UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 ROUNDTABLE TO DISCUSS PROPOSED CHANGES TO

 REGISTRATION AND COMPLIANCE REGIME FOR COMMODITY

 POOL OPERATORS AND COMMODITY TRADING ADVISORS

 Washington, D.C.

 Thursday, July 6, 2011
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 1 PARTICIPANTS:

 2 CFTC Staff:

 3 KEVIN WALEK

 3 Assistant Director, DCIO

 4

 4 ANANDA RADHAKRISHNAN

 5 DCIO

 5

 6 EILEEN CHOTINER

 6 DCIO

 7

 7 CARL KENNEDY

 8 Office of General Counsel

 8

 9 BARRY McCARTY

 9 Division of Enforcement

 10

 10 AMANDA OLEAR

 11 DCIO

 11

 12 Visitors:

 13 SIFMA Asset Management Group:

 13

 14 WILLIAM THUM

 14 Vanguard

 15

 15 STEPHEN KING

 16 PIMCO

 16

 17 MATTHEW NEVINS

 17 Fidelity Investments

 18

 18 PETER BONANNO

 19 Goldman Sachs Asset Management

 19

 20 Association for Institutional Investors (AII):

 20

 21 NEVIS BREGASI

 21 MFS Investment Management

 22
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 1 PARTICIPANTS (CONT'D):

 2 Investment Advisors Association (IAA):

 2

 3 ALISON BAUR

 3 Franklin Templeton Investments

 4

 4 National Futures Association (NFA):

 5

 5 CAROL WOODING

 6

 6 DAN DRISCOLL

 7

 7 ROBERT AMEDEO

 8 Altegris Companies

 8

 9 JOHN GRADY

 9 Steben & Company

 10

 10 U.S. Securities & Exchange Commission (SEC):

 11

 11 DOUGLAS SCHEIDT

 12

 12 SARAH G. ten SIETHOFF

 13

 13

 14 U.S. Chamber of Commerce (COC):

 14

 15 ALICE JOE

 15

 16 Security Traders Association (STA):

 16

 17 JENNIFER SETZENFAND

 17 Federated Investors

 18

 18 Managed Funds Association (MFA):

 19

 19 TOM LLOYD

 20 Campbell & Company

 20

 21 MARC BAUM

 21 Serengeti Asset Management

 22
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 1 PARTICIPANTS (CONT'D):

 2 Investment Company Institute (ICI):

 2

 3 KARRIE McMILLAN

 3

 4 Private Investors Coalition, Inc:

 4

 5 MARTIN LYBECKER

 5

 6 Alternative Investment Management Association

 6 (AIMA):

 7

 7 WILLIAM TODD GROOME

 8 Dalkeith Management Group

 8

 9

 10 * * * * *

 11

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22
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 1 P R O C E E D I N G S

 2 (9:00 a.m.)

 3 MR. WALEK: I will have a few opening

 4 remarks and some housekeeping items, but before

 5 that I'd like to introduce our division director

 6 for the Division of Clearing and Intermediary

 7 Oversight, Ananda Radhakrishnan, to say a few

 8 words.

 9 MR. RADHAKRISHNAN: Morning. Thank you,

 10 Kevin. And thank you for participating in this

 11 roundtable to discuss Proposed Changes to the

 12 Registration and Compliance Regime for Commodity

 13 Pool Operators and Commodity Trading Advisors. I

 14 appreciate everybody's participation in this

 15 roundtable and look forward to a lively discussion

 16 And before I start, I'm going to have the CFTC

 17 team introduce themselves, and perhaps we can go

 18 around and everybody can introduce themselves and

 19 then we can get the program started.

 20 So, go ahead, Kevin.

 21 MR. WALEK: I'm Kevin Walek, Assistant

 22 Director of the Audit and Financial Review Section
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 1 of the Division of Clearing and Intermediary

 2 Oversight.

 3 MS. CHOTINER: Eileen Chotiner, senior

 4 compliance analyst, Division of Clearing and

 5 Intermediary Oversight.

 6 MR. KENNEDY: Carl Kennedy from the

 7 Office of the General Counsel.

 8 MR. McCARTY: Barry McCarty from the

 9 Division of Enforcement.

 10 MS. OLEAR: Amanda Olear. Special

 11 Counsel, Division of Clearing and Intermediary

 12 Oversight.

 13 MR. SCHEIDT: And I'm Doug Scheidt. I'm

 14 with the SEC, and I thank the CFTC staff for

 15 inviting us to participate today, and I'm anxious

 16 to hear everyone's views on these issues.

 17 MR. NEVINS: My name is Matt Nevins, and

 18 I'm at Fidelity Investments.

 19 MR. THUM: I'm Bill Thum. I'm from

 20 Vanguard.

 21 MR. KING: I'm Steve King. I'm from

 22 PIMCO.
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 1 MR. BONANNO: I'm Peter Bonanno. I'm

 2 from Goldman Sachs Asset Management.

 3 MS. BREGASI: Nevis Bregasi from MFS

 4 Investment Management.

 5 MS. BAUR: Alison Baur, Deputy General

 6 Counsel at Franklin Templeton Investments.

 7 MS. WOODING: Carol Wooding, National

 8 Futures Association.

 9 MR. DRISCOLL: I'm Dan Driscoll, also

 10 from NFA.

 11 MR. AMEDEO: I'm Bob Amedeo from the

 12 Altegris Companies.

 13 MR. GRADY: John Grady from Steben &

 14 Company.

 15 MS. JOE: I'm Alice Joe with the U.S.

 16 Chamber.

 17 MS. SETZENFAND: I'm Jennifer Setzenfand

 18 with Federated Investors representing the Security

 19 Traders Association.

 20 MR. LLOYD: I'm Tom Lloyd with Campbell

 21 & Company.

 22 MS. McMILLAN: I'm Karrie McMillan with
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 1 the ICI.

 2 MR. GROOME: My name's Todd Groome. I'm

 3 with Dalkeith Management Group, and I'm

 4 representing AIMA here today as their

 5 non-executive chairman.

 6 MR. RADHAKRISHNAN: I notice we have

 7 some more people who haven't shown up yet, but I'm

 8 sure they'll show up, so take it away.

 9 Kevin? Sorry?

 10 MR. WALEK: They're going to be coming

 11 in --

 12 MR. RADHAKRISHNAN: Oh, they're coming

 13 in later? Okay.

 14 MR. WALEK: Just to start things off,

 15 today we're here to discuss how CFTC might

 16 harmonize its proposed regulations regarding Rule

 17 4.5, 4.13, and any other relevant items that may

 18 have been in the CFTC-only, non- Dodd-Frank

 19 rulemaking, and I want to emphasize that this was

 20 a tangential non-Dodd-Frank rulemaking, so it is

 21 not strictly having to follow the deadlines and

 22 dates of the Dodd-Frank rulemaking. But these
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 1 things flowed tangentially from the items that

 2 were in Dodd-Frank that we were considering.

 3 For those of you that know me, you're

 4 going to find this hard to believe. My role today

 5 is basically to moderate the panel, make sure the

 6 panel keeps moving and we make our deadlines, and

 7 not for me to talk.

 8 We have had published those written

 9 comments that were submitted to us, so in

 10 consideration of the time constraints that we have

 11 today, we would like to ask all of you to

 12 summarize your comments rather than read them

 13 verbatim and to get to the key points. We are not

 14 here today to discuss or entertain philosophical

 15 arguments about whether or not there should be

 16 regulation. But, rather, we would like you to

 17 help us define and address those areas that are

 18 most amenable to harmonization. If your items are

 19 on a later panel than the one we're currently on

 20 -- some of you have looked at the agenda -- there

 21 are basically five substantive areas -- some of

 22 you are here to speak about 4.13 only, not 4.5.
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 1 Feel free to chime in at the appropriate times,

 2 but if it's not your panel feel free to pass to

 3 the next person who may actually have something to

 4 say about the particular substantive panel that

 5 we're on at the time. And I will keep you aware

 6 of which panels those are.

 7 The first time around, because of the

 8 size of the table, I'm going to be starting on the

 9 right-hand side, working to the left, then I'm

 10 going to go from the left to the right, and then

 11 after that I may do some randomization that'll

 12 drive everybody crazy.

 13 I want to remind everybody that we are

 14 still subject to the Administrative Procedures

 15 Act, and since there's no press at the table right

 16 now -- I was going to address to the press

 17 specifically that they should not construe

 18 anything that staff says, the tone of our

 19 questions, the direction of our questions, or

 20 anything related thereto to imply any decisions

 21 that could be made in the future or may be made in

 22 the future with respect to this rulemaking.
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 1 Further -- I'll do this for everybody here at the

 2 table -- the opinions that we may express are our

 3 own and do not reflect the opinions or decisions

 4 of the Commission.

 5 Lunch -- everybody's favorite topic. As

 6 you notice, we have -- particularly the panelists

 7 -- we've had to move the schedule around from time

 8 to time. We are now scheduled to stop at 2

 9 o'clock. But several of you at the table have

 10 called and suggested why don't we just skip the

 11 lunch hour and tighten up the schedule. So, how

 12 many of you would prefer to skip the 11 o'clock

 13 lunch, have a 15- minute break in lieu thereof,

 14 and work on through and possibly be done before 2?

 15 (Pause) I think it's the vast majority. And I

 16 think we've already warned one of the persons

 17 who's coming for the fifth group that that may

 18 happen and they should get here early.

 19 As a courtesy -- this is for the

 20 audience as well and also the staff at the front

 21 table. As I notice, I forgot to do this myself.

 22 As a courtesy to everyone else, please check your
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 1 cell phones and put them on vibrate or, if not,

 2 simply turn them off.

 3 Last but not least, I would like to

 4 thank both our colleagues from the SEC -- there

 5 are some in the audience I believe -- and our

 6 colleagues from the IRS who have been very helpful

 7 to us in this area, and we have held at least two

 8 meetings with those parties trying to get some

 9 clarity, and we greatly appreciate the education

 10 that they have given us over the past month or so

 11 with respect to their regulatory regimes in these

 12 areas.

 13 With that, I would like to turn it over

 14 I think first to Doug in case he has any opening

 15 comments he'd like to make.

 16 MR. SCHEIDT: Thank you, Kevin. As

 17 Kevin said, we have been invited by the CFTC staff

 18 to participate and observe here. And as Kevin

 19 mentioned, we have on at least two prior occasions

 20 worked and met with the CFTC staff on these

 21 issues, and we're anxious to see how those issues

 22 can get resolved and we're anxious to hear what
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 1 you have to say about them. So, thank you.

 2 MR. WALEK: Amanda.

 3 MS. OLEAR: First I'd just like to thank

 4 everyone for their flexibility and for their

 5 willingness to work with us to make sure that this

 6 roundtable could happen. And I would just like to

 7 say I look forward to hearing from everybody

 8 today, and I hope that this can be a real

 9 roll-up-your-sleeves, digging-in, you know,

 10 working- group-style discussion today, and I look

 11 forward to hearing from everybody.

 12 MR. WALEK: Some of you have been

 13 fumbling with the microphones. Just so you know,

 14 when you push the little button, it turns on red

 15 and you'll know you're lit up. When you're lit

 16 up, you're on. If you want to say something to

 17 one of your colleagues and you don't want the rest

 18 of us to hear, push the button down so there's no

 19 light showing.

 20 And with that, Matt.

 21 MR. NEVINS: Thank you, Kevin. I'd like

 22 to start off by thanking the Commission for
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 1 putting this roundtable together and inviting me

 2 to participate.

 3 My name is Matt Nevins, and I am Vice

 4 President and Associate General Counsel at

 5 Fidelity Investments. In this role my primary

 6 responsibility is providing legal support to

 7 derivatives for the Equity Division of our asset

 8 management business. This includes legal support

 9 for Fidelity's commodity funds and asset

 10 allocation products.

 11 I'm here today as part of a group of

 12 four members of the Asset Management Group of the

 13 Securities Industry and Financial Markets

 14 Association. A bit of a mouthful, but we call it

 15 AMG for short. Fidelity is one of the many asset

 16 management firm members of AMG whose combined

 17 assets under management exceed $20 trillion.

 18 The proposed changes to Rules 4.5 and

 19 4.13 are of utmost importance to Fidelity and to

 20 the asset management industry generally. Both

 21 Fidelity and AMG have provided the Commission with

 22 detailed comment letters in response to both the
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 1 NFA petition and the CFTC's rule proposal

 2 outlining our concerns with the proposed changes

 3 and offering suggestions if the Commission does

 4 indeed proceed.

 5 My remarks today are made on behalf of

 6 Fidelity, although our views are shared by many

 7 members of AMG, including those in attendance

 8 today.

 9 A few words about Fidelity before I

 10 begin my substantive comments.

 11 Fidelity Investments was founded in 1946

 12 and is one of the world's largest providers of

 13 financial services, with assets under

 14 administration of $3.7 trillion, including managed

 15 assets of more than $1.6 trillion as of May 31st.

 16 Fidelity is, among other things, a market leader

 17 in asset management, offering a comprehensive line

 18 of retail and institutional investment management

 19 products, including over 400 mutual funds across a

 20 wide range of disciplines.

 21 Fidelity is also a leading provider of

 22 asset allocation solutions for individuals and
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 1 institutions. Certain private pools and mutual

 2 funds, advised by Fidelity from time to time, use

 3 commodity futures, commodity options, and swaps

 4 for hedging and other investment-related purposes.

 5 As an initial matter, Fidelity believes

 6 that the proposed changes to Rule 4.5 are not

 7 necessary, given the comprehensive and robust

 8 regulatory regime that governs mutual funds.

 9 Together, the Investment Company Act of 1940 and

 10 the related rules issued by the SEC for investors

 11 with enormous protections make mutual funds the

 12 preferred the investment vehicle for millions of

 13 Americans.

 14 The '40 Act and a number of the SEC's

 15 related rules cover the same general areas of

 16 concern that the CFTC's Part 4 requirements

 17 address. However, the CFTC's approach to dealing

 18 with these concerns is materially different from

 19 the SEC's, which will create significant

 20 compliance burdens and costs for dual registrants

 21 if not properly harmonized. Accordingly,

 22 harmonization is of vital importance if changes to
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 1 Rule 4.5 are adopted.

 2 Similarly, we do not believe that the

 3 changes Rule 4.13 should be made. Although

 4 private pools that rely on this exemption are not

 5 themselves subject to the '40 Act, their advisors

 6 are generally required to be registered with the

 7 SEC under the Investment Advisors Act of 1940 or

 8 soon will be as a result of Dodd-Frank.

 9 The Advisors Act also addresses many of

 10 the same and comprehensive recordkeeping

 11 requirements and anti-fraud protections as the

 12 CFTC's Part 4 requirements.

 13 In addition, we believe that it is

 14 appropriate for the Commission to maintain an

 15 exemption from CPO registration for advisors to

 16 pools that are sold only to sophisticated

 17 investors. Nevertheless, we understand that the

 18 Commission may wish to move forward with some form

 19 of changes to Rules 4.5 and 4.13.

 20 Fidelity believes that are many other

 21 means for the Commission to achieve many of the

 22 objectives of its proposed rulemaking without
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 1 drastically increasing the regulatory burdens on

 2 asset managers. As proposed, advisors to most

 3 mutual funds that use commodity futures, commodity

 4 options, or swaps would be required to register as

 5 CPOs. One alternative to registration is to

 6 require enhanced disclosure for these funds

 7 through existing SEC mandated filings. This would

 8 obviously require coordination with the SEC.

 9 However, it would further the CFTC's goal of

 10 providing mutual fund investors with additional

 11 disclosure with respect to fees, performance, and

 12 other information.

 13 In addition, we understand that the

 14 Commission is interest in obtaining additional

 15 data on pools that invest in commodity futures,

 16 commodity options, and swaps above certain

 17 thresholds. We believe that goal can be achieved

 18 without requiring CPO registration. The CFTC

 19 could, for example, require that some level of

 20 reporting be made for pools that are above certain

 21 thresholds, even if they remain excluded or exempt

 22 under Rule 4.5 or 4.13.
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 1 The Commission could also examine

 2 information gathered through this reporting

 3 process to determine whether any changes to Rules

 4 4.5 and 4.13 are indeed necessary at all and if so

 5 use this information to establish the appropriate

 6 extent of changes.

 7 In any event, if the Commission elects

 8 to proceed with changes to these rules, we believe

 9 that it is imperative for the Commission to

 10 appropriately tailor the changes so as not to cast

 11 too wide a net. Fidelity has made a number of

 12 recommendations on how to narrow the scope of the

 13 rule changes so as to only capture those mutual

 14 funds and private pools that may appropriately

 15 require additional oversight by the CFTC.

 16 The basic premise of our proposal is

 17 that the CFTC should require registration only of

 18 a mutual fund or a private pool that takes active

 19 positions and a referenced investment through

 20 futures and options as its primary investment

 21 strategy. To that end, we recommend a number of

 22 adjustments to the proposed Rule 4.5 test, such as
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 1 eliminating the proposed marketing restriction or

 2 narrowing it so it only applies to funds that hold

 3 them out as managed futures vehicles.

 4 In addition, we suggest exemptions for

 5 certain categories of funds, such as commodity

 6 funds whose commodity exposure is tied to an

 7 index, and fund of funds that invest in

 8 commodities only as part of an overall asset

 9 diversification strategy.

 10 We believe that the same general

 11 principle should apply equally to Rule 4.13. I

 12 look forward to discussing our ideas in more

 13 detail during today's panel discussions. As noted

 14 earlier, we ask the Commission to harmonize its

 15 rules with those of the SEC for an entity that is

 16 required to be dually registered. There are

 17 important differences between the CFTC's and the

 18 SEC's requirements in significant areas, such as

 19 the content and timing of disclosure; the form of

 20 disclosure documentation; means of delivery and

 21 acknowledgment of the master documentation;

 22 reporting; recordkeeping; and investor access
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 1 among others.

 2 In closing, I would like to thank the

 3 Commission for arranging today's dialog on this

 4 important matter. The inclusive collaborative

 5 approach taken by the staff to make sure that any

 6 changes that are made are workable and appropriate

 7 is indeed appreciated. I would like to thank the

 8 Commission for inviting me to participate in this

 9 important process.

 10 MR. RADHAKRISHNAN: Let me ask a

 11 question of everybody, and please consider what

 12 I'm going to say when you make your remarks.

 13 It's not going to be a surprise to me

 14 that you are going to say, "Back off," all right?

 15 So, I want you to think about this. And I've

 16 mentioned this in a different context. If you are

 17 a broker-dealer and you're registered with the

 18 SEC, if you engage in one futures contract for a

 19 customer, you have to be an FCN, right? So,

 20 regulation follows what it is you do, right? So,

 21 if you choose to get involved in an activity that

 22 implicates the jurisdiction of the CFTC and the
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 1 NFA, implicates the Commodity Exchange Act,

 2 implicates the Commissions regulations, why

 3 shouldn't you be regulated by us? And that's the

 4 question I want to ask.

 5 And to me, it's not easy to say well,

 6 don't regulate us because you're regulated by the

 7 SEC, and with all due respect therefore the Act I

 8 think has different outcomes, different objectives

 9 than the Commodity Exchange Act. The regulations

 10 of the SEC have different objectives.

 11 So, think about this as you, you know,

 12 make your remarks -- why should we regulate you?

 13 -- because, I mean, to me it seems to address some

 14 of the comments. That seems to be the theme --

 15 don't regulate us because we're regulated by the

 16 SEC. I mean, in some instances we've attempted to

 17 harmonize our rules, but in other areas I don't

 18 know whether we can or should.

 19 So, the question is, you know, apart

 20 from saying well, rely on the SEC, should we? And

 21 I'm not taking anything away from the SEC's

 22 regulatory scheme, but you are involving -- you
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 1 know, you are engaged in options and futures and

 2 now swaps, because you've seen that Dodd-Frank

 3 includes the word "swap" in the definition of

 4 commodity pool and operates in NCTA.

 5 So, think about that as you make your

 6 comments. Thank you.

 7 MR. WALEK: And I'm also going to be

 8 cutting you off a little bit faster as we move

 9 along, because at this rate the first panel will

 10 be done around noon.

 11 Nonetheless, let's move on to Bill.

 12 MR. THUM: Okay, I'd like to thank the

 13 Commission for inviting me to speak to the

 14 roundtable. As you know, my name's Bill Thum, and

 15 I'm principle and senior derivatives counsel at

 16 Vanguard headquartered in Valley Forge,

 17 Pennsylvania. Vanguard's one of the world's

 18 largest mutual fund firms. We offer more than 170

 19 U.S. mutual funds with combined assets of

 20 approximately 1.7 trillion. Vanguard's mutual

 21 funds are subject to a comprehensive regulatory

 22 regime and are regulated under four federal
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 1 securities laws. As a part of the prudent

 2 management of our mutual funds, we enter into

 3 swaps to achieve a number of benefits for our

 4 shareholders, including hedging portfolio risk,

 5 lowering transaction costs, and achieving more

 6 favorable execution compared to traditional

 7 investments.

 8 Vanguard has submitted a detailed

 9 comment letter summarizing our concerns and

 10 suggestions regarding the proposed changes to

 11 Rules 4.5 and 4.13. Particularly with respect to

 12 funds registered with the SEC, the proposed

 13 changes could raise significant added costs with

 14 respect to compliance with little if any

 15 commensurate added benefit to investors. A brief

 16 summary of our key points is as follows.

 17 1. There is no current need for change,

 18 given the existing regulation by the SEC of

 19 registered funds and advisors.

 20 2. If enhanced reporting and disclosure

 21 is warranted, we recommend leveraging the existing

 22 regulatory framework through coordination with the
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 1 SEC.

 2 3. If the CFTC determines the cost

 3 benefit analysis justifies more substantive

 4 changes, then amend the proposal to only require

 5 CFTC registration for registered funds and private

 6 pools that take active positions in futures and

 7 commodities as their primary strategy and exempt

 8 registered funds tied to an index and fund of

 9 funds that invest in commodities as a part of a

 10 diversification strategy.

 11 Thank you for you opportunity to share

 12 our views, and we'll look forward to participating

 13 in the roundtable today.

 14 MR. WALEK: Stephen -- by the way, This

 15 is not THE Stephen King. He promises that Carrie

 16 will not appear -- not that Carrie, anyway.

 17 MR. KING: I would also like to thank

 18 the Commission for holding this roundtable, and I

 19 appreciate the opportunity to participate. My

 20 name is Steve King, and I am a senior

 21 vice-president and attorney at PIMCO.

 22 PIMCO manages a variety of '40 Act
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 1 funds, primarily in the fixed income space but

 2 also including several enhanced index funds that

 3 use derivatives on physical commodities for the

 4 passive exposure portion of their portfolio and

 5 several asset allocation funds that may invest in

 6 these enhanced index funds.

 7 The proposed change to Rule 4.5 and the

 8 proposed rescission of Rule 4.13(a)(4) would

 9 impact nearly all of PIMCO's '40 Act funds.

 10 Nearly all the funds made from time to time

 11 utilize futures, options, or swaps on financial

 12 swaps for hedging and other investment-related

 13 purposes. In addition, the enhanced index funds I

 14 just noted utilize futures, options, or swaps on

 15 physical commodities to obtain the passive

 16 exposure that is part of each fund's strategy.

 17 For tax reasons, this exposure is typically

 18 obtained through the use of a wholly-owned

 19 offshore subsidiary.

 20 PIMCO believes that the physical

 21 commodities are an important asset class for

 22 investors to have exposure due to the
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 1 diversification and inflation protection benefits

 2 of such investments. These benefits are

 3 particularly important when an investor has

 4 effectively delegated their asset allocation

 5 decision to PIMCO by investing one of PIMCO's

 6 asset allocation funds.

 7 PIMCO agrees with the views expressed by

 8 Fidelity and the other members representing SIFMA

 9 AMG. We question whether there is any need for a

 10 change in Rule 4.5 or the rescission of

 11 4.13(a)(4), as we are unaware of any problems that

 12 have arisen as a result of these rules. If the

 13 Commission nonetheless determines that changes are

 14 necessary, PIMCO believes that the market

 15 interstriction in the proposed amendment to Rule

 16 4.5 is too broad and that trading restriction

 17 should be narrowed by either expanding the types

 18 of positions that would be included as bona fide

 19 hedges or by raising the 5 percent limit. We also

 20 believe that funds should be able to continue to

 21 use offshore subsidiary structures and rely on

 22 4.13(a)(4).
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 1 Finally, to the extent that certain '40

 2 Act funds are not able to claim the Rule 4.5

 3 exclusion, we believe that the CFTC and the SEC

 4 must work together to harmonize their rules and to

 5 eliminate unnecessary and duplicative regulation.

 6 In closing, I join Fidelity and others

 7 in commending the Commission for arranging today's

 8 roundtable in this very important matter, and I

 9 thank the Commission for giving me the opportunity

 10 to participate.

 11 MR. WALEK: Thank you very much. Peter.

 12 MR. BONANNO: Good morning. My name is

 13 Peter Bonanno, and I'm a managing director and

 14 associate general counsel at Goldman Sachs Asset

 15 Management, and I also serve as the chief legal

 16 officer and secretary for the Goldman Sachs Mutual

 17 Fund complex. I am participating in today's

 18 roundtable as part of the SIFMA Asset Management

 19 Group, and I, too, would like to express my

 20 appreciation to the Commission and the staff for

 21 organizing today's meeting on this very important

 22 matter.
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 1 GSAM shares the views of the other SIFMA

 2 AMG members that the proposed revisions to Rule

 3 4.5 are not warranted in light of the substantial

 4 regulatory regime that already governs mutual

 5 funds today. Mutual fund shareholders, including

 6 those in mutual funds that invest in commodities,

 7 commodity futures, options, and swaps are

 8 protected by a range of substantive and

 9 disclosure-based provisions that have the

 10 collective effect of limiting the degree to which

 11 mutual fund managers may engage in risk taking,

 12 investment activities, and ensuring that investors

 13 receive informative and clear disclosures relating

 14 to a fund's investment strategies, key risks, and

 15 fees and expenses, among other items.

 16 Nevertheless, to the extent that the

 17 Commission decides to proceed with modifications

 18 to Rule 4.5, we respectfully request that the

 19 Commission and staff make several changes before

 20 issuing the final rule.

 21 First, the Commission should take steps

 22 to narrow the scope of the final rule to cover
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 1 only those mutual funds that engage in active

 2 investment strategies implemented substantially

 3 through the direct use of commodity futures,

 4 options, and swaps. We believe that narrowing the

 5 universe of mutual funds in this manner will

 6 address one of the primary concerns raised by the

 7 SIFMA Asset Management Group and other commentors,

 8 namely, that the proposed revisions to Rule 4.5

 9 are overly broad and as drafted would have the

 10 potential to cause many types of mutual funds to

 11 be regulated as CPOs even where the investing

 12 commodity futures options and swaps, to a limited

 13 degree indirectly, through fund of fund structures

 14 are only a means to track a benchmark.

