing restriction, as 

proposed by the Commission, prohibits 

the marketing of interests in the 

registered investment company ‘‘as a 

vehicle for trading in (or otherwise 

seeking investment exposure to) the 

commodity futures, commodity options, 

or swaps markets.’’ 73 Again, as with the 

other aspects of the proposed 

amendments to § 4.5, the Commission 

received numerous comments on this 

prohibition.74

The vast majority of comments urged 

the Commission to remove the clause 

‘‘or otherwise seeking investment 

exposure to’’ as introducing an 

unacceptable level of ambiguity into the 

marketing restriction.75 The 

Commission agrees with these 

comments and believes that the removal 

of this clause is appropriate as the 

clause does not meaningfully add to the 

marketing restriction and only creates 

uncertainty. Thus, the Commission will 

adopt the marketing restriction without 

the clause ‘‘or otherwise seeking 

investment exposure to * * *’’ 

The Commission also received many 

comments asking that the Commission 

provide some clarification regarding the 

factors that it would consider in making 

the determination whether an entity 

violated the marketing restriction.76 The 

Commission agrees that providing 

factors to further explain the plain 

language of the marketing restriction 

would be helpful to those who plan to 

market registered investment companies 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11259 

77These factors are derived in substantial part 

from the Steben Letter and AQR Letter. 

78See Roundtable Transcript at 152–53. 

79See Vanguard Letter; ICI Letter; Dechert III 

Letter; Reed Smith Letter; AllianceBernstein Letter; 

USAA Letter; PMC Letter; Invesco Letter; IAA 

Letter; Dechert II Letter; Fidelity Letter; Janus 

Letter; SIFMA Letter; STA Letter; AQR Letter; NFA 

Letter; MFA II Letter; Alston Letter; Rydex Letter; 

and ICI II Letter. 

80See ICI Letter; Reed Smith Letter; 

AllianceBernstein Letter; Rydex Letter; Fidelity 

Letter; USAA Letter; PMC Letter; IAA Letter; Janus 

Letter; SIFMA Letter; STA Letter; comment letter 

from AlphaSimplex Group (April 12, 2011) (‘‘ASG 

Letter’’); NFA Letter; MFDF Letter; and Campbell 

Letter. 

81See MFDF Letter. 

to investors. The Commission has 

determined, however, that such factors 

should be instructive and that no single 

factor is dispositive. The Commission 

will determine whether a violation of 

the marketing restriction exists on a case 

by case basis through an examination of 

the relevant facts. The Commission 

seeks to discourage entities from 

designing creative marketing with the 

intent to avoid the marketing restriction. 

To address commenters’ requests for 

guidance, the Commission believes that 

the following factors are indicative of 

marketing a registered investment 

company as a vehicle for investing in 

commodity futures, commodity options, 

or swaps: 

• The name of the fund; 

• Whether the fund’s primary 

investment objective is tied to a 

commodity index; 

• Whether the fund makes use of a 

controlled foreign corporation for its 

derivatives trading; 

• Whether the fund’s marketing 

materials, including its prospectus or 

disclosure document, refer to the 

benefits of the use of derivatives in a 

portfolio or make comparisons to a 

derivatives index; 

• Whether, during the course of its 

normal trading activities, the fund or 

entity on its behalf has a net short 

speculative exposure to any commodity 

through a direct or indirect investment 

in other derivatives; 

• Whether the futures/options/swaps 

transactions engaged in by the fund or 

on behalf of the fund will directly or 

indirectly be its primary source of 

potential gains and losses; and 

• Whether the fund is explicitly 

offering a managed futures strategy.77

The Commission will give more 

weight to the final factor in the list 

when determining whether a registered 

investment company is operating as a de 

facto commodity pool. In contrast, a 

registered investment company that 

does not explicitly offer a managed 

futures strategy could still be found to 

have violated the marketing restriction 

based on whether its conduct satisfied 

any number of the other factors 

enumerated above. Put differently, if a 

registered investment company offers a 

strategy with several indicia of a 

managed futures strategy, yet avoids 

explicitly describing the strategy as such 

in its offering materials, that registered 

investment company may still be found 

to have violated the marketing 

restriction. 

The Commission also notes that 

whether the name of the fund includes 

the terms ‘‘futures’’ or ‘‘derivatives,’’ or 

otherwise indicates a possible focus on 

futures or derivatives, will not be 

considered a dispositive factor, but 

rather one of many that the Commission 

will consider in making its 

determination. Moreover, the 

Commission will not consider the mere 

disclosure to investors or potential 

investors that the registered investment 

company may engage in derivatives 

trading incidental to its main 

investment strategy and the risks 

associated therewith as being violative 

of the marketing restriction. 

At the Roundtable, several panelists 

questioned the Commission’s reasoning 

for deeming the use of a controlled 

foreign corporation (‘‘CFC’’) to be an 

appropriate factor in determining 

whether the registered investment 

company violates the marketing 

restriction. Based on comments received 

at the Roundtable and during the 

comment period, the Commission 

believes that registered investment 

companies use controlled foreign 

corporations as a mechanism to invest 

up to 25 percent of the registered 

investment company’s portfolio in 

derivatives.78 The Commission, 

therefore, believes that a registered 

investment company’s use of a CFC may 

indicate that the company is engaging in 

derivatives trading in excess of the 

trading threshold. Again, the 

Commission will consider this factor in 

the context of the registered investment 

company’s other conduct and will not 

view this factor as being dispositive of 

a violation of the marketing restriction. 

For these reasons, and those stated in 

the Proposal, the Commission adopts 

the marketing restriction in § 4.5 with 

the modifications discussed herein. 

5. Comments on the Harmonization of 

Compliance Obligations 

Many commenters raised concerns 

about the potential conflicts between 

the Commission’s regulatory regime and 

that imposed by the SEC if the 

Commission were to adopt the proposed 

amendments as final rules.79 As noted 

above, in an effort to obtain further 

information from interested parties, 

Commission staff held the Roundtable, 

and invited staff from the SEC, the IRS, 

and members of various trade 

organizations. The roundtable focused 

predominantly on harmonization of the 

Commission’s compliance regime with 

that of the SEC. Upon consideration of 

the comments and the discussions held 

as a result of the Roundtable relating to 

registered investment companies that 

will be required to register under 

amended § 4.5, the Commission agrees 

that it is necessary to harmonize the 

Commission’s compliance obligations 

under part 4 of the Commission’s 

regulations with the requirements of the 

SEC for registered investment 

companies. To that end, concurrently 

with the issuance of this rule, the 

Commission is issuing a notice of 

proposed rulemaking detailing its 

proposed modifications to part 4 of its 

regulations to harmonize the 

compliance obligations that apply to 

dually registered investment companies. 

The Commission will not require 

entities that must register due to the 

amendments to § 4.5 to comply with the 

Commission’s compliance regime until 

the adoption of final rules governing the 

compliance framework for registered 

investment companies subject to the 

Commission’s jurisdiction. 

6. Comments Regarding the Entity 

Required to Register as the CPO 

The Commission received a number 

of comments requesting clarification as 

to which entity would be required to 

register as a CPO if a registered 

investment company would not qualify 

for exclusion under § 4.5, as amended.80

The commenters consistently proposed 

that the registered investment 

company’s investment adviser is the 

appropriate entity to register in the 

capacity of the investment company’s 

CPO. The Commission agrees that the 

investment adviser is the most logical 

entity to serve as the registered 

investment company’s CPO. To require 

a member or members of the registered 

investment company’s board of 

directors to register would raise 

operational concerns for the registered 

investment company as it would result 

in piercing the limitation on liability for 

actions undertaken in the capacity of 

director.81 Thus, the Commission 

concludes that the investment adviser 

for the registered investment company 

is the entity required to register as the 

CPO. 

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11260 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

82See Roundtable Transcript at 165. 

83 15 U.S.C. 80a–1, et seq. 

84 7 U.S.C. 1a(10). 

85 7 U.S.C. 1a(10). 

86See Steben Letter; ICI Letter; NFA Letter; Reed 

Smith Letter; AllianceBernstein Letter; USAA 

Letter; PMC Letter; IAA Letter; Janus Letter; STA 

Letter; Rydex Letter; Alston Letter; and comment 

letter from the Association of Institutional Investors 

(July 1, 2011) (‘‘AII II Letter’’). 

87See ICI Letter; NFA Letter; Reed Smith Letter; 

AllianceBernstein Letter; USAA Letter; PMC Letter; 

IAA Letter; Janus Letter; and STA Letter. 

88See Steben Letter. 

89See Rydex Letter. 

90See AII II Letter. 

91Effective Date for Swap Regulation, 76 FR 

42508. 

92See ICI Letter; Reed Smith Letter; 

AllianceBernstein Letter; Invesco Letter; IAA Letter; 

Janus Letter; AII Letter; SIFMA Letter; and STA 

Letter. 

93 76 FR 7976, 7983–84 (Feb. 12, 2011). 

7. Comments Regarding the Use of 

Controlled Foreign Corporations 

The Commission received many 

comments regarding the use of CFCs by 

registered investment companies for 

purposes of engaging in commodities 

trading. As stated previously, it is the 

Commission’s understanding that 

registered investment companies invest 

up to 25 percent of their assets in the 

CFC, which then engages in actively 

managed derivatives strategies, either on 

its own or under the direction of one or 

more CTAs. Operators of CFCs have 

been exempt from Commission 

registration by claiming relief under 

§ 4.13(a)(4) of the Commission’s 

regulations because the sole participant 

in the CFC is the registered investment 

company. Additionally, at the 

Roundtable, panelists informed 

Commission staff that several registered 

investment companies that operated 

CFCs did not claim relief under 

§ 4.13(a)(4) because it was their opinion 

that the CFC was merely a subdivision 

of the registered investment company 

and was not a separate commodity 

pool.82

Commenters urged the Commission to 

continue to permit registered 

investment companies to use CFCs and 

to allow such CFCs to be exempt from 

registration with the Commission under 

§ 4.13 or exclude them under § 4.5 by 

reason of their sole investor being 

excluded as well. Commenters proposed 

various mechanisms by which the 

Commission could obtain information 

regarding the activities of CFCs, 

including requiring disclosure of CFC 

fees and expenses at the registered 

investment company level, requiring a 

representation that the CFC will comply 

with key provisions of the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’),83 and requiring the 

registered investment company to make 

its CFC’s books and records available to 

the Commission and NFA for 

inspection. 

The Commission does not oppose the 

continued use of CFCs by registered 

investment companies, but it believes 

that CFCs that fall within the statutory 

definition of ‘‘commodity pool’’ should 

be subject to regulation as a commodity 

pool.84 The Dodd-Frank Act amended 

the CEA to define a commodity pool as 

‘‘any investment trust, syndicate, or 

similar form of enterprise operated for 

the purpose of trading in commodity 

interests, including any * * * 

commodity for future delivery, security 

futures product, or swap.’’ 85 Based on a 

plain language reading of the statutory 

definition, CFCs wholly owned by 

registered investment companies and 

used for trading commodity interests are 

properly considered commodity pools. 

These entities also satisfy the definition 

of ‘‘pool’’ delineated in § 4.10(d)(1) of 

the Commission’s regulations, which is 

substantively identical to the statutory 

definition. There is no meaningful basis 

for concluding otherwise. Moreover, the 

Commission believes that each separate 

legally cognizable entity must be 

assessed on its own characteristics and 

that a CFC should not be entitled to 

exclusion simply because its parent 

company is a registered investment 

company that may be entitled to 

exclusion under § 4.5. Therefore, the 

Commission does not oppose the use of 

CFCs for trading in commodity interests 

by registered investment companies, but 

such CFCs will be required to have their 

CPOs register with the Commission 

unless they may claim exemption or 

exclusion therefrom on their own 

merits. 

8. Comments Regarding Implementation 

of Amendments 

The Commission received several 

comments with suggestions regarding 

implementation of the proposed 

amendments to § 4.5, if the Commission 

decided to adopt the proposed 

provisions as final rules.86 Several 

commenters recommended that the 

Commission provide for an undefined 

‘‘substantial transition period for 

compliance.’’ 87 Conversely, one 

commenter suggested that the 

Commission should only provide a 

short period of time for compliance.88

Another commenter suggested that at 

least 12-months would be required for 

registered investment companies to 

come into registration and compliance 

with Commission requirements.89

Finally, a commenter suggested that the 

Commission delay implementation until 

all mandatory Dodd-Frank Act rules are 

implemented.90

In light of the Commission’s proposed 

harmonization effort with respect to the 

compliance obligations for dually 

registered investment companies and 

the ongoing efforts to further define the 

term ‘‘swap’’ and the margin 

requirements for swaps positions, the 

Commission recognizes that a short 

implementation period is not 

practicable. The Commission believes 

that 11 months is an adequate amount 

of time to enable compliance by existing 

registered investment companies. 

Recognizing that the definition of swap 

is not yet finalized, the Commission has 

decided that compliance with the 

amendments to § 4.5 for purposes of 

registration only will occur on the later 

of either December 31, 2012 or within 

60-days following the adoption of final 

rules defining the term ‘‘swap,’’ and 

establishing margin requirements for 

such instruments.91 Entities required to 

register due to the amendments to § 4.5 

shall be subject to the Commission’s 

recordkeeping, reporting, and disclosure 

requirements set forth in part 4 of the 

Commission’s regulations within 60 

days following the effectiveness of a 

final rule implementing the 

Commission’s proposed harmonization 

effort pursuant to the concurrent 

proposed rulemaking. 

Several commenters also suggested 

that the Commission exempt from 

compliance those registered investment 

companies that have already claimed 

relief under § 4.5.92 The Commission 

does not believe that ‘‘grandfathering’’ is 

appropriate in this context. As the 

Commission stated in its Proposal, and 

reaffirms in this preamble, part of the 

purpose of amending § 4.5 is to ensure 

that entities that are engaged in a certain 

level of derivatives trading are subject to 

the registration and compliance 

obligations and oversight by the 

Commission.93 Grandfathering is 

inconsistent with the goals of the 

Commission’s amendments. The 

Commission, however, believes that 

harmonization of the Commission’s 

compliance regime with that of the SEC 

will minimize the regulatory burden of 

existing registered investment 

companies. In addition, the Commission 

is permitting a sufficient amount of time 

for existing entities to come into 

compliance before the compliance dates 

set forth above. Therefore, the 

Commission believes that it is 

addressing the commenters’ concerns 

through harmonization while still 

ensuring that the Commission has the 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11261 

94 17 CFR 230.501(a)(5), (a)(6) (2011). 

95 15 U.S.C. 77a, et seq. 

96 76 FR 7976, 7985 (Feb. 12, 2011). 

97See MFA II Letter. 

98 17 CFR 4.7(b)(3) (2011). 

99 Id. 4.22(c). 

100 76 FR 7967, 7984–85 (Feb. 12, 2011). 

101 In 2010, 951 pools were operated pursuant to 

§ 4.7 and 84 of those pools filed uncertified 

financial statements for fiscal year 2010. 

102 Id. at 7985. 

103See NFA Letter. 

104See MFA II Letter. 

105 17 CFR § 140.99. 

106See comment letter from the New York State 

Bar Association (April 12, 2011) (‘‘NYSBA Letter’’); 

comment letter from Skadden, Arps, Slate, Meagher 

& Flom LLP (April 12, 2011) (‘‘Skadden Letter’’); 

MFA Letter; comment letter from Katten, Muchin 

Rosenman LLP (April 12, 2011) (‘‘Katten Letter’’); 

Fidelity Letter; Dechert Letter; comment letter from 

the Alternative Investment Management 

Association, Ltd. (April 12, 2011) (‘‘AIMA Letter’’); 

comment letter from the Alternative Investment 

Management Association, Ltd. (July 1, 2011) 

(‘‘AIMA II Letter’’); IAA Letter; SIFMA Letter; 

comment letter from HedgeOp Compliance, LLC 

(July 28, 2011) (‘‘HedgeOp Letter’’); comment letter 

from the Private Investor Coalition; Inc. (April 12, 

2011) (‘‘PIC Letter’’); and comment letter Seward & 

Kissel, LLP (April 12, 2011) (‘‘Seward Letter’’). 

107See Skadden Letter; Katten Letter; and MFA 

Letter. 

108See Dechert Letter; and Katten Letter. 

information necessary to oversee all 

participants in the derivatives markets. 

B. Comments Regarding Proposed 

Amendment to § 4.7 

The Commission proposed two 

amendments to § 4.7. The first proposed 

to amend §§ 4.7(a)(3)(ix) and (a)(3)(x) to 

incorporate by reference the accredited 

investor standard from the SEC’s 

Regulation D 94 under the Securities Act 

of 1933,95 rather than by direct 

inclusion of its specific terms. The 

Commission stated that this amendment 

would ‘‘permit the Commission’s 

definition of QEP to continue to include 

the specific terms of the accredited 

investor standard in the event that it is 

later modified by the SEC without 

requiring the Commission to amend 

§ 4.7 each time to maintain parity.’’ 96

The Commission received one 

comment supporting this proposed 

amendment. Specifically, the 

commenter stated its belief that this 

amendment would ‘‘facilitate 

consistency amongst federal standards 

for financial sophistication and reduce 

investor confusion.’’ 97 The Commission 

agrees and, accordingly, is adopting the 

amendments to §§ 4.7(a)(3)(ix) and 

(a)(3)(x) as proposed. 

The second proposed amendment to 

§ 4.7 would rescind the relief provided 

in § 4.7(b)(3) 98 from the certification 

requirement of § 4.22(c) 99 for financial 

statements contained in commodity 

pool annual reports. In support of the 

Proposal, the Commission noted that 

approximately 85 percent of all pools 

operated under § 4.7 in fiscal year 2009 

filed financial statements that were 

certified by certified public accountants, 

‘‘despite being eligible to claim relief 

from certification under § 4.7(b)(3).’’ 100

The number of uncertified financial 

statements has continued to decline 

and, for fiscal year 2010, approximately 

91 percent of all reports filed for pools 

operated under § 4.7 included financial 

statements that were certified by 

certified public accountants.101 In the 

Proposal, the Commission stated its 

belief that ‘‘requiring certification of 

financial information by an independent 

accountant in accordance with 

established accounting standards will 

ensure the accuracy of the financial 

information submitted by its 

registrants,’’ and will further the stated 

purposes of the Dodd-Frank Act.102

The Commission received two 

comments regarding this proposed 

amendment. One commenter supported 

the proposed rescission and the 

Commission’s stated justification for 

doing so.103 The other commenter 

recommended that the Commission 

retain an exemption from certification of 

financial statements for entities where 

the pool’s participants are limited to the 

principals of its CPO(s) and CTA(s) and 

other categories of employees listed in 

§ 4.7(a)(2)(viii).104 It is unclear how 

many of the pools operated under § 4.7 

would qualify for such relief if adopted. 

The Commission believes that rather 

than adopt an exemption for such 

entities without data regarding the 

scope of the exemption’s applicability, 

it is more appropriate to rescind the 

exemption from certification for all 

pools operated under § 4.7(b)(3) 

generally and permit entities to write to 

the Division of Swap Dealer and 

Intermediary Oversight to request 

exemptive relief from the certification 

requirement on a case by case basis 

under § 140.99.105 By requiring entities 

to request relief from the Commission, 

the Commission can better determine 

whether such an exemption should be 

adopted in the future. Therefore, the 

Commission is adopting the 

amendments to § 4.7 as proposed. 

C. Comments Regarding the Proposed 

Rescission of §§ 4.13(a)(3) and (a)(4) 

As stated previously, the Commission 

proposed to rescind §§ 4.13(a)(3) and 

(a)(4). After considering the comments 

received, which are detailed herein, the 

Commission has determined to retain 

the de minimis exemption in 

§ 4.13(a)(3). The Commission concluded 

that overseeing entities with less than 

five percent exposure to commodity 

interests is not the best use of the 

Commission’s limited resources. 

Moreover, the Commission believes that 

the retention of the de minimis 

exemption in § 4.13(a)(3) provides for 

consistent treatment of entities engaging 

in de minimis levels of trading due to 

the addition of a five percent trading 

threshold in § 4.5 as well. The 

Commission received several comments 

requesting that the Commission modify 

§ 4.13(a)(3) in various respects. The 

Commission has determined, however, 

that it is appropriate to retain 

§ 4.13(a)(3) in its current form, for the 

reasons detailed below. 

1. General Comments 

In addition to the comments that the 

Commission received regarding the 

specific parts of the Proposal rescinding 

§§ 4.13(a)(3) and (a)(4), the Commission 

received numerous comments regarding 

the proposed rescissions generally.106

Broadly, the comments opposed the 

rescission of both provisions. 

Several commenters asserted that 

rescission was not necessary because 

the Commission has the means to obtain 

any needed information from exempt 

CPOs through its large trader reporting 

requirements and its special call 

authority.107 Although the Commission 

has the means to obtain certain 

information through the mechanisms 

delineated by the commenters, neither 

of those mechanisms provide the type of 

data requested on Forms CPO–PQR or 

CTA–PR with the kind of regularity 

proposed under § 4.27. For example, 

large trader reporting may provide 

detailed trading information for a 

particular market participant, but it does 

not provide the Commission with 

information regarding trends across 

funds that are not large enough to trigger 

the reporting obligation, but that may 

nevertheless impact the market. Also, 

with respect to the Commission’s 

special call authority under § 21.03, the 

collection of data under that section is 

generally reactive in nature. That is, the 

Commission would be in a position to 

collect data under § 21.03 after it 

became aware of an issue. Conversely, it 

is anticipated that collecting data using 

Forms CPO–PQR and CTA–PR will 

enable the Commission to be more 

proactive in assessing possible threats to 

market stability and in carrying out its 

duties in overseeing market participants 

generally. 

Some commenters suggested that the 

Commission adopt a limited exemption 

for SEC-registered entities that are not 

‘‘primarily engaged’’ in trading 

commodity interests.108 Pursuant to the 

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11262 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

109 7 U.S.C. 6m(3). 

110See Section 406 of the Dodd-Frank Act. 

111See MFA Letter; Seward Letter; and Katten 

Letter. 

112 76 FR 7976, 7985 (Feb. 12, 2011). 

113See MFA Letter; NYSBA Letter; comment 

letter from Schulte Roth & Zabel LLP (April 12, 

2011) (‘‘Schulte Letter’’); Dechert III Letter; Skadden 

Letter; Seward Letter; IAA Letter; NFA Letter; 

SIFMA Letter; and comment letter from 

McGuireWoods LLC (April 12, 2011) 

(‘‘McGuireWoods Letter’’). 

114 7 U.S.C. 6m(3). 

115See Skadden Letter. 

116See MFA Letter. 

117See Andrus v. Glover Construction Co., 446 

U.S. 608 (1980). 

118See MFA Letter; NFA Letter; Skadden Letter; 

Schulte Letter; NYSBA Letter; Dechert III Letter; 

IAA Letter; and Seward Letter. 

119See MFA Letter; Skadden Letter; NYSBA 

Letter; Dechert III Letter. 

terms of § 4m(3) of the CEA, as amended 

by the Dodd-Frank Act, CTAs that are 

registered with the SEC and whose 

business does not consist primarily of 

acting as a CTA, and that do not act as 

a CTA to any pool engaged primarily in 

the trading of commodity interests, are 

exempt from registration with the 

Commission.109 The Commission 

believes that that statutory exemption 

for CTAs is explicit as to Congress’s 

limited intentions regarding exempting 

entities from registration with the 

Commission. By the plain language of 

§ 4m(3), this section creates an 

exemption from the CTA registration 

requirements of the CEA; commodity 

pools are discussed in that provision 

only to the extent that the 

characteristics of the pool enable the 

CTA to claim relief. The registration 

category of CPO is not implicated. 

Therefore, the Commission concludes 

that the provisions of § 4m(3) do not 

mandate any exemption from the 

registration requirements for CPOs. 

Moreover, the Commission disagrees 

with the commenter who asserted that 

rescission is inconsistent with 

Congress’s asserted intention to avoid 

dual registration. The Commission does 

not believe it is accurate to state that 

Congress intended to avoid oversight by 

both agencies, and indeed Congress 

clearly anticipated some overlap when, 

in the Dodd-Frank Act, it required the 

Commission to work with the SEC to 

adopt a data collection instrument for 

dual registrants. Section 406 of the 

Dodd-Frank Act explicitly mandated 

that the Commission and the SEC jointly 

promulgate a reporting form for dually 

registered entities.110 The Commission 

does not believe that this requirement 

could be consistent with any asserted 

Congressional intention to absolutely 

avoid dual registration with the 

commissions. Therefore, the 

Commission concludes that dual 

registration of certain entities is not 

irreconcilable with the Congressional 

intent underlying the Dodd-Frank Act. 