 15 Second, in order to ensure that any

 16 mutual funds that would ultimately be required to

 17 be regulated as CPOs are able to continue their

 18 existing operations in largely the same manner as

 19 they are today, we respectfully request that the

 20 Commission collaborate with the SEC on harmonizing

 21 the key places where the two agencies have

 22 conflicting disclosure reporting or other
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 1 requirements. We believe that a collaborative

 2 approach of this type is necessary to provide a

 3 framework in which a dually regulated mutual fund

 4 could practically continue to operate as both a

 5 registered investment company under the Investment

 6 Company Act and as a commodity pool operator under

 7 the Commodity Exchange Act.

 8 Finally, we request that any final rule

 9 also permit mutual funds relying on Rule 4.5 to

 10 continue to utilize wholly-owned subsidiaries for

 11 the commodities- related investment activities.

 12 In our view, these structures serve a legitimate

 13 tax purpose, and eliminating their availability

 14 for non-hedging-related purposes for those funds

 15 continuing to rely on Rule 4.5 would not serve a

 16 discernible public policy objective.

 17 Thank you again for this opportunity to

 18 discuss these and other related issues regarding

 19 this important matter today.

 20 MR. WALEK: Thank you, Peter. Nevis.

 21 MS. BREGASI: Good morning. I also

 22 thank you for holding this roundtable and giving
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 1 us an opportunity to participate and share our

 2 views in what is to all of us a highly important

 3 piece of regulation.

 4 My name is Nevis Bregasi and I'm a

 5 senior counsel at MFS Investment Management. MFS

 6 currently manages over 240 billion in assets,

 7 about 80 billion of which is distributed across 60

 8 U.S. mutual funds within the MFS family of funds.

 9 My primary role in MFS is providing legal support

 10 relating to derivatives. I am participating today

 11 as a representative of the Association of

 12 Institutional Investors.

 13 MFS agrees with the views that the other

 14 participants speaking before me already mention,

 15 so I will try not to repeat any of the points that

 16 they already made. We also think and question

 17 whether there really needs to be any changes to

 18 Rules 4.5, 4.13(a)(3) and (a)(4). But if the

 19 Commission foresees a need for changes to these

 20 rules, MFS would like to make three suggestions,

 21 which are really procedural suggestions.

 22 The first one is that the Commission
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 1 should delay any further rulemaking on this

 2 proposal until the Dodd- Frank rules or the major

 3 part of the Dodd-Frank rules are finalized. And

 4 we believe that should be the case for three

 5 reasons. One, this rule is not required by Dodd-

 6 Frank; two, we think that having the Commission

 7 and the industry see some of the major Dodd-Frank

 8 rulemaking be finalized will help to see the

 9 effects of those rules on this proposed rule; and,

 10 three, the Commission and the industry will be

 11 allowed to focus their efforts first on finalizing

 12 and implementing rules that are required by

 13 Dodd-Frank.

 14 The second suggestion on the procedural

 15 front would be to move -- before moving forward to

 16 this proposed rule, we ask that the Commission and

 17 the industry would be served well if the

 18 Commission collects certain data from the industry

 19 first. The Commission can require the industry to

 20 validate the number of filed exclusions under

 21 Rules 4.5 and 4.13(a)(3) and (a)(4); and it can

 22 collect data from the industry on the extent and
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 1 purpose of the use of commodity futures, options

 2 and futures, and swaps by entities that have filed

 3 those exclusions and used these instruments above

 4 certain thresholds. This would allow the

 5 Commission to provide a meaningful cost benefit

 6 analysis in the proposed rule, as it would be able

 7 to better estimate the potential cost of the

 8 proposal.

 9 The third suggestion is that the

 10 Commission should re-propose the rule and make

 11 clear in such re- proposal its rationale for the

 12 proposed changes. Currently the Commission's

 13 proposal, with respect to 4.5, notes that it is

 14 nearly an appropriate point at which to begin

 15 discussions. As the relevant Dodd-Frank Act

 16 rulemakings become final and the Commission begins

 17 to collect additional data on the current

 18 exclusions or exemptions, we believe that a

 19 re-proposal will allow the industry to provide

 20 more appropriate, informed feedback to assist the

 21 Commission in drafting an appropriate and

 22 cost-effective final rule.
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 1 If the Commission decides to go ahead

 2 with the proposed rule as currently drafted, MFS

 3 agrees with the concerns and suggestions of the

 4 many participants that spoke before me, so I'm not

 5 going to repeat any of those arguments. MFS would

 6 support the view, though, that for those mutual

 7 funds that fail the re-propose test, the

 8 Commission should require registration with the

 9 Commission and certain reporting requirements but

 10 not subject those funds to the Part 4

 11 requirements. To the extent that certain mutual

 12 funds are made subject to the Commission Part 4

 13 requirements, it is imperative that the CFTC and

 14 the SEC work together to harmonize their rules and

 15 to eliminate unnecessary and duplicative

 16 regulation. This roundtable is clearly a huge

 17 step in the right direction and shows the

 18 Commission's thoughtful approach to this matter.

 19 Thank you again for inviting me to

 20 participate in this process. MFS appreciates the

 21 Commission's efforts in arranging this roundtable

 22 and engaging in an open dialog with the industry
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 1 on the proposed regulation.

 2 MR. WALEK: Thank you, Nevis. Alison.

 3 MS. BAUR: Thank you. Good morning.

 4 I'm Alison Baur, and I'm Deputy General Counsel of

 5 Franklin Templeton Investments. Franklin

 6 Templeton Investments provides global and domestic

 7 investment management solutions managed by various

 8 platforms within Franklin, including Franklin,

 9 Templeton, Mutual Series, Fiduciary Trust, Darby

 10 and Bissett. We are based in San Mateo,

 11 California. We have more than 60 years of

 12 investment experience, and we manage over 735

 13 billion assets under management.

 14 Thank you for the opportunity to

 15 participate in the roundtable and to present the

 16 views of the Investment Advisors Association

 17 regarding the proposed amendments to 4.5, as well

 18 as the changes to 4.13.

 19 The IAA, as you know, represents the

 20 interests of SEC registered investment advisor

 21 firms. And as you also know, IAA members that

 22 advise pools exempt under 4.5 as well as 4.13 are
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 1 already subject to the full panoply of SEC

 2 regulation and oversight. We strongly support

 3 effective and appropriate regulation of investment

 4 advisors, which are designed to protect investors.

 5 However, we are concerned and do believe that

 6 duplicative regulation by the CFTC over activities

 7 that are already extensively regulated by the SEC

 8 is unnecessary, costly, and burdensome and does

 9 not further invest our interests.

 10 While we recognize that the CFTC is

 11 concerned that it does not have sufficient data

 12 regarding commodity pools and that it would like

 13 to enhance its information regarding such

 14 vehicles, we believe that the proposals are not

 15 needed to achieve these goals and that these

 16 objectives can be accomplished through an enhanced

 17 regulatory reporting approach.

 18 Some of those suggestions would relate

 19 to enhanced reporting through the new amendments

 20 to ADV, as well as the new form PF that is being

 21 considered by the SEC, and we're certainly open to

 22 discussions regarding other enhanced reporting
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 1 obligations that would be able to get the CFTC the

 2 information that they need.

 3 Putting aside those sorts of fundamental

 4 issues to the extent that we do need to harmonize

 5 the regulations that the CFTC is hoping to impose,

 6 we would like to discuss issues around improving

 7 and expanding the bona fide hedging exception as

 8 well as the 5 percent restriction. Also we

 9 believe that the marketing restriction currently

 10 being proposed is really expansive and one that we

 11 would like to discuss further.

 12 Thank you very much for inviting me and

 13 for your consideration of these issues.

 14 MR. WALEK: Thank you very much. Before

 15 I move to the NFA, I just want to let everybody

 16 know it's about 9:30 right now. Since we're

 17 adjusting the schedule, this panel is going to now

 18 run til 10 o'clock, so the first break will happen

 19 at 10 o'clock. Hopefully we'll be able to squeeze

 20 in a few questions, but if necessary we'll have

 21 some -- I already have some questions for this

 22 first section, so we may even slip over the break
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 1 with questions. So, hopefully we'll be very

 2 flexible today.

 3 With that, Carol?

 4 MS. WOODING: Thank you. Good morning.

 5 I'm Carol Wooding. I'm Associate General Counsel

 6 at National Futures Association. NFA fully

 7 supports amending regulation 4.5 to reinstate

 8 certain operating restrictions that are similar to

 9 those that an entity had to meet prior to 2003 in

 10 order to claim the 4.5 exclusion.

 11 I think as you all know, we filed the

 12 petition for rulemaking last summer requesting

 13 that the Commission amend regulation 4.5 to

 14 reinstate certain trading and marketing

 15 restrictions. Although we still fully support the

 16 concept of amending regulation 4.5, after further

 17 consideration and consultation with managed fund

 18 representatives on both the mutual fund side and

 19 the public commodity pool side, we have developed

 20 a slightly different approach to the amendments,

 21 which we believe more precisely addresses the

 22 Commission's concerns and identifies these
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 1 concerns, and a full discussion of that proposal

 2 is in our comment letter, which is dated April

 3 12th.

 4 I won't go into the reasons we filed the

 5 petition for rulemaking, but I do want to say that

 6 when we did file it, we did not intend to

 7 eliminate these mutual fund product offerings. We

 8 recognized that simply reinstating the pre-2003

 9 restrictions might effectively do that.

 10 Therefore, when the Commission published its

 11 proposed rules, we assembled an informal group of

 12 representatives from commodity pools, from mutual

 13 funds that offered these products, from private

 14 counsel who were experts in the Part 4

 15 regulations, and private counsel who were experts

 16 in the Investment Company Act of 1940. With the

 17 help of this group, we developed an alternative

 18 approach, which as I said I think addresses both

 19 the CFTC's and the NFA's regulatory objectives and

 20 at the same time would not eliminate these product

 21 offerings.

 22 Just very briefly, we recommend that,
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 1 first of all, the Commission should consider

 2 permitting the registered investment company's'

 3 investment advisor rather than the RIC itself to

 4 register as a CPO and then just list the RIC as a

 5 commodity pool with NFA. This eliminates the

 6 issues related to whether the RIC's independent

 7 directors need to be listed as a principle or

 8 registered as a CPO themselves.

 9 We also recommend that the Commission

 10 adopt the percent threshold for non-hedge

 11 positions. Those RICs that exceed the threshold,

 12 however, would be required to register as a CPO

 13 and be subject to certain Part 4 requirements,

 14 including filing the new Form CPO-PQR. However,

 15 unless the CPO marketed the pool or, as I'll

 16 discuss later, should market the pool as a vehicle

 17 for directly or indirectly trading in on commodity

 18 futures markets, then the RIC would be exempt from

 19 other Part 4 requirements, including the ones that

 20 there is difficulty complying with on both ends,

 21 especially those related to the content and use of

 22 disclosure documents, monthly account statements,
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 1 and recordkeeping. We would, however, want that

 2 CPO to show that they are required to comply with

 3 similar requirements on the security side.

 4 We also recommended that the Commission

 5 provide more clarity on the application of the

 6 no-marketing restriction. We recommend that the

 7 adopting release for any final changes to 4.5

 8 should make clear that a RIC does not trigger the

 9 no-marketing restriction simply because it's

 10 promotional material or it's prospectus states

 11 that it trades commodity futures products or lists

 12 these instruments as those that it trades.

 13 The Commission's release should also

 14 make clear, however, that if the fund's prospectus

 15 or marketing materials highlight the benefits of

 16 managed futures or that its name even indicates

 17 that it's a managed futures fund, that type of

 18 fund would be considered to have violated the

 19 no-marketing restriction.

 20 We also wanted to make clear that we do

 21 not think that the sole determination of whether a

 22 fund is marketed as a commodity pool should be
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 1 based on how it describes itself and its marketing

 2 materials and prospectus. The Commission should

 3 make clear in its adapting release or by amending

 4 the language to the no-marketing restriction that

 5 the no-marketing restriction applies to a fund

 6 that should be marketed as a commodity pool and

 7 then provide guidance and criteria the fund should

 8 consider in making this determination. And in our

 9 comment letter we highlight a number of different

 10 factors that could be considered. Although we

 11 provided these factors, we also stressed that the

 12 Commission should not attempt to provide an exact

 13 formula, which would place the burden on the

 14 commodity pool to evaluate whether a pool that is

 15 a RIC is being appropriately marketed to potential

 16 investors in the context of the overall operation

 17 of the fund. If the RIC fails the no-marketing

 18 restriction, then there would be additional

 19 regulatory requirements beyond simply having to

 20 register as a CPO. The investment advisors for

 21 those RICs would have to comply with the

 22 Commission's Part 4 requirement, including those
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 1 related to the use of content and use of

 2 disclosure documents.

 3 Finally, we recommended that the

 4 Commission consider permitting RICs to use their

 5 wholly-owned and controlled subsidiary for futures

 6 and options traded provided that the Commission

 7 put something into Regulation 4.5 whereby the CPO

 8 agrees to make the books and records of that

 9 subsidiary available to full inspection by the

 10 CFTC and NFA.

 11 And just very briefly 4.13, NFA believes

 12 the Commission should reconsider rescinding the

 13 (a)(3) exemption. We believe the de minimis

 14 exemption allows both the Commission and NFA to

 15 focus their resources on those entities that are

 16 more directly involved in the futures markets and

 17 away from investment vehicles that are sold only

 18 to sophisticated investors who use their futures

 19 trading in a very limited manner.

 20 We also recommend, however, that the

 21 Commission require that in order to claim this

 22 exemption the entity is regulated by the SEC.
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 1 So, thank you for giving me the

 2 opportunity to express NFA's views on these

 3 important issues.

 4 MR. WALEK: Thank you, Carol, and I

 5 think Dan said he was going to pass until later

 6 when we're talking more specifically about 4.13.

 7 With that, Bob?

 8 MR. AMEDEO: My name is Bob Amedeo.

 9 Thank you for giving me the opportunity to

 10 participate.

 11 I am the Executive Vice President and

 12 Director of Business Development for the Altegris

 13 Companies. The Altegris Companies are

 14 subsidiaries of Genworth Inc., a multi-national

 15 provider of insurance and other financial

 16 services. We act as the commodity pool operator

 17 to traditional commodity funds of over a billion

 18 dollars and to '40 Act registered commodity funds

 19 with approximately a billion dollars.

 20 I also act as the NFA's CPO/CTA

 21 sub-advisory chairman and was asked by Tom

 22 Sexton's group to chair a special industry
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 1 committee to assist the NFA in examining various

 2 issues relating to the proposed amendments to Rule

 3 4.5.

 4 As Carol mentioned, the special

 5 committee included members representing

 6 traditional commodity pool operators, open-ended

 7 mutual funds and employee-managed futures, and

 8 other strategies, as well as attorneys who are

 9 expert on both the Commodity Exchange Act Part 4

 10 regulations and the Investment Company Act of

 11 1940.

 12 As part of the process, the Committee

 13 examined a number of traditional long-only mutual

 14 funds that employ futures, swaps, and notes, as

 15 well as mutual funds that include managed futures

 16 strategies in their investment and trading

 17 approaches. We also examined the current Part 4

 18 regulations and relevant portions of the 1940 Act

 19 and related relations.

 20 Finally, members of the committee had

 21 conversations with representative from industry

 22 groups, major fund families, and attorneys
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 1 representing mutual funds and traditional

 2 commodity pools. Based on its findings, the

 3 committee made specific recommendations to the

 4 staff, which Carol described and which are

 5 incorporated into the NFA's comment letter.

 6 In particular, we recommended a two-tier

 7 system for determining registration for operators

 8 of mutual funds and employed futures and swaps,

 9 mutual fund sales practices, and Part 4

 10 requirements relating to disclosure documents and

 11 delivery requirements. We also discussed periodic

 12 reporting, recordkeeping, financial reporting,

 13 areas of conflict between the requirements of Part

 14 4 regulations as they relate to registered

 15 commodity pool operators and the requirements of

 16 the 1940 Act, and -- most importantly -- specific

 17 suggestions relating to those conflicts.

 18 In particular, we discussed and

 19 recommended areas where SEC and CFTC regulations

 20 might be harmonized in a way that would allow '40

 21 Acts to continue to use futures in compliance with

 22 both Acts.
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 1 We believe that accessing futures

 2 markets through a mutual fund can offer potential

 3 advantages for some investors. They offer daily

 4 liquidity and pricing, easier access through

 5 publicly available internet platforms, and

 6 simplified tax reporting. Many investors are

 7 further comforted by the independent board

 8 oversight and third- party custody arrangements

 9 required for mutual funds, as well as by the use

 10 of NSCC centralized clearing.

 11 When an investor buys shares in a mutual

 12 fund that trades a portion of its assets in

 13 futures, he's making an investment that is already

 14 highly regulated by the SEC. Those regulations

 15 provide significant investor protections.

 16 However, we recognize that the SEC's approach to

 17 regulation and the CFTC's approach to regulation

 18 differ in many material respects.

 19 We are in favor of intelligent

 20 regulation and urge the CFTC and the SEC to work

 21 together to harmonize the conflicts between the

 22 Part 4 regulations and the requirements of the '40
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 1 Act.

 2 Thank you.

 3 MR. WALEK: Thank you, Bob. John?

 4 MR. GRADY: Good morning, and thank you

 5 for allowing me to participate in the Roundtable.

 6 I'm with Steben & Company, but I'm also

 7 here because I was on the advisory board that Bob

 8 just referenced. So much of what Steben & Company

 9 would otherwise have to say is incorporated into

 10 the NFA's excellent proposals and suggestions.

 11 But apart from our participation in that process,

 12 we submitted our own comment letters. Probably

 13 not surprisingly, we're very supportive of the

 14 Commission's initiative in the Rule 4.5 area.

 15 We are a commodity pool operator. We

 16 operate a number of public and private pools, and

 17 if one were to say sort of what's our net position

 18 on what's going on, we think that the SEC

 19 regulatory regime at this point -- and it's a

 20 fairly emergent regime -- these funds that we're

 21 talking about, with all due respect to my

 22 colleagues, are fairly new in many cases -- and
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 1 I'm talking specifically about funds that

 2 emphasize managed futures, not just commodity

 3 investing but active positions -- to pick up the

 4 point that many of my colleagues on the panel have

 5 used -- these funds are relatively new, and I

 6 think that the result of SEC regulation alone is a

 7 fairly tortured structure and a fairly tortured

 8 disclosure environment and that therefore we think

 9 that the application of the Part 4 rules would be

 10 appropriate in investor interest to bring a good

 11 deal more clarity and oversight to the disclosure

 12 of how the techniques and how the managers and how

 13 the processes are run as well as the costs and

 14 expenses and risks are presented to shareholders

 15 from both the standpoint of the disclosure itself

 16 as well as the document delivery process.

 17 Thank you.

 18 MR. WALEK: Thank you, John. Alice?

 19 MS. JOE: Good morning. My name is

 20 Alice Joe. I'm a senior director with the Center

 21 for Capital Markets Competitiveness at the U.S.

 22 Chamber of Commerce. The Chamber represents over
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 1 3 million businesses, organizations, and trades,

 2 including many of the mutual funds and hedge funds

 3 that will be impacted by the proposed amendment

 4 04.5.

 5 The Chamber has three key administrative

 6 concerns with the existing proposal. First, the

 7 proposed rule, we believe, is too broad; second,

 8 consideration of this proposal is unrealistic

 9 until Title XII regulatory structure is set; and,

 10 third, there has not been adequate consideration

 11 of the proposal's effects on the fund industry and

 12 the broader economy.

 13 Let's address the concern that the

 14 proposal is too broad. The amendment to Rule 4.5,

 15 as it's written, could affect the entire mutual

 16 fund industry despite the fact that the February

 17 11th proposal indicates that the amendments have

 18 been proposed in order to "stop the practice of

 19 registered investment companies offering

 20 futures-only investment products without

 21 commission oversight."

 22 While we understand the Commission's
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 1 concern, we do not believe that the proposed

 2 amendments are reasonable in scope or application.

 3 According to a recent survey by the Investment

 4 Company Institute, out of 1154 registered

 5 investment companies, only 23 of these were

 6 identified as pursuing a futures-only strategy. A

 7 more reasonable approach to address the CFTC's

 8 concern would be to address futures-only funds in

 9 a more surgical manner or to draw the line

 10 somewhere between the 5 percent test and a

 11 futures- only fund.

 12 On our second concern, the consideration

 13 of the proposed rule at this time is not

 14 realistic, and I'll let you know why. The

 15 promulgation of the multitude of derivatives rules

 16 under Title VII of Dodd-Frank has a direct impact

 17 on various aspects of the proposal, and they

 18 should be completed in full before this proposal

 19 is finalized. Until then, the fund industry

 20 cannot appropriately assess the costs, the burden,

 21 and the impact of any changes made in this

 22 proposal.
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 1 The Chamber's third and final concern is

 2 that adequate consideration has not been given to

 3 the facts of the proposal on the regulated funds

 4 industry or the broader economy. In 2003, the

 5 Commission gave very thoughtful consideration to

 6 the current rule by soliciting public input

 7 through a roundtable and advance notice of

 8 proposed rulemaking, a proposed rule, before

 9 concluding that the 5 percent test marketing

 10 restriction should be removed to liberalize the

 11 use of features by regulated funds "with the added

 12 benefits all market participants have increased

 13 liquidity." This is the antithesis of the

 14 Commission's February proposal to reinstate the 5

 15 percent restrictions.

 16 By ignoring administrative process,

 17 traditional administrative process, the Commission

 18 does not appear to have considered the potential

 19 adverse consequences that this proposal may have

 20 on market liquidity and the broader economy.

 21 In conclusion, if the Chamber's position

 22 that the proposed amendments to Rule 4.5 be
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 1 withdrawn and re- proposed when the broader

 2 derivatives regulatory reforms contemplated by

 3 Title VII have been completed in their entirety

 4 and at that time, and only at that time, will it

 5 be appropriate to continue the discussion started

 6 at today's roundtable.

 7 Thank you for the opportunity to express

 8 our views.

 9 MR. WALEK: Thank you very much.

 10 Jennifer?

 11 MS. SETZENFAND: Thank you. Good

 12 morning. On behalf of STA I would like to thank

 13 the Commission for the opportunity to speak here

 14 today.

 15 The STA is a global trade organization

 16 for professionals in the securities industry. We

 17 provide a forum for our members to share their

 18 distinct perspectives on issues facing our

 19 securities markets. Our goal is to provide

 20 investors with the most liquid, transparent, and

 21 efficient markets in the world.

 22 We are here today to provide comment
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 1 regarding CFTC's proposed Rule 4.5. In STA's

 2 view, the CFTC should not proceed to finalize the

 3 proposed changes for several compelling reasons.

 4 Mutual funds are investments that enable retail

 5 investors to save for their future. Mutual funds

 6 also represent a means of investing money in a

 7 diversified fashion. Futures products provide

 8 portfolio managers an alternative to manage risk

 9 and cash flow while they seek to obtain the stated

 10 objectives of a fund.

 11 In our view, the case has not been made

 12 that the current exemption from dual registration

 13 with the SEC and CFTC contained in Rule 4.5 has

 14 been abused or presents significant risk to the

 15 investing public. The scope of the proposed

 16 changes would adversely impact thousands of mutual

 17 funds used by buy-and-hold investors, and the

 18 funds affected could include basic S&P stock funds

 19 or tax retirement savers -- hardly vehicles for

 20 speculation in the futures and options market.

 21 STA shares the ICI's concern as to the

 22 public policy wisdom of subjecting so many broadly
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 1 held funds to dual registration requirements, and

 2 we note the many examples of contradictory

 3 requirements identified by the ICI in its letter

 4 to the SEC and CFTC dated April 12, 2011.

 5 Answering to two regulators would force mutual

 6 fund companies to constantly monitor two sets of

 7 regulation that could potentially conflict with

 8 each other.

 9 Restricting a portfolio manager's

 10 ability to trade in futures would force him to

 11 trade in alternative investments, which could be

 12 inferior as measured by liquidity and tracking to

 13 the fund's objectives. The consequences of using

 14 alternative investments to futures could result in

 15 implicit losses or costs to investors.

 16 Consideration also needs to be given to

 17 the impact that restricting a mutual fund's use of

 18 futures will have on the overall equity and

 19 derivatives markets. At this time, it is still

 20 not completely clear which types of funds might be

 21 impacted and to what degree. But it is clear that

 22 the compelling need for risk management tools is
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 1 present, even if the futures are not an accessible

 2 investment vehicle. If highly liquid futures

 3 products cannot be used, the unintended

 4 consequences of forcing that volume into

 5 alternative markets, such as options and ETFs,

 6 could have the effect of increasing volatility in

 7 markets where the regulators' goals have been to

 8 decrease volatility.

 9 It is important to note that any

 10 additional costs imposed on mutual funds are costs

 11 imposed on pools of share holders who are the

 12 individual investors. The negative impact of cost

 13 is even greater on smaller fund companies who have

 14 fewer resources to absorb the additional expense

 15 associated with this dual registration.

 16 In our view, the proposal needs more

 17 research and evaluation, and we request that the

 18 regulators consider forming a joint advisory

 19 committee consisting of representatives of both

 20 the CFTC and SEC and participants of the mutual

 21 fund industry to adequately study and fully vet

 22 the ramifications of the suggested regulatory
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 1 changes.

 2 We also recommend that you extend this

 3 comment period to allow the joint advisory

 4 committee we have suggested here to have the time

 5 to perform the detailed research necessary.

 6 Again, the STA appreciates the

 7 opportunity to provide our comment on this matter,

 8 and we look forward to having a dialog with the

 9 CFTC.

 10 Thank you.

 11 MR. WALEK: Thank you, Jennifer. Tom?

 12 MR. LLOYD: Good morning. Thank you for

 13 the opportunity to participate in today's

 14 roundtable. My name is Tom Lloyd, and I'm the

 15 general counsel of Campbell & Company. Campbell &

 16 Company is one of the oldest commodity trading

 17 advisors and commodity pool operators in the

 18 United States. Campbell & Company has been

 19 registered with the Commission as a commodity

 20 trading advisor since 1978 and a commodity pool

 21 operator since 1982. Our subsidiary, Campbell &

 22 Company Investment Advisor, has been registered as
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 1 an investment advisor with the Securities and

 2 Exchange Commission since 2005 and with the CFTC

 3 as a CTA since December of 2005.

 4 I am here today on behalf of Campbell as

 5 well as the Managed Funds Association and its

 6 members. I will be speaking about 4.5. My

 7 colleague, Marc Baum of Serengeti Asset

 8 Management, will be here later to speak on 4.13.

 9 MFA is the voice of the global

 10 alternative investment industry. MFA's members

 11 are active participants in the commodities,

 12 securities, and over-the-counter derivatives

 13 markets and engage in a variety of investment

 14 strategies across many different asset classes.

 15 MFA members include commodity pool operators as

 16 well as advisors to the newer managed futures

 17 mutual funds, which have been the primary focus of

 18 the proposed revisions to Rule 4.5.

 19 MFA believes that an investor or

 20 financial advisor should be able to fairly compare

 21 a managed futures mutual fund offering with a

 22 commodity pool offering and make an informed
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 1 decision on investing based on all relevant facts.

 2 The best way to make this happen is to harmonize

 3 the rules affecting the two types of funds such

 4 that an investor can set the two offerings side by

 5 side and view comparable information on each fund.