Other commenters asserted that the 

compliance and regulatory obligations 

under the Commission’s rules are 

burdensome and costly for private 

businesses and would unnecessarily 

distract entities from their primary focus 

of managing client assets.111 The 

Commission disagrees with this 

assertion, which in any event was not 

fully detailed by any commenter. The 

Commission believes that regulation is 

necessary to ensure a well functioning 

market and to provide investor 

protection. The Commission further 

believes that the compliance regime that 

the Commission has adopted strikes the 

appropriate balance between limiting 

the burden placed on registrants and 

enabling the Commission to carry out its 

duties under the CEA. Moreover, the 

compliance and regulatory obligations 

imposed on these CPO registrants will 

be no different from those imposed on 

other registered CPOs. Such compliance 

and regulatory obligations have not been 

unduly burdensome for these other 

registrants. 

2. Comments Regarding the Proposed 

Rescission of § 4.13(a)(3) 

In the Proposal, the Commission 

proposed rescinding the ‘‘de minimis’’ 

exemption in § 4.13(a)(3). The 

Commission stated its belief that ‘‘it is 

possible for a commodity pool to have 

a portfolio that is sizeable enough that 

even if just five percent of the pool’s 

portfolio were committed to margin for 

futures, the pool’s portfolio could be so 

significant that the commodity pool 

would constitute a major participant in 

the futures market.’’ 112 Moreover, the 

Commission stated that it believed that 

this rescission was consistent with the 

purposes of the Dodd-Frank Act, with 

specific regard to increased 

transparency and accountability of 

participants in the financial markets. 

The Commission did, however, solicit 

comment as to whether some form of de 

minimis exemption should be 

maintained. 

The Commission received ten 

comments specifically on its proposed 

rescission of the ‘‘de minimis’’ 

exemption in § 4.13(a)(3).113 The 

commenters consistently urged the 

Commission to retain a de minimis 

exemption. Some commenters cited to 

the amendment to § 4m(3) of the CEA by 

the Dodd Frank Act, which provides an 

exemption from registration for CTAs 

that are registered with the SEC and 

whose business does not consist 

primarily of acting as a CTA and that 

does not act as a CTA to any pool 

engaged primarily in the trading of 

commodity interests.114 One commenter 

stated that the effect of § 4m(3) was to 

exempt such CTAs from registration as 

a CPO or CTA; 115 whereas another 

commenter asserted that the amendment 

of § 4m(3) is evidence that Congress did 

not intend to have the operator of a 

commodity pool register as a CPO if its 

pool is not primarily engaged in trading 

commodity interests.116 The 

Commission notes that under the tenets 

of statutory interpretation, where 

Congress explicitly enumerates certain 

exceptions to a general prohibition, 

additional exceptions are not to be 

implied in the absence of evidence of a 

contrary legislative intent.117 By the 

plain language of § 4m(3), this section 

creates an exemption from the CTA 

registration requirements of the CEA; 

commodity pools are discussed only to 

the extent that the characteristics of the 

pool enable the CTA to claim relief. The 

registration category of CPO is not 

referenced. Therefore, the Commission 

concludes that the provisions of § 4m(3) 

do not mandate any exemptions from 

registration for CPOs. The Commission 

notes, however, that it has determined 

to retain the de minimis exemption set 

forth in § 4.13(a)(3). 

Several commenters suggested adding 

as a prerequisite for exemptive relief 

under § 4.13(a)(3), registration with the 

SEC as an investment adviser.118 The 

Commission is declining to add SEC 

registration as part of the criteria for 

relief under § 4.13(a)(3) because the 

basis for providing relief is the limited 

nature of the pool’s trading activity 

rather than its operator’s registration 

status with the SEC. To require the CPO 

of an exempt pool to be regulated by the 

SEC would limit the applicability of 

§ 4.13(a)(3), which is not the 

Commission’s intention at this time. 

Most commenters suggesting the 

additional requirement of SEC 

registration also proposed an increase in 

the trading threshold, ranging from 20 

percent to 50 percent of the pool’s 

liquidation value due to the inclusion of 

the pool’s swaps activity within the 

trading threshold.119 As discussed 

earlier in this release in the context of 

§ 4.5, the Commission believes that a 

five percent threshold continues to be 

the appropriate level for exemption or 

exclusion due to limited derivatives 

trading. Moreover, the Commission 

would again note that the inclusion of 

an alternative net notional test provides 

CPOs with another, perhaps less 

restrictive means, of qualifying for the 

exemption. The Commission believes 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11263 

120 7 U.S.C. 1a(10); 1a(11). 

121Any reference to a de minimis level of swaps 

activities by registered investment companies only 

applies in the context of CPO registration by 

registered investment companies. 

122The Commission has proposed to amend the 

definition of ‘‘commodity interest’’ as it appears in 

§ 1.3 to include swaps, consistent with the DoddFrank Act. See, 76 FR 33066 (June 7, 2011). 

123The Commission does not need to amend the 

language of § 4.13(a)(3) to include swaps within the 

trading threshold as this section determines 

eligibility based on the amount of ‘‘commodity 

interests’’ traded. In a separate rulemaking, the 

Commission has proposed to amend the definition 

of the term ‘‘commodity interest’’ to include swaps. 

See 76 FR 11701 (March 3, 2011). 

124See 17 CFR 250.202(a)(11)(G)–1. 

125See 17 CFR 140.99(a)(3) (‘‘An interpretative 

letter may be relied upon by persons in addition to 

the Beneficiary.’’). The most recent letter (CFTC 

letter 10–25) issued affirming the Division’s 

interpretation that a ‘‘family office’’ is not a pool 

under § 4.10(d) is available at the Commission’s 

Web site at: http://www.cftc.gov/ucm/groups/

public/@lrlettergeneral/documents/letter/10-25.pdf. 

See, CFTC Interpretative Letter 00–100 [2000–2002 

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,420 

(Nov. 1, 2000); CFTC Interpretative Letter No. 96– 

24, [1994–1996 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ¶ 26,653 (March 4, 1996); CFTC 

Interpretative Letter No. 97–29, [1996–1998 

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,039 

(March 21, 1997); CFTC Interpretative Letter No. 

95–35, [1994–1996 Transfer Binder] Comm. Fut. L. 

Rep. (CCH) ¶ 26,376 (Nov. 23, 1994). 

that trading exceeding five percent of 

the liquidation value of a portfolio, or a 

net notional value of commodity 

interest positions exceeding 100 percent 

of the liquidation value of a portfolio, 

evidences a significant exposure to the 

derivatives markets, and that such 

exposure should subject an entity to the 

Commission’s oversight. 

With respect to the issue of the 

inclusion of swaps making it more 

difficult to satisfy the trading threshold, 

the Commission believes that it would 

be premature to increase the threshold 

at this time. Additionally, as stated 

previously, the inclusion of an 

alternative net notional test may 

provides entities with another 

mechanism for qualifying for the 

exemption in § 4.13(a)(3). The 

Commission believes that it may be 

more appropriate to reassess the trading 

threshold after collecting data from 

registered CPOs through Form CPO– 

PQR. Therefore, the Commission has 

decided not to increase the trading 

threshold under § 4.13(a)(3). 

Additionally, the Commission 

believes that it must include swaps 

within the threshold to enable the most 

entities to claim relief under § 4.13(a)(3). 

As stated previously with respect to the 

amendments to § 4.5, the Dodd-Frank 

Act amended the statutory definition of 

the terms ‘‘commodity pool operator’’ 

and ‘‘commodity pool’’ to include those 

entities that trade swaps.120 If the 

Commission were to keep the de 

minimis test in § 4.13(a)(3) and only 

include futures and options as the basis 

for calculating compliance with the 

threshold, the swaps activities of the 

CPOs would still trigger the registration 

requirement notwithstanding the 

exclusion of swaps from the calculus. 

That is, the purpose of the threshold test 

is to define a de minimis amount of 

trading activity that would not trigger 

the registration requirement. If swaps 

were excluded, any swaps activities 

undertaken by a CPO would result in 

that entity being required to register 

because there would be no de minimis 

exclusion for such activity. As a result, 

one swap contract would be enough to 

trigger the registration requirement. For 

that reason, if the Commission wants to 

permit some de minimis level of swaps 

activity by CPOs without registration 

with the Commission, it must do so 

explicitly in the exemption.121 Because 

the Commission has determined that de 

minimis activity by CPOs does not 

implicate the Commission’s regulatory 

concerns, the Commission has decided 

that it is appropriate to include swaps 

within the trading threshold under 

§ 4.13(a)(3).122

Additionally, to enable CPOs to fully 

exercise the alternative net notional test, 

the Commission is amending 

§ 4.13(a)(3)(ii)(B) to provide guidance as 

to the notional value of cleared swaps 

positions and the ability to net swaps 

cleared by the same DCO. The 

Commission believes that this 

amendment will serve to provide equal 

ability to claim relief under § 4.13(a)(3) 

to all CPOs regardless of the types of 

commodity interests held by their 

operated pools. Therefore, the 

Commission is amending 

§ 4.13(a)(3)(ii)(B)(1) to provide that the 

notional value of a cleared swap is 

determined consistent with the 

provisions of part 45 of the 

Commission’s regulations and 

§ 4.13(a)(3)(ii)(B)(2) to provide that 

swaps cleared by the same DCO may be 

netted where appropriate. 

After consideration of the comments 

and the Commission’s stated rationale 

for proposing to rescind the exemption 

in § 4.13(a)(3), the Commission has 

determined to retain the de minimis 

exemption currently set forth in that 

section without modification.123

3. Comments Regarding a Family Offices 

Exemption 

In response to the Commission’s 

proposed rescission of §§ 4.13(a)(3) and 

(a)(4), the Commission received 

numerous comments asking that the 

Commission adopt an exemption from 

registration for family offices that is akin 

to the exemption adopted by the SEC.124

The commenters noted that prior to the 

adoption of §§ 4.13(a)(3) and (a)(4), the 

Commission staff granted relief to 

family offices on an ad hoc basis, but 

that when §§ 4.13(a)(3) and (a)(4) were 

adopted, most family offices availed 

themselves of those exemptions from 

registration. The commenters argued 

that the Commission should have less 

regulatory concern about family offices 

because their clientele is necessarily 

limited to family members and the 

family offices do not solicit outside of 

the family unit. 

Due to the exemptions previously 

granted by Commission staff, and the 

resulting lack of information regarding 

the activities of CPOs claiming relief 

thereunder, the Commission does not 

yet have a comprehensive view of the 

positions taken and interests held by 

currently exempt entities. The 

Commission, therefore, believes that it 

is prudent to withhold consideration of 

a family offices exemption until the 

Commission has developed a 

comprehensive view regarding such 

firms to enable the Commission to better 

assess the universe of firms that may be 

appropriate to include within the 

exemption, should the Commission 

decide to adopt one. Therefore, the 

Commission is directing staff to look 

into the possibility of adopting a family 

offices exemption in the future. 

The Commission notes that family 

offices previously relying on the 

exemption under Regulation § 4.13(a)(3) 

will not be affected by the rules adopted 

herein, as the Commission is not 

rescinding the § 4.13(a)(3) exemption 

and it will remain available to entities 

meeting its criteria. The Commission 

further notes that family offices 

continue to be permitted to write in on 

a firm by firm basis to request 

interpretative relief from the registration 

and compliance obligations under the 

Commission’s rules and to rely on those 

interpretative letters already issued to 

the extent permissible under the 

Commission’s regulations.125 Therefore, 

the Commission does not believe an 

exemption for family offices is 

necessary at this time. 

4. Comments Regarding a Foreign 

Advisor Exemption 

Several commenters suggested that if 

the Commission determines to adopt the 

proposed rescissions, it should adopt a 

foreign advisor exemption similar to 

that set forth in the Dodd-Frank Act 

under the Investment Adviser Act of 

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11264 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

126See Section 403 of the Dodd-Frank Act. 

127See 17 CFR 4.13(a)(4). 

128 76 FR 7976, 7986 (Feb 12, 2011). 

129See comment letter from Sidley Austin LLP 

(April 12, 2011) (‘‘Sidley Letter’’); MFA Letter; 

NYSBA Letter; comment letter from Cranwood 

Capital Management (April 12, 20110 (‘‘Cranwood 

Letter’’); Dechert III Letter; and comment letter from 

Nantucket Multi Managers, LLC (April 12, 2011) 

(‘‘Nantucket Letter’’). 

130See MFA Letter; and NYSBA Letter. 

131MFA raised this concern during several 

meetings with Commission staff, although it did not 

provide any detail regarding the scope of its 

concerns and the topic was not discussed in the 

written comments submitted regarding this 

rulemaking. 

132 17 CFR § 4.13(a)(4)(ii)(B). 

133 17 CFR § 4.7(a). 

134See Cranwood Letter. 

1940.126 The commenters expressed 

concern that the rescission of the 

exemptions under §§ 4.13(a)(3) and 

(a)(4) would result in nearly all non-US 

based CPOs operating a pool with at 

least one U.S. investor being required to 

register with the Commission. 

Commenters also expressed concern 

that foreign CPOs would have to report 

the entirety of their derivatives activities 

to the Commission even if foreign 

regulators also oversee such activities. 

Due to the exemptions previously 

adopted by the Commission, and the 

resulting lack of information regarding 

the activities of CPOs claiming relief 

thereunder, the Commission does not 

yet have a comprehensive view of the 

positions taken and interests held by 

currently exempt entities. The 

Commission, therefore, believes that it 

is prudent to withhold consideration of 

a foreign advisor exemption until the 

Commission has received data regarding 

such firms on Forms CPO–PQR and/or 

CTA–PR, as applicable, to enable the 

Commission to better assess the 

universe of firms that may be 

appropriate to include within the 

exemption, should the Commission 

decide to adopt one. Foreign advisors to 

pools that meet the criteria of 

§ 4.13(a)(3) will be able to continue to 

operate pursuant to that exemption, if 

previously claimed, or file notice of 

claim of exemption under § 4.13(a)(3). 

Therefore, the Commission is not 

providing an exemption for foreign 

advisors at this time. 

5. Comments Regarding the Proposed 

Rescission of § 4.13(a)(4) 

In the Proposal, the Commission 

proposed to rescind the exemption in 

§ 4.13(a)(4) for operators of pools that 

are offered only to individuals and 

entities that satisfy the qualified eligible 

person standard in § 4.7 or the 

accredited investor standard under the 

SEC’s Regulation D.127 In the Proposal, 

the Commission stated that it 

[S]eeks to eliminate the exemptions under 

§§ 4.13(a)(3) and (4) for operators of pools 

that are similarly situated to private funds 

that previously relied on the exemptions 

under §§ 3(c)(1) and (7) of the Investment 

Company Act and § 203(b)(3) of the 

Investment Advisers Act. It is the 

Commission’s view that the operators of 

these pools should be subject to similar 

regulatory obligations, including proposed 

form CPO–PQR, in order to provide 

improved transparency and increased 

accountability with respect to these pools. 

The Commission has determined that it is 

appropriate to limit regulatory arbitrage 

through harmonization of the scope of its 

data collection with respect to pools that are 

similarly situated to private funds so that 

operators of such pools will not be able to 

avoid oversight by either the Commission or 

the SEC through claims of exemption under 

the Commission’s regulations.128

The Commission received several 

comments regarding its proposed 

rescission.129 Several commenters 

argued that the Commission should 

consider retaining the exemption in 

§ 4.13(a)(4) for funds that do not directly 

invest in commodity interests, but do so 

through a fund of funds structure, and 

who are advised by an SEC registered 

investment adviser. Due to the 

exemptions previously adopted by the 

Commission, and the resulting lack of 

information regarding the activities of 

CPOs claiming relief thereunder, the 

Commission does not yet have a 

comprehensive view of the positions 

taken and interests held by currently 

exempt entities. The Commission, 

therefore, believes that it is prudent to 

withhold consideration of a fund of 

fund exemption until the Commission 

has received data regarding such firms 

on Forms CPO–PQR and/or CTA–PR, as 

applicable, to enable the Commission to 

better assess the universe of firms that 

may be appropriate to include within 

the exemption, should the Commission 

decide to adopt one. Therefore, the 

Commission is not providing an 

exemption for funds of funds at this 

time. The Commission notes, however, 

that staff will consider requests for 

exemptive relief for funds of funds on 

a case by case basis. 

The Commission received two 

comments that argued that the 

rescission of § 4.13(a)(4) is inconsistent 

with the private offering framework 

under the SEC’s Regulation D and that 

the rescission would result in the end of 

private offerings.130 The Commission 

believes that this analysis is flawed and 

is the result of a mistaken conflation of 

the private fund structure under the 

Commission’s rules and privatelyoffered ownership interests under the 

SEC’s rules. The Commission notes that 

the rescission of § 4.13(a)(4) does not 

preclude CPOs from utilizing Regulation 

D with respect to the offering of pool 

interests because the availability of 

relief from the registration of an offering 

under Regulation D does not require 

that the entity involved be exempt from 

regulation. Therefore, the Commission 

continues to believe that rescission of 

§ 4.13(a)(4) is appropriate for the 

reasons stated in the Proposing Release 

and that it is consistent with the 

registration of investment advisers of 

such exempt funds with the SEC. 

One commenter expressed concerns 

about the fact that the class of eligible 

participants in a pool operated pursuant 

to § 4.13(a)(4) is broader than that for a 

pool qualifying under § 4.7.131

Specifically, this commenter noted that 

under § 4.13(a)(4), participants may 

include non-natural participants that are 

QEPs under § 4.7 or accredited investors 

under § 230.501(a)(1)–(3), (a)(7) or 

(a)(8),132 whereas § 4.7 does not include 

such participants as QEPs.133 The 

Commission recognizes that this 

discrepancy may result in certain 

entities being unable to claim relief 

under § 4.7; however, due to the 

exemptions previously adopted by the 

Commission, and the resulting lack of 

information regarding the activities of 

CPOs claiming relief thereunder, the 

Commission does not yet have a 

comprehensive view of the positions 

taken and interests held by currently 

exempt entities and until the 

Commission has more information 

regarding the universe of entities 

affected, the Commission does not 

believe that it is appropriate to amend 

§ 4.7 to reflect the nature of participants 

in funds previously entitled to relief 

under § 4.13(a)(4). After the Commission 

has collected data from such entities 

through Form CPO–PQR, the 

Commission may reconsider this issue. 

The Commission also notes that staff 

will consider requests for exemptive 

relief from the limitations of § 4.7 on a 

case-by-case basis. 

One commenter argued that rescission 

is not necessary because any fund that 

seeks to attract qualified eligible 

purchasers is already required to 

maintain oversight and controls that 

exceed those mandated by part 4 of the 

Commission’s regulations such that any 

regulation imposed would be 

duplicative and unnecessarily 

burdensome.134 That commenter further 

stated that: 

We are accustomed to intense scrutiny 

from potential investors that frequently 

includes independent background checks of 

our key employees, onsite visits that include 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11265 

135See Cranwood Letter. 

136See NYSBA Letter; AIMA Letter; Schulte 

Letter; comment letter from Fulbright & Jaworski 

L.L.P. (April 12, 2011) (‘‘Fulbright Letter’’); SIFMA 

Letter; Seward Letter; Katten Letter; and comment 

letter from TIF Fund Management LLC (May 19, 

2011) (‘‘TIF Letter’’); NFA Letter; IAA Letter; and 

Dechert Letter. 

137See Schulte Letter; and Fulbright Letter. 

138See NFA Letter. See also, IAA Letter. 

139See NYSBA Letter; AIMA Letter; Schulte 

Letter; Fulbright Letter; SIFMA Letter; Seward 

Letter; and Katten Letter. 140 76 FR 7976, 7986 (Feb. 12, 2011). 

141See NFA Letter; AII Letter; and SIFMA Letter. 

142See NFA Letter. 

143See NFA Letter; and SIFMA Letter. 

144See NFA Letter. 

145See SIFMA Letter. 

interviews with our traders and other key 

personnel, interviews of our third-party 

administrator and our auditors, interviews of 

officials of our clearing broker, interviews of 

officers at our custodial bank, and bulk 

delivery of transactional data for 

independent analysis. To say that such 

information-gathering goes far beyond the 

contents of a mandated disclosure document 

is a gross understatement.135

The commenter primarily focused on 

the significant level of controls that the 

fund operator implements independent 

of regulation. The Commission believes 

that, contrary to the commenter’s 

arguments as to the import of that fact, 

such controls and internal oversight 

should facilitate compliance with the 

Commission’s regulatory regime. 

Moreover, the Commission continues to 

believe that registration serves 

important regulatory purposes as stated 

previously in this release in the context 

of the amendments to § 4.5. 

The Commission has determined to 

eliminate the exemption in § 4.13(a)(4) 

because, as stated in the proposal, there 

are no limits on the amount of 

commodity interest trading in which 

pools operating under this regulation 

can engage. That is, it is possible that a 

commodity pool that is exempted from 

registration under § 4.13(a)(4) could be 

invested solely in commodities, which, 

in the Commission’s view, necessitates 

Commission oversight to ensure 

adequate customer protection and 

market oversight. Therefore, the 

Commission adopts the rescission of 

§ 4.13(a)(4) as proposed. 

The Commission received several 

comments regarding the timing of the 

implementation of the rescission of 

§ 4.13(a)(4).136 Two commenters 

suggested that 18 months is the 

appropriate time period to permit 

entities to prepare for compliance with 

the Commission’s registration and 

compliance regime.137 One commenter 

suggested that the Commission provide 

‘‘sufficient time,’’ but provided no 

proposed specific period of time.138

Several commenters asserted that 

currently exempt entities should be 

grandfathered.139

The Commission recognizes that 

entities will need time to come into 

compliance with the Commission’s 

regulations. The Commission does not, 

however, believe that the process of 

preparing for Commission oversight 

necessitates an 18 month time period. 

Based on the comments received 

indicating that a certain portion of 

entities currently claiming relief under 

§ 4.13(a)(4) already have robust controls 

in place independent of Commission 

oversight, the Commission believes that 

entities currently claiming relief under 

§ 4.13(a)(4) should be capable of 

becoming registered and complying 

with the Commission’s regulations 

within 12 months following the 

issuance of the final rule. For entities 

that are formed after the effective date 

of the rescission, the Commission 

expects the CPOs of such entities to 

comply with the Commission’s 

regulations upon formation and 

commencement of operations. 

The Commission does not believe that 

‘‘grandfathering’’ is appropriate in this 

context. As the Commission stated in its 

Proposal, part of the purpose of 

rescinding § 4.13(a)(4) is to ensure that 

entities that are engaged in derivatives 

trading are subject to substantively 

identical registration and compliance 

obligations and oversight by the 

Commission.140 Grandfathering is not 

consistent with the stated goals of the 

Commission’s rescission and would 

result in disparate treatment of similarly 

situated entities. 

Therefore, the Commission will 

implement the rescission of § 4.13(a)(4) 

for all entities currently claiming 

exemptive relief thereunder on 

December 31, 2012, but the rescission 

will be implemented for all other CPOs 

upon the effective date of this final 

rulemaking. 

D. Comments Regarding the Proposed 

Annual Notices for Continued 

Exemptive or Exclusionary Relief 

In the Proposal, the Commission 

proposed to require annual reaffirmance 

of a claim of exemption or exclusion 

from registration as a CPO or CTA. In 

the Proposal, the Commission stated its 

position that an annual notice 

requirement would promote improved 

transparency regarding the number of 

entities either exempt or excluded from 

the Commission’s registration and 

compliance programs, which is 

consistent with one of the primary 

purposes of the Dodd-Frank Act. 

Moreover, the Commission stated its 

belief that an annual notice requirement 

would enable the Commission to 

determine whether exemptions and 

exclusions should be modified, 

repealed, or maintained as part of the 

Commission’s ongoing assessment of its 

regulatory scheme. 

The Commission received three 

comments on this provision in the 

Proposal.141 One commenter supported 

the adoption of an annual notice 

requirement, but suggested that the due 

date of the notice be changed from the 

exemption’s original filing date to a 

calendar-year end for all filers.142 The 

Commission agrees that moving the due 

date for the annual notice requirement 

to the calendar-year end for all filers 

may be more operationally efficient. 