 6 Accordingly, to the extent the

 7 Commission determines to amend 4.5, we

 8 respectfully encourage the Commission to, one,

 9 grant relief to a CPO offering a managed futures

 10 mutual fund from certain aspects of the

 11 performance disclosure and disclosure document

 12 delivery and acknowledgement requirements of the

 13 Part 4 regulations; two, grant comparable

 14 disclosure document and acknowledgement delivery

 15 relief to CPOs of traditional public commodity

 16 pools; three, extend Rule 4.26(a)(2) updating

 17 requirement from 9 months to 12 months; four,

 18 amend Rule 4.5 only with respect to the marketing

 19 test; and, five, provide a definition of marketing

 20 with respect to the marketing test to determine

 21 whether a fund is holding itself out or marketing

 22 itself as a managed futures fund.
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 1 One of the points that is particularly

 2 dear to my heart that I would like to focus the

 3 staff on is the disclosure document delivering

 4 acknowledgement requirements of Rule 4.21, which I

 5 know will be discussed in the second session, so

 6 I'll leave it there.

 7 Thank you very much, and I anticipate

 8 participating in today's discussion.

 9 MR. WALEK: Thank you, Tom. And I think

 10 there's going to be discussion later when we start

 11 asking our questions, quite honestly.

 12 Karrie.

 13 MS. McMILLAN: Good morning. I'm Karrie

 14 McMillan. I'm the general counsel of the

 15 Investment Company Institute.

 16 The ICI is a national trade association

 17 of mutual funds and other registered investment

 18 companies, and I very much appreciate the time to

 19 be able to come here today.

 20 I'd also like to thank the NFA for the

 21 hard work that it has done to refine its proposal

 22 and its willingness to meet with our members to
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 1 better understand some of the issues that have

 2 been involved. While we may still differ in some

 3 respects on the proposal, we really do appreciate

 4 the path that you've taken and particularly your

 5 willingness to understand our use of wholly-owned

 6 subsidiaries.

 7 I'm going to stray from my script a

 8 little bit to address one of the comments that was

 9 made early on, which is that the CFTC and the SEC

 10 have different regulatory objectives here, because

 11 I actually think the objectives are very much the

 12 same. And let's go to the question of why

 13 regulate.

 14 As far as Rule 4.5 is concerned, it's

 15 the same objective. It's good disclosure to

 16 investors who buy products. And the SEC is all

 17 about good disclosure. This may be done in a

 18 different way, which is what we're here to talk

 19 about in terms of harmonizing, but I think it does

 20 go to the need for the degree of substantive

 21 regulation of mutual funds.

 22 Under the APA, the Commission is
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 1 required to balance the benefits to investors

 2 versus the costs to investors of the new rule. I

 3 think the benefits of a duplicative and sometimes

 4 overlapping or conflicting regulatory structure

 5 are elusory as many of the commentors and panel

 6 participants today have said. The costs, however,

 7 I think are substantial. The costs of this

 8 duplicative regulation will in March probably be

 9 passed on to shareholders.

 10 And I think there's also a cost that we

 11 haven't talked much about, the investor confusion

 12 -- for example, of getting fee information under

 13 the SEC's fee table, and then the fee information

 14 under the CFTC's. It's going to look like, for

 15 the exact same credit they're paying different

 16 fees.

 17 So, I think all of those costs need to

 18 be factored in.

 19 To the extent that gaps have been

 20 identified and remain to be of concern by the

 21 CFTC, I agree with many of my colleagues here that

 22 the rules can be harmonized in a way that would
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 1 allow the same disclosure documents, ideally the

 2 SEC's disclosure documents, since that's what the

 3 funds are using, to incorporate some of the

 4 concerns that the CFTC has and to tailor those

 5 going forward.

 6 In the event that the CFTC does

 7 determine that it needs to go forward in this

 8 area, as we have detailed in our comment letter,

 9 we think that the scope of the rule is overly

 10 broad and needs to be substantially modified and

 11 re- proposed. I echo the comments made by Nevis

 12 about the process in which that should take place

 13 and particularly the fact that we can't set an

 14 appropriate threshold until the margin rules have

 15 been finalized. We do, in our comment letter,

 16 offer one possible path to achieve that going

 17 forward step, and I won't summarize it now. I

 18 think we have a point of discussion about that

 19 later.

 20 I'd like to close by thanking you again

 21 for the opportunity to be here.

 22 MR. WALEK: And I'll give everybody a
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 1 secret. Karrie can actually confirm that we've

 2 been meeting with the SEC, because she happened to

 3 be in the waiting room while we were there for one

 4 of our meetings.

 5 With that, I'll turn it over to Todd.

 6 MR. GROOME: I had a similar experience

 7 when I was waiting on a meeting with you and about

 8 10 people from the SEC walked out. So, I'm well

 9 aware of that.

 10 Similar to Dan, I'm going to be focused

 11 on 4.13, so, Kevin, if you'd like, I'm happy to

 12 delay the comments.

 13 MR. WALEK: That would be wonderful,

 14 because now I can say it's time for a break. And

 15 then we'll come back and we'll start with some

 16 questions.

 17 I'm going to give you about 10 minutes,

 18 so if you can be back here by --

 19 (Recess)

 20 MR. WALEK: This next segment is

 21 actually to go to the agenda -- God forbid -- and

 22 I'm going to be combining the agenda items from
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 1 the first A, B, C, and D and the second A, B, and

 2 C; and maybe, if we're lucky, we'll get through

 3 those by about 10 after 10 or 10:50. I mean --

 4 sorry -- 10 after 11 or 11:15 and then take

 5 another break there, okay? Because that's sort of

 6 my thought.

 7 My first question up -- I'm actually

 8 going to lie. I'm not going to start over here

 9 since you're primarily 4.13. This is going to

 10 sort of be a toss-up question.

 11 Clearly we've heard - no this is not

 12 Jeopardy. I'm not Canadian like Alex, but

 13 nonetheless.

 14 With respect to what I think I've heard

 15 this morning and trying to consolidate that in the

 16 form of a question, it seems to me with respect to

 17 4.5, if I were to pick the number one issue

 18 amongst the persons here at the table, it would be

 19 the marketing provision. Would that be

 20 reasonable? And if you want to throw in and add

 21 to that, please, please, you know, expand upon it

 22 if you want to. But it seems to me like marketing
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 1 is the key thing for most of you. ICI is sort of

 2 -- good.

 3 MS. McMILLAN: I guess it depends on

 4 where you would come out on the threshold for the

 5 trading, because we really feel like we can't

 6 comment on where the trading restrictions should

 7 be. But the CFTC itself noted when it removed the

 8 restrictions in 2003 that the 5 percent was hard

 9 for people to live with at that time. With what

 10 we think will be the new margin requirements, the

 11 5 percent is probably not going to work. So,

 12 assuming some rationalized flexibility about that,

 13 yeah, I do think that the marketing provisioning

 14 is pretty difficult to comply with as of right

 15 now.

 16 MR. WALEK: We didn't plan this, but

 17 thank you for the segue.

 18 Okay, I'm going to throw the -- I would

 19 like to ask the NFA first, but then toss it up to

 20 anybody else: With respect to the threshold, if

 21 you look at 4.13 -- I believe it's (a)(3)(B) --

 22 there is a net notional value test, and as many of
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 1 us know, when we start playing with percentages

 2 it's like percentage increases in salaries. The

 3 more you make, the more that percentage gives you

 4 in absolute terms. I mean, we all play with

 5 numbers enough to know that one, all right? Okay,

 6 4.13(ii)(B). There's a net notional asset value

 7 test, and in terms of -- and maybe we need to read

 8 it to you, but for those of you who may be

 9 familiar with 4.13, would that work for both 4.5

 10 and 4.13 as the only test and get us away from the

 11 percentage test?

 12 MS. WOODING: You know, our committee

 13 actually considered that as one of the factors

 14 that they could use as the threshold tax, and they

 15 went back to the 5 percent limit. This is

 16 actually -- this tax is something that we actually

 17 recommend that might be something that you could

 18 look at to see whether a fund should be marketing

 19 itself as a commodity pool. So, the committee

 20 went back and forth on a different ways to measure

 21 it and concluded that any fund that is doing a

 22 significant amount of futures trading -- and they
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 1 concluded the 5 percent was a significant amount

 2 -- should at least be registered with the CFTC,

 3 not necessarily have to comply with all Part 4

 4 requirements.

 5 MR. WALEK: And not that I disagree with

 6 that NFA or your panel, but I did some numbers

 7 across the board, across different commodities.

 8 In some commodities I wasn't even tickling a

 9 fraction of the risk to a fund, whereas other

 10 commodities at 5 percent I was almost at my

 11 hundred percent net notional value. So, that's my

 12 problem with the percentage test, and I think so

 13 many -- I think I saw Tom over here nodding his

 14 head when I was talking about that --

 15 MR. LLOYD: Yes, and the thing is, like,

 16 for example, if it's a bond future, you know how

 17 you can -- you need to control a lot more, you

 18 know, to get the risk that you want, whereas you

 19 can, you know, with another -- you know, with an

 20 S&P 500 futures or something you don't need to

 21 control as much and therefore put as much risk to

 22 get the risk for your portfolio that you want to
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 1 get. So, that's why it sort of cuts both ways.

 2 The notional value test can also kind

 3 of, like, blow it out of -- you might have to have

 4 a huge notional value to get a given risk in one

 5 market, whereas you don't need a very big notional

 6 value to get a given risk in the other market, and

 7 the margin requirements are kind of designed to

 8 take that into account. That's why I think -- for

 9 full disclosure, I also served on the NFA working

 10 group -- but that was sort of my point that I

 11 raised in the discussions that we had. So, it

 12 sort of cuts -- we think it cuts both ways.

 13 MR. WALEK: Bob.

 14 MR. AMEDEO: Yeah, just to further that

 15 point. When you start looking at funds that trade

 16 some Euro dollars and some short-term interest

 17 rates where the margin requirements are very low

 18 but the notional size of the contract is very

 19 high, the net notional number gets distorted

 20 really quickly so that particularly for some of

 21 the more traditional loan-only funds that might be

 22 using short-term interest rate -- futures --
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 1 substitutes for short-term interest rates, you're

 2 going to have very high net notional values, which

 3 I think is going to distort that calculation.

 4 MR. WALEK: Anybody else want to make a

 5 comment on the net notional test? Matt?

 6 MR. NEVINS: Sure. You know, we support

 7 using the initial margin as the right factor. I

 8 think that Tom and Bob have spelled out why that

 9 makes sense to continue to use that as the correct

 10 measure as opposed to notional. As far as the

 11 actual percentage amount, as others around this

 12 table have pointed out earlier today as well, you

 13 know, I think it's necessary if swaps are being

 14 included in the mix to take a look at what the

 15 margin requirements are going to be for swaps both

 16 uncleared and cleared going forward and to factor

 17 that into the appropriate level for percentage

 18 test.

 19 While I have the floor, if I can answer

 20 your original question, too, you know, I

 21 wholeheartedly agree with you, Kevin, that, you

 22 know, if you're thinking about scope in general,
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 1 the marketing restriction is probably the biggest

 2 factor that most of us are focused on as making

 3 sure that it's appropriately narrowed and tailored

 4 to pick up just those funds that you think require

 5 regulation with the CFTC as CPOs. What I would

 6 just say is that I think the best way to look at

 7 it is sort of a broader, holistic approach to what

 8 the key ingredient is here. It's not just looking

 9 at the marketing test. It's looking at the

 10 thresholds and the test in general. So, the way I

 11 would start looking at this is thinking about

 12 which funds are the types of funds that require

 13 that additional oversight with the CFTC and then

 14 creating your test to capture those funds as

 15 opposed to coming up with thresholds and saying

 16 okay, well, we think this works, so we think that

 17 a 5 percent initial margin test is going to work

 18 -- or we think that a marketing restriction that

 19 takes the following qualitative factors -- you

 20 know, the following 10 qualitative factors into

 21 account is the best way to do it.

 22 What we propose -- and I outlined this
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 1 briefly in my opening statement -- is requiring

 2 that any registered investment companies that

 3 utilize commodity futures or commodity options to

 4 take active positions as their most substantial

 5 portion of their investment strategy -- the sort

 6 of funds that you look to capture -- and then you

 7 create the test to get to those sorts of funds.

 8 So, where we're talking about the marketing

 9 restriction, I would suggest that that be narrowed

 10 to pick up just those funds that hold themselves

 11 out as managed futures strategies. And we've

 12 heard a lot of people around this table today use

 13 those words, "managed futures strategies."

 14 The way that we would look at managed

 15 futures vehicles is that they are those that use

 16 trading algorithms to spot market trends and take

 17 active positions as I've just defined them by

 18 frequently trading commodity options and commodity

 19 futures to both long and short investments. I

 20 think that's the appropriate scope that should be

 21 looked at when you're talking about the marketing

 22 restriction, and then I think that when you're
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 1 talking about the other more quantitative elements

 2 of the test, again, you don't want to take to

 3 broad of a brush, so you should factor in

 4 percentages that are going to really capture those

 5 funds that are heavy derivative users that you

 6 think require the additional oversight.

 7 Lastly, I think it makes a lot of sense

 8 to spell out certain types of funds that should be

 9 exempt from registration, those that don't create

 10 the level of risk that require that amount of

 11 additional CFTC oversight, and those would

 12 include, for example, commodity funds that are

 13 tied to an index or commodity exposure that's tied

 14 to an index that get that exposure to investors --

 15 that commodity exposure to investors -- as part of

 16 their overall asset allocation mix through the use

 17 of derivatives like futures, options, and swaps.

 18 It would also include fund of funds that are

 19 designed to provide exposure to commodities as

 20 part of their overall investment mix.

 21 MR. WALEK: Okay, if I might here -- and

 22 I'm thinking out loud; this is just literally from
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 1 what I'm hearing and so it's not been cooked in

 2 any fashion -- I'm thinking in terms of analysis

 3 of variance, okay? For those of you who don't

 4 know analysis of variance, you don't need to, all

 5 right? And you start getting a cascading effect.

 6 So, you've got an issue you analyze and you see

 7 how two other issues apply to that, and they may

 8 increase or decrease the correlation to what

 9 you're trying to solve, all right? So, if I'm

 10 cascading down -- because I started thinking along

 11 this line earlier -- is that marketing ties to who

 12 do you have as the CPO who has to take the test,

 13 which is -- we haven't touched on yet, we'll touch

 14 on later on today. The size of the fund, as you

 15 say -- and there could be different types of

 16 entities. Even within RICs you've closed-end

 17 funds, which eventually I'm going to come around

 18 to Steven about. PIMCO has at least two, and

 19 probably the rest of you have close-end funds out

 20 there, too. But as you're walking down this path,

 21 what I'm seeing is not one test fits all, again

 22 from what I'm hearing here. What I think we're
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 1 looking for, and I don't know if this panel can do

 2 it today, but what test fits what RIC -- or, in

 3 the worst case scenario, what test fits best. And

 4 I think you're getting me part way down the path,

 5 but I'm not all the way there.

 6 With that, I'm going to toss it up for

 7 anybody.

 8 MR. NEVINS: Well, I'll start off. I

 9 generally agree with how you just laid it out, and

 10 again I think that the best way to do it is to

 11 have a mix of tests the way that I just outlined

 12 it with appropriate exemptions for those sorts of

 13 funds that we all agree don't raise to the level

 14 of needing additional oversight.

 15 MR. WALEK: Were you going to include --

 16 and I see, Tom -- I'll get you next. Were you

 17 going to include as ones we should capture those

 18 that we're doing an index type of strategy?

 19 MR. NEVINS: No, no, my view would be

 20 that funds that are tied to an index -- they're

 21 getting their exposure in a way that's tied to an

 22 index -- should be exempt, because, again, those
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 1 are not funds that are taking active positions, so

 2 the use of derivative instruments are less risky

 3 in general.

 4 MR. WALEK: What about an intentional

 5 short fund, a contrarian fund who's intentionally

 6 using the commodities markets because they can't

 7 do enough in the securities markets to get the

 8 level of exposure they want, and in fact they're

 9 only at 5 percent but that 5 percent actually,

 10 even that particular market, will exceed the

 11 hundred percent notional test?

 12 MR. NEVINS: I would think that fund

 13 would be exempt.

 14 MR. LLOYD: Sure, and I'm going to put

 15 my MFA hat on, because this is one of the points

 16 where the MFA recommendations differ slightly from

 17 NFA's recommendations.

 18 The NFA's recommendation is, on this

 19 point, to basically not use the bona fide hedging

 20 or 5 percent tax but rely solely on the marketing

 21 restriction. In other words, don't look at, you

 22 know, a specific number because of all these
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 1 different issues. And if a fund -- and, again,

 2 this gets back to, I think, Matt's point on who do

 3 you really want to regulate here? You know, do

 4 you really want to get or do you really want to,

 5 you know, regulate and take jurisdiction over the

 6 specific types of funds that NFA pointed to in

 7 their original proposal, which I call managed

 8 futures mutual funds, all right? And that would

 9 be either -- and I think one of the points is, you

 10 know, well, let's not consider fund of funds.

 11 But if you have a multi-manager -- I

 12 mean, basically the funds that were the very focus

 13 of this were in fact fund of funds, but they were

 14 fund of funds or what we call multi-manager funds

 15 that hold themselves out as getting their

 16 significant returns from managed futures. You

 17 know, so, if your goal is to really focus on those

 18 funds, you know, the 5 percent test is really not

 19 relevant but really, but really the marketing

 20 restriction, and there have been -- you know, in

 21 NFA's proposal and in MFA's proposal there have

 22 been some objective standards that you could
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 1 consider, and Matt's raised a couple. There are

 2 ways to kind of get at that if that's really what

 3 your goal is.

 4 And so, again, it does get back to what

 5 really is your goal, you know? Is your goal to

 6 focus on those funds or is it to, you know, grab a

 7 -- you know, and how do you define it and what

 8 does it do to a short-bias fund or something like

 9 that?

 10 So, anyway, that's NFA's position on it.

 11 MR. WALEK: This actually brings me

 12 around to Nevis' earlier point. Actually she's

 13 got her light on.

 14 I'll let you speak first.

 15 MS. BREGASI: I think I was just going

 16 to say that all this discussion just brings out

 17 the two points about, one, collecting data,

 18 because we need to know what are the funds out

 19 there and what are they using, what are they

 20 doing, and for what so that you understand which

 21 funds you're trying to cover; and then also

 22 re-proposing it so that it's clear, the goal, as
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 1 to which types of funds you are trying to get to.

 2 I think if you have the data, it make it a lot

 3 easier to do what Matt said, which is first just

 4 look to understand which funds you want to cover

 5 and then draft the rules so that you cover those

 6 funds.

 7 And for us with the marketing

 8 restriction, I think one of the issues is that

 9 while we understand that the 5 percent tax has

 10 its own limitations because it's a number, it's an

 11 absolute number, and the marketing restriction is

 12 sort of at the other extreme, which is it's

 13 extremely subjective, and when it comes to

 14 registration you sort of want a bright-line test

 15 or as much of a bright-line as possible. So, we

 16 would definitely vote for a marketing restriction

 17 that's not overly subjective.

 18 MR. WALEK: You just made me flash back

 19 to my earlier pre-law life where I like to

 20 consider myself in a data wonk phase between

 21 subjective and nonobjective probabilities and

 22 their use in what you just said, because
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 1 traditionally what we would say is you collect the

 2 data first before you determine what policy you

 3 want to establish, because if you don't do that,

 4 you don't have the objective nature of the thing

 5 you're analyzing. But in that vein, here's the

 6 chicken-and-egg problem I have because I've got

 7 the lawyer hat back on: How do we implement PF or

 8 PQR or whatever to get the data if I don't have

 9 the registrant?

 10 MS. BREGASI: Can't you require -- can't

 11 you change the exclusions and exemptions so that

 12 certain data have to be given to you in order to

 13 qualify for the exclusion and exemption?

 14 MR. WALEK: The only thing we have --

 15 and I was going to -- is a special call, but, boy,

 16 I mean, last time we did a special call was about

 17 1987, I think. Yeah, so, I mean, we have done it.

 18 But it was with reluctance that the industry was

 19 responding, and I don't know how much -- and we

 20 had to be very careful even with a special call.

 21 I think we may still be subject to the OPM

 22 standard on what becomes a data collection
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 1 instrument and how many entities we can collect

 2 the data from. But I'm not sure.

 3 MS. McMILLAN: But couldn't you do a

 4 rule that would essentially say if you want to

 5 rely on 4.5 as it currently exists we file your

 6 notification but you'd have to provide certain

 7 basic information about who you are, how you

 8 trade, and so on so that you can get that

 9 information? It would be a rule proposal subject

 10 to notice and comment. It would follow all of the

 11 APA conditions but would give you the data that

 12 you want from exactly the entities that you're

 13 looking at, which are the ones that are currently

 14 relying upon the exclusion.

 15 MS. BREGASI: Yeah, that's exactly what

 16 I was going to say.

 17 MR. WALEK: Again, do the special --

 18 MS. BREGASI: I was just going to say

 19 that it's a file 4.5 notice. Condition it on

 20 filing the form PF or even, yeah, the CFTC form as

 21 well. To provide you with that information that

 22 you need to make sure that you're monitoring the
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 1 marketing appropriately.

 2 MR. WALEK: I'd have to look into this a

 3 little bit further, because there are some other

 4 intricacies in terms of the logistics, because

 5 we're looking -- as most of you from the proposed

 6 rulemaking, we're looking to NFA to possibly be

 7 our data collection facility. And I don't believe

 8 we can delegate -- maybe we can -- a special call

 9 to NFA for non-NFA members. But, again, that's

 10 something I have to look into.

 11 MS. CHOTINER: I just wanted to make one

 12 clarification, which -- for Kevin --

 13 MR. WALEK: Thank you.

 14 MS. CHOTINER: -- which is that I'm not

 15 -- I mean, this is of course just discussion at

 16 this point, but it's not necessarily in the form

 17 of form PF or PQR.

 18 MR. WALEK: Right. We need something

 19 else.

 20 MS. CHOTINER: I mean, you know, we're

 21 just talking here, but if, you know, just in terms

 22 of consideration that it would -- I would sort of
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 1 see that it would not necessarily have to be that

 2 detailed.

 3 MR. WALEK: And I'm underscoring -- I'm

 4 not saying yes; I'm not saying no. I'm saying

 5 it's an interesting idea. I'm just seeing given

 6 the current budgetary constraints, unless

 7 something happened last night while I was

 8 sleeping, the lack of being able to exceed the

 9 debt ceiling and various other staffing

 10 constraints, I see this as being a difficult

 11 hurdle for us to do. Even though my training in

 12 the other field would say you get the data first,

 13 I'm not seeing it in this current political and

 14 budgetary environment. But we're hearing you.

 15 Trust me, I'm hearing you.

 16 MS. BREGASI: I was just going to say

 17 also that it also depends on how much data you're

 18 asking for. So, if you keep it to a minimum data

 19 you actually need to understand who you want to

 20 regulate, then it's going to make it a little bit

 21 easier to handle it.

 22 MR. WALEK: Appreciate that. Todd.
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 1 MR. GROOME: Kevin, I know I said our

 2 comments are really focused on 4.13, and they are,

 3 but this conversation is obviously spilling over

 4 into 4.13 and data and what have you. So, I

 5 actually -- you know from many conversations with

 6 us our focus is registration fine but let's figure

 7 out who you're going to register and what you're

 8 going to do with registration, because our concern

 9 is the margin of cost really after registration of

 10 all the reporting, examination, what have you.

 11 And so we're very concerned about the duplication

 12 between the SEC and the CFTC overlap, and then

 13 increasingly for our members around the world the

 14 same thing is happening obviously in the U.K.

 15 Where it's been for years, but it's also happening

 16 in Hong Kong, Singapore, Australia, what have you,

 17 with increased regularity now. So, we're very

 18 concerned about the duplication.

 19 But the thing you and I have debated in

 20 the past, and it seems like it's right back on the

 21 table for this conversation right now, is what are

 22 you trying to regulate -- not even who but what,
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 1 and I think what's more important than who -- and

 2 our focus has always been, certainly with the SEC

 3 conversation and I believe with you as well, has

 4 been -- really this is leading into Dodd-Frank and

 5 others -- is really focusing on systemic risk

 6 analysis and trying to improve market analysis and

 7 risk analysis more than a lot of other goals. And

 8 if that's the case, I don't think trying to figure

 9 out what data you need is that hard. What you

 10 really need to figure out is the coverage you need

 11 to get a representative sampling from the audience

 12 you're targeting to get that information, which is

 13 a very different exercise.

 14 MR. BONANNO: Yeah, I would just echo

 15 those comments and say that, I mean, I think you

 16 raised a very legitimate point about the potential

 17 burden from a regulatory or from an NFA

 18 perspective, and I think, as many of the

 19 commentors said as we went around the table, the

 20 potential outcome of the rule, at least as

 21 proposed, I think could be a potentially

 22 overwhelming result in terms of the number of
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 1 potential funds or entities that would be covered.

 2 So, from the standpoint of determining how best to

 3 proceed in terms of arriving at exactly what you

 4 want to focus on, some sort of up-front data

 5 collection exercise, again, has to be

 6 appropriately focused on what is most meaningful.

 7 But I think at the end, it might actually result

 8 in the consumption of fewer resources from a

 9 regulatory oversight perspective.

 10 MR. WALEK: With that in mind, I'd like

 11 to ask -- well, actually, I've got William.

 12 MR. THUM: I just wanted to build on

 13 Tom's point about the relative merit of the two

 14 tests. And right now certainly the marketing test

 15 is going to pick up just about every fund. If you

 16 start it from a perspective of narrowing the

 17 marketing test along the lines that Matt has

 18 described in terms of active management as a

 19 primary purpose and use that as a threshold for

 20 getting basic reporting in the door. And then as

 21 the usage of the derivatives cross a certain

 22 threshold, then have that be at the threshold for
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 1 registration. So, you have the reporting to

 2 narrow the range of entities that have to report

 3 based on a very narrow marketing test and then

 4 have registration based on height and usage,

 5 whether it's 5 percent or possibly more may make

 6 sense. But that would build on what Tom was

 7 mentioning, as well as Matt.

 8 MR. GRADY: Bob, I know you had --

 9 MR. AMEDEO: No, thanks.

 10 MR. GRADY: One of your points goes to

 11 something we talked a great deal about in our NFA

 12 discussions, and that is the two tiers of industry

 13 participants, some of whom are really in an active

 14 trading mode and many others who are using the

 15 instruments themselves to gain exposure in, in

 16 some cases, pure hedging techniques, if you will.

 17 But when Matt mentions the index piece, I just

 18 kind of want to weigh in. We had a lengthy

 19 discussion as to whether the index approach can

 20 provide that kind of bright line that you

 21 mentioned where people understand that if I'm in

 22 an index mode I must not be active; if I'm not
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 1 active, I'm not covered. You can now have indices

 2 that are, in effect, active management -- I don't

 3 want to say disguise, that's suggests some ill

 4 intent, but indices that reflect an active trading

 5 style, the CTA index, even a trading index like

 6 the DTI is proffered as an index but it's actually

 7 a trading strategy -- so we worry when we looked

 8 at this, and I put my Steben hat on probably more

 9 so than the NFA hat, although I did weigh in to

 10 the effect in our discussions. The index, out,

 11 can swallow the otherwise application of the, what

 12 do you want to call it, the non-exclusionary

 13 exclusion of the application of 4.5 to register

 14 on. So, if all you have to say is I'm chasing an

 15 index, I'm out, I think you'll be amazed at how

 16 much comes out that actually we think we want to

 17 keep in.

 18 MR. NEVINS: Okay. Well, thank you,

 19 John, and I certainly understand that point. That

 20 said, you know, I think it's worthwhile to still

 21 consider the index idea, and maybe there's a way

 22 to just take a more granular approach to what
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 1 indices are allowed to be exempt because they're

 2 more passive in nature than those that you're

 3 alluding to -- some, you know, for lack of a

 4 better word, bespoken indices that are designed to

 5 essentially give you an active trading strategy.

 6 So, that may not be a question that we can answer

 7 sitting around this table today, but that may be

 8 something that we should think about, maybe some

 9 food for thought, because I do think it's very

 10 valuable to consider funds, especially commodity

 11 funds, that get their exposure in a way that's

 12 tied to an index that are long-only, that are, you

 13 know, long-term liquidity providers for the market

 14 place, and they provide a great service for our

 15 retail investors by giving them a diversified

 16 asset class and commodities to round out their

 17 equity and fixed income investing. So, I do think

 18 that it's very worthwhile to consider those funds

 19 for exemption. Again, how you define which ones

 20 are in and which ones out is something we can

 21 certainly discuss further.

 22 The reason I turned my light on before
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 1 -- I was really following up on a point that Bill

 2 raised, and it's something that a bunch of us have

 3 discussed and commented on as well.

 4 You know, so far we've talked about the

 5 marketing restriction, and we've talked about the

 6 5 percent test, and then I've put out this notion

 7 of okay, well, you should really just pick up

 8 funds that are taking active positions. There's

 9 another element of this as well, and that's the

 10 hedging piece of this. So, you know, for purposes

 11 of the 5 percent test, modified hedging as defined

 12 under the CFTC regs is exempt.

 13 One thing that, you know, we would put

 14 forward for consideration -- I know others have

 15 made this point as well -- is should you take a

 16 broader view of what gets excluded for that 5

 17 percent test? So, we understand that bona fide

 18 hedging is what it is under the CFTC's definition,

 19 but are there other types of use that should not

 20 be considered for testing the quantitative element

 21 of this test? And really what I'm getting at is

 22 what I would consider things that are not active
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 1 positions.

 2 So, using futures, options, swaps to

 3 equitize cash, again trying to get exposure that's

 4 tied to an index, we can define, you know, how

 5 index is appropriately described. And using these

 6 instruments for risk management and risk

 7 mitigation -- the portfolio, duration risk, and

 8 the like you know, there are very legitimate uses

 9 of derivative instruments that don't neatly fall

 10 into the bona fide hedging definition but may be

 11 the sort of derivative usage that you don't need

 12 to pick up here.

 13 MR. AMEDEO: Matt made the point that I

 14 was going to make, and that was that perhaps

 15 looking at this problem from the 5 percent test in

 16 expanding what was included or not included in

 17 that 5 percent might be an approach that would be

 18 a filter that could be used as a starting point.

 19 Our committee looked at this question,

 20 because there's such a broad continuum of users of

 21 futures within the '40 Act world, and there are

 22 folks that express their long equity positions
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 1 using futures, which may or not be who you want to

 2 regulate, and that is one of the issues I think

 3 all of us are up in the air about. I think the

 4 question is who are you trying to catch? What is

 5 it you're trying to regulate? And there's such a

 6 broad continuum of users of futures from people

 7 that express long positions using futures to

 8 people who use actively managed futures approaches

 9 within a '40 Act fund as part of their strategy.

 10 One of the things we talked about at the

 11 committee level was looking at defining that 5

 12 percent test in a different way but also looking

 13 as -- the second part of that, the marketing test

 14 -- rather than trying to develop a single test,

 15 which was going to catch everyone, which we found

 16 virtually impossible to do, using a set of indicia

 17 that one would look at in determining whether a

 18 fund is marketing or is holding itself out as

 19 marketing or should be registered. And to the

 20 extent that we could develop a series of indicia

 21 that the industry could look at that would give us

 22 indicators as to whether a fund was being marketed
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 1 as a fund, coupled with a broader definition of

 2 what the 5 percent test is, I think you could fine

 3 tune the regulation to cover who you want without

 4 including everybody who uses futures in a '40 Act

 5 format.

 6 MR. WALEK: Karrie?

 7 MS. McMILLAN: If I could respond to

 8 that, we looked also at the PV letter and the MFA

 9 letters and some of the others to see if we could

 10 develop that, and I think the conclusion at the

 11 end was that while those factors are helpful in

 12 determining, I think as maybe Nevis had said, it's

 13 very important when you're talking about

 14 registration to make sure you know if you're in

 15 our out of the box. And I'm a '40 Act lawyer, so

 16 I reference everything by my experience. But

 17 there's a similar test under the Investment

 18 Company Act, and it's as difficult at times to

 19 determine whether you've hit that threshold or

 20 not, and a lot of money and lawyer time can be

 21 spent trying to get an opinion to determine if

 22 you're there, and having written those opinions,
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 1 it can be very hard to make that determination.

 2 The stakes are high. So, I guess I would caution

 3 against a lot of criteria unless they're weighted

 4 very carefully so that people can take the

 5 subjective factors and put it into some sort of

 6 objective answer, because it really does expose

 7 the fund or the advisor to substantial liability

 8 if they were to get it wrong, or you're talking

 9 about a lot of CFTC staff time answering, as Doug

 10 knows, requests for no action really for

 11 interpretive guidance about whether something is

 12 or is not in that right box.

 13 MR. AMEDEO: Yeah. Just to be clear,

 14 that test -- the marketing test would be applied

 15 after the application of an expanded 5 percent

 16 test so that the first filter, as I said earlier,

 17 would be whether the fund was intended to be

 18 caught using the 5 percent test, and the 5 percent

 19 might exclude equitizing positions; it might

 20 exclude a whole series of clearly defined

 21 criteria, which would potentially eliminate a

 22 large number of funds who are obviously not using
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 1 futures as a speculative tool, leaving the

 2 remainder to apply the indicia test for marketing

 3 purposes.

 4 MS. McMILLAN: I think that could work

 5 better. I just -- my only caution is just not too

 6 many criteria and not an open-ended type of thing.

 7 We're trying to apply -- just as a more recent

 8 example, the SIFI factors where you have this long

 9 list from Congress and no waiting to it and nobody

 10 knows what they mean, including I think the FSOC

 11 at this point. So, just to try to draw from that

 12 experience, in the SEC criteria, the case law is

 13 that there are five factors; the first two are the

 14 most important. That helps. It's not perfect,

 15 but it helps.

 16 MR. WALEK: Steve.

 17 MR. KING: My concern was such a test,

 18 though, would be some of the factors that you

 19 would consider, like that would capture some of

 20 the other funds that wouldn't be intended to be

 21 captured I think, such as if you look at the

 22 fund's name, that would capture a commodity fund
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 1 that is an index fund. It would also capture a

 2 commodity fund that's an enhanced index fund. If

 3 you looked at the source of the fund's income, the

 4 commodity index fund would have all commodity

 5 income, commodity enhanced index fund would have -

 6 the majority of its income would likely be

 7 commodity income. So, by t hose tests you would

 8 capture the kinds of funds that we've been talking

 9 about that we think should be excluded.

 10 MS. McMILLAN: But, Steve, I think Bob

 11 said that that marketing test would only apply

 12 after you've applied those exclusions. So, if you

 13 are a passive fund, you would never get to the

 14 marketing test if I understood correctly.

 15 MR. KING: That's correct.

 16 MS. McMILLAN: So, you have to already

 17 --

 18 MR. KING: Well, I mean, after the 5

 19 percent, though, right?

 20 MS. McMILLAN: After the 5 percent and

 21 presumably --

 22 MR. KING: But we don't know whether the
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 1 percent will result in --

 2 MS. McMILLAN: The threshold, let's put

 3 it that way, the threshold. And I think that, as

 4 Matt was saying, you know -- and we have a lot of

 5 this in our comment letters -- well, there are a

 6 lot of reasons why funds use these things. I

 7 don't know whether -- and I'm just doing this now

 8 so you guys can jump on me if I'm wrong -- but

 9 whether it helps to thinks of these other uses,

 10 these what we characterize as risk management

 11 tools, these things that are used to further the

 12 securities aspect of what they do, at least in the

 13 non-passive. So, you have a bond fund and you're

 14 using a swap to change your duration. That's not

 15 speculating in the futures market or in the swaps.

 16 That is using it to keep your securities position

 17 as you've disclosed to investors. You have an S&P

 18 500 fund. You get a lot of cash at the end of

 19 day. You want to put it work. So, you do a swap

 20 on an index. That's not a speculative swap; that

 21 is furthering your security purpose. So, whether

 22 that kind of an analysis is helpful in
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 1 distinguishing the types of things that are more

 2 active or more passive uses, for lack of a better

 3 phrase, of those kinds of instruments, whether

 4 that would help.

 5 MR. WALEK: In the consideration of

 6 time, this particular item I think could be a

 7 roundtable by itself from what I'm hearing here,

 8 because you've got my mind going in 16 different

 9 directions. What I would like to ask -- and I'll

 10 make the point now that I was going to make later

 11 in the day, which is that we plan on leaving the

 12 record for this meeting open for three weeks, and

 13 any issues that you would like to expand upon

 14 resulting from this meeting, you are free to

 15 expand upon those and get those to us, and they

 16 will be published.

 17 MS. OLEAR: I would say additionally, to

 18 the extent that anyone would feel compelled to

 19 have further conversations with us in person as

 20 opposed to in writing, you may contact me. I

 21 think everybody has my -- everyone should have my

 22 telephone and e-mail address, and we can work
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 1 toward setting them up. But you do need to

 2 contact me within the next two weeks, because at

 3 some point we are going to have to cut off

 4 meetings, because we do have a rule to write. So,

 5 like I said, in two weeks -- within the next two

 6 weeks, if you want to have a meeting, contact me.

 7 MR. WALEK: The next question I have,

 8 though, is the discussion that Bob just went

 9 through with what was part of the NFA meeting

 10 group -- is that something that is private, or is

 11 that something that the NFA could share with us at

 12 the staff level? And maybe you need to go back

 13 and check.

 14 MR. DRISCOLL: We'd be glad to share any

 15 information we have either in writing or verbally

 16 and to sort of expand on the thought processes

 17 that the committee and staff went through in

 18 formulating our comment letter.

 19 MR. WALEK: Thank you very much. I'm

 20 going to move on now so that we do move a little

 21 bit. We're getting close to that -- yeah, so

 22 maybe we may get to harmonization sometime this
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 1 century. I now have 10:46 on my clock, so I'm

 2 going to be moving us on now to who should

 3 register as a CPO. And I know several of you have

 4 made points about this, but I also want to ask the

 5 question not only who should register as a CPO but

 6 do we need to change the tests. And I don't know

 7 -- whoever wants to start the discussion on that,

 8 because the tests may not be necessarily

 9 indicative of the kinds of things -- like swaps,

 10 so. Recognize another CFTC's tests, but is there

 11 something -- is that a part of the problem?

 12 Because some of you in your comment letters have

 13 said that you've got members that don't want to

 14 have to take the test. Is it the test per se,

 15 taking the test per se, or it is the nature of the

 16 subject matter of the test not being necessarily

 17 indicative of what they're doing?

 18 MR. NEVINS: I'll be brief. I'll start

 19 off with your first question.

 20 So, I think that, from our perspective,

 21 it should certainly be the advisor and not the

 22 fund who's required to register as a CPO. I think
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 1 logically that makes the most sense when we're

 2 thinking about who the commodity pool is.

 3 I'll use the register investment company

 4 context since we've been talking mostly about 4.5

 5 so far. The commodity pool is the fund itself, so

 6 the operator would logically seem to be the

 7 advisor. I think administratively that would be a

 8 lot easier from our side of the table.

 9 I would imagine from the regulator side

 10 of the table and NFA's side of the table that it

 11 would also be easier for them to administer, you

 12 know, filings on an advisor level rather than

 13 thousands -- and I'm probably underestimating that

 14 -- of filing at the fund level. I think it also

 15 works out more logically when you're looking at

 16 the CPO regulations in general -- and I know that

 17 this is one that's had a lot of discussion to date

 18 and that's whether if you have a registered

 19 investment company that falls into the commodity

 20 pool definition under a revised 4.5, the trustee's

 21 or director's for that registered investment

 22 company would also be required to register as
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 1 well, which would be, I think, a result for the

 2 industry.

 3 It would be a bad result, again, from an

 4 administrative perspective and it could be very

 5 difficult to, you know, administratively require

 6 individuals that serve as directors to these funds

 7 to actually submit as a CPO and become subject to

 8 all the CFTC requirements related to that.

 9 MR. WALEK: Is this a problem for all of

 10 the RICs, or is it a problem for just the

 11 CFC-affiliated entities?

 12 MR. NEVINS: No, I think it's RICs in

 13 general, Kevin, and, you know, again, the thinking

 14 here is that if it's such an administrative

 15 hardship -- and I think it would be -- it could

 16 create a disincentive for very good directors to

 17 want to serve on boards of fund companies.

 18 MS. BAUR: I think it's also an issue

 19 for private funds as well, many of which are

 20 organized as corporations which also have boards.

 21 So, I think that you would see the same issue on

 22 the private fund side.
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 1 MR. NEVINS: Yeah, I would just echo

 2 that I think it would be a bad outcome for mutual

 3 fund trustees to have to register as CPOs. For

 4 the reasons Matt mentioned and also just as a

 5 practical matter, they neither are handling the

 6 investment program for the fund directly -- they

 7 perform a governance function only -- nor are

 8 they, in their field, selling or distributing fund

 9 shares. So, it's hard to craft the rationale for

 10 why directors would be caught up in that rubric,

 11 and so to the extent that the fund as opposed to

 12 the advisor would be the required entity to

 13 register as a CPO, it takes you down that path of

 14 having to grapple with that issue.

 15 MR. AMEDEO: I think one very practical

 16 issue is that under the Commodity Exchange Act

 17 CPOs have joint and several liabilities for

 18 violation of the Commodity Exchange Act. I think

 19 under the business judgment rule for directors and

 20 trustees of '40 Act companies, they are protected

 21 by the Business Judgment Rule and their liability

 22 is somewhat limited. So, I think requiring
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 1 directors and trustees to register expands their

 2 legal liability substantially, and I think it

 3 would be a terrible disincentive for someone to

 4 serve as a director.

 5 MR. WALEK: So, what I'm hearing -- you

 6 know, if I'm hearing this correctly -- the group,

 7 not necessarily as a whole but a large part of the

 8 group, think that that might be a reasonable

 9 approach -- is having just the investment advisors

 10 register in this context, which would be also more

 11 parallel with what happens on the SEC side. Is

 12 that what I'm hearing?

 13 Dan. And then -- Dan, then John.

 14 MR. DRISCOLL: So, I think that's right,

 15 and I think that's what everybody is saying.

 16 That's why NFA believes that would be the best

 17 result. I can tell you on the futures side, the

 18 individuals that have to take the exam, if you're

 19 a director of a commodity pool operator and you're

 20 not part of active management not involved in

 21 sales, you don't get registered as an AP, you

 22 don't have to take the test. So, I think that
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 1 would also be consistent with how it works in the

 2 traditional commodity pool context.

 3 I can tell you that we do have -- NFA

 4 does have certain waivers that are available to

 5 particular APs of commodity pool operators where

 6 the fund is primarily in securities and that the

 7 individuals are not involved in the futures part

 8 of the fund. So, there are also waivers available

 9 on the issue of swaps. Right now the series 3

 10 clearly doesn't have anything about swaps, because

 11 none of the rules are in place and we haven't

 12 created a special exam there. So, going forward

 13 there may very well be waivers and new tests

 14 created with regard to swaps. So, I think from

 15 NFA's viewpoint the last thing we would want to do

 16 is require people to take a test that has no real

 17 applicability to it and that there is really no

 18 public policy reason to do it just because they

 19 fit into a box. So, I think from an NFA staff

 20 viewpoint, to the extent that any new firms get

 21 registered we would certainly take into

 22 consideration all of those factors.
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 1 MR. LLOYD: Go ahead.

 2 MR. GRADY: Thanks, Tom. To your point,

 3 Amanda, that at some point you're going to start

 4 writing rules, or at least the language for a

 5 rule, if you're going to go down the path of

 6 having the advisor register as the CPO, I think

 7 it's important to remember the advisor is here by

 8 contract and can be terminated if we keep a '40

 9 Act concept in mind here for a minute by notice

 10 without condition upon a notice period provided in

 11 the contract not to exceed 60 days.

 12 So, as Doug and Karrie and many others

 13 here know, the replacement of an advisor is one of

 14 the important considerations that a board of a

 15 mutual fund has to, from time to time, consider

 16 either because of issues involving the advisor,

 17 whether it's mergers, acquisitions, business

 18 failures, and sometimes just simple failure to

 19 perform as hoped for or failure or refusal to

 20 serve for a reasonable fee.

 21 So, there are a lot of reasons why the

 22 board might be looking for a new advisor. And if
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 1 in doing so it has to make sure it limits itself

 2 to advisors who are also CPOs, it's going to

 3 narrow the field of replacement advisors/CPOs.

 4 And what it's done on the '40 Act side is to spawn

 5 rules, exemptive relief, and no-action letters,

 6 all trying to get at how quickly can a board react

 7 to an emergency when the registered status of its

 8 advisor is not necessarily certain or it limits

 9 the ability of the board to replace an advisor

 10 with another one. So, again, it's probably -- you

 11 can probably out-think yourself in terms of trying

 12 to come up with all the scenarios, but it is an

 13 issue. Certainly when you're replacing advisors,

 14 if they have to have a separate registered status,

 15 that of CPO, it's certainly going to play at some

 16 point in the future.

 17 MR. LLOYD: And just to follow up on

 18 what Dan said, I mean, this obviously, in the

 19 traditional commodity pool structure -- you know,

 20 the fund sponsors is, you know, the general

 21 partner of the fund, the commodity pool operator,

 22 and frequently is the CTA on the fund as well.
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 1 So, having the advisor register would be

 2 consistent with that structure on the typical

 3 commodity pool, although not a hundred percent,

 4 because you can have, you know, fund of funds.

 5 And also, you know, to follow up on

 6 John's point, it would then develop a group of

 7 advisors who are registered and who would register

 8 to be in the business. So, you know, it would be

 9 -- you know, the period of replacement obviously

 10 would be difficult, but you would end up with, you

 11 know, registered advisors who are also CPOs who

 12 are therefore qualified to serve in this capacity,

 13 so.

 14 MS. McMILLAN: If I could just add on to

 15 that, we of course agree that the advisor should

 16 be the one to register. But as we noted in our

 17 comment letter, I think, since he raised the

 18 question of the test, thought should be given to

 19 what exams the advisor CPO should be subject to,

 20 because the advisor's not selling the fund. The

 21 principal underwriter sells the fund; the advisor

 22 provides investment advice. It's a different
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 1 role. And so, just as you are -- if you decide to

 2 go forward with rules, if you do go down that

 3 route to think about that and need to have some

 4 suggestions for that in a comment letter.

 5 MR. NEVINS: If I could just add on to

 6 what Karrie just said and follow up on Dan's point

 7 as well.

 8 You know, I'm not sure from an

 9 examination perspective whether it matters too

 10 much whether it's the advisor or the fund that's

 11 registering. My understanding is under current

 12 Commodity Exchange Act provisions 3.12(h)(1)(ii)

 13 to be specific. There is an exemption for

 14 registered representatives that have passed their

 15 Series 7 or Series 63, so, you know, under the

 16 NFA's rules, from what I understand, for each CPO

 17 there is at least one required associated person,

 18 so I think that -- this is really following up on

 19 what Karrie just said -- it raises the question of

 20 whether it's the fund or an advisor as to who that

 21 associated person should be, and apparently that

 22 would be the party that would be required to take
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 1 the Series 3 examination. But I think in any

 2 case, you know, if you've got people that have a

 3 Series 7 and 63 that are selling your funds, then

 4 those folks would be exempt.

 5 MR. LLOYD: Yes, I was going to say, not

 6 to make things even more complicated, but which

 7 advisor -- many funds are sub-advised, so I would

 8 say in that context the manager, the main advisor

 9 would be the one that you would want to register.

 10 MR. WALEK: Yeah, that was going to be

 11 my next question, so thank you for raising it.

 12 Again, in consideration of time, I'm

 13 going to shift right now to disclosure

 14 requirements.

 15 Now, from the opening statements, one of

 16 the things that I think I've heard is the need to

 17 harmonize -- we're talking about harmonization

 18 here now -- the need to harmonize the disclosure

 19 with respect to fees. And we have on the CFTC

 20 side the NFA's break-even table, which actually

 21 flows from CFTC regulations, and we have a slight

 22 variation on the SEC side.
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 1 If I could get anybody out here to

 2 explain to me what you need to be different or to

 3 be changed on the CFTC side or what you would like

 4 to see changed on the CFTC side to make them more

 5 compatible, or vice versa.

 6 MS. OLEAR: I was going to say you don't

 7 necessarily have to limit it to recommendations to

 8 the CFTC, because to the extent that you believe

 9 that our regime is more workable, we certainly

 10 have a representative fro the SEC who is here to

 11 listen to any suggestions that you might have.

 12 Okay, I'll take the plunge. Again, I'm most

 13 familiar with the SEC's regime, which provides a

 14 standardized fee table, which allows for a lot of

 15 comparability among funds. Just to make -- I

 16 guess my comments are going to be more to make

 17 sure we're all understanding what the SEC does,

 18 because there has been some concern that the use

 19 of a wholly-owned subsidiary doesn't capture the

 20 fees and expenses of the underlying funds.

 21 Most of the members we've talked to

 22 don't even charge fees at the wholly-owned
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 1 subsidiary level, because they're just charging it

 2 to themselves and it flows up. There are some

 3 structures where CTAs and those fees and expenses

 4 may be charged at that level. And, as we said in

 5 our comment letter, we would fully support having

 6 full disclosure of those fees and having that be

 7 brought up through the fee disclosure process.

 8 So, I think that the concerns that were rightfully

 9 expressed by some of the commentors that there may

 10 not be as complete fee transparency as you get

 11 through these different layers could be dealt with

 12 by pulling those into the fee table from the SEC

 13 and providing comparability.

 14 I'm not as familiar with the break-even

 15 statement, but there is a portion that follows the

 16 fee table in the SEC's fee table disclosure, so

 17 it's right up front that people get, which shows

 18 how much you would pay in terms of fees and

 19 expenses for being invested in the fund for

 20 various points in time, making certain assumptions

 21 as to rate of return and the amount of money

 22 invested. So, it's, I think, a thousand dollars.
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 1 Maybe they adjusted it for inflation since I used

 2 to draft those. But basically you multiply your

 3 investment by the number and you get a cost of how

 4 much it's going to cost you to be in that fund.

 5 So, by equivalence you could say that's how much I

 6 need to break even.

 7 So, this is, I think, a good example of

 8 how things are done differently, but they are

 9 designed to get the same information to investors.

 10 And so if the CFTC could get comfortable that that

 11 does provide the comparable information of what

 12 they are seeking to achieve, that might be a way

 13 that would be something where you wouldn't have to

 14 do dramatic changes or harmonization but to say

 15 okay, this is being covered by item 2 of the SEC's

 16 registration document.

 17 MR. WALEK: Tom.

 18 MR. LLOYD: Yeah, I think Karrie is

 19 right in the primary concern of at least --

 20 putting my Campbell & Company hat on here now --

 21 of, you know, the commodity pool operator world

 22 was that the -- and, Amanda, I actually like the
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 1 CFTC's tables better, but that's, you know, my

 2 personal view, but -- and the reason I --

 3 You know, it had -- the break-even table

 4 concept, you know, has all these fees, which in

 5 its traditional commodity pool will capture the 2

 6 percent or the 2 and 20 or whatever it is that's

 7 paid to the underlying manager -- or to the

 8 manager, right? And the concern I think, which I

 9 think Karrie may have touched on the way to

 10 address it, but if you can get those underlying

 11 fees, because you've got your subsidiary and your

 12 subsidiary is investing in commodity pools and

 13 there's a 2 and 20 down there that's nobody sees

 14 -- and I don't think it works to have that

 15 mentioned in a footnote, because you've got a

 16 table, and I've -- you know, I deal with our

 17 marketing guys and they come in and they go wait a

 18 minute, here's our table, here's their table. It

 19 looks like, you know, we have a 2 percent higher

 20 break-even point than they do. And if you can

 21 filter that up through and whether you call it the

 22 CFTC table or you call it the SEC table and you
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 1 can include that such that you can set them side

 2 by side and they make some sense and a person can

 3 say okay, I want to look at these two on how to

 4 know, do they show the same types of fees, you can

 5 really do that. And so I don't necessarily know

 6 that you have to change yours. You know, however

 7 you can do it. If you do it with enhanced

 8 disclosure in the SEC table, then that would be

 9 fine. It's just, you know, from a business

 10 perspective having people able to look at the same

 11 thing is I think what got our attention and I

 12 think got a lot of the CPO world attention on it.

 13 MR. WALEK: In terms of enhanced

 14 disclosure, would that be in the form of a

 15 narrative or tabular in your opinion?

 16 MR. LLOYD: In my opinion, it should be

 17 in a table. It should be -- you should be able to

 18 look at it, because if you look at it -- because a

 19 table has -- like, I think the '40 Act table has,

 20 you know, total fees. There's a number, right?

 21 And if that total fee number doesn't include the 2

 22 and 20, then you're really not getting to where
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 1 you want to be, which because here's -- I mean, I

 2 was also, in a prior life, you know, a lawyer to

 3 the retail sales division of a broker-dealer, and

 4 let me tell you, they're looking at those fee

 5 numbers. I mean, they're looking at those numbers

 6 and they're going okay, this is break-even, here's

 7 the expense load, here's the expense load. So,

 8 that's my view.

 9 MR. WALEK: Bob?

 10 MR. AMEDEO: Yeah, one of the things

 11 that we've talked about was the possibility that

 12 the SEC would allow essentially the bottom line

 13 figure from the CFTC's Part 4 table to be included

 14 as an acquired fee expense or acquired fund

 15 expense so that the possibility of doing a CFTC

 16 calculation -- and it may need to be modified,

 17 because the CFTC calculation, as you know, is a

 18 break-even, not a percentage of assets -- and

 19 there's a difference in terms of how those numbers

 20 are presented -- but perhaps there might be a

 21 solution in using the acquired fund expense line

 22 as a place to put the fees associated with the
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 1 underlying subsidiaries or underlying investment

 2 funds.