Therefore, the Commission will adopt 

the annual notice requirement 

mandating that the notice be filed at the 

calendar year-end rather than the 

anniversary of the original filing. 

Two commenters suggested that the 

30-day time period for filing was not 

adequate to enable firms to comply.143

One commenter proposed a 60-day time 

period,144 whereas the other commenter 

proposed 90 days as the necessary 

amount of time.145 The Commission 

recognizes that the proposed 30-day 

filing period may not be adequate due 

to the ramifications of an entity’s failure 

to file its annual notice in a timely 

manner, which would result in the 

exemption or exclusion being deemed 

withdrawn. This issue is particularly 

important because of the NFA’s Bylaw 

1101, which prohibits NFA members 

from conducting business with nonmembers. Should an entity fail to file its 

annual notice within the requisite time 

frame, its NFA membership could be 

deemed withdrawn, which could 

potentially impact numerous other NFA 

members. The Commission believes that 

extending the filing period from 30 days 

to 60 days will provide NFA with 

adequate time to follow up with filing 

entities to ensure that a filing is not 

omitted inadvertently and to limit the 

adverse consequences for other NFA 

members. The Commission does not, 

however, believe that 90 days is 

necessary as it intends for such notice 

to be filed electronically with NFA and 

for NFA’s filing system to pre-populate 

the notice with the names and NFA IDs 

of all exempt pools operated by the CPO 

with an option to choose to reaffirm the 

exemptions for all exempt pools. The 

Commission believes that this 

minimizes both the time and expense 

burdens on the CPO and should enable 

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11266 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

146 76 FR 7976, 7986 (Feb. 12, 2011). 

147See SIFMA Letter; Fidelity Letter; and 

comment letter from Chris Barnard (Feb. 26, 2011) 

(‘‘Barnard Letter’’). 

148See SIFMA Letter; and Fidelity Letter. 

149See 7 U.S.C. 1a(10), 1a(11), and 1a(12). 

150See SIFMA Letter; and Fidelity Letter. 

151See Barnard Letter. 

152These risk disclosure statements do not affect 

the swap disclosure requirements mandated in CEA 

Section 4s(h)(3)(B) and rules relating to that 

statutory provision. See proposed § 23.431 

Disclosure of Material Information, Business 

Conduct Standards for Swap Dealers and Major 

Swap Participants with Counterparties, 75 FR 

80638 (Dec. 22, 2010). In addition, managed 

accounts that do not convey discretionary authority 

to the CTA will require the pass through of the 

swap disclosures in any final rule promulgated 

pursuant to 4s(h)(3)(B). 

153See Fidelity Letter; and AIMA Letter. 

154See ICI Letter; AIMA Letter; and comment 

letter from K&L Gates LLP (Feb. 12, 2011) (‘‘K&L 

Letter’’). 

155See Fidelity Letter. 

156See AIMA Letter; SIFMA Letter; and Fidelity 

Letter. 

all entities to comply with the 

requirement within 60 days. 

E. Comments Regarding the Proposed 

Risk Disclosure Statement for Swaps in 

§ 4.24 and § 4.34 

The Commission also proposed 

adding standard risk disclosure 

statements for CPOs and CTAs regarding 

their use of swaps to §§ 4.24(b) and 

4.34(b), respectively.146

The Commission received three 

comments with respect to the proposed 

standard risk disclosure statement for 

swaps.147 Two argued that a standard 

risk disclosure statement is not the 

appropriate way to disclose the risks 

inherent in swaps activity to 

participants or clients.148 Specifically, 

those commenters argued that the use of 

swaps by CPOs and CTAs varies and 

depending on the reason for using 

swaps, different risks may be 

implicated. Furthermore, those 

commenters also noted that the 

proposed risk disclosure statement is 

inconsistent with recent SEC guidance 

to registered investment companies to 

avoid generic disclosures. The 

Commission respectfully disagrees with 

the assertions of those commenters who 

believe that a standard risk disclosure 

statement is not appropriate. The 

Commission believes that a 

standardized risk disclosure statement 

addressing certain risks associated with 

the use of swaps is necessary due to the 

revisions to the statutory definitions of 

CPO, CTA, and commodity pool enacted 

by the Dodd-Frank Act.149 Moreover, it 

is the Commission’s position that 

concerns about ‘‘one-size-fits-all’’ 

disclosure of risks are addressed 

through additional disclosures required 

under §§ 4.24(g) and 4.34(g), which 

govern disclosures regarding the risks 

associated with participating in the 

offered commodity pool or program. 

With respect to the comments 

submitted regarding the conflicting 

requirements imposed on registered 

investment companies whose advisers 

are required to register as CPOs 

pursuant to amended § 4.5,150 such 

concerns will be addressed through the 

proposed modifications to the 

Commission’s compliance regime that 

will be applicable to registered 

investment companies overseen by both 

the SEC and the Commission. 

Additionally, the Commission 

received one comment that supported 

the adoption of the standard risk 

disclosure statement for swaps, but 

suggested that the Commission consider 

whether the wording needed to be 

modified depending on whether the 

swaps were cleared or uncleared.151

Based on the language proposed, the 

Commission does not believe that 

different language must be adopted to 

account for the differences between 

cleared and uncleared swaps. In 

particular, the Commission notes that 

the proposed risk disclosure statement 

is not intended to address all risks that 

may be associated with the use of 

swaps, but that the CPO or CTA is 

required to make additional disclosures 

of any other risks in its disclosure 

document pursuant to §§ 4.24(g) and 

4.34(g) of the Commission’s regulations. 

Moreover, the language of the proposed 

risk disclosure statement is conditional 

and does not purport to assert that all 

of the risks discussed are applicable in 

all circumstances. For the reasons 

discussed above and those stated in the 

Proposal, the Commission adopts the 

proposed risk disclosure statements for 

CPOs and CTAs regarding swaps.152

These additional risk disclosure 

statements will be required for all new 

disclosure documents and all updates 

filed after the effective date of this final 

rulemaking. 

F. Section 4.27 and Forms CPO–PQR 

and CTA–PR 

1. General Comments 

The Commission received numerous 

comments in response to proposed 

§ 4.27, which requires CPOs and CTAs 

to report certain information to the 

Commission on Forms CPO–PQR and 

CTA–PR, respectively. Several 

commenters questioned whether the 

data collection was necessary for the 

Commission’s oversight of its 

registrants.153 Others asserted that 

certain groups, such as registered 

investment companies or family offices, 

should be exempted from completing 

the data collection.154

The Commission’s new reporting 

requirements supplement SEC reporting 

requirements for dual registrants that 

must file Form PF with the SEC by 

virtue of their dual registration status. 

Information about CTAs and CPOs that 

are non-dual registrants is necessary for 

the Commission to identify significant 

risk to the stability of the derivatives 

market and the financial market as a 

whole. Following the recent economic 

turmoil, the Commission has 

reconsidered the level of regulation that 

it believes is appropriate for entities 

participating in the commodity futures 

and derivatives markets. With respect to 

the assertion that registered investment 

companies should not be required to file 

Form CPO–PQR, the Commission 

believes that it is important to collect 

the data in Form CPO–PQR from 

registered investment companies whose 

activities require CPO registration to 

assess the risk posed by such 

investment vehicles to derivatives 

markets and the broader financial 

system. Consequently, the Commission 

intends to require from registered 

investment companies that are also 

registered as CPOs the same information 

that it is requiring from entities solely 

registered as CPOs. Additionally, the 

Commission notes that to the extent that 

the entity registered as the CPO for the 

registered investment company is 

registered as an investment adviser and 

is required to file Form PF with the SEC, 

the activities of the registered 

investment company may be reported 

on Form PF as well. 

The Commission further believes that 

the same reasoning applies with respect 

to the collection of data from family 

offices. To enable the Commission to 

evaluate a potential family offices 

exemption following the collection and 

analysis of data regarding their 

activities, the Commission believes that 

it is essential that family offices remain 

subject to the data collection 

requirements to the extent that such 

entities are not entitled to claim relief 

pursuant to the Commission’s 

interpretative guidance regarding family 

offices. 

One commenter recommended that 

the Commission clarify the filing 

obligations for CPOs and CTAs that are 

required to file Form PF with the SEC 

and to streamline the reporting 

obligations.155 Another commenter 

argued that a very large private fund 

that has a limited amount of derivatives 

trading should not be subject to 

Schedule C of Form CPO–PQR.156 As 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11267 

157See Barnard Letter. 

158See Dechert Letter. 

159See AIMA Letter; MFA II Letter; Seward 

Letter. See also, AIMA II Letter. 

160See AIMA Letter. 

161See AIMA Letter; MFA II Letter; Seward 

Letter. 

162 76 FR 71128, 71135 (Nov. 16, 2011). 

163See AIMA Letter; MFA II Letter; Dechert 

Letter; Seward Letter; IAA Letter; Fidelity Letter; 

AIMA II Letter; K&L Letter; MFA Letter; and SIFMA 

Letter. 

164See AIMA Letter; and MFA II Letter. 

165Form PF defines net assets under management 

as regulatory assets under management less 

liabilities 76 FR 71128, 71136 (Nov. 16, 2011). 

stated in the Proposal, CPOs that are 

dually registered with the SEC and that 

file Form PF must still file Schedule A 

with the Commission, and CTAs must 

still file Form CTA–PR. The 

Commission intends to adopt § 4.27 as 

proposed and permit dual registrants to 

file Form PF with the SEC in lieu of 

completing Schedules B and/or C of 

Form CPO–PQR. The Commission never 

intended to require very large dual 

registrants to file anything more than 

the general identifying information 

required on Schedule A with the 

Commission, and neither § 4.27 nor the 

forms require dual registrants to file 

Schedules B or C if they are filing Form 

PF. 

The Commission has modified both 

Schedule A of Form CPO–PQR and 

Form CTA–PR so that both documents 

are only soliciting general demographic 

data. The Commission has moved 

Question 12, which asked for 

information regarding position 

information, from proposed Schedule A 

to Schedule B of Form CPO–PQR in an 

effort to avoid collecting redundant 

information from dual registrants. 

Additionally, the Commission is not 

adopting Schedule B from Form CTA– 

PR, and therefore, will be limiting the 

information collected from registered 

CTAs to demographic data and the 

names of the pools advised by the CTA. 

One commenter questioned whether 

the information collected on Forms 

CTA–PR and CPO–PQR will provide the 

Commission with real-time data that 

will enable it to have an accurate and 

timely picture of a CTA’s activities and 

operating status.157 The Commission 

recognizes the limitations of the data 

collection instruments with respect to 

the timeliness of the information 

requested. The Commission believes, 

however, that the forms strike the 

appropriate balance between the time 

needed to compile complex data and the 

Commission’s need for timely 

information. Moreover, the Commission 

believes that the information required 

on Form CPO–PQR and CTA–PR will be 

useful because it will allow the 

Commission to better deploy its 

enforcement and examination resources. 

Another commenter questioned 

whether the Commission possessed the 

staffing and financial resources 

necessary to meaningfully use such data 

as part of its oversight.158 The 

Commission recognizes that the 

resources available to it are limited. To 

that end, the Commission, as stated in 

the Proposal, intends to coordinate with 

the NFA to accomplish the analysis 

necessary to make full use of the data 

collected from Commission registrants. 

In addition, the Commission intends 

for the data to be collected from 

registrants in an electronic format, 

which will enable the Commission to 

leverage its technology and to require 

less intensive staff time to achieve the 

desired results. The use of an electronic 

format will enable the FSOC to conduct 

additional analysis of the data collected 

in the event that the FSOC requests such 

information from the Commission, 

without significant consumption of 

Commission resources. For these 

reasons, the Commission believes that it 

has the tools necessary to make full use 

of the data that it intends to collect on 

Forms CPO–PQR and CTA–PR, 

notwithstanding the Commission’s 

current staffing and financial resources. 

2. Comments Regarding the Reporting 

Thresholds 

The Commission received several 

comments regarding the appropriate 

reporting thresholds for the various 

schedules of Form CPO–PQR.159 The 

commenters stated that $150 million in 

assets under management was too low 

of a threshold for entities to be 

categorized as mid-sized and required to 

file Schedule B. Rather, the commenters 

urged the Commission to increase the 

threshold to $500 million in assets 

under management.160 The Commission 

believes that $150 million in assets 

under management is still the 

appropriate threshold for mid-sized 

CPOs. The Commission will retain this 

threshold because it is consistent with 

the threshold for advisers filing Section 

1 of Form PF, which is substantively 

similar to Schedule B of Form CPO– 

PQR, and it will ensure comparable 

treatment of entities of similar 

magnitude. 

These commenters also suggested that 

the Commission increase the threshold 

for large CPOs from $1 billion to $5 

billion in assets under management.161

The Commission has decided not to 

increase the large CPO threshold to $5 

billion. The Commission has decided, 

however, to increase the threshold from 

$1 billion to $1.5 billion. The 

Commission believes that increasing the 

threshold to $1.5 billion will reduce the 

number of CPOs required to file 

Schedule C of Form CPO–PQR, but will 

still represent a substantial portion of 

the assets under management by 

registered CPOs. Moreover, the 

Commission notes that this modification 

is consistent with the revised threshold 

for large hedge fund advisers that it 

recently adopted with respect to Form 

PF.162 The Commission believes that 

increasing the threshold beyond $1.5 

billion could limit the Commission’s 

access to information necessary to 

oversee entities that could pose a risk to 

the derivatives markets or the financial 

system as a whole. 

3. Comments Regarding Harmonization 

With the SEC’s Compliance Regime 

The Commission received numerous 

comments on harmonizing Forms CPO– 

PQR and CTA–PR with Form PF.163 The 

Commission has considered comments 

received on the Form PF proposed 

jointly with the SEC that address 

harmonization of the CFTC and SEC 

forms in addition to the comments 

received specifically on the Proposal. 

Two commenters argued that the 

Commission and the SEC should use the 

same metrics for measuring assets under 

management for purposes of 

determining filing obligations.164 As 

noted several times in this preamble, the 

Commission has sought to harmonize 

Forms CPO–PQR and CTA–PR to the 

extent possible; however, it is not 

appropriate in all circumstances. For 

example, the SEC and the CFTC use 

different methods for determining the 

threshold for reporting assets under 

management. In order to determine 

whether a CPO meets the asset 

threshold for classification as a midsized or large CPO, Form CPO–PQR 

requires the use of the aggregated gross 

pool assets under management. 

Conversely, Form PF defines 

‘‘regulatory assets under management’’ 

as the gross value of the securities 

portfolio as reported on the SEC’s Form 

ADV.165 Additionally, Form CPO–PQR 

uses net assets under management as 

the method for determining whether a 

commodity pool is a large commodity 

pool for filing purposes, whereas Form 

PF uses net regulatory assets. In the 

Commission’s view, gross assets under 

management and net asset value are 

more appropriate means for determining 

filing obligations for CPOs and large 

commodity pools because entities 

registered with the Commission are 

familiar with the use of net asset value 

for other purposes including 

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11268 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

166 Id. 

167 Id. Additionally, the Commission notes that 

Form PF also asks for net assets under management 

in question 3 of Section 1. 

168See, e.g., 17 CFR 4.22. 

169See Fidelity Letter; and K&L Letter. 

170See AIMA II Letter; Seward Letter; MFA 

Letter; AIMA Letter; and SIFMA Letter. 

171See MFA II Letter; MFA Letter; AIMA Letter; 

SIFMA Letter; and Seward Letter. 

172See MFA II Letter. 

173 Id. 

174 Id. 

175See 7 U.S.C. 1a(11). 

determining the required frequency of 

reporting to participants.166 Moreover, 

the Commission believes that it is 

inappropriate for it to incorporate the 

SEC definitions of regulatory assets 

under management and net regulatory 

assets under management into Form 

CPO–PQR as those terms are not 

consistent with the existing CFTC 

regulatory framework.167 The use of net 

asset value is consistent with the 

longstanding utilization of net asset 

value in U.S. GAAP and in the 

Commission’s regulations.168 Therefore, 

the Commission does not believe that its 

use of net asset value requires any 

additional calculation by dual 

registrants beyond that required to 

complete Form PF. 

Several commenters argued that the 

Commission does not need to collect 

information through Forms CPO–PQR 

and CTA–PR because it already receives 

information through the Large Trader 

Reporting System and Form 40.169 Large 

Trader Reporting and Form 40 do not 

provide the information regarding the 

relationship between a large position 

held by a pool and the rest of the pool’s 

other derivatives positions and 

securities investments. The Commission 

believes that the scope of information 

sought through Forms CPO–PQR and 

CTA–PR will provide it with 

substantially more detail regarding the 

activities of entities engaged in 

derivatives trading and will better 

enable it to assess the risk posed by a 

pool or CPO as a whole. 

Several commenters also urged the 

Commission to consider coordinating 

with the SEC to promulgate a single 

form.170 The Commission believes that 

it is most efficient for Commission-only 

registrants to use a form that is based 

upon the format of NFA’s Form PQR, 

with which current registrants are 

already familiar. Currently registered 

CPOs have been filing NFA’s Form PQR 

on a quarterly basis for more than one 

year and have experience using NFA’s 

interface for the collection of data. The 

Commission recognizes that new 

registrants will not have any experience 

with NFA’s Form PQR or NFA’s filing 

system; however, the same would be 

true if the Commission were to 

implement an altogether new system. 

Therefore, the Commission believes that 

by continuing to use the system 

developed by NFA for collecting data 

from CPOs and CTAs, it is minimizing 

the burden on current registrants 

because they will not be required to 

learn a new system, without adding any 

additional burden to new registrants. 

Several commenters raised concerns 

about how affiliated entities will be 

treated on the forms.171 The 

Commission believes that affiliated 

entities should be permitted, but should 

not be required, to report on a single 

form with respect to all affiliates and the 

pools that they advise. This position is 

consistent with the treatment of 

affiliated entities on Form PF. 

Furthermore, the Commission believes 

that where a pool is operated by one or 

more co-CPOs, only one CPO should 

report on the activities of the jointly 

operated pool, but that CPO must 

disclose the identities of the other coCPOs. The Commission believes that 

this will eliminate the potential for 

double counting of pool assets if all coCPOs were required to report on the 

jointly operated pool. 

4. Comments Regarding Funds of Funds 

The Commission also received one 

comment regarding issues unique to 

fund of funds and feeder funds.172

Specifically, this commenter asserted 

that funds of funds that invest in 

unaffiliated commodity pools are ‘‘not 

in the business of trading commodity 

interests,’’ and therefore, should not be 

subject to reporting obligations on Form 

CPO–PQR.173 This commenter further 

argues that funds of funds reporting is 

not necessary because either the 

Commission or the SEC will oversee the 

investee fund and that funds of funds 

likely do not have access to information 

with sufficient detail to respond to the 

questions in Form CPO–PQR regarding 

size, strategy, or positions held by the 

investee fund.174

The Commission disagrees with the 

commenter’s assertion that funds 

investing in unaffiliated commodity 

pools are not in the business of trading 

commodity interests. Although it is true 

that the fund does not directly engage in 

such trading, it is the position of the 

Commission that a fund investing in an 

unaffiliated commodity pool is itself a 

commodity pool. This interpretation is 

consistent with the statutory definition 

of commodity pool, which draws no 

distinctions between direct and indirect 

investments in commodity interests.175

Moreover, the Commission believes that 

permitting indirect investment in 

commodity interests to occur without 

Commission oversight would create an 

incentive for entities to avoid direct 

investment in commodity interests and 

possibly increase the opacity of the 

market. Therefore, the Commission 

concludes that a fund that invests in an 

unaffiliated commodity pool is a 

commodity pool for purposes of the 

CEA and the Commission’s regulations 

promulgated thereunder. 

With respect to the commenter’s 

assertion that the funds of funds need 

not report because the investee fund 

will be subject to the jurisdiction of 

either the Commission or the SEC, the 

Commission must again disagree. As the 

commenter itself noted in its comment, 

the funds of funds could be invested in 

a fund whose adviser or operator is not 

required to report due to exemptive 

relief granted by either the Commission 

or the SEC. The Commission 

acknowledges that a fund of funds may 

not have access to the kind of 

information necessary to respond to all 

of the data elements in Schedules B and 

C with respect to the investment 

activities of its investee funds. 

Nevertheless, the Commission believes 

that requiring basic information about 

the investment in the investee funds 

without requiring that funds of funds 

complete the additional detail strikes an 

appropriate balance between 

recognizing the limitations of the 

information available to funds of funds 

and enabling the Commission to analyze 

and monitor the levels of 

interconnectedness among a CPO’s 

funds. The Commission believes that a 

fund of funds should still be required to 

provide at a minimum the name of the 

investee fund(s) and the size of its 

investment(s) in such funds. 

Accordingly, the Commission is 

adding a question to Schedule A of 

Form CPO–PQR requesting the names of 

the investee funds and the size of the 

fund of funds’ investment in the 

investee funds. The Commission is also 

adding an instruction to Form CPO– 

PQR permitting the CPO of a fund of 

funds to exclude any assets invested in 

the equity of commodity pools or 

private funds for purposes of 

determining the CPO’s reporting 

obligations. The CPO must, however, 

treat these assets consistently for 

purposes of Form CPO–PQR. For 

example, an adviser may not include 

these assets for purposes of certain 

questions such as those regarding 

borrowing, but disregard such assets for 

purposes of determining the reporting 

thresholds. This new instruction will 

permit a CPO to disregard investments 

in commodity pools or private funds, 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11269 

176See NFA Letter; Seward Letter; and AIMA 

Letter. 177See AIMA Letter. 

but would not allow a CPO to disregard 

the liabilities of the fund, even if 

incurred due to the investment in the 

underlying fund. Moreover, if any of the 

CPO’s commodity pools invests 

substantially all of its assets in the 

equity of other commodity pools or 

private funds and, aside from those 

investments, holds only cash, cash 

equivalents, and instruments intended 

to hedge currency risk, the CPO may 

complete only Schedules A and B with 

respect to that fund and otherwise 

disregard such assets for reporting 

purposes. These instructions are 

consistent with those instructions 

adopted as part of the joint Form PF, 

and the Commission believes that this 

treatment of funds of funds reduces the 

burden of reporting for CPOs and 

improves the quality of the data 

obtained by the Commission. Therefore, 

the Commission is adding a general 

question regarding funds of funds, but is 

otherwise permitting CPOs to disregard 

the assets of such funds that are 

invested in other commodity pools or 

private funds for reporting purposes. 

5. Adopted Modifications to Form CPO– 

PQR 

The Commission has decided to make 

several additional revisions to Form 

CPO–PQR in addition to those 

discussed previously. The Commission 

believes that these revisions are 

necessary to provide clarification, 

decrease the burden imposed on 

registrants, and further harmonize Form 

CPO–PQR with Form PF. 

a. Instructions 

As discussed previously, the 

Commission has decided to revise 

certain instructions governing the 

completion of Form CPO–PQR. 

Specifically, the Commission has 

determined that it is appropriate to raise 

the threshold for large CPOs from $1 

billion to $1.5 billion in an effort to 

reduce the number of CPOs required to 

report on a quarterly basis and respond 

to commenters’ concerns, but still 

provide the Commission with the 

information necessary to effectively 

oversee such large market participants. 

The Commission has also determined to 

modify the frequency of reporting for 

filers of Form CPO–PQR. As adopted, all 

CPOs, other than large CPOs, will be 

required to file Schedule A on an 

annual basis; mid-size CPOs will be 

required to file Schedule B on an annual 

basis; and large CPOs will be required 

to file Schedules A, B, and C on a 

quarterly basis. 

The Commission received several 

comments asserting that the 15-day 

period for reporting was not sufficient to 

permit reporting CPOs to complete and 

file the form and all suggested extending 

the period to 30 or 45 days.176 The 

Commission agrees that reporting CPOs 

will need additional time in which to 

submit the various schedules of Form 

CPO–PQR. 

Upon further consideration, the 

Commission believes that it is 

appropriate to require all CPOs, other 

than large CPOs, to file Schedule A 

within 90 days of the end of the 

calendar year. This time period 

coincides with the annual questionnaire 

required by NFA of its entire population 

of member CPOs and with the vast 

majority of annual report filings for 

commodity pools. The revised deadline 

will enable CPOs, other than large 

CPOs, to benefit from the availability of 

the NFA annual questionnaire and the 

availability of the information in CPO 

annual report filings. Moreover, because 

the Commission has transferred the pool 

position information from Schedule A 

to Schedule B, the Commission believes 

that non-large CPOs should be able to 

comply with filing basic demographic 

data within 90 days. 

With respect to mid-sized CPOs filing 

Schedule B, the Commission believes 

that 90 days is an adequate time period 

for compiling data and completing that 

schedule. The Commission notes that 

CPOs are generally required to file 

annual reports for their pools within 90 

days of their fiscal year end, most of 

which coincide with the calendar year 

end. The Commission believes that the 

alignment of pools’ fiscal years with the 

calendar year end should facilitate the 

preparation of Schedule B and reduce 

the burden imposed on mid-size CPOs 

because some of the information 

required will be similar to that included 

in a pool’s annual financial statements. 

With respect to the quarterly reporting 

by large CPOs on Schedules A, B, and 

C, the Commission believes that 60 days 

is a sufficient amount of time to 

complete those schedules for large 

CPOs. The Commission notes that the 

entities required to file on a quarterly 

basis have a significant amount of assets 

under management, and as such, the 

Commission anticipates that such 

entities routinely generate the type of 

information requested on Schedules B 

and C as part of their internal 

governance. Accordingly, the 

Commission will require large CPOs to 

file Schedules B and C within 60 days 

following the end of the reporting 

period as defined in Form CPO–PQR. 

In October 2011, the Commission 

adopted Form PF as a joint reporting 

form with the SEC. The terms of Form 

PF permit dually registered entities that 

are filing the form for their private funds 

under advisement to report on the 

activities of their other commodity 

pools as well. Entities that choose to file 

Form PF for all of their funds under 

advisement will still be required to file 

Schedule A on an annual basis, which 

is consistent with the terms of the 

Proposal. The instructions of Form 

CPO–PQR have been modified to reflect 

this change. 

The Commission has also determined 

to omit the statement that the failure to 

answer all required questions 

completely and accurately may severely 

impact your ability to operate. The 

Commission does not believe that such 

language is necessary to inform 

registered CPOs of their obligations 

under the CEA and the Commission’s 

regulations to comply with such 

obligations in good faith. 

Additionally, the Commission has 

concluded that it should clarify the 

obligations of co-CPOs of a pool with 

respect to the submission of Form CPO– 

PQR. The Commission has amended the 

instructions to the form to clarify that 

for co-CPOs, the CPO with the greater 

assets under management overall is 

required to report for the co-operated 

pool. Furthermore, if a pool is operated 

by co-CPOs and one of the CPOs is also 

a registered investment adviser, the noninvestment adviser CPO will still be 

obligated to file the applicable sections 

of Form CPO–PQR regardless of whether 

the investment adviser CPO filed a Form 

PF. The Commission believes that this 

will prevent the possibility of double 

counting and unnecessary duplicative 

filings regarding co-operated pools. 

b. Schedule A 

Schedule A seeks basic identifying 

information about the CPO, each of its 

pools, and any services providers used. 

The Commission has decided to adopt 

Schedule A as proposed with the 

following revisions. In question 3 of part 

2, the Commission has added a question 

asking whether the pool is operated by 

co-CPOs and for the name of the other 

CPO(s). This question will enable the 

Commission to ensure that only one 

CPO is filing with respect to each cooperated commodity pool. In addition, 

question 12 of part 2, which asked for 

information regarding the pool’s trading 

strategies, has been moved to Schedule 

B, both in response to a commenter’s 

suggestion 177 and in an effort to ensure 

that dual registrants are not required to 

file extensive duplicative information 

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11270 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

on Schedule A that they are already 

providing on Form PF. 

The Commission added a question 

asking for the telephone number and 

email for the contact person for the 

reporting CPO as this was inadvertently 

omitted in the Proposal. Also, the 

Commission added a subpart h. to 

question 10 regarding the base currency 

used by the CPO for the particular pool 

for which it is reporting. This question 

was inadvertently omitted but is 

necessary for the Commission to fully 

utilize the information reported 

regarding the changes in the pool’s 

assets under management. 

The Commission added subparts to 

question 12 regarding prospective risks 

for the imposition of ‘‘gates’’ and 

restrictions on redemption of 

participant withdrawals. The terms of 

question 12, as proposed, only seek 

information on a retrospective basis, 

which, although useful to the 

Commission in assessing overall issues 

regarding the imposition of restrictions 

on redemption, does not assist the 

Commission in assessing possible 

sources of prospective risk to the market 

and pool participants. Moreover, 

question 12, as proposed, did not 

capture information about pools that 

have procedures in place governing the 

imposition of restrictions on 

redemptions, but whose restrictions 

have not been triggered. The 

Commission believes that the 

modifications to this question solicits 

such information and will provide the 

Commission with a more complete 

understanding of the role of restrictions 

on redemptions in the operation of 

commodity pools. Moreover, the 

Commission believes that the request for 

additional information regarding the 

potential imposition of restrictions on 

redemptions is consistent with the tenor 

and intent of question 12 as proposed. 

The Commission also has made 

numerous non-substantive technical 

amendments in Schedule A, including 

formatting corrections, the deletion of 

the term ‘‘carrying’’ from question 5 in 

part 2, and the addition of two months 

that were inadvertently omitted from 

the monthly rate of return table in part 

2, question 11. 

c. Schedule B 

Mid-sized and large CPOs will be 

required to complete Schedule B, which 

will solicit data about each pool 

operated by these CPOs. The 

Commission has decided to adopt 

Schedule B with the following 

revisions. 

In question 1, subpart d, the 

Commission has decided to change the 

format of the question from a pull-down 

list of options to a chart, consistent with 

the format used for substantively 

identical question 20, section 1c in 

Form PF. The Commission believes that 

the chart format change will add clarity 

to the question and will facilitate the 

completion by registrants. The 

Commission also has added a column 

requesting the percentage of the pool’s 

capital invested in each strategy. This 

additional information aligns Form 

CPO–PQR with the information 

requested in Form PF and also provides 

the Commission with the means to 

assess the risk that a pool derives from 

its borrowing activities. 

The Commission has also amended 

question 1 to add a subpart g asking the 

reporting CPO to report the percentage 

of the commodity pool’s net asset value 

that is traded pursuant to a high 

frequency trading strategy. This subpart 

previously appeared as part of the chart 

in question 1 regarding investment 

strategies. The Commission believes that 

denoting the issue of high frequency 

trading as its own subpart of question 1 

will enhance the clarity of the question 

and make the data gained by the 

Commission more usable in its 

assessment of risks posed to the 

derivatives markets. 

The Commission is amending 

question 2 to include the percentage of 

a pool’s borrowings from U.S. and nonU.S. creditors that are not ‘‘financial 

institutions,’’ as that term is defined in 

Form CPO–PQR, as separate line items. 

This revision parallels the structure of 

subparts b and c of that question. 

Finally, the Commission has made 

several non-substantive corrections/ 

alterations, including modifying the 

format of question 3 to provide a more 

user-friendly interface for reporting 

funds and combining several subparts 

into charts, correcting a typographical 

error in question 5, adding the question 

that was formerly question 12 of 

Schedule A to Schedule B as question 

6, and expanding several categories of 

investments to provide a parallel level 

of detail among the asset classes. 

d. Schedule C 

Schedule C requests information 

about the pools operated by large CPOs 

on an aggregated and pool by pool basis. 

The Commission is adopting Schedule C 

as proposed with the following 

revisions. 

Part 1 

The questions in part 1 of Schedule C 

seek information for all of the pools 

operated by the large CPO on an 

aggregate basis. 

Question 1 requires a CPO to report a 

geographical breakdown of investments 

held by the pools that it operates. The 

Commission has modified this question 

to require a less detailed breakdown by 

focusing on regions as opposed to 

individual countries and has added a 

separate disclosure regarding 

investment in certain countries of 

interest. The Commission expects that 

this revision will reduce the burden of 

responding to this question because the 

less granular categories should permit 

more CPOs to rely on classifications that 

they already use. 

The Commission has determined that 

question 3, which seeks information 

regarding the duration of the pools’ 

fixed income investments on an 

aggregate basis, is redundant in light of 

question 9 in part 2 of Schedule C. 

Question 9 in part 2 of Schedule C asks 

for the same information on a pool by 

pool basis. For that reason, the 

Commission has deleted question 3 

from part 1 of Schedule C. 

Part 2 

Part 2 of Schedule C seeks 

information from large CPOs on an 

individual pool basis for each operated 

‘‘large pool’’ as that term is defined in 

Form CPO–PQR. The Commission has 

revised subpart c of question 3 to be a 

yes/no response with respect to whether 

the pool used a central clearing 

counterparty (‘‘CCP’’) during the 

reporting period. The Commission 

believes that this is less burdensome 

and provides it with sufficient 

information regarding the use of CCPs 

because the CPO’s relationship is with 

the swap dealer, futures commission 

merchant, or direct clearing member 

rather than directly with the CCP. 

In subpart b of question 4, the 

Commission has made several revisions 

correcting the technical terminology 

used with respect to ‘‘value at risk’’ 

(‘‘VaR’’). These revisions are nonsubstantive. The Commission also 

added a new subpart c to question 4, 

which asks the CPO whether it uses any 

metrics other than VaR for risk 

management purposes for the reporting 

fund. The Commission believes that this 

information will be useful as it 

continues to amend Form CPO–PQR as 

necessary to obtain relevant information 

from registrants. Because of the addition 

of a new subpart c to question 4, subpart 

c of question 4 as proposed has been 

redesignated as subpart d of question 4. 

The Commission also added a category 

of ‘‘relevant/not formally tested’’ to 

subpart d of question 4 in an effort to 

capture all possible opinions of the 

reporting CPO with respect to the listed 

market factors. The Commission 

believes that this modification will 

reduce the burden on reporting CPOs 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11271 

178See, e.g., IAA Letter; MFA II Letter; AIMA 

Letter; SIFMA Letter; and Fidelity Letter. 

179 Id. 

180 76 FR 7976, 7982 (Feb. 12, 2011). 

181See MFA II Letter and Seward & Kissel Letter. 

182See Roundtable transcript. Commission staff 

also had numerous meetings with commenters that 

addressed this issue of confidentiality of 

information. 

183See 5 U.S.C. 601, et seq. 

because fewer CPOs will need to 

provide detailed responses, and because 

those CPOs without existing 

quantitative models will not be required 

to build or acquire them to respond to 

the question. The Commission 

continues to believe that this question 

will provide valuable risk information 

to the Commission with respect to 

specific large pools. 

The Commission is revising subpart a 

of question 5 to include the percentage 

of a pool’s borrowings from U.S. and 

non-U.S. creditors that are not 

‘‘financial institutions’’ as that term is 

defined in Form CPO–PQR, as separate 

line items. This revision parallels the 

structure of the question as proposed 

with respect to financial institutions. 

The Commission is also amending 

question 9, regarding the duration of 

each large pool’s fixed income 

instruments. This question, as amended, 

requires the CPO to report the duration, 

weighted average tenor, or 10-year 

equivalents of fixed income portfolio 

holdings, including asset-backed 

securities. This is a difference from the 

question as proposed, which would 

have required all large CPOs to report 

duration. Through this revision, the 

Commission is giving large CPOs the 

option of instead reporting weighted 

average tenor or 10-year bond 

equivalents because the Commission 

understands that CPOs may use a wide 

range of metrics to measure interest rate 

sensitivity. The Commission expects 

that this revised approach will reduce 

the burden on CPOs because they will 

generally be able to utilize their existing 

practices when providing this 

information on the form. 

6. Form CTA–PR 

The Commission received several 

comments regarding the content of Form 

CTA–PR.178 Most commenters urged the 

Commission to eliminate the form in its 

entirety.179 Although the Commission 

does not believe that the complete 

elimination of Form CTA–PR is 

appropriate, it believes that Schedule B 

of the form contains redundant 

information that will already be 

collected through Form CPO–PQR. To 

reduce the burden on CTAs, the 

Commission will eliminate Schedule B. 

Instead, the Commission has decided to 

adopt only Schedule A of Form CTA– 

PR and will add a question asking the 

reporting CTA to identify the pools 

under its advisement so that the 

Commission can analyze the 

relationships among the various 

registrants to better assess sources of 

risk to the market and measure their 

potential reach. Because Form CTA–PR 

will be limited to demographic data, the 

Commission believes that it is 

appropriate for CTAs to file the form on 

an annual basis within 45 days of the 

end of the fiscal year. Therefore, the 

Commission has amended the text of 

§ 4.27 to reflect this modification of the 

reporting obligations of CTAs. 

7. Implementation 

The effective date for § 4.27 and 

Forms CPO–PQR and CTA–PR is July 2, 

2012. The Commission is adopting a 

two-stage phase-in period for 

compliance with Form CPO–PQR filing 

requirements. The compliance date for 

§ 4.27 is September 15, 2012 for any 

CPO having at least $5 billion in assets 

under management attributable to 

commodity pools as of the last day of 

the fiscal quarter most recently 

completed prior to September 15, 2012. 

Therefore, a CPO with $5 billion in 

commodity pool assets under 

management as of June 30, 2012, must 

file its first Form CPO–PQR within 60 

days following September 30, 2012. 

Reporting CPOs must file all schedules 

of Form CPO–PQR. 

For all other registered CPOs and all 

CTAs, the compliance date for § 4.27 is 

December 15, 2012. As a result, most 

advisers must file their first Form CPO– 

PQR or CTA–PR based on information 

as of December 31, 2012. This delay in 

compliance should allow sufficient time 

for CPOs and CTAs to develop systems 

for collecting the information required 

on the forms and prepare for filing. The 

Commission anticipates that this 

timeframe will also enable the NFA to 

have adequate time to program a system 

to accept the filings. The Commission 

has determined that the extension of the 

compliance dates is necessary because 

the rule and forms are being adopted 

later than expected. 

G. Amendments to §§ 145.5 and 147.3: 

Confidential Treatment of Data 

Collected on Forms CPO–PQR and 

CTA–PR 

As the Commission stated in the 

Proposal, the collection of certain 

proprietary information through Forms 

CPO–PQR and CTA–PR raises concerns 

regarding the protection of such 

information from public disclosure.180

The Commission received two 

comments requesting that the 

Commission treat the disclosure of a 

pool’s distribution channels as 

nonpublic information,181 and 

numerous other comments urging the 

Commission to be exceedingly 

circumspect in ensuring the 

confidentiality of the information 

received as a result of the data 

collections.182

The Commission agrees that the 

distribution and marketing channels 

used by a CPO for its pools may be 

sensitive information that implicates 

other proprietary secrets, which, if 

revealed to the general public, could put 

the CPO at a competitive disadvantage. 

Accordingly, the Commission is 

amending §§ 145.5 and 147.3 to include 

question 9 of Schedule A of Form CPO– 

PQR as a nonpublic document. 

Additionally, the Commission is 

amending §§ 145.5 and 147.3 to remove 

reference to question 13 in Schedule A 

of Form CPO–PQR because such 

question no longer exists due to 

amendments to that schedule. Similarly, 

the Commission will be designating 

question subparts (c) and (d) of question 

2 of Form CTA–PR as nonpublic 

because it identifies the pools advised 

by the reporting CTA. 

Therefore, as adopted, the parts of 

Form CPO–PQR that are designated 

nonpublic under parts 145 and 147 of 

the Commission regulations are: 

• Schedule A: Question 2, subparts 

(b) and (d); Question 3, subparts (g) and 

(h); Question 9; Question 10, subparts 

(b), (c), (d), (e), and (g); Question 11; and 

Question 12. 

• Schedule B: All. 

• Schedule C: All; and 

• Form CTA–PR: question 2, subparts 

c and d. 

H. Conforming Amendments to Part 4 

As a result of the amendments 

adopted herein, the Commission must 

amend various provisions in part 4 of 

the Commission’s regulations for 

purposes of making conforming 

changes. Specifically, the Commission 

is deleting references to repealed 

§ 4.13(a)(4) in other sections of the 

Commission’s regulations. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(RFA)183 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 

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11272 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

184 47 FR 18618 (April 30, 1982). 

185See 47 FR 18618, 18619, Apr. 30, 1982. 

186See 47 FR at 18619–20. 

187See 47 FR at 18620. 

188See 44 U.S.C. 3501 et seq. 

189See, e.g., ICI Letter, Fidelity Letter, Dechert III 

Letter. 

190See 7 U.S.C. 12. 

191See 5 U.S.C. 552a. 

such entities in accordance with the 

RFA.184

CPOs: The Commission has 

determined previously that registered 

CPOs are not small entities for the 

purpose of the RFA.185 With respect to 

CPOs exempt from registration, 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).186 Such CPOs will continue 

to qualify for either exemption or 

exclusion from registration and 

therefore will not be required to report 

on proposed Form CPO–PQR; however, 

they will have an annual notice filing 

obligation confirming their eligibility for 

exemption or exclusion from 

registration and reporting. The 

Commission estimates that the time 

required to complete this new 

requirement will be approximately 0.25 

of an hour, which the Commission has 

concluded will not be a significant time 

expenditure. The Commission has 

determined that the proposed regulation 

will not create a significant economic 

impact on a substantial number of small 

entities. 

CTAs: The Commission has 

previously decided to evaluate, within 

the context of a particular rule proposal, 

whether all or some CTAs should be 

considered to be small entities, and if 

so, to analyze the economic impact on 

them of any such rule.187 Form CTA–PR 

is proposed to be required of all 

registered CTAs, which necessarily 

includes entities that would be 

considered small. The majority of the 

information requested on Form CTA–PR 

is information that is readily available to 

the CTA or readily calculable by the 

CTA, regardless of size. Therefore, the 

Commission estimates that the time 

required to complete the items 

contained in Form CTA–PR will be 

approximately 0.5 hours as it is 

comprised of only two questions, which 

solicit information that is expected to be 

readily available. The Commission has 

determined that Form CTA–PR will not 

create a significant economic impact on 

a substantial number of small entities. 

Accordingly, the Chairman, on behalf of 

the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the 

proposed rules, will not have a 

significant impact on a substantial 

number of small entities. 

The Commission did not receive any 

comments on its analysis of the 

application of the RFA to the instant 

part 4 amendments. 

B. Paperwork Reduction Act 

This rulemaking contains information 

collection requirements. The Paperwork 

Reduction Act (‘‘PRA’’) imposes certain 

requirements on Federal agencies in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA.188

An agency may not conduct or sponsor, 

and a person is not required to respond 

to, a collection of information unless it 

displays a currently valid control 

number from the Office of Management 

and Budget (‘‘OMB’’). 

The Commission is amending 

Collection 3038–0023 to allow for an 

increase in response hours for the 

rulemaking resulting from the rescission 

of §§ 4.13(a)(4) and the modification of 

§ 4.5. This amendment differs from that 

in the Proposal due to the Commission’s 

decision to retain the exemption set 

forth in § 4.13(a)(3). The Commission is 

amending Collection 3038–0005 to 

allow for an increase in response hours 

for the rulemaking associated with new 

and modified compliance obligations 

under part 4 of the Commission’s 

regulations resulting from these 

revisions. The titles for these collections 

are ‘‘Part 3—Registration’’ (OMB Control 

number 3038–0023) and ‘‘Part 4— 

Commodity Pool Operators and 

Commodity Trading Advisors’’ (OMB 

Control number 3038–0005). Responses 

to this collection of information will be 

mandatory. 

Both amendments differ from those 

set forth in the Proposal due to 

comments received asserting that, 

absent harmonization of the 

Commission’s compliance regime for 

CPOs with that of the SEC for registered 

investment companies, entities 

operating registered investment 

companies that would be required to 

register with the Commission would not 

be able to comply with the 

Commission’s regulations and would 

have to discontinue its activities 

involving commodity interests.189 The 

Commission acknowledges that there 

are certain provisions of its compliance 

regime that conflict with that of the SEC 

and that it would not be possible to 

comply with both. For this reason, the 

Commission is considering issuing a 

notice of proposed rulemaking regarding 

the areas of potential harmonization 

between the Commission’s compliance 

obligations and those of the SEC. Until 

such time as the harmonized 

compliance regime is adopted as final 

rules, the Commission will not be 

requiring compliance with the 

provisions of § 4.5 for registered 

investment companies. Therefore, the 

Commission is excluding § 4.5 

compliance from the PRA burden 

calculation for these final rules, and is 

recalculating the information collection 

requirements associated with § 4.5 in 

the proposed harmonized compliance 

rules. 

The Commission will protect 

proprietary information according to the 

Freedom of Information Act (‘‘FOIA’’) 

and 17 CFR part 145, ‘‘Commission 

Records and Information.’’ In addition, 

section 8(a)(1) of the CEA strictly 

prohibits the Commission, unless 

specifically authorized by the CEA, from 

making public ‘‘data and information 

that would separately disclose the 

business transactions or market position 

of any person and trade secrets or names 

of customers.’’ 190 The Commission is 

also required to protect certain 

information contained in a government 

system of records according to the 

Privacy Act of 1974.191

1. Additional Information Provided by 

CPOs and CTAs 

a. OMB Control Number 3038–0023 

Part 3 of the Commission’s regulations 

concern registration requirements. The 

Commission is amending existing 

Collection 3038–0023 to reflect the 

obligations associated with the 

registration of new entrants, i.e., CPOs 

that were previously exempt from 

registration under §§ 4.5 and 4.13(a)(4), 

that had not previously been required to 

register. The Commission is omitting 

those CPOs continuing to claim relief 

under § 4.13(a)(3), as that section will 

remain effective, and those CPOs that 

would be required to register under 

revised § 4.5, as those entities will not 

be able to register and comply with the 

Commission’s compliance obligations 

until such time as the harmonization of 

its requirements with those of SEC is 

finalized. Because the registration 

requirements are in all respects the 

same as for current registrants, the 

collection has been amended only 

insofar as it concerns the increased 

estimated number of respondents and 

the corresponding estimated annual 

burden. 

Accordingly, the Commission is 

amending existing Collection 3038– 

0023 to provide, in the aggregate: 

Estimated number of respondents: 

75,425. 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11273 

192Based on information that the Commission 

received from registrants on their annual financial 

report filings, the Commission determined that 1⁄3

of all pools reporting to the Commission in 2009 

reported gains or losses from securities or a 

combination of securities and futures. Based on the 

provisions of Form PF, which permits filers of the 

form to file with respect to commodity pools that 

are not private funds, the Commission anticipates 

that all entities entitled to file Form PF for their 

commodity pools will do so, as it is less 

burdensome on the filer. Therefore, the Commission 

has included burden estimates for CPOs to file 

Form PF for their commodity pools that are not 

private funds, which is an incremental increase 

over the burden imposed by the obligation to file 

Form PF for the entity’s private funds. 

193See Fidelity Letter; and AIMA Letter. 

194See ICI Letter; AIMA Letter; and K&L Letter. 

195See Fidelity Letter. 

196See AIMA Letter; see also, SIFMA Letter; and 

Fidelity Letter. 

Annual responses by each 

respondent: 75,932. 

Estimated average hours per response: 

0.09. 

Annual reporting burden: 6,833.9. 

In addition to the reporting burdens, 

each CPO or CTA not previously subject 

to registration will be obligated to 

submit a $200 registration fee, an $85 

registration fee for each associated 

person, and a $15 fee for fingerprinting 

services for each associated person. 

Those entities that do not already 

provide certified annual reports will 

now incur public accounting costs as a 

result of the newly adopted rules 

requiring certification. Moreover, the 

Commission anticipates that reporting 

entities may hire external service 

providers, such as law firms or 

accounting firms, to prepare and submit 

some of the documents required both in 

Collection 3038–0023 and in Collection 

3038–0005, which is accounted for 

below. 

b. OMB Control Number 3038–0005 

Part 4 of the Commission’s regulations 

concerns the operations of CTAs and 

CPOs, and the circumstances under 

which they may be exempted or 

excluded from registration. Under 

existing Collection 3038–0005 the 

estimated average time spent per 

response has not been altered; however, 

adjustments have been made to the 

collection to account for current 

information available from NFA 

concerning CPOs and CTAs registered 

or claiming exemptive relief under the 

part 4 regulations, and the new burden 

expected under proposed § 4.27. The 

Commission estimates that a total of 300 

entities annually will file the Notice of 

Exemption from CTA Registration under 

§ 4.14(a)(8), with an estimated burden of 

0.5 hours per notice filing. An estimated 

253 entities will annually file 7,890 

Notices of Exclusion from CPO 

Definition under § 4.5, with an 

estimated burden of 0.5 hours per notice 

filing. The rules also require certain 

reports by each entity registered as a 

CPO or CTA. These include certain 

disclosure documents, pool account 

statements and pool annual reports, and 

requests for extensions of the annual 

report deadline. The Commission 

estimates that 180 entities will prepare 

an average of 1.5 pool account 

statements as required under § 4.22(a) 

an average of 9 times per year, with a 

per-response burden of 3.85 hours. The 

Commission estimates that these same 

180 entities will prepare and file an 

average of 1.5 annual reports, with a 

burden of 9.58 hours per report. In 

addition, the Commission anticipates 

that 962 entities will file a request for 

a deadline extension for the annual 

report each year, with a burden of 0.5 

hours per request. 