 3 MR. GRADY: I agree with both Tom and

 4 Bob in that regard. There is a tradition on the

 5 mutual fund side of including the fees of

 6 underlying funds if the fund is substantially

 7 exposed to underlying funds and even bringing up

 8 performance fees into the fee table if that's a

 9 principle investment of the underlying fund. The

 10 problem is that in many cases people say well,

 11 this is a small investment; it's only 25 percent

 12 or less of the fund's assets and it's in a

 13 controlled foreign corporation. But from a return

 14 standpoint, that investment is driving the bulk of

 15 the returns of, to Tom's words or phrase, the

 16 mutual fund -- the managed futures mutual fund.

 17 So, I think that one of the reasons why I don't

 18 think we've seen the underlying fund fees come up

 19 into the table is they don't appear to be a major

 20 investment of the mutual fund unlike the case

 21 where a mutual fund is a fund of funds. But when

 22 Tom referred to them as fund of funds, I think
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 1 that's an accurate description of what they are in

 2 terms of where they're driving their returns.

 3 Their assets may not be, from a balance sheet

 4 standpoint, entirely devoted to the production of

 5 managed futures returns but from the engine of

 6 what's driving returns it's the investment -- the

 7 underlying funds are with the CTAs themselves --

 8 and bringing that up into the table we think is

 9 important as well as -- and here's something that

 10 I think that is a long-range issue, and that's the

 11 question of brokerage, because the two regimes

 12 come down very differently on whether you count

 13 brokerage as part of the basis of the investment

 14 or whether you show brokerage as an expense of the

 15 fund in the table and the two commissions come out

 16 very differently for accounting reasons on that

 17 question. Obviously, the break-even that the CPOs

 18 deal with includes brokerage as an expense and

 19 then also allows the interest income off of the

 20 fixed income portion to be, in effect, counted as

 21 a contrary item for that and other expenses. So,

 22 there are some meaningful differences. And I
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 1 understand from a world accounting basis that

 2 there are proposals to move, and the mutual fund

 3 industry has weighed in I think in opposition to

 4 them to move all accounting so that brokerage is

 5 part of the expense rather than part of the basis

 6 of the fund's investment. That's obviously a

 7 development secular to this discussion.

 8 MS. McMILLAN: If I could weigh in on

 9 that matter. Sorry.

 10 MR. KING: I was going to weigh in on

 11 that point as well and maybe about the same thing

 12 that Karrie's about to say.

 13 But, I mean, the primary difficulty

 14 there is on fixed income securities where there's

 15 no commission but it's a spread, it's very

 16 difficult to quantify that transaction cost.

 17 MS. McMILLAN: Same idea. The SEC has

 18 studied this before. Other international

 19 organizations have studied this before. And if we

 20 were looking only at a world where you had

 21 brokerage, I don't think it would be a problem,

 22 but when you're comparing that then -- if you want
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 1 to compare mutual funds, then you would have

 2 disparate costs because your fixed income funds

 3 would look different from your equity funds, and

 4 that's why this comes out pretty consistently that

 5 you don't include brokerage. There may be a way

 6 that that could be disclosed as a footnote or

 7 separate line item or something like that, but in

 8 terms of putting it into the fee table, it would

 9 make the mutual funds misleading. That's the

 10 reason. An equity or a bond fund or a balanced

 11 fund versus an equity fund or something like that.

 12 MR. GRADY: Although, interestingly,

 13 global accounting developments might actually

 14 overtake the distinctions that you're making,

 15 which are reasonable and rational, and they

 16 supported the decisions made by the Commission to

 17 date in terms of how the fee table is proposed.

 18 But to some extent, we may all be forced to deal

 19 with the impact of global accounting

 20 pronouncements.

 21 MS. McMILLAN: If we do, it makes this

 22 discussion a lot easier.
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 1 MR. GRADY: Yeah.

 2 MR. LLOYD: And I think this does double

 3 back to, you know, again, who do you pull into

 4 this, right? If you pull into this the funds that

 5 you sort -- the fund groups that you were really

 6 focused on, these are probably less of an issue,

 7 because they're not doing that. You know, their

 8 underlying brokerage is in futures trading.

 9 MR. WALEK: It's that cascade again.

 10 All right, with that, why don't we -- unless

 11 somebody's got something they want to add and

 12 throw in right here, this is a good time to take

 13 our next break, and we'll make this, what, a

 14 10-minute break? I think I've got -- let's see

 15 what time I've got here. I've got 11:08. Let's

 16 make it a nice round -- you can be back here at

 17 11:20.

 18 (Recess)

 19 MR. WALEK: For those of you who don't

 20 know, and during the next break, which I'm

 21 probably going to be trying to take at about

 22 12:30, there is -- and full disclosure, I am not
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 1 an owner, have no interest in the place, but the

 2 Port of Piraeus is right here, it's part of this

 3 building, towards the front, and if you have a

 4 blood sugar issue or something and you need to eat

 5 something, please feel free to do so, because I

 6 may have to do so myself. I can already feel the

 7 tingling sensation, so to speak, and that's not a

 8 positive one.

 9 MS. OLEAR: To the extent that you don't

 10 want to go to Port of Piraeus and you're not

 11 interested in leaving the building, there are, you

 12 know, vending machines down near the restrooms.

 13 If you make a right coming out of the room, for

 14 those of you who haven't been down there already,

 15 there are both liquid refreshments and food

 16 available in vending machines down there.

 17 MR. WALEK: Now that Ananda is back, we

 18 can't let him know that the last panel was

 19 actually productive. With that, I'm going to

 20 start now on the disclosure, delivery and updating

 21 requirements. And now playing back off of the

 22 opening comments again, I want to throw a question
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 1 out there. Again, referencing my earlier

 2 statement, this does not mean I like this

 3 necessarily as the idea, but I want to throw this

 4 out there for some people to discuss, and that is,

 5 what would you think, as a group, if we move

 6 towards, and hopefully you're familiar with the

 7 most recently published ETF requirements with

 8 respect to delivery and the like, what would you

 9 guys think of that scheme as a regime for 4.5 and

 10 4.13 entities if we go through with the

 11 rulemaking? And with that, Eileen, do you have

 12 anything more you want to add to it? Okay. With

 13 that, whoever wants -- okay, Carol.

 14 MS. WOODING: I think everyone probably

 15 would think that's a good idea. I know our

 16 committee thought it was a very good idea. But

 17 there was one caveat, we also thought that the

 18 Commission should consider giving the same relief

 19 to traditional commodity pools also.

 20 MR. LLOYD: Carol, thank you for the

 21 segue. As I said, this is obviously something

 22 that's near and dear to my heart. But, yeah,
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 1 going to that type of a structure for, you know,

 2 public commodity pools and, you know, and

 3 obviously the future mutual funds, you know, it

 4 really -- it's a very workable structure, and it,

 5 you know, recognizes the technology advances, the

 6 use of the internet, the ease of delivery, and the

 7 ease of access, and it would be a very efficient

 8 way to, you know, to keep everything -- to get

 9 investors informed, as well as giving them the

 10 opportunity to review the full disclosure

 11 documents or prospectus or whatever it is.

 12 MR. WALEK: How about our mutual fund

 13 families over here? No comment, okay.

 14 MS. MCMILLAN: They're quiet. This is

 15 Karrie. As we put in our comment letter, we think

 16 that that would be a workable solution. There may

 17 be a few little tweaks which we've identified in

 18 our comment letter that would be necessary, but

 19 the principal and the framework would be very

 20 workable.

 21 MR. NEVINS: Kevin, I'll just chime in

 22 real quick.
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 1 MR. WALEK: Okay. Thank you, Matt.

 2 MR. NEVINS: You're welcome.

 3 MR. WALEK: I was hoping somebody on

 4 this side would.

 5 MR. NEVINS: Yeah -- no, I think that

 6 we'd have to study, you know, a little bit more

 7 closely the commodity ETF relief that's now been

 8 codified. And we may, agreeing with Karrie, have

 9 some comments on the edges, but I would certainly

 10 agree with the notion that having document

 11 delivery being done electronically and

 12 acknowledgement done electronically is something

 13 that should apply across the board for any

 14 commodity pools that are subject to CFTC's

 15 jurisdiction, so we would encourage that approach.

 16 MR. WALEK: Keep in mind that we may

 17 have some scope issues here involved, too, in

 18 terms of the APA, but I appreciate your comments

 19 on that point. I had a feeling you guys would

 20 answer that way with respect to that one, so

 21 that's one of our easiest areas. Past performance

 22 reporting, that one, and in some of the comment
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 1 letters and in some of the subsequent meetings

 2 we've had seems to be a touching issue. Karrie, I

 3 had a feeling you'd be one of the first ones up.

 4 Go ahead.

 5 MS. MCMILLAN: This is one where -- I

 6 mean, I can see either way. It's actually not an

 7 SEC issue as much of a FINRA issue. FINRA is the

 8 analog to the NFA, and they have taken a position

 9 that you can't put the past performance in a

 10 mutual fund perspective. They govern mutual fund

 11 advertising. So we would need to work with

 12 somebody who's not currently at the table.

 13 I was at the SEC when those no action

 14 letters were done. I could go either way. I see

 15 the rationale as to whether or not it should be in

 16 there. I'll let my members, you know, talk about

 17 whether they feel differently, but this is

 18 definitely one where there is a direct conflict,

 19 would absolutely have to be resolved before this

 20 proposal were to go forward, and I think it's one

 21 where people should have the ability to do notice

 22 and comment and be able to comment on that, as
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 1 well.

 2 MS. BAUR: Yeah, I would certainly

 3 agree. I mean we certainly see this on the mutual

 4 fund side, as Karrie noted, but we also see it on

 5 the private fund side, as well, because FINRA does

 6 regulate the marketing materials that are provided

 7 by private funds. And certainly from the Franklin

 8 Templeton standpoint, I think that our view is

 9 that we should be able to provide that information

 10 if we think it's fully and appropriately

 11 disclosed. But the wrinkle for us has

 12 historically been that FINRA has taken a very

 13 strong position that the information should not be

 14 disclosed. So it is a definitely conflict on both

 15 the mutual fund side, as well as the private fund

 16 side.

 17 MR. AMEDEO: I just want to make a

 18 clarifying point. I don't think FINRA has any

 19 jurisdiction of what goes into the prospectus, it

 20 is only the marketing materials that are affected.

 21 So to the extent that the past performance issue

 22 is a prospectus issue, I think this is an issue
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 1 that needs to be resolved between the two

 2 commissions. I agree that FINRA does have

 3 jurisdiction over marketing material and tends --

 4 and enforces it aggressively, but I don't think

 5 this is an issue -- I don't think FINRA is a

 6 player in this discussion for purposes of what

 7 goes into the prospectus.

 8 MS. MCMILLAN: Thanks for that

 9 clarification, Bob. One other thing just to be

 10 reminded, I don't know where the SEC would come

 11 out on this, but to the extent that a fund is

 12 putting performance of a private SEC fund that's

 13 excluded under SEC rules into public documents,

 14 there may be some concern that you are then doing

 15 an indirect public offering of that say hedge fund

 16 or private fund. And so before a U.S. mutual fund

 17 would be comfortable about putting that

 18 information in, that would be something that would

 19 have to be addressed and provided comfort on, as

 20 well.

 21 MR. LLOYD: Speaking as -- we actually

 22 -- public commodity pools, you know, do have
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 1 marketing materials that are reviewed by FINRA, so

 2 the past performance is not included in the

 3 marketing materials because we know FINRA takes

 4 that, but it is included in the prospectus. And

 5 the private offering -- the Reg D issue is dealt

 6 with by describing performance on a portfolio

 7 basis. In other words, instead of saying the X

 8 fund, instead of saying the Campbell Fund Trust,

 9 which is a private offering, we have the portfolio

 10 that that invests in, which is the Campbell

 11 Managed Futures portfolio. So the past

 12 performance that's given in the -- I don't know if

 13 it's even -- it may be given in part two, but it's

 14 in there that satisfies the CFTC requirements,

 15 it's not included in the marketing materials, and

 16 it's not on a portfolio basis, not on a private

 17 fund basis to alleviate the Reg D issues.

 18 MR. WALEK: With respect -- oh, sorry,

 19 Peter.

 20 MR. BONANNO: I was just going to make

 21 one point, that, you know, for all of us with

 22 mutual fund complexes sitting at the table, we
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 1 offer a wide range of funds, some of which would

 2 be in scope for potential 4.5 reform and some of

 3 which would have nothing to do with this. So my

 4 point is that I think to avoid investor confusion

 5 across the mutual fund landscape, across all types

 6 of products, that whatever the outcome here is,

 7 and I agree with Karrie, I could see both sides of

 8 this, but I think the solution needs to be kind of

 9 a holistic one that would cover the mutual fund

 10 industry taken as a whole, not to have two

 11 standards. So you would have a past performance

 12 obligation that may be required for prospectus

 13 only with respect to funds that would be brought

 14 and scope here, and then for funds that are not in

 15 scope, have a different standard. I think that

 16 goes down the path of creating sort of I think a

 17 confusing landscape for investors to understand.

 18 MR. WALEK: With respect to other

 19 issues, other disclosure issues -- I can see the

 20 red light again unless, Doug, did you want to --

 21 with respect to other disclosure issues, I think

 22 we've hit the biggest ones, but what other areas
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 1 do you see there need to be harmonization, and is

 2 the harmonization with respect to substance or

 3 location? And when I say location, location in

 4 whether it's, you know, front part, back part,

 5 whether it's in, you know, different filings, that

 6 kind of thing. So if you could be clear, if you

 7 have a substantive issue, also is there a location

 8 issue? Matt.

 9 MR. NEVINS: Okay. So just one thing

 10 I'd point out, and maybe it's a question for Doug

 11 or an issue for Doug. The summary prospectus

 12 rules mandate that you're only allowed to include

 13 what's required by the form. So to the extent

 14 that any of our funds would be subject to the part

 15 four requirements and wanted to continue using a

 16 summary prospectus, which is an initiative that

 17 mutual fund companies have put a lot of time and

 18 energy and cost into rolling out over the last few

 19 years, we would just ask that that be squared, the

 20 requirements of any additional disclosures be

 21 squared with whatever the summary prospectus

 22 requirements are.
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 1 MR. LLOYD: So is the fee table and the

 2 summary prospectus --

 3 MS. MCMILLAN: Yes.

 4 MR. LLOYD: Okay. So whatever changes

 5 you would make to the fees that we discussed

 6 before would roll up to that and be in the summary

 7 prospectus? Okay, thank you. Because I know the

 8 break even table has to be in the first part of

 9 the document.

 10 MS. MCMILLAN: It's going to find its

 11 way onto the first page of the summary prospectus.

 12 Echoing what Matt says, that's very important. We

 13 spent a lot of time getting that summary

 14 prospectus and investors like it. Going to

 15 another disclosure area, just to point out, some

 16 of this is timing, so the annual reports, monthly

 17 statements, things like that are different.

 18 That's not as much of a location as a timing.

 19 Also, audited financial statements, the nine

 20 months versus the 12 months, could cause -- if we

 21 had to do that on a nine month basis for mutual

 22 funds, particularly as Peter said, there's a lot
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 1 of different funds in the complex, you want to

 2 have your auditors in and doing everything and not

 3 have to come in constantly to work on this, and so

 4 that could cause a lot of cost and problems. So

 5 we would recommend moving to the 12 month standard

 6 really for both regimes. And I think that the CPO

 7 folks don't object to that, but I won't speak for

 8 them.

 9 MR. LLOYD: No, I mean we strongly

 10 support that, at least I do for our recommendation

 11 at MFA and personally.

 12 MR. GRADY: And I agree from Steben's

 13 standpoint, moving to that 12 month standard makes

 14 a lot of sense. I guess it probably makes sense

 15 to just interject that we'd hate to see the

 16 bifurcation of disclosure documents. So you get

 17 your mutual fund prospectus, then you get your

 18 sort of CPO disclosure document that comes with

 19 it.

 20 It's been proposed that you would create

 21 sort of a supplement to the prospectus, delivered

 22 with it as a second document in the package or a
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 1 second document to look at online. I don't think

 2 that's what we're in support of, because we think

 3 that if you're really going to harmonize, you

 4 should be able to do it in one document as opposed

 5 to have investors say what's this other thing, I

 6 don't know, that looks like it doesn't even belong

 7 with the first part, these different terms, and it

 8 seems to have a different purpose, so I'm just

 9 going to ignore it.

 10 MR. LLOYD: And just to follow up on the

 11 9 month/12 month distinction, I mean we literally

 12 just went through this, where, you know, your

 13 annual, you know, you do your audits at year end,

 14 12/31, and your nine months has expired, and so

 15 you don't really have your audits done yet, and I

 16 know there are ways that we deal with it, and it

 17 is dealt with.

 18 But if you had a 12 month time period

 19 you would say, okay, we're going to do the audits

 20 this time, we're going to file X, we're going to

 21 do it the same time every year, and it would be

 22 very consistent and it would make the operational,
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 1 again, you know, expenses to the -- we actually

 2 ended up having to do two filings because we did

 3 one without the new audited financials and then

 4 one with the new audited financials, so, again,

 5 just to pile on that we support that.

 6 MR. AMEDEO: Also, consideration in

 7 connection with the filing is that, under the

 8 current NFA rules, the document has got to be

 9 filed subject to the 21 day review period. As a

 10 practical matter, that makes it virtually

 11 impossible to do that in the 40 Act world, to be

 12 able to shut the offering down while the documents

 13 are being revised, so I would suggest that that

 14 would be something else that you'd want to look at

 15 carefully.

 16 MR. WALEK: What is the parallel for you

 17 on the SEC side as to the 21 day rule? Because

 18 there's an amendment cycle over there, as well.

 19 MR. GRADY: Right, there's a 60, or a 75

 20 day amendment process, there's an instant

 21 effective amendment process, it depends on sort of

 22 whether you qualify for immediate effectiveness,
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 1 which actually can go out as far as 20 days. So

 2 you can project even your instantly effective --

 3 effectively non- reviewed update in an amendment

 4 form and project it forward to a specific date if

 5 you want to kind of get in and get settled.

 6 MS. MCMILLAN: I'd just like to respond

 7 to what John said about trying harmonize documents

 8 versus having multiple documents. I think in a

 9 perfect world, harmonized is best, but we did a

 10 lot of studies just at the SEC in doing the

 11 summary prospectus, the idea that a layered

 12 approach in using the value of technology is very

 13 beneficial, and I think there have also been some

 14 papers done about electronic technology is the way

 15 of providing investors with information, good

 16 information, and so I don't think that -- I

 17 wouldn't be so locked into trying to get

 18 everything into one document, that doesn't make

 19 sense. As long as it's very clear to investors

 20 where they can get more information and that it's

 21 important that they should read that information,

 22 and the way that it works through the summary
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 1 prospectus is that there's hyper links and there's

 2 ways to get to the documents, the supplemental

 3 documents very clearly, and there's rules about

 4 how long those documents have to remain on the

 5 Fund's web site and so on.

 6 And so I think that kind of a model has

 7 worked very well. And, you know, as you talk with

 8 the SEC, I would encourage you to think about

 9 something like that.

 10 MR. WALEK: Well, that was going to be

 11 -- I was going to ask a question about it, if we

 12 were to even consider going to the ETF style

 13 model, which would be online, it's sort of a

 14 seamless web -- with hyper links, it's sort of

 15 seamless web whether it's one document or two

 16 documents or three documents because a hyper link

 17 in effect makes that file folder potentially a

 18 single document.

 19 MS. MCMILLAN: Right, and it also has

 20 the benefit that there can be other materials that

 21 may not be part of the required materials, but the

 22 investor is there and they can get it, they can
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 1 read more, they can learn more, and so we think it

 2 provides a more holistic investor education

 3 experience for them to go that route than just

 4 simply be given a piece of paper, particularly if

 5 it's a big, fat piece of paper that they're

 6 probably going to be intimidated and not read.

 7 So not investors in our studies really

 8 want all of that, but some do, and this way it

 9 provides a very easy way for them to get all of it

 10 in one place.

 11 MR. WALEK: Any other comments with

 12 respect to -- Steve.

 13 MR. KING: I guess -- actually it's a

 14 question for Doug, I guess. If there were two

 15 documents, then what would be the treatment of the

 16 CFTC document under the securities laws? Would

 17 you review it, would it be part of your N1A? I

 18 don't know how that would work.

 19 MS. OLEAR: I don't think Doug is in a

 20 position to comment on that, because I think,

 21 speaking for Doug.

 22 MR. SCHEIDT: My whole goal here was to
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 1 not say a word. You know, I would suspect that

 2 any SEC discloser reviewer would care about how

 3 the fund was being presented, whether it was from

 4 a commodities future side or from an SEC side, so

 5 I think that the reviewer would probably want to

 6 see how it was presented, and, you know, that

 7 would raise presentation issues.

 8 MR. WALEK: Okay. We've touched

 9 tangentially on -- I've got to learn how to answer

 10 like you do. But nonetheless, moving on a little

 11 bit, we touched a little bit on the annual report

 12 filing, but there's also -- on our side, there

 13 would probably be a quarterly reporting

 14 requirement.

 15 MS. CHOTINER: Monthly.

 16 MR. WALEK: Monthly, I'm sorry, monthly.

 17 I'm thinking of 4.7, but here would be monthly,

 18 right. That's why they're here. But in terms of

 19 the reporting requirements on the mutual fund

 20 side, the registered investment company side, is

 21 that a significant problem to do monthlies, number

 22 one, and number two, what kind of time frame would
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 1 you prefer if not monthly, and then, three, what

 2 kind of turnaround time, number of days after the

 3 end of the reporting period? And whoever wants to

 4 take that can take it. Somebody must want it.

 5 Matt.

 6 MR. NEVINS: Yeah, I think it would be

 7 an additional burden for our funds. We do do

 8 quarterly reporting today, and semi-annual

 9 reporting to shareholders, we think that that's

 10 sufficient, and we'd like to continue operating

 11 under the SEC requirements as far as frequency of

 12 reporting goes. Again, I think that the burdens

 13 on us would really involve the additional cost of

 14 putting that information together, getting those

 15 filings in, et cetera, et cetera, and it's quite

 16 an operation for any mutual fund company.

 17 MR. DRISCOLL: As a long time futures

 18 regulator, I think one of the reasons why there's

 19 always been monthly reporting is because you don't

 20 have daily liquidity, you don't know what your net

 21 asset value is each day, so at least from my

 22 personal perspective, where you can know each day
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 1 what your net asset value is, it diminishes, in my

 2 mind, the requirement to have monthly versus

 3 quarterly reporting.

 4 MR. WALEK: The way they're structured

 5 would be an argument in favor of less regularized

 6 reporting.

 7 MR. DRISCOLL: In my view, yes.

 8 MS. OLEAR: I'll pile on that I think

 9 that the information that the shareholders would

 10 want and need are available as the regime

 11 currently exists. To the extent, again, that

 12 anything could be deemed to be missing, in terms

 13 of, you know, broad information, posting on a web

 14 site, would be far better than trying to have that

 15 being mailed out, particularly in a retail regime

 16 where you have lots and lots and lots of investors

 17 often going through intermediaries, that

 18 information goes to the brokers, and it gets set

 19 out, and it is done at considerable expense, it's

 20 more than just the mailing costs and the printing

 21 costs that are involved.

 22 MS. MCMILLAN: And I would just add that
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 1 those expenses are going to be born by the

 2 shareholders, so I mean I think that's something

 3 that we shouldn't lose track of.

 4 MR. WALEK: That was going to be one of

 5 my broader questions for later, but I want to hit

 6 it now since it just came up again. I keep

 7 hearing that the costs are all going to be born by

 8 the participants, and I wonder, you know, given

 9 the structure of the pool, the operation of the

 10 entity, the operation of the CIV, how likely is

 11 that all to be born by the participant?

 12 MS. MCMILLAN: At this point, the way

 13 that most of the fund disclosures work is that

 14 shareholder communications reporting disclosure of

 15 those types of things are fund level expenses, not

 16 advisor expenses. The advisor always has the

 17 ability to waive its expenses, so it could do

 18 that, but if it follow the traditional advisory

 19 agreement of how this all gets whacked up, this

 20 would be considered in most circumstances to be a

 21 shareholder expense.

 22 MR. WALEK: So, in fact, I wanted to go
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 1 down that path, and I'm glad you went down there

 2 for me, is that if I look at the mutual funds out

 3 there now, I can see anything from a.8 all the way

 4 up to one and a half, a two, whatever, and that's

 5 -- basically I'm looking at the size of the fund,

 6 it looks like that's whether or not they decide to

 7 charge the participant, and it's not an automatic

 8 pass to the participant, because they can choose

 9 to waive.

 10 MS. MCMILLAN: They can choose to waive.

 11 Most funds waive and jump in, because I'm speaking

 12 really broadly, but when you're starting up a

 13 fund, you tend to waive your fees and expenses,

 14 because spreading those expenses over a small

 15 group of investors is a lot of expense on a few

 16 people. Once your fund gets pretty big, there are

 17 certain economies of skills which has that all go

 18 down. Some of it may have to do with your

 19 distribution network. As I said, if you pay

 20 broker dealers to distribute this, there's certain

 21 fees that are embedded in doing that that are not

 22 necessarily set by the broker dealers.
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 1 So there are, you know, there are

 2 different times when people may waive for fees,

 3 but my expectation is, an ongoing expense like

 4 this, the mailing expenses and things like that,

 5 would be something that is for the - the CFTC

 6 thinks it's for the benefit of the shareholders,

 7 and so it would be charged to the shareholders.

 8 MR. WALEK: Now let me take the next

 9 twist and I'll come to you after that, Bob. My

 10 next twist is, if we go the ETF route and it's

 11 online, what's the cost, and isn't it

 12 substantially decreased?

 13 MS. MCMILLAN: The cost definitely goes

 14 down because you don't have the mailing and

 15 distribution costs, but you do still have the fact

 16 that it's a regulatory requirement, and people

 17 don't take that lightly, and so these guys can

 18 really tell you, you want to try to do a

 19 regulatory filing that has all of the liability

 20 and the headline risk and the enforcement risk and

 21 everything else that goes along with the

 22 regulatory filing. That document is going to be
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 1 prepared and reviewed by reams of people, internal

 2 and outside, and so there is still a cost to doing

 3 that.

 4 MS. CHOTINER: Just to make one

 5 clarification, which is that the monthly reporting

 6 requirement, or quarterly if you're, you know, in

 7 that category, is to participants and is not a

 8 regulatory filing. So I mean it is, you know --

 9 MS. BAUR: I think we'd still take the

 10 position, though, that it's a regulatory

 11 obligation, even though it's not a filing

 12 requirement, and would be born by the

 13 shareholders. Of course, as Karrie noted, I mean

 14 there are fee waivers that can take place, as well

 15 as expense caps, so, you know, it is possible and

 16 likely that in some situations, advisors will

 17 ultimately bear that cost, but it starts out as a

 18 shareholder expense.

 19 MR. WALEK: And, Bob, I missed you

 20 again.

 21 MR. AMEDEO: You raised the question I

 22 was going to point to, which was the possibility
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 1 that the statement could be posted on the

 2 internet.