These burden estimates, together with 

those associated with the increases 

necessary to account for the filing of 

forms CPO–PQR, PF, and CTA–PR 

discussed below, will result in an 

amendment to Collection 3038–0005 to 

provide, in the aggregate: 

Estimated number of respondents: 

43,168. 

Annual responses for all respondents: 

61,868. 

Estimated average hours per response: 

8.77. 

Annual reporting burden: 257,635.8. 

Proposed § 4.27 is expected to be the 

main reason for the increased burden 

under Collection 3038–0005. 

The Commission has amended its 

burden estimates with respect to Form 

CPO–PQR to reflect the fact that dually 

registered entities that operate pools 

that are not private funds may report the 

activities for such funds on Form PF.192

The Commission expects that any entity 

that is eligible to file form PF will file 

that form and not the form CPO–PQR, 

and has excluded from the estimates for 

form CPO–PQR those entities. As most 

of the burden associated with filing 

form PF for CPOs newly required to 

register with the Commission has been 

accounted for by the Commission in an 

information collection request 

associated with a rulemaking adopted 

jointly with the SEC, the amendment to 

Collection 3038–0005 accounts only for 

the burden of filing form PF by dually 

registered CPOs for pools that are not 

private funds as defined in the joint 

rulemaking. 

i. Comments on § 4.27 Reporting 

Requirements 

The Commission received numerous 

comments in response to proposed 

§ 4.27, and in response has adopted a 

number of cost-mitigating measures. 

Several commenters questioned whether 

the data collection was necessary for the 

Commission’s oversight of its 

registrants.193 Others asserted that 

certain groups, such as registered 

investment companies or family offices, 

should be exempted from completing 

the data collection.194 In the 

Commission’s judgment, in order to 

fulfill the Commission’s systemic-risk 

mitigation mandate, it is necessary to 

obtain information from the full 

universe of registrants to fully assess the 

activities of CPOs and CTAs in the 

derivatives markets. 

With respect to the assertion that 

registered investment companies should 

not be required to file form CPO–PQR, 

the Commission believes that it is 

important to collect the data in form 

CPO–PQR from registered investment 

companies whose activities require CPO 

registration to assess the risk posed by 

such investment vehicles in the 

derivatives markets and the financial 

system generally. In this respect, the 

Commission intends to require the same 

information from the CPOs of registered 

investment companies as it is requiring 

from other registered CPOs. 

Additionally, the Commission notes that 

to the extent that the entity registered as 

the CPO for the registered investment 

company is registered as an investment 

adviser and is required to file Form PF 

with the SEC, the activities of the 

registered investment company may be 

reported on Form PF rather than form 

CPO–PQR. 

The Commission further believes that 

the same reasoning applies with respect 

to the collection of data from family 

offices. To enable the Commission to 

evaluate a potential family offices 

exemption following the collection and 

analysis of data regarding their 

activities, the Commission believes that 

it is essential that family offices remain 

subject to the data collection 

requirements. 

One commenter recommended that 

the Commission clarify the filing 

obligations for CPOs and CTAs that are 

required to file form PF with the SEC 

and streamline the reporting 

obligations.195 Another commenter 

argued that a very large private fund 

that has a limited amount of derivatives 

trading should not be subject to 

schedule C of form CPO–PQR.196

As stated in the Proposal, CPOs that 

are dually registered with the SEC and 

that file form PF must still file schedule 

A, containing basic demographic 

information, with the Commission, and 

CTAs must still file form CTA–PR. The 

Commission intends to adopt § 4.27 as 

proposed and permit dual registrants to 

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11274 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

197See Barnard Letter. 

198See Dechert Letter. 

199See AIMA Letter; MFA II Letter; Seward 

Letter. See also, AIMA II Letter. 

200See AIMA Letter. 

201See AIMA Letter; MFA II Letter; and Seward 

Letter. 

202See NFA Letter; Seward Letter; and AIMA 

Letter. 

file form PF with the SEC in lieu of 

completing schedules B and/or C of 

form CPO–PQR. 

However, the Commission did not 

intend to require very large dual 

registrants to file anything more than 

the general identifying information 

required on schedule A with the 

Commission, and neither § 4.27 nor the 

forms require dual registrants to file 

schedules B or C if they are filing form 

PF. Similarly, the Commission is not 

adopting schedule B from form CTA– 

PR, and therefore, will be limiting the 

information collected from registered 

CTAs to demographic data and the 

names of the pools advised by the CTA. 

These measures will mitigate costs to 

market participants by limiting the 

number of registrants that must file 

these forms with the Commission. 

One commenter questioned whether 

the information collected on forms 

CTA–PR and CPO–PQR will provide the 

Commission with real-time data that 

will enable it to have an accurate and 

timely picture of a CTA’s activities and 

operating status.197 Another commenter 

questioned whether the Commission 

possessed the staffing and financial 

resources necessary to meaningfully use 

such data as part of its oversight.198 The 

Commission recognizes the limitations 

of the data collection instruments with 

respect to the timeliness of the 

information requested. The Commission 

believes, however, that the forms strike 

the appropriate balance between the 

time needed to compile complex data 

and the Commission’s need for timely 

information. Information that is less 

than real-time is nevertheless useful in 

assisting the Commission in overseeing 

registrants as it will provide additional 

information upon which the 

Commission can base future program 

adjustments to ensure efficient 

deployment of the Commission’s 

resources. 

As an offset to the costs otherwise 

associated with additional reporting, the 

Commission intends for the data to be 

collected from registrants in an 

electronic format. The Commission 

anticipates that electronic data filing 

will be less time-intensive and should 

lower compliance costs for participants, 

as well as processing costs for the 

Commission. Moreover, the Commission 

believes that, over time, participants 

will develop certain efficiencies in the 

filing of their annual CPO–PQR and 

CTA–PR forms, allowing costs to 

continue to decrease over time. Further, 

the Commission recognizes that the 

resources available to it are variable. As 

a further cost-mitigating measure, the 

Commission will leverage any limits on 

its resources through its coordination 

with NFA to accomplish the analysis 

necessary to make full use of the data 

collected from Commission registrants. 

The Commission received several 

comments regarding the appropriate 

reporting thresholds for the various 

schedules of form CPO–PQR.199 The 

commenters stated that $150 million in 

assets under management was too low 

of a threshold for entities to be 

categorized as mid-sized and required to 

file schedule B. Rather, the commenters 

urged the Commission to increase the 

threshold to $500 million in assets 

under management.200 These 

commenters also suggested that the 

Commission increase the threshold for 

large CPOs to $5 billion in assets under 

management.201

The Commission believes that $150 

million in assets under management is 

still the appropriate threshold for midsized CPOs. The Commission will retain 

this threshold because it is consistent 

with the threshold for advisers filing 

section 1 of form PF, which is 

substantively similar to schedule B of 

form CPO–PQR, and it will ensure 

comparable treatment of entities of 

similar magnitude. In addition, the 

Commission has decided not to increase 

the large CPO threshold to $5 billion. 

The Commission has decided, however, 

to increase the threshold for large CPOs 

from $1 billion to $1.5 billion. The 

Commission anticipates that increasing 

the threshold to $1.5 billion will lower 

costs by reducing the number of CPOs 

required to file schedule C of form CPO– 

PQR, while still capturing data 

concerning a substantial portion of the 

assets under management by registered 

CPOs. The Commission believes that 

increasing the threshold beyond $1.5 

billion, however, could limit the 

Commission’s access to information 

necessary to oversee entities that could 

pose a risk to the derivatives markets or 

the financial system as a whole. 

In response to comments, the 

Commission has also determined to 

mitigate costs and promote efficiency by 

modifying the frequency of reporting for 

filers of form CPO–PQR. As adopted, all 

CPOs other than large CPOs will be 

required to file schedule A on an annual 

basis; mid-size CPOs will be required to 

file schedule B on an annual basis; and 

large CPOs will be required to file 

schedules A, B, and C on a quarterly 

basis. 

The Commission received several 

comments asserting that the 15-day 

period for reporting was not sufficient to 

permit reporting CPOs to complete and 

file the form and all suggested extending 

the period to 30 or 45 days.202 The 

Commission agrees that reporting CPOs 

will need additional time in which to 

submit the various schedules of form 

CPO–PQR. In a further effort to reduce 

costs to participants, all CPOs other 

than large CPOs will be required to file 

schedule A within 90 days of the end of 

the calendar year. This time period was 

chosen for efficiency and cost mitigation 

inasmuch as it coincides with the 

annual questionnaire required by NFA 

of its entire population of member CPOs 

and with the vast majority of annual 

report filings for commodity pools. 

Moreover, because the Commission has 

transferred the pool position 

information from schedule A to 

schedule B, the Commission believes 

that CPOs should be able to comply 

with filing basic demographic data 

within 90 days. 

For schedule B, mid-sized CPOs are 

required to submit that schedule within 

90 days; the Commission believes this is 

an adequate time period for compiling 

and reporting that schedule. The 

Commission notes that CPOs are 

generally required to file annual reports 

for their pools within 90 days of their 

fiscal year end, most of which coincide 

with the calendar year end. The 

Commission believes that the alignment 

of pools’ fiscal years with the calendar 

year end should facilitate the 

preparation of schedule B and reduce 

the burden imposed on mid-size CPOs 

because some of the information 

required will be similar to that included 

in a pool’s annual financial statements. 

With respect to the quarterly reporting 

by large CPOs on schedules A, B, and 

C, the Commission believes that 60 days 

is a sufficient amount of time to 

complete those schedules for large 

CPOs. The Commission notes that the 

entities required to file on a quarterly 

basis have a significant amount of assets 

under management, and as such, the 

Commission anticipates that such 

entities routinely generate the type of 

information requested on schedules B 

and C as part of their internal 

governance. Accordingly, the 

Commission will require large CPOs to 

file schedules A, B, and C within 60 

days following the end of the reporting 

period as defined in form CPO–PQR. 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11275 

203See e.g., IAA Letter; MFA II Letter; AIMA 

Letter; SIFMA Letter; and Fidelity Letter. 

204 Id. 

205 7 U.S.C. 6m. 

206 17 CFR §§ 4.5(a)(1), 4.13(a)(4). 207 7 U.S.C. 19(a). 

The Commission received several 

comments regarding the content of form 

CTA–PR.203 Most commenters urged the 

Commission to eliminate the form in its 

entirety.204 The Commission does not 

believe that the complete elimination of 

form CTA–PR is appropriate; however, 

the Commission agrees that schedule B 

of the form contains redundant 

information that will already be 

collected through form CPO–PQR. 

Accordingly, the Commission has 

decided to adopt only schedule A of 

form CTA–PR. In so doing, the 

Commission believes the burden on 

CTAs should be significantly reduced. 

Because form CTA–PR will be limited to 

demographic data, the Commission 

believes that it is appropriate for CTAs 

to file the form on an annual basis 

within 45 days of the end of the fiscal 

year. 

Finally, because the regulations have 

been modified to allow dually registered 

entities to file only form PF (plus the 

first schedule A of form CPO–PQR) for 

all of their commodity pools, even those 

that are not ‘‘private funds,’’ the 

Commission expects that such entities 

should not be burdened by the costs of 

dual registration and dual filing. 

ii. Information Collection Estimates for 

Forms CPO–PQR, PF, and CTA–PR 

The Commission expects the 

following burden with respect to the 

various schedules of Forms CPO–PQR, 

PF, and CTA–PR: 

Form CPO–PQR: Schedule A: 

Estimated number of respondents 

(excluding large CPOs): 3,890. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

6. 

Annual reporting burden: 23,340. 

Estimated number of respondents 

(large CPOs): 170. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

6. 

Annual reporting burden: 4,080. 

Form CPO–PQR: Schedule B: 

Estimated number of respondents 

(mid size CPOs): 440. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

4. 

Annual reporting burden: 1,760. 

Estimated number of respondents 

(large CPOs): 170. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

4. 

Annual reporting burden: 2,720. 

Form CPO–PQR: Schedule C: 

Estimated number of respondents: 

170. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

18. 

Annual reporting burden: 12,240. 

Form PF (non-large CPOs): 

Estimated number of respondents: 

220. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

4. 

Annual reporting burden: 880. 

Form PF (large CPOs): 

Estimated number of respondents: 90. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

18. 

Annual reporting burden: 6,480. 

Form CTA–PR: 

Estimated number of respondents: 

450. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

0.5. 

Annual reporting burden: 225. 

C. Considerations of Costs and Benefits 

The Commission has historically 

exercised its authority to exempt certain 

categories of entity from the CPO and 

CTA registration requirement set forth 

in Section 4m(1) of the CEA, which 

states that it is otherwise ‘‘unlawful for 

any commodity trading advisor or 

commodity pool operator, unless 

registered under this Act’’ to conduct 

business in interstate commerce.205

Exempted entities have included certain 

investment companies registered with 

the SEC pursuant to the Investment 

Company Act of 1940, and certain 

entities whose only participants are 

‘‘qualified eligible persons.’’ 206 This 

system of exemptions was appropriate 

because such entities engaged in 

relatively little derivatives trading, and 

dealt exclusively with qualified eligible 

persons, who are considered to possess 

the resources and expertise to manage 

their risk exposure. 

In the Commission’s judgment, 

changed circumstances warrant 

revisions to these rules. The 

Commission is aware, for example, of 

increased derivatives trading activities 

by entities that have previously been 

exempted from registration with the 

Commission, such that entities now 

offering services substantially identical 

to those of registered entities are not 

subject to the same regulatory oversight. 

Meanwhile, the Dodd-Frank Act has 

given the Commission a more robust 

mandate to manage systemic risk and to 

ensure safe trading practices by entities 

involved in the derivatives markets, 

including qualified eligible persons and 

other participants in commodity pools. 

Yet, while the Commission must 

execute this mandate, there currently is 

no source of reliable information 

regarding the general use of derivatives 

by registered investment companies. 

The Commission, therefore, is 

adopting a new registration and data 

collection regime for CPOs and CTAs 

that is consistent with the data 

collection required under the DoddFrank Act. In these final rules, the 

adopted amendments to part 4 of the 

Commission’s regulations will do the 

following: (A) Rescind the exemption 

from CPO registration provided in 

§ 4.13(a)(4) of the Commission’s 

regulations; (B) rescind relief from CTA 

registration for those CTAs who advise 

pools with relief under § 4.13(a)(4); (C) 

rescind relief from the certification 

requirement for annual reports provided 

to operators of certain pools only offered 

to qualified eligible persons (‘‘QEPs’’) 

under § 4.7(b)(3); (D) modify the criteria 

for claiming relief under § 4.5 of the 

Commission’s regulations; (E) require 

the annual filing of notices claiming 

exemptive relief under § 4.5, § 4.13, and 

§ 4.14 of the Commission’s regulations; 

and (F) require additional risk 

disclosures for CPOs and CTAs 

regarding swap transactions and, certain 

conforming amendments. By these 

amendments, the Commission seeks to 

eliminate informational ‘‘blind spots,’’ 

which will benefit all investors and 

market participants by enhancing the 

Commission’s ability to form and frame 

effective policies and procedures. 

Section 15(a) 207 of the CEA requires 

the Commission to consider the costs 

and benefits of its actions before 

promulgating a regulation under the 

CEA or issuing an order. Section 15(a) 

further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. To the 

extent that these new regulations reflect 

the statutory requirements of the Doddmstockstill on DSK4VPTVN1PROD with RULES2

11276 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

208See Reporting by Investment Advisers to 

Private Funds and Certain Commodity Pool 

Operators and Commodity Trading Advisors on 

Form PF, 76 FR 71128 (Nov. 16, 2011). 

209 76 FR 7976, 7989 (Feb. 11, 2011). 

210See SIFMA Letter; USCC Letter; Reed Smith 

Letter; NFA Letter; Invesco Letter; Dechert II Letter; 

and ICI Letter. 

211See ICI Letter. 

212See Dechert II Letter. 

213See Vanguard Letter; MFA Letter. 

214As noted above, however, the Commission 

agrees that it should not implement the inclusion 

of swaps within the threshold test prior to the 

effective date of such relevant final rules. Therefore, 

it is the Commission’s intention to delay the 

effective date of the inclusion of swaps into the 

threshold calculation until 60 days after the final 

rules regarding the definition of ‘‘swap’’ and the 

delineation of the margin requirement for such 

instruments are effective. 

215See, e.g. ‘‘Sound Practices for Hedge Fund 

Managers.’’ Managed Funds Association (MFA). 

Washington DC, 2007.; ‘‘Principles and Best 

Practices for the Hedge Fund Industry.’’ Investors 

Committee Report to the President’s Working Group 

on Financial Markets, Washington DC, 2008.; and 

‘‘Best Practices for the Hedge Fund Industry.’’ Asset 

Managers Committee Report to the President’s 

Working Group on Financial Markets, Washington 

DC, 2009. 

Frank Act, they will not create costs and 

benefits beyond those resulting from 

Congress’s statutory mandates in the 

Dodd-Frank Act. However, to the extent 

that the new regulations reflect the 

Commission’s own determinations 

regarding implementation of the DoddFrank Act’s provisions, such 

Commission determinations may result 

in other costs and benefits. It is these 

other costs and benefits resulting from 

the Commission’s own determinations 

pursuant to and in accordance with the 

Dodd-Frank Act that the Commission 

considers with respect to the Section 

15(a) factors. 

The Commission has quantified 

estimated costs and benefits where it is 

reasonably practicable to do so. The 

Commission notes that, unless 

otherwise specified, all costs discussed 

herein are estimates based on the 

Commission’s knowledge of the 

operations and registration statuses of 

CPOs and CTAs. Moreover, the 

Commission is obligated to estimate the 

burden of and provide supporting 

statements for any collections of 

information it seeks to establish under 

considerations contained in the PRA, 44 

U.S.C. 3501 et seq., and to seek approval 

of those requirements from the OMB. 

Therefore, the estimated burden and 

support for the collections of 

information in this this rulemaking, as 

well as the consideration of comments 

thereto, are discussed in the PRA 

section of this rulemaking and the 

information collection requests filed 

with OMB as required by that statute. 

All estimates are based on average costs; 

actual costs may vary depending on the 

entity’s individual business model and 

compliance procedures. 

The Commission is sensitive to costs 

incurred by market participants and has 

attempted in a variety of ways to 

minimize burdens on affected entities. 

These include the Commission’s efforts 

to harmonize its compliance 

requirements with those of the SEC, 

including through specific harmonizing 

provisions in the joint SEC–CFTC rule 

for dually registered investment 

advisers, as well as through tailoring of 

the current amendments.208 A number 

of other cost-mitigation measures are 

discussed later in this section. 

In its Proposal, the Commission 

invited commenters to ‘‘to submit any 

data and other information that they 

may have quantifying or qualifying the 

costs and benefits of this proposed rule 

with their comment letters.’’ 209 Many 

comments addressed the costs and 

benefits of the proposed rule in 

qualitative terms. These comments are 

considered below. 

In the following discussion, the 

Commission sets forth its own 

assessment of the benefits and costs of 

the amendments; addresses relevant 

comments on the Proposal and 

alternatives to the Proposal submitted 

by commenters; and evaluates the 

benefits and costs in light of the five 

broad areas of market and public 

concern set forth in Section 15(a) of the 

CEA. The analysis begins by addressing 

general comments related to cost-benefit 

analysis in the context of the Proposal 

as a whole, and then proceeds to 

examine the specific issues according to 

the following three categories of 

regulation contained within the 

Proposal: (1) registration (including 

changes to § 4.5, § 4.13(a), and § 4.14); 

(2) data collection (including the 

adoption of forms CPO–PQR and CTA– 

PR); and (3) complementary amending 

provisions (including changes to § 4.7, 

§ 4.24, § 4.34, and parts 145 and 147). 

1. General Comments 

Several commenters claimed that the 

Commission did not provide a sufficient 

consideration of costs and benefits in 

the Notice of Proposed Rulemaking.210

One commenter noted that the costbenefit considerations focused on 

benefits that are already provided by 

other federal securities laws, making the 

regulations duplicative.211 Another 

commenter asserted that until other 

rules, such as the further definition of 

‘‘swaps,’’ as well as capital and margin 

requirements, have been finalized, it is 

not possible to determine the costs and 

benefits of these rules.212 Other 

commenters suggested there be another 

roundtable meeting to discuss the 

proposed rules.213

In response to these comments, the 

Commission has further considered 

costs and benefits as they relate to the 

final rules. As explained below in the 

discussion concerning dual SEC and 

Commission registrants, the 

Commission believes that the benefits 

provided by these rules are 

supplementary to, and not duplicative 

or redundant of, benefits provided by 

the federal securities laws. The 

Commission does not believe that the 

adoption of these regulations should be 

postponed until after other regulations 

are finalized and believes that the costs 

and benefits are sufficiently clear at this 

point and that delay is not justified.214

In addition, the Commission has no 

reason to believe that another 

roundtable meeting would yield 

information substantially different from 

that gleaned from prior roundtables, 

comment letters, and meetings with 

industry representatives. 

The Commission has determined that 

these amendments will create additional 

compliance costs for affected 

participants. These costs include, but 

may not be limited to, the cost to 

prepare and file new forms CPO–PQR 

and CTA–PR; the cost to file an annual 

notice to claim exemptive relief under 

§§ 4.5, 4.13, and 4.14; the cost of 

preparing, certifying, and submitting 

annual reports as required for 

registrants; the cost of preparing 

required disclosure documents; the cost 

of preparing and distributing account 

statements on a periodic basis to 

participants; the cost of keeping certain 

records as required; and the cost of 

registering as a CPO or CTA. These costs 

each relate to collections of information 

subject to PRA compliance, and 

therefore have been accounted for in the 

PRA section of this rulemaking and the 

information collection requests filed 

with OMB as required by that statute. 

Notably, many of the benefits 

associated with the requirements 

adopted or amended in these 

regulations are recognized not only by 

the Commission in its mission to protect 

derivatives markets and the participants 

in them but also by the industry. Several 

‘‘best practices’’ manuals highlight the 

benefits of being registered with the 

Commission, preparing and 

disseminating risk disclosure 

documents, confirming receipt of 

disclosure documents, and ensuring 

independent audit of financial 

statements and annual reports.215 These 

benefits include increased consumer 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11277 

216See AIMA II Letter. 

217 Id. 

218For more information on audit procedures, 

visit the NFA Web site, currently at http:// 

www.nfa.futures.org/NFA-compliance/NFAgeneral-compliance-issues/nfa-audits.HTML. 

confidence in offered pools and funds as 

well as increased internal risk 

management structures. 

2. Regulations Regarding Registration 

Requirements for CPOs and CTAs 

As discussed above, the amendments 

to the registration provisions under part 

4 include rescissions of the exemptions 

for entities functioning as commodity 

pools with only ‘‘qualified eligible 

persons’’ as participants and the 

exclusion of registered investment 

companies under the Investment 

Company Act of 1940, unless those 

investment companies fall below a 

certain threshold level of derivatives 

investment activity. With respect to 

those entities that will continue to claim 

exemption or exclusion from 

registration as CPOs or CTAs under the 

rules, the amendments will also require 

annual reaffirmance of those claims of 

exemption or exclusion. 

a. Benefits of Registration Provisions 

As discussed above in II.A.1, the 

Commission believes that registration 

provides two significant interrelated 

benefits. First, registration allows the 

Commission to ensure that entities with 

greater than a de minimis level of 

participation in the derivatives markets 

meet minimum standards of fitness and 

competency. Second, registration 

provides the Commission and members 

of the public with a direct means to 

address wrongful conduct by 

participants in the derivatives markets. 

The Commission has direct authority to 

take punitive and/or remedial action 

against registered entities for violations 

of the CEA or of the Commission’s 

regulations. The Commission also has 

the ability to deny or revoke 

registration, thereby prohibiting an unfit 

individual or entity from serving as an 

intermediary in the industry. Members 

of the public also may access the 

Commission’s reparations program to 

seek redress for wrongful conduct by a 

Commission registrant. 

The Commission believes that the 

registration procedures enacted as part 

of its regulatory regime upgrade the 

overall quality of market participants, 

which, in turn, strengthens the 

derivatives industry by minimizing lost 

business due to customer dissatisfaction 

and by reducing litigation arising from 

acts of market participants. Therefore, 

the Commission believes that its 

registration requirements further critical 

regulatory objectives and serve 

important public policy goals. 

By expanding the Commission’s 

regulatory oversight of entities 

performing the functions of CPOs and 

CTAs, the Commission believes that the 

final rules related to registration will 

help to ensure that such entities meet 

basic standards of competency and 

fitness, which in turn will provide a 

greater level of protection to market 

participants. Ensuring that CPOs and 

CTAs are qualified in the first 

instance—as opposed to relying solely 

on after-the-fact enforcement actions to 

deter and remedy misconduct—should 

reduce such instances of misconduct 

and resulting litigation, and thereby 

promote overall market confidence. 

Therefore, the Commission believes that 

its registration requirements are integral 

to its regulatory objectives and are in the 

public interest. 

With specific respect to the annual 

reaffirmance requirement, this 

amendment will promote transparency 

regarding the number of entities either 

exempt or excluded from the 

Commission’s registration and 

compliance programs. One primary 

purpose of the Dodd Frank Act is the 

promotion of transparency in the 

financial system, particularly in the 

derivatives market. This requirement is 

consistent with and will further that 

purpose. Finally, the annual notice 

requirement will enable the 

Commission to determine whether 

exemptions and exclusions should be 

modified, repealed, or maintained as 

part of the Commission’s ongoing 

assessment of its regulatory scheme. 

These benefits—enhancing the quality 

of entities operating within the market, 

and the screening of unfit participants 

from the markets—are substantial, even 

if unquantifiable. Through registration, 

the Commission will be better able to 

protect the public and markets from 

unfit persons and conduct that may 

threaten the integrity of the markets 

subject to its jurisdiction. 

b. Costs of Registration Provisions 

Because of the amendments to part 4 

as adopted here, the Commission 

recognizes that some participants who 

previously were excluded or exempted 

from registering as a CPO or CTA will 

now be required to register with the 

Commission through NFA. In addition 

to costs associated with registration 

accounted for under the PRA, which 

one commenter said would ‘‘vary 

significantly depending on a range of 

factors, including the number of 

employees who will need to pass 

examinations, the number of funds 

advised, investment strategy and 

complexity, existing IT systems, and 

whether or not an adviser is already 

registered or authorized and subject to 

a different regulatory regime,’’ 216 the 

commenter estimated ongoing costs to 

be in the range of $150,000 to $250,000 

per year, a substantial part of which 

would be made up of additional 

compliance personnel, information 

technology development and legal/ 

accounting advice that will be required, 

and again vary significantly depending 

on the factors mentioned above.217 The 

Commission presents these estimates for 

the consideration of affected entities, 

reiterating the high variability of costs 

depending on the factors enumerated by 

the commenter. This variability is one 

reason the Commission presented its 

own estimates of costs on a perrequirement basis; affected entities 

should be aware that the total cost of 

registration and compliance will most 

likely be the sum of any number of the 

estimates presented in this section and 

under the PRA. In addition to the 

information collection costs addressed 

by the Commission under the PRA, 

entities that will be required to register 

with the Commission also will become 

subject to NFA rules and to NFA audit 

procedures. NFA assesses annual 

membership dues on CPOs and CTAs, 

currently $750, and charges $90 for the 

National Commodity Futures 

Examination (NCFE) or Series 3 

Examination for each AP. The 

Commission understands that NFA 

audits CPOs and CTAs, on average, 

every two to three years, though the 

frequency of audit depends greatly on 

individual risk factors, and NFA 

generally conducts an audit within the 

first year following registration of an 

entity.218 The cost of such an audit may 

be incurred by the CPO or CTA through 

an ‘‘audit fee’’ imposed by NFA; 

however, the audit fee varies greatly by 

individual entity and individual audit 

and thus is difficult to quantify on any 

sort of aggregated basis. 

Notwithstanding the difficulty of 

quantifying such a burden, the 

Commission notes this cost will most 

likely arise in the first year of 

registration and on average every few 

years thereafter, and entities should 

expect such a fee to be incurred. 

c. Comments Regarding Registration 

Provisions 

1. § 4.5 Amendments 

Commenters who opposed the 

changes to § 4.5 claimed that requiring 

registered investment companies to 

register and comply with the 

Commission’s regulatory regime would 

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219See, e.g., ICI Letter. 

220See ICI Letter; Vanguard Letter; Reed Smith 

Letter; AllianceBernstein Letter; USAA Letter; PMC 

Letter; IAA Letter; Dechert II Letter; Janus Letter; 

STA Letter; Invesco Letter; and Equinox Letter. 

221 76 FR 7976, 7985 (Feb. 12, 2011) (stating that 

‘‘[the] Commission believes that it is possible for a 

commodity pool to have a portfolio that is sizeable 

enough that even if just five percent of the pool’s 

portfolio were committed to margin for futures, the 

pool’s portfolio could be so significant that the 

commodity pool would constitute a major 

participant in the futures market’’). 

222 17 CFR 4.13(a)(3). 223 68 FR 47221, 47225 (Aug. 8, 2003). 224The Commission currently only has 

information on the positions held by CPOs in 

futures markets, i.e., those entities already 

registered as CPOs, as opposed to those excluded 

from the definition of CPO under § 4.5. The 

Commission does not have access to information on 

the total liquidation value of funds operated by 

registered CPOs or those operated by excluded 

CPOs, values that are needed to determine the 

universe of entities affected by one particular 

percentage threshold versus another. These data 

limitations are one reason why the Commission is 

pursuing additional data collection initiatives 

under these final rules. 

225See Invesco Letter; ICI Letter; Vanguard Letter; 

Reed Smith Letter; AllianceBernstein Letter; AII 

Letter; STA Letter; Janus Letter; PMC Letter; USAA 

Letter; Fidelity Letter; SIFMA Letter; Dechert III 

Letter; Rydex Letter; USCC Letter; Sidley Letter; 

NFA Letter; Campbell Letter; AQR Letter; Steben 

Letter; ICI II Letter; and AII Letter. 

226 76 FR 7976, 7985 (Feb. 12, 2011) (stating that 

‘‘[the] Commission believes that it is possible for a 

commodity pool to have a portfolio that is sizeable 

enough that even if just five percent of the pool’s 

portfolio were committed to margin for futures, the 

pool’s portfolio could be so significant that the 

commodity pool would constitute a major 

participant in the futures market’’). 

227 17 CFR 4.13(a)(3). 

228 68 FR 47221, 47225 (Aug. 8, 2003). 

229The Commission currently only has 

information on the positions held by CPOs in 

futures markets, i.e., those entities already 

registered as CPOs, as opposed to those excluded 

from the definition of CPO under § 4.5. The 

Commission does not have access to information on 

the total liquidation value of funds operated by 

registered CPOs or those operated by excluded 

CPOs, values that are needed to determine the 

universe of entities affected by one particular 

percentage threshold versus another. These data 

limitations are one reason why the Commission is 

pursuing additional data collection initiatives 

under these final rules. 

230See Rydex Letter; Invesco Letter; and ICI 

Letter. 

231See Transcript of CFTC Staff Roundtable 

Discussion on Proposed Changes to Registration 

and Compliance Regime for Commodity Pool 

Operators and Commodity Trading Advisors 

(‘‘Roundtable Transcript’’), at 19, 25, 30, 76–77, 87– 

90, available at http://www.cftc.gov/ucm/groups/ 

public/@swaps/documents/dfsubmission/ 

dfsubmission27_070611-trans.pdf. 

232Additional reasons for not accepting this 

alternative are discussed in section II.A.2 of this 

release. 

233See Dechert III Letter. 

provide no benefit, because such 

entities are already subject to 

comprehensive regulation by the 

SEC.219 The Commission disagrees. 

While the Commission and the SEC 

share many of the same regulatory 

objectives, including protecting market 

users and the public from fraud and 

manipulation, the Commission 

administers the CEA to foster open, 

competitive, and financially sound 

commodity and derivatives markets. 

The Commission’s programs are 

structured and its resources deployed to 

meet the needs of the markets it 

regulates. In light of this Congressional 

mandate, it is the Commission’s view 

that entities engaging in more than a de 

minimis amount of derivatives trading 

should be required to register with the 

Commission. The alternative 

approaches suggested by commenters 

would, as discussed above, detract from 

the benefits of registration. 

As also discussed above, the 

Commission is aware that currently 

unregistered entities are offering 

services substantially identical to those 

of registered CPOs. Several commenters 

also asserted that modifying § 4.5 would 

result in a significant burden on entities 

required to register with the 

Commission without any meaningful 

benefit to the Commission.220 The 

Commission recognizes that significant 

burdens may arise from the 

modifications to § 4.5; however, the 

Commission believes, as discussed 

throughout this release, that entities that 

are offering services substantially 

identical to those of a registered CPO 

should be subject to substantially 

identical regulatory obligations. 

Nevertheless, the Commission has not 

eliminated altogether the exemption 

available under § 4.5. Where an entity’s 

trading does not exceed five percent of 

the liquidation value of its portfolio, 

that entity will remain exempt from 

registration. In the Commission’s 

judgment, trading exceeding five 

percent of the liquidation value of a 

portfolio evidences a significant 

exposure to the derivatives markets.221

This threshold was adopted by the 

Commission in its earlier enactment of 

§ 4.13(a)(3).222 In promulgating that 

exemption for de minimis activity, the 

Commission determined that five 

percent is an appropriate threshold 

beyond which oversight by the 

Commission is warranted.223 Because 

current data and information does not 

allow the Commission to evaluate the 

difference in market impact at various 

threshold levels 224 the Commission 

believes it is prudent to maintain the 

current threshold level. Further, as 

discussed above, no facts have been put 

before the Commission that would 

warrant deviation from the five-percent 

threshold, including data respecting the 

costs and benefits of the same. The 

Commission also received numerous 

comments on the proposed addition of 

a trading threshold to the exclusion 

under § 4.5.225 Some commenters stated 

that a five percent de minimis threshold 

is too low in light of the Commission’s 

determination to include swaps within 

the measured activities. Although these 

commenters presented alternatives to 

this five percent threshold (some said 

twenty percent would be more 

reasonable, for example) the 

Commission believes, as stated in the 

Proposal, that trading exceeding five 

percent of the liquidation value of a 

portfolio evidences a significant 

exposure to the derivatives markets.226

Moreover, in its adoption of the 

exemption under § 4.13(a)(3),227 the 

Commission previously determined that 

five percent is an appropriate threshold 

to determine whether an entity warrants 

oversight by the Commission.228 Current 

data and information does not allow the 

Commission to evaluate the difference 

in market impact at various threshold 

levels; 229 thus, the Commission believes 

it is prudent to maintain the current 

threshold level. Commenters also 

recommended that the Commission 

exclude from the threshold calculation 

various instruments including broadbased stock index futures, security 

futures generally, or financial futures 

contracts as a whole.230 As discussed 

above, the Commission does not believe 

that a meaningful distinction can be 

drawn between those security or 

financial futures and other categories of 

futures for the purposes of registration; 

thus, the Commission does not believe 

that exempting any of these instruments 

from the threshold calculation is 

appropriate. 

Several panelists at the Roundtable 

suggested that, instead of a trading 

threshold that is based on a percentage 

of margin, that the Commission should 

focus solely on entities that offer 

‘‘actively managed futures’’ 

strategies.231 As discussed in section 

II.A.2, the Commission does not find it 

appropriate to establish a differentiation 

between ‘‘active’’ and ‘‘passive’’ 

derivative investments because, in 

addition to other reasons,232

establishing such differentiation would 

introduce an element of subjectivity to 

an otherwise objective standard and 

make the threshold more difficult to 

interpret, apply, and enforce. 

One commenter suggested that the 

Commission should consider the 

adoption of an alternative test that 

would be identical to the aggregate net 

notional value test that is currently 

available under § 4.13(a)(3)(ii)(B).233

Section 4.13(a)(3)(ii)(B) provides that an 

entity can claim exemption from 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11279 

234 17 CFR 4.13(a)(3)(ii)(B). 

235See Roundtable Transcript at 69–71. 

236See NFA Letter, Campbell Letter, AQR Letter, 

and Steben Letter. 

237See AQR Letter. 

238See NYSBA Letter; Skadden Letter; MFA 

Letter; Katten Letter; Fidelity Letter; Dechert Letter; 

AIMA Letter; AIMA II Letter; IAA Letter; SIFMA 

Letter; HedgeOp Letter; PIC Letter; and Seward 

Letter. 

239See Skadden Letter; Katten Letter; and MFA 

Letter. 

240See MFA Letter; Seward Letter; and Katten 

Letter. 242See Cranwood Letter. 

registration if the net notional value of 

its fund’s derivatives trading does not 

exceed one hundred percent of the 

liquidation value of the fund’s 

portfolio.234

Conversely, several panelists at the 

Roundtable opposed such a test, stating 

that it was not a reliable means to 

measure an entity’s exposure in the 

market.235 As stated previously herein, 

the Commission believes that the 

adoption of an alternative net notional 

test will provide consistent standards 

for relief from registration as a CPO for 

entities whose portfolios only contain a 

limited amount of derivatives positions 

and will afford registered investment 

companies with additional flexibility in 

determining eligibility for exclusion. 

Therefore, the Commission will adopt 

an alternative net notional test, 

consistent with that set forth in 

§ 4.13(a)(3)(ii)(B) as amended herein, for 

registered investment companies 

claiming exclusion from the definition 

of CPO under § 4.5. 

The Commission also received several 

comments supporting both the 

imposition of a trading threshold in 

general and the five percent threshold 

specifically.236 At least one commenter 

suggested, however, that the 

Commission consider requiring 

registered investment companies that 

exceed the threshold to register, but not 

subjecting them to the Commission’s 

compliance regime beyond requiring 

them to be subject to the examination of 

their books and records, and 

examination by NFA.237 In effect, this 

commenter requested that the 

Commission subject such registrant to 

‘‘notice registration.’’ The Commission 

believes that adopting the approach 

proposed by the commenter would not 

materially change the information that 

the Commission would receive 

regarding the activities of registered 

investment companies in the derivatives 

markets, which is one of the 

Commission’s purposes in amending 

§ 4.5. Moreover, a type of notice 

registration would not provide the 

Commission with any real means for 

engaging in consistent ongoing 

oversight. Notwithstanding such notice 

registration, the Commission would still 

be deemed to have regulatory 

responsibility for the activities of these 

registrants. In the Commission’s view, 

notice registration does not equate to an 

appropriate level of oversight. For that 

reason, the Commission has determined 

not to adopt the alternative proposed by 

the commenter. The Commission is 

adopting the amendment to § 4.5 

regarding the trading threshold without 

modification for the reasons stated 

herein and those previously discussed 

in the Proposal. 

2. §§ 4.13(a)(3) and (a)(4) Rescissions 

In addition to the comments that the 

Commission received regarding the 

specific parts of the Proposal rescinding 

§§ 4.13(a)(3) and (a)(4), the Commission 

received numerous comments regarding 

the proposed rescissions generally.238

Broadly, the comments opposed the 

rescission of the provisions. In the 

Proposal, the Commission proposed 

rescinding the ‘‘de minimis’’ exemption 

in § 4.13(a)(3). The Commission 

received ten comments specifically on 

this aspect of the Proposal, which 

consistently urged the Commission to 

retain a de minimis exemption. As 

discussed above in section II.C.2, the 

Commission, after consideration of the 

comments and the Commission’s stated 

rationale for proposing to rescind the 

exemption in § 4.13(a)(3), has 

determined to retain the ‘‘de minimis’’ 

exemption currently set forth in that 

section without modification. 

Several commenters asserted that 

rescission was not necessary because 

the Commission has the means to obtain 

any needed information from exempt 

CPOs through its large trader reporting 

requirements and its special call 

authority.239 Although the Commission 

has those means, neither of those rules 

were intended to provide the kind of 

data requested of registered entities on 

forms CPO–PQR or CTA–PR with the 

regularity proposed under § 4.27. 

Another commenter asserted that the 

compliance and regulatory obligations 

under the Commission’s rules are 

burdensome for private businesses and 

would unnecessarily distract entities 

from their primary focus of managing 

client assets.240 The Commission 

believes that regulation is necessary to 

ensure a well functioning market and to 

provide protection of those clients. The 

Commission further believes that the 

compliance regime that the Commission 

has adopted strikes the appropriate 

balance between limiting the burden 

placed on registrants and enabling the 

Commission to carry out its duties 

under the Act. 

In the Proposal, the Commission also 

proposed to rescind the exemption in 

§ 4.13(a)(4) for operators of pools that 

are offered only to individuals and 

entities that satisfy the qualified eligible 

person standard in § 4.7 or the 

accredited investor standard under the 

SEC’s Regulation D.241 Several 

commenters argued that the 

Commission should consider retaining 

the exemption in § 4.13(a)(4) for funds 

that do not directly invest in commodity 

interests, but do so through a fund of 

funds structure, and who are advised by 

an SEC registered investment adviser. 

The Commission has not developed a 

comprehensive view regarding the role 

of funds of funds in the derivatives 

markets, in part, due to a lack of data 

regarding their investment activities. 

The Commission, therefore, believes 

that it is prudent to withhold 

consideration of a fund of funds 

exemption until the Commission has 

received data regarding such firms on 

forms CPO–PQR and/or CTA–PR, as 

applicable, to enable the Commission to 

better assess the universe of firms that 

may be appropriate to include within 

the exemption, should the Commission 

decide to adopt one. Therefore, the 

Commission declines to adopt the 

commenter’s alternative to provide an 

exemption for funds of funds at this 

time. 

One commenter argued that rescission 

is not necessary because any fund that 

seeks to attract qualified eligible persons 

is already required to maintain oversight 

and controls that exceed those 

mandated by part 4 of the Commission’s 

regulations such that any regulation 

imposed would be duplicative and 

unnecessarily burdensome.242 The 

commenter primarily focused on the 

significant level of controls that the 

fund operator implements independent 

of regulation. The Commission believes 

that, contrary to the commenter’s 

arguments as to the import of that fact, 

such controls and internal oversight 

should make compliance with the 

Commission’s regulatory regime easier 

and cheaper rather than more 

burdensome. If the information required 

to be disclosed under the Commission’s 

regulations is to a large extent already 

being disclosed by the firm, the 

Commission anticipates that this would 

limit the costs of compliance to those 

costs directly involved with formatting 

such information as required by the 

Commission’s disclosure and reporting 

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11280 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

243 76 FR 7976, 7986 (Feb. 12, 2011). 

244See NFA Letter; and SIFMA Letter. 

245See NFA Letter. 

246See SIFMA Letter. 

247See NFA Letter. 

248The National Futures Association’s 

Background Affiliation Status Information Center 

(BASIC) is currently available at http:// 

www.nfa.futures.org/basicnet/. 

rules. The Commission adopts the 

rescission of § 4.13(a)(4) as proposed. 

The Commission has also elected to 

mitigate costs by phasing in gradually 

the rescission of § 4.13(a)(4). As 

discussed in section II.C.5, in response 

to certain comments, the Commission 

will implement the rescission of 

§ 4.13(a)(4) for all entities currently 

claiming exemptive relief thereunder on 

December 31, 2012, but the rescission 

will be implemented for all other CPOs 

upon the effective date of this final 

rulemaking. This timeline reflects the 

Commission’s belief that entities 

currently claiming relief under 

§ 4.13(a)(4) should be capable of 

becoming registered and complying 

with the Commission’s regulations 

within 11 months following the 

issuance of the final rule. For entities 

that are formed after the effective date 

of the rescission, the Commission 

expects the CPOs of such entities to 

comply with the Commission’s 

regulations upon formation and 

commencement of operations. 

3. Annual Notice of Exemption or 

Exclusion Requirement 

The amendments will require annual 

reaffirmance of any claim of exemption 

or exclusion from registration as a CPO 

or CTA.243 In the Proposal, the 

Commission stated that an annual 

notice requirement would promote 

transparency, a primary purpose of the 

Dodd Frank Act, regarding the number 

of entities either exempt or excluded 

from the Commission’s registration and 

compliance programs. Moreover, the 

Commission stated that an annual 

notice requirement would enable the 

Commission to determine whether 

exemptions and exclusions should be 

modified, repealed, or maintained as 

part of the Commission’s ongoing 

assessment of its regulatory scheme. 

Two commenters suggested that the 

30-day time period for filing was not 

adequate to enable firms to comply.244

One commenter proposed a 60-day time 

period,245 whereas the other commenter 

proposed 90 days as the necessary 

amount of time.246 As a further costmitigating measure, and for the reasons 

discussed in section II.D, the 

Commission has elected to extend the 

filing period from 30 days to 60 days. 

Further, the Commission will adopt the 

annual notice requirement with one 

significant modification designed, 

among other things, to mitigate costs— 

that the notice be filed at the end of the 

calendar year and not the anniversary of 

the original filing. The Commission 

believes this alternative presented by a 

commenter will be more operationally 

efficient.247

d. Section 15(a) 

In this section, the Commission 

considers the costs and benefits of its 

actions in light of five broad areas of 

market and public concern set forth in 

§ 15(a) of the CEA: (1) protection of 

market participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. 

1. Protection of Market Participants and 

the Public 

Registration provides many benefits 

for both the registrants and their 

customers. The registration process 

allows the Commission to ensure that 

all entities participating in derivative 

markets meet a minimum standard of 

fitness and competency. The regulations 

governing who must register and what 

registrants must do provide clear 

direction for CPOs and CTAs. At the 

same time, clients wishing to invest 

with registered entities have the 

knowledge that such entities are held to 

a high financial standard through 

periodic account statements, disclosure 

of risk, audited financial statements, 

and other measures designed to provide 

transparency to investors. The 

Commission believes its regulations 

protect market participants and the 

public by requiring certain parties 

previously excluded or exempt from 

registration to be held to the same 

standards as registered operators and 

advisors, which ensures the fitness of 

such market participants and 

professionals. 

Additionally furthering the goal of 

investor protection, NFA provides an 

on-line, public database with 

information on the registration status of 

market participants and their principals 

as well as certain additional registrant 

information such as regulatory actions 

taken by the NFA or Commission.248

This information is intended to assist 

the public in making investment 

decisions regarding the use of 

derivatives professionals. Although 

those previously exempt entities may 

incur costs associated with registering 

and the compliance obligations arising 

therefrom, or may incur costs to inform 

the Commission of their exempt status, 

the Commission believes the benefits of 

transparency in the derivatives markets 

in the long term will outweigh these 

costs, which should decrease over time 

as efficiencies develop. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The amendments adopted herein will 

result in the registration of more CPOs 

and CTAs, which will enable the 

Commission to better oversee their 

activities in the derivatives markets, 

thereby protecting the integrity of the 

markets. Indeed, even including those 

entities still exempt under revised part 

4 that are required to file notice with the 

Commission on an annual basis, the 

Commission will be able to better 

understand who is operating in 

derivatives markets and identify any 

threats to the efficiency, 

competitiveness, or integrity of markets. 

Moreover, because similarly situated 

entities in the derivatives markets will 

be subject to the same regulatory regime, 

the competitiveness of market 

participants will be enhanced. 

3. Price Discovery 

The Commission has not identified 

any impact on price discovery through 

the registration of additional CPOs and 

CTAs as a result of these regulations. 

4. Sound Risk Management 

The information the Commission 

gains from the registration of entities 

allows the Commission to better 

understand the participants in the 

derivatives markets and the 

interconnectedness of all market 

participants. Such an understanding 

allows the Commission to better assess 

potential threats to the soundness of 

derivatives markets and thus the 

financial system of the United States. 

The Commission also believes that the 

information required of registrants, to 

the extent that producing such 

information requires entities to examine 

their internal systems and operations in 

a manner not previously assessed, 

provides registrants with an additional 

method of understanding the risk 

inherent in their day-to-day businesses. 