 3 MR. WALEK: Thank you. I appreciate the

 4 comment, though, on the side, because the costing

 5 troubles me and we want to make sure that we're as

 6 complete as possible on the cost benefit side of

 7 things. But it's been very hard, as Nevis also

 8 pointed out, if we had data, but it's been very

 9 hard to get at the cost benefit issues, and we're

 10 trying to delve into that area as best we can.

 11 Next I want to move into controlled

 12 foreign corporations and the CFC issue. Now,

 13 we've talked about that somewhat earlier in the

 14 context of wholly owned subsidiaries, we've talked

 15 about it in the context of it would be okay -- it

 16 may be okay for some if we were to bring those or

 17 pass up the line and the disclosure of the fees,

 18 because those usually happen in these wholly owned

 19 subsidiaries or CFC's, but what other concerns or

 20 considerations might there be for the way we have

 21 proposed 4.5 to the CFC community? Are those the

 22 only issues? Are there other issues that you see?
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 1 If we were to handle those two issues, you don't

 2 care? Anybody want to jump in on that? Bob.

 3 MR. AMEDEO: This is a 4.13 issue, but

 4 many of the subsidiaries rely on 4.13 as an

 5 exemption from, I'm sorry, from CPO registration.

 6 And to the extent that 4.13 is amended, that may

 7 very well remove the ability for those firms or

 8 those companies to rely on that exemption.

 9 MR. NEVINS: I'll just add onto --

 10 sorry. I'll just add onto Bob's comment here. It

 11 is a 4.13, generally speaking. Most of us that

 12 have the CFTC structures file a 4.13(a)(4), so

 13 it's more of a 4.13 issue. Getting back to some

 14 of the comments I made at the outset here, to the

 15 extent that there are carve outs that are

 16 established for a changed 4.5, we would suggest

 17 that those same carve outs apply equally to 4.13.

 18 So if you had a commodity fund, for

 19 example, that used a wholly owned subsidiary to

 20 invest in commodities through swaps, futures

 21 options, and that commodity exposure was tied to

 22 an index, then we would ask that that fund and the
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 1 subsidiary, the CFC, be exempt from CPO

 2 registration.

 3 MR. WALEK: Okay. I have a little

 4 trouble crafting this question. But I understand

 5 the 4.13(a)(4) issue and the fact that some of

 6 these CFC's are using 4.13(a)(4), but interesting

 7 enough to us, the issue of CFC's came up first

 8 with respect to 4.5. And so I have to admit, I'm

 9 starting down my head, the waters are muddied

 10 rather than clarified as to what the lines of

 11 issues are between 4.5, getting rid of it or

 12 changing -- I'm not getting rid of it, but

 13 changing it to the way we want to change it,

 14 4.13(a)(4), getting rid of it, and the CFC issue.

 15 And so there's not a question there, I realize,

 16 but could someone out there please help me get

 17 these compartmentalized a little bit better? Tom.

 18 MR. LLOYD: Well, I think if you look

 19 back on when the issue first arose, I think as we

 20 talked about earlier, the issue was full

 21 disclosure of fees as they filter down through the

 22 CFC, right, and if we address that the way we've
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 1 talked about addressing that, then I think from

 2 the commodity pool operator's perspective, then

 3 you've got some pretty good equal disclosure. And

 4 I don't think anybody has an issue with the CFC as

 5 far as it just exists, and it being there for tax

 6 purposes, which everybody understands. So that's,

 7 you know, so that was the issue I think that drove

 8 the concern about the CFC in the beginning.

 9 MS. MCMILLAN: Yeah, I think the initial

 10 proposal seemed to imply that we would not be able

 11 to use CFC's at all, so that was a major concern

 12 for registered investment companies that need the

 13 structure for tax purposes, and this, we've said,

 14 has been blessed by 50 or so IRS rulings. I think

 15 that part of the concern hopefully has been

 16 addressed, but there was misinformation about how

 17 and why they were used. There were certainly

 18 statements made in the Wall Street Journal that

 19 they were used to avoid regulation and to evade

 20 regulation. We went a little crazy on that

 21 because they're definitely not. The 40 Act has a

 22 provision that says you can't do indirectly what
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 1 you can't do directly, so you can't use your CFC

 2 to avoid other -- the 40 Act requirements. The

 3 IRS rules specifically say, or the private letter

 4 rulings specifically say you have to comply with

 5 the leverage requirements.

 6 And so I think that to the extent that

 7 there are concerns about the CFC's and whether the

 8 regulators can get a full handle on those, they

 9 can be addressed by the flow up of fee

 10 information, which is already being done. If it's

 11 a wholly owned subsidiary, it's already coming up,

 12 so let's be clear about that. That was a little

 13 bit confusing on the last panel.

 14 But also, to the extent that the

 15 regulators want to understand what the CFC's are

 16 doing and have that transparency to make the books

 17 and records of those entities available to the

 18 CFTC or to the NFA so that they can look at those,

 19 and I know you had that in your comment letter and

 20 we're fully supported of that, as well.

 21 MR. GRADY: Yeah, some of the points

 22 that Karrie is referring to are actually comments
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 1 that were made in a Wall Street Journal story that

 2 quoted our chairman, so I assume we want to answer

 3 any questions that would be suggestive that we

 4 misrepresented the situation or unfairly

 5 characterized the CFC. I think --

 6 MS. MCMILLAN: Reporters don't always

 7 get it right.

 8 MR. GRADY: That's right. And she did a

 9 great job of shuttling back and forth between you

 10 and us to try and understand if we were saying the

 11 same thing or saying different things the same

 12 way. I think that when we look at the CFC, we do

 13 see a bit of almost a fun house mirror effect,

 14 because although certain CFC's used to

 15 transmographie, if you will, commodity income into

 16 good income for subchapter M purposes as a

 17 legitimate use of an offshore vehicle, it's also

 18 fair to point out that this offshore vehicle

 19 becomes, for many of the funds, the principal

 20 driver of returns.

 21 It's not just a 25 percent investment

 22 from the standpoint of the total portfolio, it is
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 1 the driver of the managed futures returns, the

 2 driver. So if anybody here could explain to me

 3 from the disclosure documents that the funds are

 4 using how they're investing in the CFC and what

 5 they're actually doing in the CFC, it would

 6 surprise me, because I can't find it. I'm a 40

 7 Act lawyer from way back and I can't figure out

 8 from disclosure documents exactly what level of

 9 gearing is being used, what kind of investments

 10 are being made, what kind of underlying funds are

 11 being chosen, what the fees of the underlying

 12 funds are.

 13 We all talk about the fact of leverages

 14 being permitted there, I totally agree with that

 15 point. We're not talking about leverage, we're

 16 talking about trading levels, we're talking about

 17 gearing, we're talking about risk, we're talking

 18 about underlying funds with significant fees that

 19 may be embedded inside the fund, and therefore,

 20 they don't look like performance fees paid by the

 21 mutual fund, but downstream, they are performance

 22 fees nonetheless being paid to CTA firms that are
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 1 charging them in compliance, possibly with the

 2 Investment Advisors Act, but who can tell.

 3 So we weren't attacking performance fees

 4 paid by mutual funds, which are fulcrum fees. So

 5 in that article, we were very clear to say we're

 6 talking about advisor act issues, not 40 Act

 7 issues, which are the fulcrum fees, which are a

 8 legitimate form of mutual fund fee that is

 9 different than the two and 20 that the CTA is

 10 charging. So what we're suggesting is that, more

 11 than just fee disclosure, but actual operating

 12 assessment. What is going on down there, pulling

 13 that out from a -- this is a 25 percent

 14 investment, so it's sort of a part of our

 15 portfolio to -- this is the engine for our returns

 16 for these managed futures mutual funds.

 17 Let's look at what's going on in there,

 18 let's look at what the fees are, let's also look

 19 at what the strategies are, the gearing is, the

 20 leverage, that's where I'm saying I think the part

 21 four regulations and the experience of the CFTC

 22 staff and the NFA staffers, in looking at these
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 1 structures and pulling the details out into the

 2 documents is what investor protection will be

 3 served by. So sorry for the soap box.

 4 MR. NEVINS: I'm glad I get to follow

 5 that one up, thanks, John. So let me just ask you

 6 a question actually because I want to make sure

 7 we're on the same page. When you're referring to

 8 these funds that use CFC's, and you're talking

 9 about managed futures strategies, are you talking

 10 specifically about managed futures the way that I

 11 was alluding to them earlier, or are you talking

 12 about, you know, commodity funds, commodity mutual

 13 funds that are using CFC's to get their commodity

 14 exposure?

 15 MR. GRADY: We are talking - I am

 16 talking about the sort of actively exposed,

 17 actively managed futures mutual funds.

 18 MR. NEVINS: Okay, thank you, because

 19 that's what I interpreted, as well, but I just

 20 wanted to make sure we're all on the same page, so

 21 thank you for that clarification. So the point

 22 that I was going to make was, and this is really
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 1 responsive to Kevin's question, how do you guys -

 2 how should you look at these things? So from my

 3 perspective, I look at the CFC wholly together

 4 with the parent mutual fund. It is part of the

 5 same overall structure.

 6 So technically speaking, the way that we

 7 do it at Fidelity today for our commodity funds,

 8 and I think others follow the same path, we file a

 9 4.5 exclusion for the parent fund, and a

 10 4.13(a)(4) for the subsidiary. One way of

 11 potentially looking at this in the future is, to

 12 the extent that there's a changed 4.5, and you are

 13 going to look at that structure together

 14 holistically, which is the way that, again, we

 15 look at it at Fidelity, it's the way that I think

 16 that the SEC looks at it, I don't want to speak

 17 for Doug, but I think that that's fair to say, I

 18 think it's certainly the way that the IRS looks at

 19 it, as well. Under the private letter ruling that

 20 many of us have, you are required to follow

 21 certain SEC guidelines at the CFC level, as well,

 22 namely, and most importantly, the restrictions on
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 1 leverage that are contained in 18F for the 40 Act

 2 applied at the CFC level, in addition to at the

 3 parent level.

 4 And I would propose that you look at -

 5 you codify into 4.5, that you look at the

 6 subsidiary together with the parent fund for

 7 whatever exemption or exclusion remains under a

 8 changed 4.5.

 9 I will just add onto what Karrie was

 10 saying, and I know that this is consistent with

 11 what Bob and John were getting at, as well, that,

 12 you know, we're certainly open to the idea, and

 13 this came out of the NFA comment letter, of making

 14 sure and codifying that the fee disclosure for

 15 fees charged at the CFC level are transparent to

 16 investors in the parent fund, and also to provide

 17 any access to books and records. So we don't

 18 think that those are unreasonable requests that

 19 the NFA has made.

 20 So, again, the way that I would look at

 21 it is, to the extent that you're making changes to

 22 4.5, 4.13, look at it holistically; to the extent
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 1 that you've got a commodity fund that's getting

 2 exposure to commodities in a way that's tied to an

 3 index through these CFC's, then exempt them, and

 4 if, using John's example, you have what's really a

 5 managed futures fund that's using a CFC, that may

 6 be a different story.

 7 MR. AMEDEO: Kevin, I think this

 8 question goes to the heart of this whole

 9 discussion, because, in my mind, once you decide

 10 who you want to regulate, what are the entities

 11 that need additional regulation and will be

 12 excluded from the 4.5 exclusion, then the question

 13 just becomes one of what kind of disclosure do you

 14 want and what kind of reporting do you want.

 15 But the first thing that has to be done

 16 is, you have to parse out the people that don't

 17 fall within the group of people you want to

 18 regulate. Once you do that, whether they - you

 19 take a 40 Act that has a CFC that trades futures

 20 directly from the CFC, and there are those - there

 21 is that structure, there are structures where you

 22 have the fund, the CFC, and the CFC essentially
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 1 investing in a series of funds that provide

 2 commodity exposure, all this becomes is a question

 3 of disclosure about what the underlying operations

 4 and fees are.

 5 But before you can get there, you have

 6 to decide, are you trying to regulate the long

 7 only funds that use futures, are you trying to

 8 regulate the target date funds that use futures,

 9 the funds of funds that use futures, and I think

 10 once you decide that, the rest of the regulation

 11 falls in line pretty quickly, because it's just a

 12 matter of disclosing what's going on at the

 13 various underlying levels in the fund's document.

 14 MR. LLOYD: Point well taken. And just

 15 to follow up on that, keep in mind that it's just

 16 not the fees that are being charged to the CFC,

 17 but the fees being charged by the pools into which

 18 the CFC is investing, which I think both of you

 19 guys pointed out.

 20 MR. AMEDEO: To the extent that that is

 21 one structure.

 22 MR. LLOYD: And the gearing and all of
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 1 that stuff.

 2 MR. AMEDEO: That is a structure. There

 3 are also structures where the CFC does all of the

 4 futures trading directly at the CFC level.

 5 MR. LLOYD: That's correct. But you'd

 6 want to consider how to bring in both of those

 7 structures and how to cover both of those

 8 structures.

 9 MR. WALEK: I think we may have to have

 10 some conversations, I don't know how we can do

 11 that, though, with the timeframe. Nonetheless,

 12 okay, I'm ready to move on now, actually to 4.13.

 13 You have more? Okay. Even though it's earlier

 14 than we planned on, let's take a ten minute break

 15 and we'll move on to 4.13 after the break.

 16 (Recess)

 17 MR. WALEK: Well, I was a bit too

 18 successful getting back on schedule, and as a

 19 consequence, our colleagues from the IRS missed

 20 part of the CFC discussion. So if I could trouble

 21 everybody, my understanding of where we are right

 22 now, at least from the earlier part of the CFC
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 1 discussion, is that, for some at the table, on the

 2 commodity regulation side, commodity pool side,

 3 that the issue is primarily one of disclosure and

 4 having disclosure passed up through.

 5 From the ICI, I've been able to discern

 6 that some of those disclosures being passed up the

 7 line are probably okay. From the rest of the

 8 discussion, there's some issue as to what makes a

 9 commodity -- what makes a CFC a commodity pool

 10 sufficiently deriving its income from the

 11 commodity side of the picture that it should be

 12 within our regulatory regime, and as a consequence

 13 -- is that close, John, trying to put it into a

 14 real nut shell?

 15 MR. GRADY: Yes.

 16 MR. WALEK: Okay. So in terms of the

 17 issue, it's not so much of whether it's offshore

 18 or onshore, it's a wholly owned subsidiary that is

 19 not being fully disclosed at the top level.

 20 MR. GRADY: And in fairness, I made some

 21 statements about, you know, the managed futures

 22 mutual funds that don't apply to every single
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 1 managed futures mutual fund, even the active ones,

 2 to use the language Matt is careful and his

 3 colleagues are careful to point out. But I was

 4 talking generally about what we're seeing in that

 5 space.

 6 MR. WALEK: So if I may ask the next

 7 question then, is it not so much that we could

 8 have a rush to offshore by entities or is there

 9 still that possibility?

 10 MR. GRADY: I mean I think the rush to

 11 offshore, if there is one, is because the situs of

 12 the controlled foreign corporation determines

 13 whether you pay tax, determines a number of other

 14 economic elements, and therefore, at least in my

 15 firm's view, to the extent that the bulk of the

 16 returns of the vehicle from a managed futures

 17 standpoint, maybe even all of the returns in the

 18 managed futures investment strategy were going to

 19 come through the foreign corporation. You did

 20 have what looks to be a movement of U.S. assets at

 21 least through an offshore domicile, that is, much

 22 less subject to U.S. regulation and oversight.
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 1 MR. WALEK: Bob.

 2 MR. AMEDEO: I just want to take issue

 3 with that, because fund families have being using

 4 CFC's for a number of years now, and the primary

 5 purpose for using a CFC has nothing to do with

 6 obfuscating disclosure, it has nothing to do with

 7 trying to push business out of the U.S. into

 8 foreign hands. There have been offshore commodity

 9 pools for years, as you know, Kevin. The primary

 10 purpose people use CFC's in 40 Act companies is to

 11 convert bad income, which is income from the

 12 trading of commodity contracts, futures contracts

 13 on real commodities, into income that is good

 14 income for 40 Acts purposes, period.

 15 The issue I think John has been talking

 16 about is a different issue, and that is, aside

 17 from the why the CFC is used, the legitimate

 18 purposes for which the CFC is used, is there

 19 enough disclosure about what is going on at the

 20 CFC level in light of the underlying purposes of

 21 the CFC, they're designed to provide tax benefits,

 22 but they're also the vehicles through which the
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 1 commodity trading is done. And I think -- I don't

 2 mean to speak for John, but I think the issue

 3 that's being raised is not the question of whether

 4 the CFC has a legitimate use, it's whether there

 5 is sufficient disclosure of the underlying CFC

 6 operation.

 7 MR. NEVINS: Yeah, I'd really just like

 8 to second what Bob was saying. The reason that

 9 CFC's are used by registered investment companies

 10 is a tax reason at the registered investment

 11 company level. Again, this is not a tax reason

 12 that is being used by mutual funds to be cute, to

 13 get around tax laws, or to nefariously hide any

 14 sort of income, it's far from it.

 15 As Bob was alluding to, commodities

 16 investments by registered investment companies are

 17 not qualifying income under IRS guidelines, which

 18 could cause mutual funds to lose the tax treatment

 19 that's beneficial for our investors. If they lose

 20 that pass through tax treatment, then they get

 21 taxed at the fund level and the shareholder level.

 22 And the IRS and the SEC has been comfortable with
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 1 these structures.

 2 So I would just, you know, really just

 3 second everything that Bob said, that, you know,

 4 there is no intent for those of us that use these

 5 structures to hide or not be fully transparent

 6 about what they do. If there are those that think

 7 that additional disclosure is required, we're

 8 certainly open to that conversation. I would

 9 lastly just add, I want to just make one caveat on

 10 some of the statements I made right before the

 11 break, because it was really Fidelity's approach

 12 to filing for our CFC's under 4.13(a)(4). I

 13 should stress that it's my understanding that

 14 others do take a different approach, and there are

 15 those that have the view that, and I'm not sure

 16 what the right answer here is, but there are those

 17 that have the view that CFC's, the subsidiaries

 18 themselves, are actually not commodity pools, and

 19 therefore, there is no need to make any filing

 20 whatsoever for those entities, that they're

 21 covered under the 4.5 exclusion.

 22 MR. WALEK: Okay, Peter.
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 1 MR. BONANNO: Just to chime in similarly

 2 to Matt, I think what was illuminating about the

 3 earlier discussion is that there appear to be a

 4 wide range of practices with CFC's. You know, our

 5 practices sound very similar to what Matt's

 6 described. To the extent we have CFC's, they are

 7 part and parcel of the top tier fund, and with

 8 respect to, you know, key control aspects, the way

 9 our products are run from a board oversight and

 10 governance standpoint, from a disclosure angle,

 11 the way we think about transparency, risk control,

 12 monitoring, I mean you really can't find a

 13 distinction between the top level product and the

 14 CFC, I think it's all part and parcel, the same.

 15 To the extent that there are practices elsewhere

 16 in the industry that don't provide that level of

 17 transparency or disclosure, I think that would

 18 make sense to bring everything up to a level

 19 playing field.

 20 MR. WALEK: Karrie.

 21 MS. MCMILLAN: I would like to go back

 22 to what Matt said before, about looking at this
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 1 from a holistic point of view. I think this might

 2 be why some take the idea that the 4.5 covers both

 3 the fund and the CFC for registration purposes.

 4 But in following on what Peter said, this is

 5 really one fund, it's only for tax purposes that

 6 it has to be split into two. And so funds look at

 7 it as if it is all one fund.

 8 When you're thinking about disclosure,

 9 as in disclosure to investors, as opposed to

 10 information available to regulators, to me,

 11 disclosure to investors is what are the risks

 12 involved with my investment, what is my fund

 13 doing, and how is it going about achieving that,

 14 but not in super granular detail. They want to

 15 know the basics of how all this happens. From a

 16 holistic point of view, the nuts and bolts of the

 17 CFC, I would argue, are not as relevant, maybe

 18 available in the supplemental materials or

 19 something like that, but that's not the heart of

 20 what they're getting. The fact that they're doing

 21 it may be a risk disclosure, that they're

 22 investing in a Cayman Islands fund, and that
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 1 there's different regulation or something like

 2 that, but I don't know that it's subject to the

 3 same type of disclosure that John's talking about.

 4 However, for a regulator to oversee

 5 what's going on, I think you do need a different

 6 level, and that's why I think the books and

 7 records and that kind of transparency is very

 8 valuable for a regulator to make sure that things

 9 are operating in the way that the funds are

 10 representing and what they're saying is being

 11 done.

 12 So as you're thinking about what the new

 13 rules should be, think about whether this is

 14 disclosure that goes to investors and how much

 15 they need and want, and then whether it's

 16 something that you need from a regulatory purpose,

 17 because I think the answers may be different and

 18 it would drive different outcomes in terms of

 19 where you finally come out.

 20 MR. LLOYD: And just to tie that back,

 21 you know, from the investor's level, obviously,

 22 you know, sort of the flow up of the fees from the
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 1 underlying CFC and the pools that they invest in,

 2 the management performance fees, gearing, and

 3 things that John mentioned, that's the type of

 4 thing that an investor would want to see and we'd

 5 like to see, and I think ICI has talked about, you

 6 know, working up into the fee table and that type

 7 of thing.

 8 MR. WALEK: That reminds me of what my

 9 tax law professor said about 30, oh my God, that

 10 many years ago, and that is that tax evasion is

 11 illegal, tax avoidance is a right, which I always

 12 had trouble with, but nonetheless, I think that's

 13 what I'm hearing here, is that as long as the

 14 rules allow for it, and the rulings allow for it,

 15 have at it. So CFC's are okay, but let's have

 16 more disclosure.

 17 MR. GRADY: And I think -- again, I

 18 don't want to reiterate a point I made earlier,

 19 but I think the reason why we are focused on this

 20 issue is that the 25 percent investment is the

 21 driver of the returns of the vehicle, at least

 22 those that call themselves managed futures mutual
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 1 funds, and that's not typically the case in a

 2 mutual fund, even one that invests its assets

 3 across a number of asset classes to derive a

 4 balance to return or otherwise, but again, it may

 5 be at 25 percent, so less than half, obviously a

 6 quarter of the assets of the fund perhaps are in

 7 the CFC, but that investment is the driver of the

 8 managed futures returns. And again, there are

 9 exceptions, there are funds that can split their

 10 commodities investing, so that some of it's inside

 11 the CFC, some of it's outside, I'm not casting

 12 dispersions on the concept of the CFC, I'm saying

 13 given its importance, its critical importance to

 14 the returns that investors are seeking from their

 15 investment in the fund, the amount of light that

 16 you can put on it and the amount of explanation

 17 and disclosure you can get around what it's doing

 18 can only help investors.

 19 MR. WALEK: Steve.

 20 MR. KING: I would just say, at least in

 21 the case of our funds, there's full disclosure of

 22 the strategies and the risks at -- it's the same
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 1 as in the fund. I mean it's carried out through

 2 the sub for tax reasons and it's clearly disclosed

 3 in the prospectus. Also, the risks of having the

 4 offshore subsidiary are disclosed. And the

 5 holdings are consolidated. I mean you see

 6 everything, the results of the sub's operations

 7 are included in the fund's operations. We test

 8 compliance at the fund level, basically

 9 disregarding the subsidiary, with the exception of

 10 seg assets, where we do it at the sub level. And

 11 then also with regard to fees, there's full

 12 disclosure, and we waive all fees. So essentially

 13 I mean we would rather not have the sub. I mean

 14 it would be less costly to not have the sub, but

 15 for tax reasons, we need it in order to have good

 16 income.

 17 MS. MCMILLAN: Can I just ask John --

 18 you said that mutual funds don't get all of their

 19 returns from, you know, a sub in the same way that

 20 these do, I just take issue. You could have a

 21 fund, a balanced fund that says it's going to get,

 22 you know, a small slice from a money market fund
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 1 and half of the rest from a balanced fund and half

 2 of the rest from an equity fund, and you would not

 3 find the disclosure saying this is how -- this is

 4 the equity fund, this is how it operates, this is

 5 the leverage of the equity fund, and then the same

 6 thing for the balanced fund, you get it all

 7 together.

 8 This is what our fund is doing. We may

 9 invest in other funds that provide these returns,

 10 but you don't get that level of detail, and I

 11 guess I'm still struggling with why it should be

 12 different in this case.

 13 MR. GRADY: I think that it comes down

 14 to, for example, and the example you've used, the

 15 fund's overall goal is a balanced return from a

 16 series of asset classes. If it achieves that

 17 through funds that are either registered or

 18 otherwise, you're going to be at the whole

 19 representing the sum of the individual

 20 investments. In the case of a managed futures

 21 mutual fund, you can more or less ignore 75

 22 percent of the fund's operations. Now, some funds
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 1 do more or less with their fixed income side than

 2 others to try to accentuate the fixed income

 3 returns, but a fund that says managed futures in

 4 its name is driving -- and its objective, and it

 5 purpose is to drive managed futures returns for

 6 shareholders, and so it's really the only part of

 7 the entire portfolio that is actually driving

 8 those returns that are the central investment

 9 focus of the fund. That, to me, separates it from

 10 a fund that invests in other funds in order to

 11 achieve a broad objective.

 12 And in this case -- and to Steve's

 13 point, it is -- the character of the investment in

 14 the CFC is different than the character of the

 15 investment of the remaining 75 percent, they're as

 16 different as night and day. You've got fixed

 17 income securities in the 75 percent piece outside

 18 of the CFC, and you've got investments in

 19 underlying funds or with separate accounts in

 20 CTA's, and other devices that are designed to

 21 drive managed futures returns, so you really have

 22 extremely different purposes between the two
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 1 segments of your portfolio. And I'm saying we're

 2 kind of allowing the disclosure to be consistent

 3 with the idea that this is just 25 percent, when

 4 really what you want to say is, this is it, and

 5 everything else is basically liquidity for the

 6 vehicle.

 7 MS. MCMILLAN: I guess I disagree,

 8 though. To me, maybe it's just coming down to

 9 identifying exactly where it's coming from. But

 10 at the end of the day, the investor's returns and

 11 the risks and the strategies and everything else

 12 are the blend of everything in that fund. And so

 13 if the primary risk and return is coming from the

 14 CFC, then those risk disclosures and the

 15 strategies will be, you know, this is what our

 16 strategy is and this is where our risks are, and

 17 they may not say this comes from the CFC part of

 18 it, but the investor will know that's what they're

 19 getting and what they're not getting.

 20 So maybe it's a little bit more about

 21 semantics than trying to track through where

 22 everything is coming from, but again, I go back to
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 1 -- from the investor's point of view, do they care

 2 which segment of the portfolio it's coming from

 3 when at the end of the day the risks are a part of

 4 the blend and the returns are part of the blend.

 5 MR. KING: I mean before we had the

 6 offshore sub, before there was a need for it, we

 7 did the same thing in the main fund, and the

 8 disclosure was exactly the same as it is now, with

 9 the exception of the disclosure about being able

 10 to do that through the sub and the risks of having

 11 that sub; other than that, it's fully transparent.

 12 MR. GRADY: Do you invest the sub in

 13 underlying funds that have their own expense

 14 structures and CTA's and separate fees?

 15 MR. KING: No; the sub is just used for

 16 doing the activity and would give rise to bad

 17 income.

 18 MR. GRADY: And there are a number of

 19 managed futures mutual funds, and I've got to be

 20 quiet because Bob deserves a chance to talk. But

 21 I do think there are funds in this room that do

 22 things directly that pose far fewer
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 1 transparency/opaqueness issues than I'm raising

 2 with respect to the examples that I'm using, but I

 3 think it's a distinguishing element that the funds

 4 that we're really focused on are having to do

 5 pooled investing underneath the CFC. The CFC is

 6 not the investing vehicle, per se, the CFC is a

 7 conduit to a series of underlying investments that

 8 have their own fees, their own advisors, their own

 9 structures, their own conflicts, their own

 10 gearing, their own leverage, and those are the

 11 things that we want to see much more brought up

 12 into the overall disclosure document for the

 13 reasons I was saying earlier.

 14 MS. MCMILLAN: I'm going to jump ahead

 15 of Bob just to say we agree with that. I think

 16 what we talk about mostly is when it's a wholly

 17 owned subsidiary and it really is as if it is the

 18 fund; if the tax laws were changed, it would be

 19 done exactly as it is with different funds.

 20 MR. AMEDEO: And I think -- two issues,

 21 one, I disagree in part with John's

 22 characterization. There are a number of funds
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 1 that trade futures, that trade managed futures

 2 directly through the CFC so that it's one

 3 structure. The structure John's referring to is

 4 the CFC investing in some underlying pools.

 5 And to some extent, I agree with what

 6 his characterization of the need for full and fair

 7 disclosures. Look, this is about materiality,

 8 what is material to the investor, and Karrie's

 9 point is that if you look at the fund

 10 holistically, from the top down, if you disclose

 11 all that's material about that fund's operations,

 12 by definition, you are going to include the

 13 underlying investments that the fund makes and the

 14 characterization of those underlying investments

 15 where they are the driver of the returns for the

 16 fund. Whether it's granular or whether it's not

 17 granular, in the end, it's the information about

 18 what's happening below the line that everybody is

 19 concerned about.

 20 MR. WALEK: To get an IRS ruling today

 21 in this area, what representations -- Matt, I'm

 22 going to start with you because you seem to know
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 1 everything today anyway, no, in all seriousness,

 2 what are the representations that are required for

 3 you to apply or get the IRS ruling? And the

 4 reason I'm asking this is, what I'm potentially

 5 hearing here, I'll even hold my hand out and show

 6 my cards, is that maybe this is a place where we

 7 need to undertake more dialogue with the IRS as to

 8 how these things operate.

 9 MR. NEVINS: Thanks, Kevin.

 10 MR. WALEK: I'll warn you ahead of time.

 11 MR. NEVINS: I'll take that as a

 12 compliment. I don't have a copy of our private

 13 letter ruling in front of us, and I, frankly,

 14 can't answer that question in detail. However,

 15 what I can tell you is that you're required to

 16 basically represent that the parent fund is going

 17 to be compliant with the 40 Act, that the

 18 subsidiary, as I mentioned earlier, itself will be

 19 compliant with Section 18(f) and the guidance

 20 under 18(f) relating to coverage, and the

 21 consequent restrictions on leverage that can be

 22 used in the fund. Again, that needs to be made at
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 1 the subsidiary level and at the parent fund level.

 2 Other than that, I would happy to work

 3 with you guys, you know, after today and get you

 4 some more information to the extent you'd like

 5 that. I don't know if any of my colleagues have

 6 anything else to add.

 7 MR. WALEK: Does anybody want to add

 8 anything on that in terms of the representations

 9 that have to be made? Okay.

 10 MS. MCMILLAN: There's an express

 11 representation that the CFC will comply with the

 12 18(f), which is the senior security, and then

 13 there's also the 25 percent limitation. I'm not

 14 sure if you'd put that in. There may be some more

 15 that I'm forgetting, but I know those are still in

 16 there.

 17 MR. WALEK: How is the 25 percent

 18 calculated?

 19 MS. MCMILLAN: Oh, shoot, I shouldn't

 20 have opened my mouth. Matt, do you know?

 21 MR. WALEK: The bottom line is, you can

 22 provide that for the record, but I'm sort of
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 1 curious about how that is calculated, because in

 2 the earlier discussion on percentage --

 3 MR. NEVINS: We'll get back to you on

 4 that one, as well, Kevin. But there are a series

 5 of other regulations that -- they're under tax

 6 language, it's called regulated investment

 7 companies, also RIC's, must comply with, and there

 8 are tax diversification tests and the like that

 9 will apply, including this 25 percent restriction,

 10 but we can follow up.

 11 MR. WALEK: Does anybody up here have

 12 anything more on the CFC issue? Anybody out there

 13 want to say anything more about the CFC issue at

 14 this point? I think -- I neglected books and

 15 records earlier, even though I touched on them

 16 tangentially, I didn't get into great detail on

 17 books and records. What areas may we harmonize

 18 with respect to books and records and how, you

 19 know, what kind of thoughts do you guys have? No,

 20 Matt, you don't get to start this time, I'm going

 21 to start on this side of the room, although Karrie

 22 --
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 1 MS. MCMILLAN: See, I wasn't turning my

 2 light on because I was afraid I would get the same

 3 thing. Mutual funds by and large keep their books

 4 and records with their service providers who are

 5 the ones that are handling those records. So, for

 6 example, a custodian has a large amount of them,

 7 but there may be transpirations, there may be

 8 other service providers that do, as well. Through

 9 a written agreement with those service providers,

 10 it is agreed that the records are the records of

 11 the fund and that the service provider will make

 12 them available to the SEC or regulators as

 13 requested, and we would suggest that the same be

 14 done for these types of funds, as well.

 15 As far as I know, there's never been a

 16 problem with the SEC getting the records because a

 17 service provider has failed to or been unwilling

 18 to provide those, but that could be something you

 19 could ask them in your dialogue with the SEC.

 20 MR. NEVINS: I guess it's my turn now.

 21 So I would agree with everything Karrie just said,

 22 and I would just add, I know that we've made this
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 1 point before, registered investment advisors are

 2 required to disclose in their form ADV all the

 3 locations of their books and records. So it's no

 4 secret, and it's publicly available information,

 5 it's already out there. So, again, we'd like, you

 6 know, further leeway as far as, you know, where

 7 you can hold your records. We do hold them, you

 8 know, a company like Fidelity, we have offices all

 9 over the country, and, in fact, globally, and we

 10 hold our records in all of our different offices

 11 and in -- off site with third party service

 12 providers.

 13 The other sort of related point that I

 14 would make on this is investor access to

 15 information of the commodity pool. And it's

 16 something that we probably need to understand a

 17 bit better, it's CFTC Rule 4.23, how this would

 18 work in practice. But one of the concerns that we

 19 have is that if investors have the ability to, at

 20 a moment's notice, get access to the holding

 21 information of any of our funds, that that could

 22 create selective disclosure issues under SEC
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 1 rules.

 2 I'm not sure how those two are squared

 3 together, but there are prohibitions that

 4 registered investment companies must follow on

 5 selectively disclosing information on portfolio

 6 holdings to their investors.

 7 MR. WALEK: On that, I was going to lean

 8 either towards Dan or anybody from the commodity

 9 side with respect to your experiences with someone

 10 asking to inspect their books and records. Last I

 11 had heard from most of the commodities borrowers

 12 is that they never had one, anybody come in and

 13 request it, is that -- what's your experience?

 14 MR. GRADY: I haven't been with a

 15 company as long as we've been in business, but I'm

 16 not aware of any such request actually being made

 17 on us.

 18 MR. WALEK: So maybe there's no need for

 19 the rule.

 20 MS. MCMILLAN: Yes.

 21 MR. AMEDEO: We have had a request from

 22 a limited partner to inspect some books and
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 1 records in a very specific case. They didn't cite

 2 the statute, or the rule, but we recognized that

 3 we had an obligation to deliver per their request.

 4 MR. WALEK: Dan.

 5 MR. DRISCOLL: And I don't remember

 6 that. I can't remember any single instance of it

 7 coming up either.

 8 MR. WALEK: Yeah, I hear your point on

 9 that, too. Yeah, most of the time it's with

 10 respect to inspecting the trading -- if the

 11 trading of the principal is being -- is available

 12 for review, and that's where I've seen it come up

 13 the most, which is a rule you didn't mention, so,

 14 you know, there's that. With respect to 18, I

 15 think it's 18-96, staff, help me, 18-96, we're

 16 familiar with that, but we've got a rule out there

 17 that applies to I believe wholly offshore, I'm

 18 sorry, it's a letter advisory that applies to

 19 fully offshore entities that we've had in place

 20 for several years now, since 1996, in fact. But

 21 to make a long story short, if you are familiar

 22 with that, would that solve the problem, if we
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 1 open that up for these types of entities? And

 2 that may be something you need to respond to expo

 3 facto.

 4 MR. NEVINS: Agreed; I'm not familiar

 5 with it, to be honest.

 6 MR. AMEDEO: Could you give a little

 7 more detail about the letter?

 8 MR. WALEK: Yeah, 18-96, my

 9 recollection, and maybe I should have Eileen talk

 10 about it more because I think she's dealt with it

 11 more, I don't know if she's willing to; do you

 12 want to?

 13 MS. CHOTINER: Well, I would have to

 14 also refresh my memory a bit. But I mean it deals

 15 primarily with entities that are offering pools

 16 entirely outside the United States, but are

 17 located or have some, you know, business conducted

 18 in the United States. And there is a provision in

 19 there -- so it basically deals with exemption from

 20 most of the requirements that would apply to

 21 CPO's, but it does have a component that deals

 22 with books and records. And I honestly would have
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 1 to go back and reread it as to the details of

 2 that, but I think that might be the, you know, the

 3 part that could apply. But we -- I mean, I had

 4 not considered that in this context, you know,

 5 prior to now, so --

 6 MS. OLEAR: It's my understanding of

 7 18-96 that the relief that's given is, we're

 8 permitting these entities to keep their books and

 9 records offshore instead of onshore as opposed to

 10 necessarily -- I don't know that it necessarily

 11 contemplated the use of a third party service

 12 provider for maintenance of those records, but at

 13 least it is a consideration that we've dealt with

 14 in the past, and it may provide a way forward.

 15 MR. WALEK: Staff has been nodding their

 16 head no to me, but I also remember, at a time when

 17 we were in the old building, for me, I have to

 18 mark time where I was -- what building I was in

 19 with the CFTC, but I remember a letter that we

 20 issued, and I thought we issued many of them, that

 21 allowed onshore persons to keep their books and

 22 records at a location that was not their main
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 1 business office. If it was one of their other

 2 entity -- let's say they had three offices, one in

 3 Colorado, one in Virginia, and one in New York,

 4 and New York was listed as the main business

 5 office, they could keep it at one of the other

 6 locations. But again, it's not exactly a third

 7 party in the classic sense, but what I'm

 8 suggesting is, maybe there's room for us to move

 9 in that direction. Dan.

 10 MR. DRISCOLL: Well, from NFA's

 11 viewpoint, by the way, there are other classes of

 12 commission registrant that don't have the same

 13 restrictions, so I don't -- FCM's are allowed to

 14 keep their records in more than one spot, they

 15 just have to disclose. So it's different for pool

 16 operators than it is for other classifications.

 17 As far as we're concerned, in order to do

 18 examinations and get information quickly, we need

 19 to be up-to- date on where the records are, that's

 20 the most important thing.

 21 MR. WALEK: So it's disclosure of where

 22 the records are is most important?
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 1 MR. DRISCOLL: And not so much --

 2 MR. WALEK: Where.

 3 MR. DRISCOLL: -- the home office.

 4 MR. WALEK: Okay. So that's one that I

 5 think, again, we may be able to consider. Alison.

 6 MS. BAUR: Yeah, I was just going to say

 7 that I think disclosure is certainly important,

 8 you should know where the records are, but I

 9 think, you know, certainly speaking with Franklin

 10 Templeton hat on, we have trading operations that

 11 are in different places then where our advisory

 12 entity is located. So I mean we're going to have

 13 records depending upon what the issue is in many,

 14 many different places, and we're able to get those

 15 very quickly. But to expect that just because the

 16 advisory entity is located in one place, that all

 17 records are going to be there, I think, you know,

 18 is not going to be realistic in many cases.

 19 MR. WALEK: I think under our rule 1.31,

 20 isn't it 72 hours? And I don't know how that

 21 would work for NFA.

 22 MR. DRISCOLL: Well, we have rules and
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 1 interpretations that -- because we have a number

 2 of members that are located offshore in some

 3 countries that we probably wouldn't want to travel

 4 to necessarily, and there is a requirement that

 5 they have to provide all of their -- they have to

 6 tell us a location in the United States that they

 7 could provide all of their required records within

 8 72 hours, I think it is.

 9 MR. WALEK: So we'll take that one under

 10 advisement. Other books and records issues? Bob,

 11 I'm sorry, Bob.

 12 MR. AMEDEO: I think to some extent this

 13 issue has been addressed in your ETF relief,

 14 because although ETF's aren't a direct corollary,

 15 they, like us, don't have necessarily a privity

 16 with the underlying client to get books and

 17 records of name, address, number of interests held

 18 and so forth and so on. So I would suggest that

 19 the ETF model might be one that the staff look at.

 20 MR. WALEK: If there's no more on books

 21 and records, I'm going to move us, if everybody is

 22 amenable, I don't think we need another break this
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 1 soon, moving onto the real 4.13 discussion. And,

 2 Todd, I'm going to let you take your first shot.

 3 MR. GROOME: Thank you very much, Kevin.

 4 MR. WALEK: Starting with this side and

 5 working backwards.

 6 MR. GROOME: Thank you. A lot of the

 7 conversation this morning, I know not directly

 8 related to 4.13, though, is, we've crossed over

 9 this path a few times, so apologies if I cover

 10 some themes at least which I think have been

 11 raised.

 12 I'm the Non-Executive Chairman of the

 13 Alternative Investment Management Association,

 14 known as AIMA, based in London. We have

 15 approximately 1,250 corporate members spread out

 16 around 40 different countries in the world. Our

 17 membership is also quite diverse professionally,

 18 and that's relevant for our comments in that the

 19 submissions we've made to yourselves and the SEC

 20 over the last couple of years, and on the Hill

 21 before that, have been made up of working groups

 22 from that broad geographic and professional
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 1 diversity, so it's very much a hedge fund industry

 2 comment that we try to tend to provide.

 3 Related to that, in February of '09,

 4 very quickly after the November, '08 G-20 meetings

 5 here in Washington, D.C., AIMA came out with a

 6 policy platform to try to be very clear as to

 7 where we were looking to become involved in the

 8 conversation.

 9 We strongly support all the efforts to

 10 address potential systemic risk analysis and to

 11 approve the transparency to regulators, which we

 12 understand really to be the driving force of the

 13 G-20, and, as well, with Dodd Frank and many

 14 starting points. This also includes clearly the

 15 broader regulatory coverage of certain markets and

 16 institutions, not least of which hedge funds.

 17 In that February, '09 platform, I would

 18 just highlight four particular points which I

 19 think are relevant to today's conversation in 4.13

 20 in particular. We came out very early and

 21 supported the mandatory registration of managers

 22 or private fund advisors in the jurisdictions in
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 1 which they operate. Second, we supported the

 2 periodic reporting of systemically relevant

 3 information to those supervisors, and we use our

 4 language very carefully. We think focusing on the

 5 advisor, which came out earlier in this

 6 conversation as appropriate, and we think focusing

 7 on systemically relevant information to improve

 8 the FSOC and other type of analysis should be the

 9 key focus here.

 10 Third point, very important for a global

 11 industry like ourselves, we called for, in support

 12 of the G-20 call, for a globally consistent and

 13 coordinated approach in this exercise. Indeed,

 14 anything that deviates from a coordinated and

 15 consistent approach to our industry simply

 16 represents increased marginal costs in trying to

 17 comply with what's happening. Given that we're

 18 involved in so many different countries, our

 19 managers would have investors all over the world

 20 trade in different markets, if we have to, file in

 21 different jurisdictions, the costs ring up quite

 22 quickly.
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 1 And then fourth, something I also heard

 2 mentioned earlier this morning, we came out and

 3 supported de minimis thresholds, that the marginal

 4 cost for smaller managers and mid sized managers

 5 to come up with some of this compliance would be

 6 significantly great, and the information, quite

 7 frankly, that they contribute to that systemic

 8 risk analysis is not that material and what we

 9 think is the end game.

 10 So those principals are really driven.

 11 At AIMA, our thinking over the last two and a half

 12 -- three years in dealing with Capital Hill, the

 13 SEC, the CFTC, Treasury, the FED and others

 14 involved in this conversation. Now, with regard

 15 to 4.13 and the proposed elimination of the

 16 exemptions under (a)(3) and (a)(4), if you follow

 17 those principals, we have a number of concerns

 18 that we've raised in particular in our letters.

 19 First, very simply, as proposed,

 20 advisors in the United States and internationally,

 21 and not just private fund advisors of the hedge

 22 fund type, but much broader, would be subject to
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 1 multiple and in very many cases different

 2 registration and reporting regimes. And as I said

 3 earlier, this simply rings up for us a marginal

 4 cost conversation.

 5 We support the regulatory objectives,

 6 particularly as it addresses greater transparency

 7 and improved systemic risk analysis, but we

 8 believe those objectives can be realized in a more

 9 cost effective and regulatory effective way. In

 10 the United States, the CFTC and the SEC have

 11 repeatedly said they're looking to implement

 12 substantially similar regimes, or the language I

 13 think that's often used, regimes creating

 14 substantially -- putting regulated entities in a

 15 substantially similar situation, and we support

 16 that. But we think that, increasingly, that's not

 17 where we might end up. We see very different

 18 regimes emerging between the CFTC and the SEC.

 19 And then when you extrapolate that

 20 internationally and look at the U.K. FSA, you look

 21 at Hong Kong, Australia, and Singapore, which are

 22 advancing relatively faster than many other
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 1 jurisdictions, and now the EU, which is also

 2 chiming in on a regional level, that overlap and

 3 difference begins to become quite significant.

 4 With regard to specific requests and

 5 proposals, we have very simply asked the CFTC to

 6 consider that they provide registration exemptions

 7 similar to the SEC. It could be done in two very

 8 broad based ways. You could exempt any advisors

 9 that are already registered with the SEC or that

 10 have been deemed exempt from registration with the

 11 SEC. And with regard to that second aspect, you

 12 could, therefore, use the private fund advisor

 13 exemption proposed by the SEC, or the foreign

 14 private fund advisor exemption with respect to

 15 non-U.S. managers, either one would get us to that

 16 final point.

 17 With regard to reporting, we've also

 18 requested and proposed that the CFTC and the SEC

 19 work together much more closely, whether the

 20 outcome is something looking like foreign PQR, PR,

 21 or PF at the SEC, we're relatively neutral, but

 22 we'd like to see one form begin to come together
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 1 and be consolidated between the two agencies.

 2 If that's not possible, we'd like to see

 3 one agency take the lead and then basically

 4 attempt to share that information between the two

 5 other agencies, and ultimately, of course, with

 6 many other agencies as it goes up through Treasury

 7 into the FSOC process.

 8 We think whatever reporting regime

 9 emerges, it needs to have two very distinct goals,

 10 one, for tracking what's happening in the

 11 industry, which we think could be very basic

 12 information filed annually and updated annually,

 13 and the other for the systemic risk analysis. On

 14 the systemic risk analysis, we think the old 80/20

 15 rule is still very much appropriate to think about

 16 here, and we believe it's something the SEC is

 17 also doing with their work. Where I understand

 18 the SEC, where they may be looking at gross

 19 exposures rather than net exposures within the

 20 management companies and their funds, are still

 21 looking to get about 75 to 80 percent coverage of

 22 the industry as they gather information from the
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 1 FSOC process.

 2 In the United States today is

 3 approximately 240 advisors with a billion dollars

 4 or more of assets under management on a net basis,

 5 but they represent 82 percent of assets under

 6 management in the hedge fund industry. So through

 7 that simple 80/20 process, you begin very quickly

 8 to get a targeted group where you can get a very

 9 representative sample of what the hedge fund

 10 industry can contribute to the FSOC analysis.

 11 And finally on reporting, we encourage

 12 the CFTC and the SEC to work together to develop

 13 common thresholds and an information focus of the

 14 information gathered. Similar to what we see

 15 emerging in the U.K., Hong Kong, Europe and

 16 elsewhere, there seem to be distinctions drawn

 17 around managers anywhere from zero to 150 million

 18 of AUM, where very little information is gathered,

 19 or what I refer to as tracking information to find

 20 out who's in the industry, what strategies are

 21 being followed, and what trends they can gather

 22 from small funds in the industry. This also
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 1 represents only three to four percent of assets

 2 under management in this country, and it's pretty

 3 much a similar number globally.

 4 The second threshold tends to be a

 5 number between 150 million, or in Europe, 100

 6 euros, and one billion AUM. Here you have about

 7 15 percent of assets under management in this

 8 country by the hedge fund industry, and we think

 9 something approximating Schedule A, a foreign PQR,

 10 would be appropriate with the elimination of some

 11 of the position level data that is currently

 12 included in there, and probably updated annually,

 13 because once again, the purpose would seem to be

 14 to track what is happening in the industry.

 15 And then finally, for the billion dollar

 16 club, the billion AUM up managers, that is where

 17 we see Schedule C having most application, where

 18 we would encourage it to be updated semi-

 19 annually, 30 to 45 days after the period, not 15,

 20 as proposed, and the information would very much

 21 focus on tracking systemically relevant

 22 information as is currently the goal under foreign
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 1 PF and certainly what's been implemented for a

 2 number of years at the FSA. So I'll be happy to

 3 answer questions based on that.

 4 MR. WALEK: I think next on the 4.13 was

 5 going to be Marc, with your opening comment.

 6 MR. BAUM: I'm going to try to cut down

 7 on our comments. Thanks for the opportunity to

 8 participate today. My name is Marc Baum, and I'm

 9 the General Counsel and the Chief Compliance

 10 Officer for Serengeti Asset Management. Serengeti

 11 oversees investments predominantly made in North

 12 America that are focused on sector dislocations,

 13 uncovered or misunderstood opportunities, and

 14 liquidations. We're based in New York City.

 15 I've spent 25 of my 27 years as a

 16 practicing lawyer in- house at regulated financial

 17 services firms, from broker dealers, through

 18 banks, through hedge funds, that's my context.

 19 I'm here today to speak on behalf of the MFA and

 20 its members. I believe that the participants here

 21 are familiar with what we do, and we've introduced

 22 ourselves today and what our activities are, so
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 1 I'll jump ahead.

 2 MFA has consistently, as you know,

 3 supported intelligent and well informed regulation

 4 of the U.S. securities and futures markets through

 5 the Dodd Frank legislative process. We also have

 6 consistently endorsed the notion that our

 7 regulators benefit from market and participant

 8 information and appropriate funding to be able to

 9 discharge the regulatory responsibilities

 10 effectively. We're very concerned, however, with

 11 the Commission's proposed rescission of private

 12 pool exemptions, because we believe, by and large,

 13 the exemptions have worked, and rescinding them

 14 would require many registrants that are now or

 15 will be subject to SEC registration to become

 16 dually registered with the CFTC and subject to

 17 redundant, unnecessary and inefficient regulation.

 18 Dual registration can be excessively

 19 burdensome for registrants, though especially for

 20 smaller ones like Serengeti, and as the Commission

 21 and the SEC's regulatory compliance requirements,

 22 as has been noted, may be similar, but still
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 1 different in many respects.

 2 You know, we believe that with respect

 3 to private pools that have an investment advisor

 4 registered with the SEC, rescission of the private

 5 pool exemptions is unnecessary to achieve the

 6 public policy objectives of Dodd Frank, that the

 7 preservation of private pool exemptions is

 8 consistent with current law and interagency comedy

 9 and that the Commission still will receive

 10 information it needs from the new form PF, the

 11 SEC, and exchanges, even if the Commission retains

 12 the private pool exemptions. MFA believes that

 13 the Commission should work with the SEC and other

 14 members of the Financial Stability Oversight

 15 Counsel to implement an information sharing

 16 framework for systemic risk data, and we've said

 17 that. And the Commission should review and

 18 analyze form PF data before considering whether

 19 rescission of the private pool exemption is

 20 necessary.

 21 We think that such information will help

 22 inform the rulemaking process, if necessary, by
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 1 providing the Commission with information on the

 2 number of market participants engaged in trading

 3 commodity interest and the scope of their

 4 activities.

 5 We have also provided the Commission

 6 with some alternatives to rescinding the private

 7 pool exemptions. Specifically with respect to

 8 4.13(a)(3), we believe the Commission, under an

 9 information sharing framework with the SEC, should

 10 retain the exemption in 4.13(a)(3) for a pool that

 11 is not engaged primarily in trading commodity

 12 interest and that has an investment advisory

 13 registered with the SEC.

 14 We believe that this recommendation is

 15 consistent with Dodd Frank, which attempts to

 16 minimize dual registration as demonstrated by the

 17 preservation expansion of the exemptions from

 18 advisory registration under the CTA for advisors

 19 not primarily acting as a CTA, that do not act as

 20 a CTA to any commodity pool that is engaged

 21 primarily in trading commodity interest. The

 22 advisor's act contains similar exemptions.
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 1 In our view, consistent with Dodd Frank,

 2 a pool operator should not have to register with

 3 the CFTC as a CPO if its commodity pool is not

 4 engaged primarily in trading commodity interest.

 5 Also, given that the Commission will have access

 6 to a great deal of information on private pools

 7 such as through form PF, larger trader reporting,

 8 and swap data repositories, we believe the

 9 Commission will have the information it needs to

 10 over -- the cost as has been noted associated with

 11 rescission of the private pool exemptions would

 12 greatly exceed, we believe, the limited benefit

 13 from dual registration.

 14 We have proposed, in letters to the

 15 Commission, and in our written submission proposal

 16 about possible tiering, ranging from de minimis,

 17 as was discussed, to a broader regulatory

 18 structure. I'm happy to discuss that if

 19 necessary. But again, MFA believes it makes the

 20 most sense for the Commission to retain 4.13(a)(3)

 21 for a pool that does not engage primarily in

 22 trading commodity interest and that has a
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 1 registered investment advisor. Thank you.

 2 MR. WALEK: Thank you, Marc. I think

 3 next on 4.13 was going to be Dan.

 4 MR. DRISCOLL: And Carol really

 5 summarized NFA's view on 4.13. I'll reiterate

 6 that NFA has always been a big proponent of

 7 4.13(a)(3), asked for it for a number of years

 8 before it was actually adopted, and before that

 9 time, as Ananda mentioned with FCM's, if a fund

 10 did just one futures contract, it raised the

 11 specter of having to register as a commodity pool

 12 operator, and we don't think that makes any sense

 13 with regard to the use of regulatory resources.