5. Other Public Interest Considerations 

The Commission has not identified 

any other public interest considerations 

impacted by the registration of 

additional CPOs and CTAs as a result of 

these regulations. 

3. Data Collection 

In these final rules, the Commission is 

enacting new § 4.27, which requires 

CPOs and CTAs to report certain 

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information to the Commission on forms 

CPO–PQR and CTA–PR, respectively. 

The forms, reporting thresholds, and 

filing deadlines are further detailed in 

section II.F of this release. 

a. Benefits of Data Collection 

The Commission expects that the data 

collected from forms CPO–PQR and 

CTA–PR will increase the amount and 

quality of information available to the 

Commission regarding a previously 

opaque area of investment activity. 

Entities that are required to file all three 

schedules of the forms are large enough 

to have, potentially, a great impact on 

derivatives markets should such entities 

default, whereas smaller entities are 

required to file only basic demographic 

information. Because the data currently 

available to the Commission regarding 

CPOs and CTAs is limited in scope, the 

Commission does not have complete 

information as to who is transacting in 

derivatives markets. With the additional 

information that the Commission will 

have as a result of the new requirements 

under § 4.27, the Commission will be 

able to tailor its regulations to the needs 

of, and risks posed by, entities in the 

market, and to protect investors and the 

general public from potentially negative 

or overly risky behavior. 

The Dodd-Frank Act charged the 

Commission, as a member of FSOC and 

as a financial regulatory agency, with 

mitigating risks that may impact the 

financial stability of the United States. 

The Commission is dedicated to 

assisting FSOC in that goal, and these 

final regulations are essential for the 

Commission to be able to fulfill that role 

effectively because the Commission 

cannot protect against risks of which it 

is not aware. By creating a reporting 

regime that makes the operations of 

commodity pools more transparent to 

the Commission, the Commission is 

better able to identify and address 

potential threats. The total benefit of 

risk mitigation as it pertains to the 

overall financial stability of the United 

States is not quantifiable, but it is 

significant insofar as the Commission 

may be able to use this data to prevent 

further future shocks to the U.S. 

financial system. 

b. Costs of Data Collection 

The Commission has not identified 

costs of data collection that are not 

associated with an information 

collection subject to the PRA. These 

costs therefore have been accounted for 

in the PRA section of this rulemaking 

and the information collection requests 

filed with OMB, as required by the PRA. 

c. Section 15(a) Determination 

This section analyzes the data 

collection rules according to the five 

factors set forth in section 15(a) of the 

CEA: (1) protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. 

1. Protection of Market Participants and 

the Public 

The Commission believes that the 

information to be gathered from forms 

CPO–PQR and CTA–PR increases the 

amount and quality of information 

available regarding a previously opaque 

area of investment activity and, thereby, 

enhances the ability of the Commission 

to protect investors and oversee 

derivatives markets. This enhanced 

ability provides a better understanding 

of the participants in derivatives 

markets and their operations, and as 

such, the Commission is better able to 

protect the public from the potential 

risk that large, unregulated entities 

could bring to markets under the 

Commission’s jurisdiction, many of 

which are essential to society at large. 

Moreover, to mitigate reporting costs to 

regulated entities that may be registered 

both with the Commission and with the 

SEC, the regulations have been modified 

to allow dually registered entities to file 

only form PF (plus the first schedule A 

of form CPO–PQR) for all of their 

commodity pools, even those that are 

not ‘‘private funds.’’ The cost mitigation 

has been accounted for in the PRA 

section of this rulemaking and the 

information collection requests filed 

with OMB, as required by the PRA. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

Although the Commission does not 

believe this rule relates directly to the 

efficiency or competitiveness of futures 

markets, the Commission does recognize 

that the interconnectedness of the 

participants within derivatives markets 

can be extensive such that the proper 

oversight of each category of 

participants affects proper oversight of 

derivatives markets and the financial 

system as a whole. To the extent that the 

information collected by form CPO–PQR 

and form CTA–PR and the adopted 

amendments to the Commission’s 

compliance regime assist the 

Commission in identifying threats in 

derivatives markets, the regulations 

herein protect the integrity of futures 

markets. 

3. Price Discovery 

The Commission has not identified 

any impact on price discovery as a 

result of this data collection initiative. 

4. Sound Risk Management 

The Dodd-Frank Act tasks FSOC and 

its member agencies (including both the 

SEC and the Commission) with 

mitigating risks to the financial stability 

the United States. The Commission 

believes these regulations are necessary 

to fulfill that obligation. These 

regulations improve the ability of the 

Commission to oversee the derivatives 

markets. As the Commission’s 

understanding of the regulated entities, 

their behavior in derivatives markets, 

and the overall riskiness of their 

positions increases through the data 

collection in these rules, the 

Commission will be able to better 

understand any risks posed to the 

financial system as a whole arising from 

markets under the Commission’s 

jurisdiction. These benefits are shared 

by market participants, at least 

indirectly, as a part of the United States 

financial system. In addition, CPOs and 

CTAs may benefit from these 

regulations to the extent that reporting 

form CPO–PQR and form CTA–PF 

requires such entities to review their 

firms’ portfolios, trading practices, and 

risk profiles; thus, the CFTC believes 

that these regulations may improve the 

sound risk management practices within 

their internal risk management systems. 

5. Other Public Interest Considerations 

The Commission has not identified 

any other public interest considerations 

impacted by this data collection 

initiative. 

4. Complementary Provisions 

As part of these final regulations, the 

Commission is also adopting other 

amending provisions that complement 

the registration and data collection 

provisions, including changes to § 4.7, 

§ 4.22, §§ 4.24 and 4.34, and parts 145 

and 147. This section sets forth the 

Commission’s consideration of related 

costs and benefits in general, responds 

to relevant comments, and then 

analyzes the complementary provisions 

in light of the five factors enumerated in 

§ 15(a) of the CEA. 

a. Benefits of the Complementary 

Provisions 

The provisions in this category amend 

additional sections of part 4 in order to 

improve the Commission’s ability to 

effectively regulate derivatives markets 

and their participants. Some of these 

complementary provisions are 

specifically designed to protect 

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11282 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

investors, e.g., requiring certified annual 

reports and disclosure of swaps risk 

ensures investors are getting complete 

and accurate information regarding their 

investment, which increases consumer 

confidence in the financial system. As 

the information available to consumers 

becomes more accurate and complete, a 

prospective investor can more easily 

compare investment vehicles to choose 

the investment vehicle best suited to the 

investor’s individual financial plan and 

risk tolerance. 

Other provisions protect market 

participants by amending the 

Commission’s internal procedures to 

provide for the confidentiality of certain 

proprietary information. Moreover, the 

Commission’s planned harmonization 

rules are designed to limit the impact to 

entities regulated by multiple entities, 

protecting those participants from 

overly burdensome regulatory regimes. 

b. Costs of the Complementary 

Provisions 

The Commission has identified no 

costs of the complementary provisions 

that are not associated with an 

information collection subject to the 

PRA. These costs therefore have been 

accounted for in the PRA section of this 

rulemaking and the information 

collection requests filed with OMB, as 

required by the PRA. 

c. Comments on the Complementary 

Provisions 

1. § 4.7 Amendments 

As stated previously, the Commission 

is adopting an amendment to § 4.7 that 

would rescind the relief provided in 

§ 4.7(b)(3) from the certification 

requirement of § 4.22(c) for financial 

statements contained in commodity 

pool annual reports. The Commission 

received two comments regarding this 

proposed amendment. One commenter 

supported the proposed rescission and 

the Commission’s stated justification for 

doing so. The other commenter 

recommended that the Commission 

retain an exemption from certification of 

financial statements for entities where 

the pool’s participants are limited to the 

principals of its CPO(s) and CTA(s) and 

other categories of employees listed in 

§ 4.7(a)(2)(viii). It is unclear how many 

of the pools operated under § 4.7 would 

qualify for such relief if adopted. The 

Commission is therefore unable to agree 

that such exclusions would materially 

reduce costs or increase any benefit 

achieved by the rule. 

2. § 4.24 and § 4.34 Amendments 

The Commission also proposed 

adding standard risk disclosure 

statements for CPOs and CTAs regarding 

their use of swaps to §§ 4.24(b) and 

4.34(b), respectively. The Commission 

received three comments with respect to 

the proposed standard risk disclosure 

statement for swaps. Two argued that a 

standard risk disclosure statement does 

not beneficially disclose the risks 

inherent in swaps activity to 

participants or clients. A third 

recommended that the Commission 

consider whether the wording of the 

standard disclosure should be modified 

depending on whether the swaps were 

cleared or uncleared. 

The Commission respectfully 

disagrees with the assertions of those 

commenters who believe that a standard 

risk disclosure statement is not 

beneficial. The Commission believes 

that a standardized risk disclosure 

statement addressing certain risks 

associated with the use of swaps is 

necessary due to the revisions to the 

statutory definitions of CPO, CTA, and 

commodity pool enacted by the DoddFrank Act. In addition, based on the 

language proposed, the Commission 

does not believe that different language 

must be adopted to account for the 

differences between cleared and 

uncleared swaps. In particular, the 

Commission notes that the proposed 

risk disclosure statement is not intended 

to address all risks that may be 

associated with the use of swaps, but 

that the CPO or CTA is required to make 

additional disclosures of any other risks 

in its disclosure document pursuant to 

§§ 4.24(g) and 4.34(g) of the 

Commission’s regulations. Moreover, 

the language of the proposed risk 

disclosure statement is conditional and 

does not purport to assert that all of the 

risks discussed are applicable in all 

circumstances. 

For the reasons discussed above in 

section II.E and those stated in the 

Proposal, the Commission adopts the 

proposed risk disclosure statements for 

CPOs and CTAs regarding swaps. These 

additional risk disclosure statements 

will be required for all new disclosure 

documents and all updates filed after 

the effective date of this final 

rulemaking. 

3. Harmonization of Regulations and 

Fund-of-Fund Investments 

The Commission received numerous 

other comments regarding such subjects 

as harmonizing CFTC regulations with 

SEC regulations and fund of fund 

investments. These comments are 

discussed in detail in sections II.F.3 and 

4 and adopted by reference herein. 

4. Confidentiality of Submitted Data 

Additionally, as the Commission 

stated in the Proposal, the collection of 

certain proprietary information through 

forms CPO–PQR and CTA–PR raises 

concerns regarding the protection of 

such information from public 

disclosure. The Commission received 

two comments requesting that the 

Commission treat the disclosure of a 

pool’s distribution channels as 

nonpublic information, and numerous 

other comments urging the Commission 

to be exceedingly circumspect in 

ensuring the confidentiality of the 

information received as a result of the 

data collections. 

The Commission agrees that the 

distribution and marketing channels 

used by a CPO for its pools may be 

sensitive information that implicates 

other proprietary secrets, which, if 

revealed to the general public, could put 

the CPO at a competitive disadvantage. 

Accordingly, and to mitigate costs and 

eliminate risks to participants, the 

Commission is amending §§ 145.5 and 

147.3 to include question 9 of schedule 

A of form CPO–PQR as a nonpublic 

document. Additionally, the 

Commission is amending §§ 145.5 and 

147.3 to remove reference to question 13 

in Schedule A of Form CPO–PQR 

because that such question no longer 

exists due to amendments to that 

schedule. Similarly, the Commission 

will be designating subparts c. and d. of 

question 2 of form CTA–PR as 

nonpublic because it identifies the pools 

advised by the reporting CTA. 

d. Section 15(a) Determination 

This section considers these costs and 

benefits in light of the five broad areas 

of market and public concern set forth 

in section 15(a) of the CEA: (1) 

protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. 

1. Protection of Market Participants and 

the Public 

The complementary provisions 

discussed in this section protect market 

participants and the public in a variety 

of ways. The changes under § 4.7 

require entities to have their annual 

financial statements independently 

audited; such a requirement protects the 

investors in pools registered under § 4.7 

by ensuring that the financial statements 

provided to participants are accurate 

and correct. As most CPOs registered 

under § 4.7 currently file audited annual 

reports, the burden to the industry as a 

whole will be relatively minor whereas 

the benefits, including increased 

consumer confidence, are likely to be 

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11283 

large. The dollar value of improvements 

to overall accuracy of financial reporting 

is not quantifiable, but is a significant 

benefit. 

Registered entities can remain 

confident in the confidentiality of their 

reports to the Commission, as the 

revised parts 145 and 147 protect 

proprietary information from being 

released to the public, while still giving 

the Commission needed information to 

protect derivatives markets and their 

participants. 

The amending provisions that require 

similar information from CPOs 

transacting in swaps products and 

markets increase the Commission’s 

awareness of transactions in the 

previously unregulated over-the-counter 

markets. That awareness will help to 

bring transparency to the swaps 

markets, as well as to the interaction of 

swaps and futures markets, protecting 

the participants in both markets from 

potentially negative behavior. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

Although the Commission does not 

believe this part of these regulations has 

a direct impact on the efficiency of 

futures markets, the Commission does 

recognize that the protection of 

proprietary information is essential for 

the competitiveness and integrity of 

futures markets. The Commission 

believes that requiring all registered 

CPOs to provide participants and the 

Commission with annual financial 

statements that are certified by 

independent public accountants will 

increase the reliability of the 

information provided, which will serve 

to enhance the financial integrity of 

market participants, and by extension, 

the market as a whole. Moreover, the 

Commission also believes that requiring 

such certified statement of all registrants 

serves to make market participants more 

competitive as it enables prospective 

participants to more easily compare 

various investment vehicles. 

3. Price Discovery 

The Commission has not identified 

any impact on price discovery as a 

result of these regulations. 

4. Sound Risk Management 

The Commission has not identified 

any other impacts on sound risk 

management as a result of the other 

amending provisions that are different 

from the impacts of the registration and 

data collection initiatives described in 

sections III.A.3 and 4. 

5. Other Public Interest Considerations 

The Commission has not identified 

any other public interest considerations 

impacted by as a result of these 

regulations. 

5. Conclusion 

The Commission recognizes that the 

final regulations will impose some 

significant costs on the industry, as 

described above and in the PRA section. 

Notwithstanding the costs, the 

Commission has determined to adopt 

this rule because the Commission 

believes that proper regulation and 

oversight of market participants is 

necessary to promote fair and orderly 

derivatives markets. 

List of Subjects 

17 CFR Part 4 

Advertising, Brokers, Commodity 

futures, Commodity pool operators, 

Commodity trading advisors, Consumer 

protection, Reporting and recordkeeping 

requirements. 

17 CFR Part 145 

Commission records and information. 

17 CFR Part 147 

Open commission Meetings. 

Accordingly, 17 CFR Chapter I is 

amended 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, 4, 6(c), 6b, 6c, 

6l, 6m, 6n, 6o, 12a, and 23. 

■ 2. In § 4.5, add paragraphs (c)(2)(iii) 

and (c)(5) to read as follows: 

§ 4.5 Exclusion from the definition of the 

term ‘‘commodity pool operator.’’ 

* * * * * 

(c) * * * 

(2) * * * 

(iii) Furthermore, if the person 

claiming the exclusion is an investment 

company registered as such under the 

Investment Company Act of 1940, then 

the notice of eligibility must also 

contain representations that such person 

will operate the qualifying entity as 

described in Rule 4.5(b)(1) in a manner 

such that the qualifying entity: 

(A) Will use commodity futures or 

commodity options contracts, or swaps 

solely for bona fide hedging purposes 

within the meaning and intent of Rules 

1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 

151.5); Provided however, That in 

addition, with respect to positions in 

commodity futures or commodity 

option contracts, or swaps which do not 

come within the meaning and intent of 

Rules 1.3(z)(1) and 151.5, 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) (17 CFR 

190.01(x)) may be excluded in 

computing such five percent; 

(B) The aggregate net notional value of 

commodity futures, commodity options 

contracts, or swaps positions not used 

solely for bona fide hedging purposes 

within the meaning and intent of Rules 

1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 

151.5), determined at the time the most 

recent position was established, does 

not exceed 100 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: 

(1) The term ‘‘notional value’’ shall be 

calculated for each 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, for each such 

option position by multiplying the 

number of contracts by the size of the 

contract, adjusted by its delta, in 

contract units (taking into account any 

multiplier specified in the contract, by 

the strike price per unit, for each such 

retail forex transaction, by calculating 

the value in U.S. Dollars for such 

transaction, at the time the transaction 

was established, excluding for this 

purpose the value in U.S. Dollars of 

offsetting long and short transactions, if 

any, and for any cleared swap by the 

value as determined consistent with the 

terms of 17 CFR part 45; and 

(2) The person may net futures 

contracts with the same underlying 

commodity across designated contract 

markets and foreign boards of trade; and 

swaps cleared on the same designated 

clearing organization where appropriate; 

and 

(C) Will not be, and has not been, 

marketing participations to the public as 

or in a commodity pool or otherwise as 

or in a vehicle for trading in the 

commodity futures, commodity options, 

or swaps markets. 

* * * * * 

(5) Annual notice. Each person who 

has filed a notice of exclusion under 

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11284 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

this section must affirm on an annual 

basis the notice of exemption from 

registration, withdraw such exemption 

due to the cessation of activities 

requiring registration or exemption 

therefrom, or withdraw such exemption 

and apply for registration within 30 

days of the calendar year end through 

National Futures Association’s 

electronic exemption filing system. 

* * * * * 

■ 3. In § 4.7: 

■ a. Revise paragraphs (a)(3)(ix), 

(a)(3)(x), and (b)(3) to read as follows: 

§ 4.7 Exemption from certain part 4 

requirements for commodity pool operators 

with respect to offerings to qualified eligible 

persons and for commodity trading 

advisors with respect to advising qualified 

eligible persons. 

* * * * * 

(a) * * * 

(3) * * * 

(ix) A natural person whose 

individual net worth, or joint net worth 

with that person’s spouse at the time of 

either his purchase in the exempt pool 

or his opening of an exempt account 

would qualify him as an accredited 

investor as defined in Sec. 230.501(a)(5) 

of this title; 

(x) A natural person who would 

qualify as an accredited investor as 

defined in S§ 203.501(a)(6) of this title; 

* * * * * 

(b) * * * 

(3) Annual report relief. (i) Exemption 

from the specific requirements of 

§ 4.22(c) of this part; Provided, that 

within 90 calendar days after the end of 

the exempt pool’s fiscal year or the 

permanent cessation of trading, 

whichever is earlier, the commodity 

pool operator electronically files with 

the National Futures Association and 

distributes to each participant in lieu of 

the financial information and statements 

specified by that section, an annual 

report for the exempt pool, affirmed in 

accordance with § 4.22(h) which 

contains, at a minimum: 

(A) A Statement of Financial 

Condition as of the close of the exempt 

pool’s fiscal year (elected in accordance 

with § 4.22(g)); 

(B) A Statement of Operations for that 

year; 

(C) Appropriate footnote disclosure 

and such further material information as 

may be necessary to make the required 

statements not misleading. For a pool 

that invests in other funds, this 

information must include, but is not 

limited to, separately disclosing the 

amounts of income, management and 

incentive fees associated with each 

investment in an investee fund that 

exceeds five percent of the pool’s net 

assets. The income, management and 

incentive fees associated with an 

investment in an investee fund that is 

less than five percent of the pool’s net 

assets may be combined and reported in 

the aggregate with the income, 

management and incentive fees of other 

investee funds that, individually, 

represent an investment of less than five 

percent of the pool’s net assets. If the 

commodity pool operator is not able to 

obtain the specific amounts of 

management and incentive fees charged 

by an investee fund, the commodity 

pool operator must disclose the 

percentage amounts and computational 

basis for each such fee and include a 

statement that the CPO is not able to 

obtain the specific fee amounts for this 

fund; 

(D) Where the pool is comprised of 

more than one ownership class or series, 

information for the series or class on 

which the financial statements are 

reporting should be presented in 

addition to the information presented 

for the pool as a whole; except that, for 

a pool that is a series fund structured 

with a limitation on liability among the 

different series, the financial statements 

are not required to include consolidated 

information for all series. 

(ii) Legend. If a claim for exemption 

has been made pursuant to this section, 

the commodity pool operator must make 

a statement to that effect on the cover 

page of each annual report. 

* * * * * 

■ 4. In § 4.13: 

■ a. Revise paragraphs (a)(3)(ii)(B)(1) 

and (2); 

■ b. Remove and reserve paragraph 

(a)(4); 

■ c. Revise paragraph (b)(1)(ii); 

■ d. Redesignate paragraph (b)(4) as 

paragraph (b)(5) and add new paragraph 

(b)(4); and 

■ e. Revise paragraph (e)(2) introductory 

text. 

The revisions and additions read as 

follows: 

§ 4.13 Exemption from registration as a 

commodity pool operator. 

* * * * * 

(a) * * * 

(3) * * * 

(ii) * * * 

(B) * * * 

(1) The term ‘‘notional value’’ shall be 

calculated for each 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, for each such 

option position by multiplying the 

number of contracts by the size of the 

contract, adjusted by its delta, in 

contract units (taking into account any 

multiplier specified in the contract, by 

the strike price per unit, for each such 

retail forex transaction, by calculating 

the value in U.S. Dollars of such 

transaction, at the time the transaction 

was established, excluding for this 

purpose the value in U.S. Dollars of 

offsetting long and short transactions, if 

any, and for any cleared swap by the 

value as determined consistent with the 

terms of part 45 of the Commission’s 

regulations; and 

(2) The person may net futures 

contracts with the same underlying 

commodity across designated contract 

markets and foreign boards of trade; and 

swaps cleared on the same designated 

clearing organization where appropriate; 

and 

* * * * * 

(b) * * * 

(2) * * * 

(ii) Contain the section number 

pursuant to which the operator is filing 

the notice (i.e., § 4.13(a)(1), (2), or (3)) 

and represent that the pool will be 

operated in accordance with the criteria 

of that paragraph; and 

* * * * * 

(4) Annual Notice. Each person who 

has filed a notice of exemption from 

registration under this section must 

affirm on an annual basis the notice of 

exemption from registration, withdraw 

such exemption due to the cessation of 

activities requiring registration or 

exemption therefrom, or withdraw such 

exemption and apply for registration 

within 30 days of the calendar year end 

through National Futures Association’s 

electronic exemption filing system. 

* * * * * 

(e) * * * 

(2) If a person operates one or more 

commodity pools described in 

paragraph (a)(3) 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) of 

this section; Provided, That the person: 

* * * * * 

■ 5. In § 4.14: 

■ a. Revise paragraph (a)(8)(i)(D); and 

■ b. Redesignate paragraph (a)(8)(iii)(D) 

as (a)(8)(iii)(E) and add a new paragraph 

(a)(8)(iii)(D). 

The revision and addition read as 

follows: 

§ 4.14 Exemption from registration as a 

commodity trading adviser. 

* * * * * 

(a) * * * 

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(8) * * * 

(i) * * * 

(D) A commodity pool operator who 

has claimed an exemption from 

registration under § 4.13(a)(3), or, if 

registered as a commodity pool 

operator, who may treat each pool it 

operates that meets the criteria of 

§ 4.13(a)(3) as if it were not so 

registered; and 

* * * * * 

(iii) * * * 

(D) Annual notice. Each person who 

has filed a notice of exemption from 

registration under this section must 

affirm on an annual basis the notice of 

exemption from registration, withdraw 

such exemption due to the cessation of 

activities requiring registration or 

exemption therefrom, or withdraw such 

exemption and apply for registration 

within 30 days of the calendar year end 

through National Futures Association’s 

electronic exemption filing system. 

* * * * * 

■ 6. In § 4.24, add paragraph (b)(5) to 

read as follows: 

§ 4.24 General disclosures required. 

* * * * * 

(b) * * * 

(5) If the pool may engage in swaps, 

the Risk Disclosure Statement must 

further state: 

SWAPS TRANSACTIONS, LIKE 

OTHER FINANCIAL TRANSACTIONS, 

INVOLVE A VARIETY OF 

SIGNIFICANT RISKS. THE SPECIFIC 

RISKS PRESENTED BY A PARTICULAR 

SWAP TRANSACTION NECESSARILY 

DEPEND UPON THE TERMS OF THE 

TRANSACTION AND YOUR 

CIRCUMSTANCES. IN GENERAL, 

HOWEVER, ALL SWAPS 

TRANSACTIONS INVOLVE SOME 

COMBINATION OF MARKET RISK, 

CREDIT RISK, COUNTERPARTY 

CREDIT RISK, FUNDING RISK, 

LIQUIDITY RISK, AND OPERATIONAL 

RISK. 

HIGHLY CUSTOMIZED SWAPS 

TRANSACTIONS IN PARTICULAR 

MAY INCREASE LIQUIDITY RISK, 

WHICH MAY RESULT IN A 

SUSPENSION OF REDEMPTIONS. 

HIGHLY LEVERAGED TRANSACTIONS 

MAY EXPERIENCE SUBSTANTIAL 

GAINS OR LOSSES IN VALUE AS A 

RESULT OF RELATIVELY SMALL 

CHANGES IN THE VALUE OR LEVEL 

OF AN UNDERLYING OR RELATED 

MARKET FACTOR. 

IN EVALUATING THE RISKS AND 

CONTRACTUAL OBLIGATIONS 

ASSOCIATED WITH A PARTICULAR 

SWAP TRANSACTION, IT IS 

IMPORTANT TO CONSIDER THAT A 

SWAP TRANSACTION MAY BE 

MODIFIED OR TERMINATED ONLY BY 

MUTUAL CONSENT OF THE 

ORIGINAL PARTIES AND SUBJECT TO 

AGREEMENT ON INDIVIDUALLY 

NEGOTIATED TERMS. THEREFORE, IT 

MAY NOT BE POSSIBLE FOR THE 

COMMODITY POOL OPERATOR TO 

MODIFY, TERMINATE, OR OFFSET 

THE POOL’S OBLIGATIONS OR THE 

POOL’S EXPOSURE TO THE RISKS 

ASSOCIATED WITH A TRANSACTION 

PRIOR TO ITS SCHEDULED 

TERMINATION DATE. 

* * * * * 

■ 7. In § 4.34, add paragraph (b)(4) to 

read as follows: 

§ 4.34 General disclosures required. 

* * * * * 

(b) * * * 

(4) If the commodity trading advisor 

may engage in swaps, the Risk 

Disclosure Statement must further state: 

SWAPS TRANSACTIONS, LIKE 

OTHER FINANCIAL TRANSACTIONS, 

INVOLVE A VARIETY OF 

SIGNIFICANT RISKS. THE SPECIFIC 

RISKS PRESENTED BY A PARTICULAR 

SWAP TRANSACTION NECESSARILY 

DEPEND UPON THE TERMS OF THE 

TRANSACTION AND YOUR 

CIRCUMSTANCES. IN GENERAL, 

HOWEVER, ALL SWAPS 

TRANSACTIONS INVOLVE SOME 

COMBINATION OF MARKET RISK, 

CREDIT RISK, FUNDING RISK, AND 

OPERATIONAL RISK. 

HIGHLY CUSTOMIZED SWAPS 

TRANSACTIONS IN PARTICULAR 

MAY INCREASE LIQUIDITY RISK, 

WHICH MAY RESULT IN YOUR 

ABILITY TO WITHDRAW YOUR 

FUNDS BEING LIMITED. HIGHLY 

LEVERAGED TRANSACTIONS MAY 

EXPERIENCE SUBSTANTIAL GAINS 

OR LOSSES IN VALUE AS A RESULT 

OF RELATIVELY SMALL CHANGES IN 

THE VALUE OR LEVEL OF AN 

UNDERLYING OR RELATED MARKET 

FACTOR. 

IN EVALUATING THE RISKS AND 

CONTRACTUAL OBLIGATIONS 

ASSOCIATED WITH A PARTICULAR 

SWAP TRANSACTION, IT IS 

IMPORTANT TO CONSIDER THAT A 

SWAP TRANSACTION MAY BE 

MODIFIED OR TERMINATED ONLY BY 

MUTUAL CONSENT OF THE 

ORIGINAL PARTIES AND SUBJECT TO 

AGREEMENT ON INDIVIDUALLY 

NEGOTIATED TERMS. THEREFORE, IT 

MAY NOT BE POSSIBLE TO MODIFY, 

TERMINATE, OR OFFSET YOUR 

OBLIGATIONS OR YOUR EXPOSURE 

TO THE RISKS ASSOCIATED WITH A 

TRANSACTION PRIOR TO ITS 

SCHEDULED TERMINATION DATE. 

* * * * * 

■ 8. Effective July 2, 2012, revise § 4.27, 

as added November 16, 2011, at 76 FR 

71114, and effective March 31, 2012 to 

read as follows: 

§ 4.27 Additional reporting by advisors of 

certain large commodity pools. 

(a) General definitions. For the 

purposes of this section: 

(1) Commodity pool operator or CPO 

has the same meaning as commodity 

pool operator defined in section 1a(11) 

of the Commodity Exchange Act; 

(2) Commodity trading advisor or CTA 

has the same meaning as defined in 

section 1a(12); 

(3) Direct has the same meaning as 

defined in section 4.10(f); 

(4) Net asset value or NAV has the 

same meaning as net asset value as 

defined in section 4.10(b); 

(5) Pool has the same meaning as 

defined in section 1(a)(10) of the 

Commodity Exchange Act; 

(6) Reporting period means the 

reporting period as defined in the forms 

promulgated hereunder; 

(b) Persons required to report. A 

reporting person is: 

(1) Any commodity pool operator that 

is registered or required to be registered 

under the Commodity Exchange Act and 

the Commission’s regulations 

thereunder; or 

(2) Any commodity trading advisor 

that is registered or required to be 

registered under the Commodity 

Exchange Act and the Commission’s 

regulations thereunder. 

(c) Reporting. (1) Except as provided 

in paragraph (c)(2) of this section, each 

reporting person shall file with the 

National Futures Association, a report 

with respect to the directed assets of 

each pool under the advisement of the 

commodity pool operator consistent 

with appendix A to this part or 

commodity trading advisor consistent 

with appendix C to this part. 

(2) All financial information shall be 

reported in accordance with generally 

accepted accounting principles 

consistently applied. 

(d) Investment advisers to private 

funds. Except as otherwise expressly 

provided in this section, CPOs and 

CTAs that are dually registered with the 

Securities and Exchange Commission 

and are required to file Form PF 

pursuant to the rules promulgated under 

the Investment Advisers Act of 1940, 

shall file Form PF with the Securities 

and Exchange Commission in lieu of 

filing such other reports with respect to 

private funds as may be required under 

this section. In addition, except as 

otherwise expressly provided in this 

section, CPOs and CTAs that are dually 

registered with the Securities and 

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Exchange Commission and are required 

to file Form PF pursuant to the rules 

promulgated under the Investment 

Advisers Act of 1940, may file Form PF 

with the Securities and Exchange 

Commission in lieu of filing such other 

reports with respect to commodity pools 

that are not private funds as may be 

required under this section. Dually 

registered CPOs and CTAs that file Form 

PF with the Securities and Exchange 

Commission will be deemed to have 

filed Form PF with the Commission for 

purposes of any enforcement action 

regarding any false or misleading 

statement of a material fact in Form PF. 

(e) Filing requirements. Each report 

required to be filed with the National 

Futures Association under this section 

shall: 

(1)(i) Contain an oath and affirmation 

that, to the best of the knowledge and 

belief of the individual making the oath 

and 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 and 

(ii) Each oath or affirmation must be 

made by a representative duly 

authorized to bind the CPO or CTA. 

(2) Be submitted consistent with the 

National Futures Association’s 

electronic filing procedures. 

(f) Termination of reporting 

requirement. All reporting persons shall 

continue to file such reports as are 

required under this section until the 

effective date of a Form 7W filed in 

accordance with the Commission’s 

regulations. 

(g) Public records. Reports filed 

pursuant to this section shall not be 

considered Public Records as defined in 

§ 145.0 of this chapter. 

■ 9. Revise appendix A to part 4 to read 

as follows: 

Appendix A to Part 4—Form CPO–PQR 

BILLING CODE 6351–01–P 

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■ 10. Add appendix C to part 4 to read 

as follows: 

Appendix C to Part 4—Form CTA–PR 


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BILLING CODE 6351–01–C 

PART 145—COMMISSION RECORDS 

AND INFORMATION 

■ 11. The authority citation for part 145 

continues to read as follows: 

Authority: Publ. L. 99–570, 100 Stat. 3207; 

Pub. L. 89–554, 80 Stat. 383; Pub. L. 90–23, 

81 Stat. 54; Pub. L. 98–502, 88 Stat. 1561– 

1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93– 

463, 88 Stat. 1389 (5 U.S.C. 4a(j)). 

■ 12. In § 145.5, revise paragraphs 

(d)(1)(viii) and (h) to read as follows: 

§ 145.5 Disclosure of nonpublic records. 

* * * * * 

(d) * * * 

(1) * * * 

(viii) The following reports and 

statements that are also set forth in 

paragraph (h) of this section, except as 

specified in 17 CFR 1.10(g)(2) or 17 CFR 

31.13(m): Forms 1–FR required to be 

filed pursuant to 17 CFR 1.10; FOCUS 

reports that are filed in lieu of Forms 1– 

FR pursuant to 17 CFR 1.10(h); Forms 

2–FR required to be filed pursuant to 17 

CFR 31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); all 

reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); and 

(A)(1) The following portions of Form 

CPO–PQR required to be filed pursuant 

to 17 CFR 4.27: Schedule A: Question 2, 

subparts (b) and (d); Question 3, 

subparts (g) and (h); Question 9; 

Question 10, subparts (b), (c), (d), (e), 

and (g); Question 11; Question 12; and 

Schedules B and C; 

(2) The following portions of Form 

CTA–PR required to be filed pursuant to 

17 CFR 4.27: Question 2, subparts (c) 

and (d); 

* * * * * 

(h) Contained in or related to 

examinations, operating, or condition 

reports prepared by, on behalf of, or for 

the use of the Commission or any other 

agency responsible for the regulation or 

supervision of financial institutions, 

including, but not limited to the 

following reports and statements that 

are also set forth in paragraph (d)(1)(viii) 

of this section, except as specified in 17 

CFR 1.10(g)(2) and 17 CFR 31.13(m): 

Forms 1–FR required to be filed 

pursuant to 17 CFR 1.10; FOCUS reports 

that are filed in lieu of Forms 1–FR 

pursuant to 17 CFR 1.10(h); Forms 2–FR 

required to be filed pursuant to 17 CFR 

31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); all 

reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); and 

(1) The following portions of Form 

CPO–PQR required to be filed pursuant 

to 17 CFR 4.27: Schedule A: Question 2, 

subparts (b) and (d); Question 3, 

subparts (g) and (h); Question 9; 

Question 10, subparts (b), (c), (d), (e), 

and (g); Question 11; Question 12; and 

Question 13; and Schedules B and C; 

(2) The following portions of Form 

CTA–PR required to be filed pursuant to 

17 CFR 4.27: Question 2, subparts (c) 

and (d); and 

* * * * * 

PART 147—OPEN COMMISSION 

MEETINGS 

■ 13. The authority citation for part 147 

continues to read as follows: 

Authority: Sec. 3(a), Pub. L. 94–409, 90 

Stat. 1241 (5 U.S.C. 552b); sec. 101(a)(11), 

Pub. L. 93–463, 88 Stat. 1391 (7 U.S.C. 4a(j) 

(Supp. V, 1975)). 

■ 14. In § 147.3, revise paragraphs 

(b)(4)(i)(H) and (b)(8) to read as follows: 

§ 147.3 General requirement of open 

meetings; grounds upon which meetings 

may be closed. 

* * * * * 

(b) * * * 

(4)(i) * * * 

(H) The following reports and 

statements that are also set forth in 

paragraph (b)(8) of this section, except 

as specified in 17 CFR 1.10(g)(2) or 17 

CFR 31.13(m): Forms 1–FR required to 

be filed pursuant to 17 CFR 1.10; 


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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11343 

FOCUS reports that are filed in lieu of 

Forms 1–FR pursuant to 17 CFR 1.10(h); 

Forms 2–FR required to be filed 

pursuant to 17 CFR 31.13; the 

accountant’s report on material 

inadequacies filed in accordance with 

17 CFR 1.16(c)(5); all reports and 

statements required to be filed pursuant 

to 17 CFR 1.17(c)(6); the following 

portions of Form CPO–PQR required to 

be filed pursuant to 17 CFR 4.27: 

Schedule A: Question 2, subparts (b) 

and (d); Question 3, subparts (g) and (h); 

Question 9; Question 10, subparts (b), 

(c), (d), (e), and (g); Question 11; and 

Question 12; and Schedules B and C; 

and the following portions of Form 

CTA–PR required to be filed pursuant to 

17 CFR 4.27: Question 2, subparts (c) 

and (d); 

* * * * * 

(8) Disclose information contained in 

or related to examination, operating, or 

condition reports prepared by, on behalf 

of, or for the use of the Commission or 

any other agency responsible for the 

regulation or supervision of financial 

institutions, including, but not limited 

to the following reports and statements 

that are also set forth in paragraph 

(b)(4)(i)(H) of this section, except as 

specified in 17 CFR 1.10(g)(2) or 17 CFR 

31.13(m): Forms 1–FR required to be 

filed pursuant to 17 CFR 1.10; FOCUS 

reports that are filed in lieu of Forms 1– 

FR pursuant to 17 CFR 1.10(h); Forms 

2–FR pursuant to 17 CFR 31.13; the 

accountant’s report on material 

inadequacies filed in accordance with 

1.16(c)(5); and all reports and 

statements required to be filed pursuant 

to 17 CFR 1.17(c)(6); and 

(i) The following portions of Form 

CPO–PQR required to be filed pursuant 

to 17 CFR 4.27: Schedule A: Question 2, 

subparts (b) and D; Question 3, subparts 

(g) and (h); Question 10, subparts (b), 

(c), (d), (e), and (g); Question 11; 

Question 12; and Question 13; and 

Schedules B and C; and 

(ii) The following portions of Form 

CTA–PR required to be filed pursuant to 

17 CFR 4.27: Schedule B: Question 4, 

subparts (b), (c), (d), and (e); Question 

5; and Question 6; 

* * * * * 

Issued in Washington, DC, on February 8, 

2012, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations: 

Appendices to Commodity Pool 

Operators and Commodity Trading 

Advisors: Amendments to Compliance 

Obligations—Commission Voting 

Summary and Statements of 

Commissioners 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler, 

Commissioners Chilton, O’Malia and Wetjen 

voted in the affirmative; Commissioners 

Sommers voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rule increasing the 

transparency to regulators of commodity pool 

operators (CPOs) and commodity trading 

advisors (CTAs) acting in the derivatives 

marketplace—for both futures and swaps. 

This rule reinstates the regulatory 

requirements in place prior to 2003 for 

registered investment companies that trade 

over a de minimis amount in commodities or 

market themselves as commodity funds. This 

rule enhances transparency in a number of 

ways and increases customer protections 

through amendments to the compliance 

obligations for CPOs and CTAs. 

First, these amendments are consistent 

with the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act), 

as these changes bring the swaps activities of 

CPOs and CTAs under the CFTC’s oversight. 

If CPOs and CTAs are trading swaps, they 

will have to register with the Commission, 

giving their customers the benefit of the 

protections in the Dodd-Frank Act. 

Second, these amendments addressed the 

concerns raised by the National Futures 

Association (NFA) in its petition requesting 

the Commission to reinstate Commission 

oversight of CPOs and CTAs for futures that 

existed prior to 2003. Since 2003, the 

participation of registered investment 

companies in commodity futures, swaps, and 

options markets has increased significantly. 

Some registered investment companies have 

been marketing commodity pools to retail 

investors and are operating without the 

supervision of the CFTC and the NFA. In 

addition, foreign advisors with U.S. 

customers have been exempt from 

supervision since 2003. The final rule 

reinstates the protections that futures 

customers of CPOs and CTAs had prior to the 

exemptions the Commission granted in 2003. 

It is critical to bring the pools that have been 

in the dark since 2003 back into the light so 

their customers can benefit from the CFTC’s 

oversight. 

Third, the final rule increases transparency 

to regulators by enhancing data available to 

the Commission and the NFA, providing a 

much more complete understanding of how 

these pools are operating in the derivatives 

markets for futures and swaps. The data, 

which CPOs and CTAs will submit through 

Form CPO–PQR and Form CTA–PR, will 

help the Commission develop further 

regulatory protections for customers of these 

entities, market participants and the 

American public. 

The Commission benefited from significant 

public comment on this rule. Some 

commenters raised questions about the 

definition of bona fide hedging under section 

4.5, in particular that risk mitigation 

positions were not included in such bona 

fide hedging transactions. The final rule 

provides treatments consistent with the 

Commission’s treatment of registered 

investment companies prior to 2003, and, in 

fact, this rule reinstates criteria in place 

before 2003. The Commission determined not 

to include risk management positions within 

the bona fide hedging exemption because 

many, if not most, positions in a portfolio 

could potentially be characterized as serving 

a risk management purpose. This would 

result in an overly broad exclusion from the 

definition of CPO. 

Further, bona fide hedging transactions are 

excluded from determining whether a 

registered investment company has to 

register under 4.5, though these transactions 

are not excluded when determining whether 

commodity pools not registered with the 

Securities and Exchange Commission (SEC) 

will be required to register with the CFTC 

under section 4.13(a)(3). With respect to the 

consideration of bona fide hedging positions 

under 4.13(a)(3), the Commission previously 

stated its position that bona fide hedging 

positions should not be excluded within the 

de minimis exemption in 4.13(a)(3) when it 

proposed that rule. In the proposal for 

4.13(a)(3) (68 FR 12622, 12627), the 

Commission stated its belief that 4.13(a)(3) 

should not differentiate between trading for 

bona fide hedging and non-hedging purposes 

because the rule is intended to apply to 

strictly de minimis situations, where trading 

is limited regardless of purpose. Conversely, 

the exclusion under 4.5 was not solely 

determined by the de minimis nature of the 

trading, but rather the combination of the de 

minimis amount of trading and the fact that 

the investment vehicle was otherwise 

regulated by the SEC. See 67 FR 65743. 

Several commenters asked the Commission 

to reconsider the treatment of family offices 

under these rules. The Commission will 

continue to permit family offices to rely on 

existing guidance for family offices seeking 

relief from the requirements of Part 4. The 

Commission also is directing staff to look 

into the possibility of adopting a family 

offices exemption that is similar to the rule 

recently adopted by the SEC and is soliciting 

comment from the public. 

Appendix 3—Dissenting Statement of 

Commissioner Jill E. Sommers 

The amendments to the Commission’s Part 

4 regulations we are adopting with these final 

rules were prompted by a petition from the 

NFA seeking to reinstate certain operating 

restrictions that were in place prior to 2003 

for entities excluded from the definition of 

CPO under § 4.5. Had we limited the 

amendments to address the issues raised by 

the NFA’s petition, we could have met our 

regulatory objectives without disrupting a 

significant number of business structures. I 

would have supported such an approach. As 

it is, we have gone far beyond what was 

needed to resolve NFA’s concerns and I must 

dissent. 

Section 404 of the Dodd-Frank Act requires 

certain advisors of private funds to register 

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11344 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

with the SEC and to report to the SEC 

information ‘‘as necessary and appropriate 

* * * for the protection of investors or for 

the assessment of systemic risk by the 

Financial Stability Oversight Council.’’ With 

the finalization of these rules, the 

Commission has determined that the 

‘‘sources of risk delineated in the Dodd-Frank 

Act with respect to private funds are also 

presented by commodity pools’’ and that 

registration of certain previously exempt or 

excluded CPOs is therefore necessary ‘‘to 

assess the risk posed by such investment 

vehicles in the derivatives markets and the 

financial system generally.’’ The Commission 

states that the data it will collect as a 

consequence of registration is necessary ‘‘in 

order to fulfill the Commission’s systemic 

risk mitigation mandate.’’ While I agree that 

the Commission has a regulatory interest in 

the activities of commodity pools, this 

overstates the case and gives a false 

impression that the data we gather will 

enable us to actively monitor pools for 

systemic risk, that we have the resources to 

do so, and that we will do so. Moreover, 

Congress was aware of the existing 

exclusions and exemptions for CPOs when it 

passed Dodd-Frank and did not direct the 

Commission to narrow their scope or require 

reporting for systemic risk purposes. The 

Commission justifies the new rules as a 

response to the financial crisis of 2007 and 

2008 and the passage of Dodd-Frank, yet 

there is no evidence to suggest that 

inadequate regulation of commodity pools 

was a contributing cause of the crisis, or that 

subjecting entities to a dual registration 

scheme will somehow prevent a similar crisis 

in the future. 

I could nevertheless support a revision of 

the current exclusions and exemptions that 

would give us access to information we 

determine is necessary to carry out our 

regulatory mission if supported by a 

sufficient cost-benefit analysis. The rationale 

underlying a number of the decisions 

encompassed by the rules is sorely lacking, 

however, and is not supported by the existing 

cost-benefit analysis. The Commission 

concludes, for example, that bona fide 

hedging transactions are unlikely to present 

the same level of risk as risk mitigation 

positions because they are offset by exposure 

in the physical markets. A risk mitigation 

position is, by definition, a position that 

mitigates or ‘‘offsets’’ exposure in another 

market. Both are hedges and there is no 

explanation as to why the Commission 

believes that bona fide hedges are less risky. 

The preamble states that the alternative net 

notional test under § 4.5 is meant to be 

consistent with the net notional test set forth 

in § 4.13(a)(3), except the § 4.5 test allows 

unlimited use of futures, options or swaps for 

bona fide hedging purposes, while the 

§ 4.13(a)(3) test does not. No explanation is 

given for the differing treatment. We reject an 

exemption for foreign advisors similar to the 

exemption allowed by the Investment 

Advisors Act of 1940 under Section 403 of 

Dodd-Frank because we lack information on 

the activities of foreign pools, even though, 

as some commenters observed, this may 

result in nearly all non-U.S. based CPOs 

operating a pool with at least one U.S. 

investor having to register and report all of 

their derivatives activities to the 

Commission, including activity that may be 

subject to comparable foreign regulation. 

While we leave open the possibility of future 

exemptions based on information we collect 

on Forms CPO–PQR and CTA–PR, the more 

likely result of this new policy is that U.S. 

participants will be excluded from investing 

in foreign pools. The Commission may have 

good reasons for this course of action, but no 

rationale is given. 

Our ‘‘split the baby’’ approach on the issue 

of family offices is illogical. The Commission 

states that it is ‘‘essential that family offices 

remain subject to the data collection 

requirements’’ to fulfill our regulatory 

mission and to develop a comprehensive 

view of such firms to determine whether an 

exemption may be appropriate in the future. 

At the same time, we are allowing an 

unknown percentage of family offices to rely 

on previously issued interpretive letters to 

avoid registration, reporting and other 

compliance obligations. This makes no sense. 

We either need this data or we do not. Family 

offices may fit within the parameters of the 

existing interpretive letters, in which case we 

will not develop the comprehensive view we 

are seeking. On the other hand, we ignore the 

fact that we have consistently found, for 

more than three decades, that family offices 

are not the type of collective investment 

vehicle that Congress intended to regulate in 

adopting the CPO and commodity pool 

definitions, a finding that Congress 

confirmed in § 409 of Dodd-Frank with 

respect to investment advisors. Moreover, our 

repeal of the family office exemption is 

inconsistent with the exclusion recently 

adopted by the SEC pursuant to § 409 at a 

time when Dodd-Frank has urged us to 

harmonize our rules to the fullest extent 

possible. 

It is unlikely, in my view, that the costbenefit analysis supporting the rules will 

survive judicial scrutiny if challenged. And, 

although I am relieved that the 

recordkeeping, reporting and disclosure 

obligations required by the rules will be 

delayed until after proposed harmonization 

rules are finalized, the rules contain a 

confusing and needlessly complicated set of 

compliance dates for other provisions. 

While I have felt that many of the rules we 

have finalized in the last few months were 

far too overreaching, our justification that a 

particular rule was required by statute was 

largely accurate. With regard to these rules 

the same justification does not hold true. 

These rules are not mandated by Dodd-Frank, 

and I do not believe that the benefits 

articulated within the final rules outweigh 

the substantial costs to the fund industry. We 

admit in the preamble that we do not have 

enough information to determine the validity 

of requiring some of these entities to register. 

A more prudent approach would have been 

to gather the information first and then 

decide what constitutes sound policy. For 

these and other reasons, I cannot support the 

final rules. 

[FR Doc. 2012–3390 Filed 2–23–12; 8:45 am] 

BILLING CODE 6351–01–P 

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