 14 One or two sort of related things, under

 15 the current 4.13(a)(3) and (a)(4), there's a

 16 requirement to file an exemption notice with NFA

 17 at the time you're claiming the exemption, but

 18 there's no follow-up required, so we really have

 19 no way of knowing what the status is of all of the

 20 12,000 entities that have sought an exemption, so

 21 we fully endorse the Commission's proposal for

 22 4.5, 4.13 and 4.14 to have an annual
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 1 recertification qualification for any exemptions

 2 you have.

 3 The last thing, which is just one of my

 4 personal pet peeves is, it hasn't happened a lot,

 5 but there have been a few entities and individuals

 6 that filed for exemptions under 4.13(a)(3) and

 7 (a)(4) who, prior to that, had had their CFTC

 8 registrations revoked or have been tossed out by

 9 NFA, and if you could find a way to make those

 10 types of entities ineligible for the exemptions,

 11 that might be a wise thing to do.

 12 MR. WALEK: Martin, you're actually the

 13 last panel, but since you're here, why don't --

 14 you're the last person I think to give an opening

 15 statement, so why don't we give it now, unless

 16 you'd rather hold it until later?

 17 MR. LYBECKER: I don't really need to

 18 make an opening statement, I'm here to represent

 19 the Private Investor Coalition, our partner, a

 20 private law firm, they're my client, and unlike

 21 the rest of the people here, I think I'm here to

 22 give you information about the family office world
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 1 --

 2 MR. WALEK: Exactly.

 3 MR. LYBECKER: -- and why they deserve

 4 an exemption.

 5 MR. WALEK: So we'll hold it until that

 6 issue actually comes up. And as you can see, we

 7 have the relevant person from the SEC who just

 8 finalized a rule on family offices, so if we have

 9 any problems, hopefully she can help us out.

 10 Okay. With that, my first question on the 4.13

 11 actually goes to, again, the threshold issue, or

 12 the calculation. If we were to maintain some sort

 13 of a de minimis test, what should that de minimis

 14 test be?

 15 MR. BAUM: Bigger than we are. No --

 16 MR. LLOYD: Much bigger than you are.

 17 MR. BAUM: Much bigger, much, much

 18 bigger.

 19 MR. WALEK: Well, this came up earlier

 20 in the context of 4.5, as well, and I have some

 21 concerns any time we use percentages for your

 22 benefit, because percentages of bigger numbers can
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 1 be bigger numbers.

 2 MR. BAUM: Absolutely.

 3 MR. WALEK: And so I'm not a fan of

 4 percentages, and that's why I'm asking isn't there

 5 anything else out there that we might be able to

 6 consider?

 7 MR. BAUM: You know, so we offered a

 8 percentage rule, I'm sure there are actually other

 9 ways to measure this. You know, the tension is,

 10 you're always going to be dealing with funds of

 11 vastly different sizes, so I don't know how you

 12 can get fully away from something in there, and I

 13 don't think absolute dollar numbers make sense

 14 either for the same reason.

 15 MR. GROOME: I would approach it this

 16 way, I think you need to have two objectives,

 17 tracking and systemic risk, and they're very

 18 distinct and different objectives, and I think

 19 what you gather and how frequently you gather it

 20 will be very different if those are your two

 21 objectives.

 22 The second would be, I think for
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 1 simplicity purposes -- well, let me back up, if

 2 you think of the evolution of this process in

 3 different parts of the world, the UK probably

 4 stepped out first, and Hong Kong second, and they

 5 had an ambition when they started to gather all

 6 kinds of information, tremendous amounts of

 7 information from tremendous amounts of firms, and

 8 they quickly realized that they got an information

 9 overload very quickly and began to fear that they

 10 were perceived in knowing a lot more than they

 11 actually did because they had so much information

 12 sent to them so frequently.

 13 So from your perspective, I think -- and

 14 I have a sense that the colleagues from the SEC

 15 have moved in this direction because of an

 16 internal conversation in the SEC as to whether to

 17 use NAV or gross exposure, that it's almost a

 18 non-starting conversation because the end point is

 19 the same and that is, they're looking for

 20 somewhere around 75 to 80 percent of the industry

 21 to provide systemic risk type reporting, which

 22 will automatically take you to something
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 1 approximating 220 - 240 type of managers in the

 2 United States, and about 400 globally. So backing

 3 into your answer is another way of saying it. So,

 4 therefore, if you want to take a billion AUM on an

 5 NAV basis, you're done. If you want to do it on a

 6 gross exposure basis, you're going to have a

 7 larger number, but you're still going to end up

 8 with about 200 to 220 reporting entities of what

 9 you call Schedule C, or the SEC calls form PF.

 10 MR. WALEK: Okay. Why don't we approach

 11 this in a very delicate way because we're

 12 concerned about -- I know why you're concerned

 13 about 4.13 and who is or is not there, because it

 14 will drive who files the form, okay. We weren't

 15 planning on not being concerned today about form

 16 PF and form PQR, but I think I understand why

 17 you're raising it, is because if you're in, you're

 18 in, and you have to file the form, and that's

 19 where AIMA's concern is the most and not who's

 20 being regulated?

 21 MR. GROOME: Who's being regulated, you

 22 have to define what regulation is, and regulation
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 1 here really is oversight and not regulation, per

 2 se, I would call it more you're trying to learn

 3 what's happening inside these entities and look

 4 through these entities to markets and make a risk

 5 analysis, at least that's what's been happening

 6 with the FSA and in Hong Kong, where there's

 7 relatively more experience, that's where they've

 8 ended up.

 9 MR. WALEK: So let me just pause that

 10 this is sort of a devil's advocate kind of thing.

 11 If there were not a data collection instrument

 12 being proposed, PF, PQR, whatever, then everything

 13 else doesn't matter to AIMA?

 14 MR. GROOME: No, I wouldn't say

 15 everything doesn't matter. We were asked this

 16 question actually very earlier in the House

 17 process on Dodd Frank, and we said we -- we

 18 provided public comment that if you wanted to

 19 register everybody in the industry, we would not

 20 oppose that. It's what you do with registration

 21 which begins to drive up significant marginal

 22 costs to our members.
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 1 MS. BAUR: Yeah, so, you know, in

 2 addition to the comments I made about 4.5, I also

 3 represent the IAA and obviously have a

 4 constituency with respect to 4.13. But certainly,

 5 you know, from our standpoint, I think that we are

 6 very willing and able to provide whatever

 7 regulatory reporting is necessary for you to

 8 monitor systemic risk. So certainly, you know, I

 9 think form PF goes a long way towards that, you

 10 know, I think PQR, if there is additional items of

 11 information that are needed to address your

 12 monitoring concerns, that's something that we

 13 could certainly live with. I think our concern,

 14 though, is with conflicting regulations,

 15 substantive regulation, and so our position has

 16 been that, you know, with respect to the Advisors

 17 Act that already provides a robust framework for

 18 many regulatory issues, and so our concern is not

 19 seeing conflicting regulation on the CFTC side,

 20 but certainly on a reporting side, we're willing

 21 to give you what you need.

 22 MR. BAUM: And we would echo that.
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 1 We're very happy providing information. I mean

 2 we've been in it at both commissions, we've had

 3 issues around the frequency, because we've tried

 4 to make the frequency make sense given other parts

 5 of our business, and that came up in the 4.5

 6 conversation, but it really is the issue of dual

 7 regulatory, you know, it's not an information

 8 issue, we perceived this an issue of you all

 9 getting the information that you needed, and we

 10 trying to operate under one logical consistent

 11 regulatory framework.

 12 MR. WALEK: Dan, what -- I know it's

 13 hard to -- because we don't have the second side

 14 of the aging test yet, it's hard for you to

 15 determine how many people will be out there that

 16 may come back in if we do 4.13. At the same time,

 17 do you think we're going to have a large migration

 18 back in or are they going to migrate to 4.7 or

 19 change their business model?

 20 MR. DRISCOLL: Well, about 12 questions

 21 there, Kevin, so I'll see how many --

 22 MR. WALEK: I intentionally did that,
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 1 Dan.

 2 MR. DRISCOLL: -- of them I can try to

 3 deal with. As I said, I think there's 12,000

 4 entities that have filed exemptions, and it's

 5 close to 30,000 funds, and almost all of those

 6 came in since 2003, when (a)(3) and (a)(4) were

 7 adopted. And since that time, we have had a

 8 reduction in the number of pool operator

 9 registrants and members. I think that maybe they

 10 went down by a total of 500 or 600. So my best

 11 guess is, I don't think you're going to see 12,000

 12 firms coming in, but you could potentially see 400

 13 - 500 - 600 new firms come in, sort of undoing

 14 what happened over the last eight years.

 15 MR. WALEK: Given the fact that there

 16 may be more of an undoing than a new population

 17 coming in, isn't it likely that they already know

 18 how to handle the regulatory regime? Maybe I

 19 unfairly ask you that and I should ask the other

 20 persons on the panel.

 21 MR. DRISCOLL: Well, if we're presuming

 22 that there are firms that were registered before,
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 1 yeah, I guess that's - I guess that's true. We do

 2 point out in our comment letter that if you do

 3 away with (a)(3) and (a)(4), there needs to be an

 4 ample amount of time so that firms can actually

 5 assess their business, determine what they want to

 6 do, give them time to staff up if they need to

 7 staff up, give them time to actually go through

 8 the registration process, ask questions.

 9 So, personally, I don't think it's so

 10 much that they don't know how to deal with the

 11 regulatory process. I am empathetic to the fact

 12 that, you know, nobody wants multiple regulators,

 13 if everybody could have one, they would probably

 14 -- they might prefer that. So I don't think it's

 15 without cost, but I don't think it's so much that

 16 they just don't know how to deal with regulation.

 17 MR. WALEK: In the NFA letter, if I

 18 remember correctly, I think you said earlier,

 19 either you or Carol mentioned that you do support

 20 continuation of, in some form, (a)(3) and (a)(4),

 21 (a)(3), just (a)(3)?

 22 MR. DRISCOLL: Yeah.
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 1 MR. WALEK: Okay, just (a)(3), sorry.

 2 MR. DRISCOLL: Well, and we don't -- we

 3 haven't asked for the repeal of (a)(4), we were

 4 just silent about that in our letter.

 5 MR. WALEK: Okay. In that context, is

 6 that largely due to -- I think you mentioned that

 7 you don't think that the cost benefit is there; is

 8 that from the audits that you've done at NFA or --

 9 MR. DRISCOLL: Yeah, I mean over the

 10 years we've dealt with having all of these -- a

 11 lot of firms out there that, because they're

 12 registered members, you have to go do

 13 examinations, you have to spend time on them, and

 14 we didn't feel, after many years of doing that,

 15 and now I'm not talking about cost benefits for

 16 the industry, I'm talking about cost benefit for

 17 the regulator --

 18 MR. WALEK: Regulator.

 19 MR. DRISCOLL: -- that is just didn't

 20 seem to be the wisest use of our resources. And,

 21 of coursed, the same holds true for the firms, so

 22 it just magnifies that cost benefit analysis.
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 1 MR. WALEK: We have Todd and then Marc.

 2 MR. GROOME: A couple things, maybe

 3 first back with Dan. When you said 400 to 500 or

 4 400 to 600 may migrate, who are they, are they

 5 U.S. firms, I mean what do they look like?

 6 Because we were asked that question, as well, by

 7 Amanda and Kevin, and so we had an initial number,

 8 and sort of a process of full registration with

 9 SEC/CFTC versus getting into an NFA world, we had

 10 people say to us in - interestingly not the U.S.,

 11 but the UK, Hong Kong, Singapore and Australia,

 12 3,000 to 3,500 entities, not just hedge funds, but

 13 asset managers broadly, would have to do something

 14 in the United States because of either their

 15 investor population or they trade futures of some

 16 incidental number and they'd be caught up.

 17 Subsequent to that conversation, we were

 18 asked to go back and look harder at that number,

 19 and so we expanded it throughout Europe, looking

 20 with a number of European entities, and that

 21 number has grown to something in the 5,000 - 6,000

 22 range.
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 1 MR. DRISCOLL: And like I -- it was a

 2 shot in the dark when I said the numbers I did,

 3 and it only reflected the change in the membership

 4 since before 2003. Now, obviously in eight years,

 5 there are new entities out there that would have -

 6 that didn't exist before 2003 that do now, so I --

 7 there's nothing scientific about me saying that.

 8 I just --

 9 MR. WALEK: I just -- sorry.

 10 MR. DRISCOLL: So I would just indicate

 11 that I don't think that all 12,000 would come in,

 12 certainly it's less than that. And then, of

 13 course, when you add swaps to the mix --

 14 MR. WALEK: That's right.

 15 MR. DRISCOLL: -- that adds a lot, too.

 16 So it's hard -- I think if somebody has got a

 17 really precise number, that's great, but I was

 18 just taking a shot in the dark.

 19 MR. WALEK: And I think the other thing

 20 - the other thing I'd ask you in terms of your

 21 numbers, because when we start throwing numbers

 22 around in this industry, it's sort of fascinating
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 1 because it depends on what we're counting, and

 2 your 600 I think was commodity pool operators.

 3 Your entities may have been --

 4 MR. GROOME: Swaps.

 5 MR. WALEK: -- the entities operated by

 6 somebody, and so there could be --

 7 MR. GROOME: Our numbers --

 8 MR. WALEK: -- so his pool -- there

 9 could be four pools per commodity pool operator,

 10 which would be 2,400 entities, and I think yours

 11 was the number of entities.

 12 MR. GROOME: Advisors.

 13 MR. WALEK: Yours was the number of

 14 advisors, which is, again, different than ours,

 15 because a CPO could have five or six advisors.

 16 MR. GROOME: And we did consciously ask

 17 the question, commodity interest has been

 18 redefined for swaps, you'd be caught if you have

 19 investors in the United States and/or you trade

 20 relatively insignificant number of futures in the

 21 United States, and so that's where that number

 22 came from, and we not only bounced that through
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 1 our national groups, but we actually talked to

 2 public authorities, regulators in those countries,

 3 and the numbers - these are all estimates, so I

 4 totally agree with you there, and so they take

 5 them with caution. But we double checked through

 6 the public authorities, and they thought the

 7 numbers were rationale.

 8 MR. WALEK: And right now, your number

 9 -- since you actually surveyed the swaps issue,

 10 that's probably the only number we've got right

 11 now that's even tied to anything. Marc and then

 12 Matt.

 13 MR. BAUM: So I'm responding to a couple

 14 of points. One, we were going to find out part of

 15 this when registration occurred over at the SEC,

 16 that's been put off for a little bit, but to Dan's

 17 point, now, I think what we have to understand is,

 18 this 2003, there's enormous change within -- one

 19 of the things about hedge funds, very dynamic

 20 business, historically low (inaudible) to entry,

 21 and huge numbers start each year, huge numbers

 22 fail each year, and so you're going to be, you
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 1 know, and, in fact, much of the industry was

 2 gearing up for regulation for the very first time,

 3 putting aside the 80/20 part of this.

 4 So I think if you're living in the 80/20

 5 part, you know, this is a marginal change, it's

 6 not very big. For lots of the rest of the

 7 business, and I've worked in big places and small

 8 places and a billion dollars is still small to me,

 9 you know, this is the first time they're gearing

 10 up for being regulated at this moment, they do not

 11 have the internal expertise, they are developing

 12 the internal expertise, and, in fact,

 13 industry-wide, for its real compliance with this

 14 kind of stuff, there is not nearly enough industry

 15 expertise, you know.

 16 People are wondering whether there's

 17 enough for the SEC regulatory system, it is

 18 marginal when you add another set of regulators,

 19 but there's not remotely enough experience across

 20 the entire business to service both of these

 21 unless there is, in fact, if you choose to

 22 implement it, a large period of time just to train
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 1 people in order to do this.

 2 MR. WALEK: I'm going to go off the

 3 sheet here for a second, because what's just hit

 4 me a little bit in terms of -- particularly

 5 because of Todd and Marc's conversation is that

 6 what we've got is, you know, two -- again, I'm

 7 talking about my cascade, but I'm thinking of two

 8 heads here, one is the registration process, and

 9 then the other is everything else that follows on

 10 because you're registered, okay.

 11 And what we're talking about primarily

 12 is harmonization with the SEC on the everything

 13 else. And even though we didn't intend to have

 14 the data collection as part of that, it's

 15 important -- it now flashed in my brain, maybe a

 16 little later, that we have these two sides or two

 17 heads. In that context, okay, in that context,

 18 and - I don't want the rest of the day to go into

 19 the PF and the like, assuming there has to be a

 20 data collection, of the other regulatory issues,

 21 those that need to be harmonized, what is most

 22 important? And if a couple of you just want to
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 1 give me your one, two and three of that to help me

 2 out, because I know a couple of you would make the

 3 data collection one, from what I'm hearing, okay.

 4 But other than the data collection, what would be

 5 one, two and three, with regard to 4.13 or 4.5?

 6 MR. GROOME: I'm not sure I fully

 7 understand, but let me try to answer it this way.

 8 MR. WALEK: Okay.

 9 MR. GROOME: Number one, we would

 10 encourage you to ask yourself, and ask yourself

 11 right there next to the SEC, what is it you're

 12 trying to achieve through the process of both

 13 registration and reporting? And I think the

 14 answer will be, you want to have a greater clarity

 15 of who's out there in the industry as an advisor,

 16 that's what I call tracking, that's getting on

 17 your radar screen and gathering basic information,

 18 and I think second, and I think, in all fairness,

 19 more importantly, is the systemic risk analysis

 20 aspect of this feeding into FSOC, where my 80/20

 21 rule I think is going to be applicable, in fact,

 22 it's probably something closer to ten percent of
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 1 the industry providing, you know, 80 percent of

 2 that, and so it's a very different approach,

 3 Kevin.

 4 And let me just clarify something I said

 5 earlier, registration, we've never been opposed

 6 to, but we're not supportive of many different

 7 types of multiple registration, certainly in the

 8 same country, but ideally not even registering in

 9 three or four different countries. So we

 10 certainly would like to see one registration

 11 worked out between the CFTC and the SEC, because

 12 some of those same people will have registration

 13 requirements outside of the United States, and

 14 then you multiply that concern through examination

 15 and reporting processes if they are also different

 16 time frames, different data, and different

 17 thresholds to who has to do what.

 18 MR. WALEK: That's helpful. Maybe I can

 19 help clarify. Ananda has helped me a little bit

 20 with what I'm trying to ask I think here. One is,

 21 okay, you have to register. Once you register,

 22 then you have other requirements, i.e.,
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 1 disclosure, reporting, record keeping. Part of

 2 the reporting is your financial reporting, the

 3 other part of your reporting would be the data

 4 collection that we're talking about doing, okay.

 5 Assuming that the data collection is a

 6 fait accompli which you don't want to assume, but

 7 assuming that's the case, of the other three, are

 8 the harmonization issues mostly in disclosure, are

 9 they mostly in reporting, or are they mostly in

 10 record keeping? If we were to expend limited

 11 resources in trying to harmonize the issues in

 12 those three areas, where would our time at the

 13 staff level be spent best?

 14 MR. BAUM: I would say all of those

 15 things, what you're looking for is -- can I sort

 16 of try to -- so start at the beginning of the

 17 process, start at the registration statement, the

 18 basic information about the firm. It could be

 19 that, you know, the same form about the basic

 20 information about the firm. You know, if you

 21 harmonize and say, you know, here's what you're

 22 doing for SEC registration, here's what you're
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 1 having to do for -- and CFTC, you know, it's the

 2 joint SEC/CFTC.

 3 And then you go, you know, everything

 4 sort of begins to leave from that, and so what

 5 you're looking for is, figuring out, you know, to

 6 the extent you can harmonize in all of those

 7 areas, because it shouldn't be, you know, for

 8 registrants, it shouldn't be that different. None

 9 of these things should truly be, you know, this is

 10 an age old tension, that different, but, you know,

 11 it starts with, you know, if you started on the

 12 information and think that, again, the burdens for

 13 smaller firms to give you everything you want are

 14 much greater than the burdens for bigger firms to

 15 give you everything you want, and that's where

 16 this gets complicated, which is when you have,

 17 even on form PF, this has been an ongoing

 18 conversation, is, it's this thing that, you know,

 19 as the D.E. Shaws of the world begin within their

 20 firms, then they've talked about this for MFA, you

 21 know, they begin to figure out how long that's

 22 going to take them and what their needs for
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 1 personnel are for that.

 2 That's a vastly different issue, same

 3 information request to a firm much smaller. And

 4 so all of those things, to the extent that you

 5 have to, you know, figuring out what is this

 6 additional information you really need, do you

 7 truly need it, and then, if so, we're very happy

 8 to work with you if it can get distilled in a way

 9 that we can actually give you information that's

 10 helpful.

 11 (Discussion off the record.)

 12 MR. WALEK: Okay. Now we're better off.

 13 I guess we can only have a limited number on at

 14 the same time. All right. Again, we're sliding

 15 off into the data collection instrument, and I'm

 16 hearing you, I'm hearing what you're saying with

 17 respect to the data collection instrument, but I'm

 18 also trying to focus my resources on what I need

 19 to do.

 20 Now, I will tell you, just to disabuse

 21 some people at the table of a couple of things

 22 that I've heard today that trouble me greatly is
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 1 that you have down here what a person from one

 2 part of the SEC who's working on a team that --

 3 well, she's done most recently the family fit

 4 issue that's come up, but she's also been working

 5 with a team that's done the data collection.

 6 You've got Doug from the team that

 7 handles the 4.5 issues, and we've been talking

 8 about harmonization. I've also been talking with

 9 David Vaughn, et cetera, with respect to

 10 harmonization and form PF. We've been working on

 11 that data collection form since, I think it's now

 12 almost -- it'll be two years in October, not on

 13 that form, per se, but on the data collection

 14 instruments, starting with FSA and IOSCO, okay.

 15 We've been working for two years, and, in fact,

 16 I'm going to the IOSCO TCFUE meeting on August

 17 2nd. All of this stuff is throwing together.

 18 In terms of harmonization on that, we

 19 have been working on the form, I don't think we've

 20 had a meeting where we haven't met on the form

 21 together with also the other members of the FSOC.

 22 And so this issue that we haven't -- the FSOC
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 1 hasn't talked to us, we've met with those people

 2 on those -- on the FSOC on a regularized basis,

 3 okay, so it has been harmonized. And so,

 4 likewise, we've been talking with Doug about

 5 harmonizing other stuff. That's why I want to try

 6 and get down to the nitty gritty. I don't want to

 7 know if it's disclosure generally, I want to know

 8 if it's disclosure item on this issue that we need

 9 to fix, if it's disclosure item this issue we need

 10 to fix, because we have been going round and round

 11 and round.

 12 There was a harmonization panel, I think

 13 it was mentioned by the Chamber of Commerce, which

 14 actually wasn't part of this rulemaking process,

 15 that was directed by Congress and needs to be

 16 addressed separately. So it doesn't make this a

 17 violation of the APA.

 18 Nonetheless, we have started with that

 19 harmonization conference, which Doug -- I think

 20 David Vaughn was on it, and Doug, as well, we've

 21 had meetings on this on a regularized basis, and

 22 what's troubling me is, we keep coming back to the
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 1 same point.

 2 We have generalized areas, but give me

 3 the specifics as to what we need to fix, okay.

 4 And sorry for that little bit of getting on my

 5 soap box, but I feel it's going around and around

 6 on the same points. Now, some of the things I

 7 hear we're fairly close on, and I think, you know,

 8 depending on how things go, you know, we'll see

 9 what you guys think in the end, but the bottom

 10 line is, what are the specifics, okay. And coming

 11 back to form PF and PQR, that's not the point

 12 today for another issue, for another day, tell me

 13 line item by line item what you don't like or what

 14 you think is inconsistent with the SEC's.

 15 MS. BAUR: So, Kevin, I can't give you a

 16 line item by line item analysis, which I know is

 17 what you just asked for. What I can say is that

 18 from the disclosure standpoint for investment

 19 advisors, for the last number of years, maybe even

 20 going back ten years, as we were talking about

 21 with Doug earlier this morning, the SEC has been

 22 working on changes to form 80B, and finally we've
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 1 gotten the changes adopted, and so we're now

 2 trying to absorb those and distill those and

 3 figure out how those are going to apply to us.

 4 So I think from the investment advisor

 5 standpoint, we're trying to focus on how to comply

 6 with these new rules, and to have another layer of

 7 additional rules I think would be very challenging

 8 at this point. So I mean from the advisor's

 9 perspective, I think that that's currently what

 10 we're dealing with on the disclosure side.

 11 MS. CHOTINER: Can I just make a

 12 procedure?

 13 MR. WALEK: Yes.

 14 MS. CHOTINER: Procedural issue, three

 15 to four microphones seems to be the limit, so if

 16 we can try to keep it to three, it seems like four

 17 might have triggered the outage, so just --

 18 MR. WALEK: And I appreciate that

 19 comment, but I will tell you that one of the

 20 things that we will do on our side is, we are

 21 looking at the things that have just been done by

 22 the SEC, and we will bring ours into line with
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 1 what they've been working on to the extent that

 2 it's appropriate, or that we don't have a

 3 definitional difference because of our statute.

 4 Some of the issues that arise are

 5 actually statutory definitional differences and

 6 some are regulatory definitional differences. To

 7 the extent we can make the fixes, we can make

 8 them, but we may not be able to fix all of those

 9 little minute things, but we'd like to know line

 10 by line what they are, okay.

 11 And again, we said the record is open

 12 for three weeks, but that's really what we're

 13 looking for here, and the same thing with

 14 harmonization. You've helped a lot here, because

 15 there are some specifics that I've gotten today, I

 16 got three pages worth of specifics that we can

 17 work on and work at in greater detail, some of

 18 which we've already discussed with Doug, and so I

 19 think we're working along those lines. So even

 20 though I may have sounded nasty there, I don't

 21 mean to be too nasty. With that, anything else in

 22 the 4.13 area that you want to raise, the
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 1 4.13(a)(3) area, (a)(4) is coming up later.

 2 MR. NEVINS: Can I quickly make a

 3 comment?

 4 MR. WALEK: Sure.

 5 MR. NEVINS: So really just to tie it

 6 all together, you know, I fully support the idea

 7 of maintaining a de minimis exception for

 8 4.13(a)(3), I think that that's something that

 9 should be implemented in any rule change here. We

 10 discussed a little bit earlier on the 4.5 panels

 11 this morning, it's our view that any changes that,

 12 or any carve outs rather that are included in a

 13 change to 4.5 should be considered equally for

 14 changes to 4.13, both (a)(3) and (a)(4).

 15 But when we're talking about things

 16 like, you know, resource requirements and cost and

 17 the like, and just thinking through some of the

 18 numbers that Dan threw out at the NFA, and this

 19 was the point I was going to raise earlier, I'm

 20 glad that Todd and Dan hit upon it, now that we

 21 have swaps into the mix, you know, I don't know if

 22 the numbers of exemptions that are on the books
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 1 today are adequately going to capture the

 2 marketplace of who could be required to file under

 3 a revised 4.13. So you're talking about a lot of

 4 potential players. And it's an interest to us at

 5 Fidelity because we have an institutional

 6 management business, so we manage other accounts

 7 other than mutual funds, commodity pools, ERISA

 8 accounts and the like that use other exemptions

 9 here, but we do rely on 4.13, as well. So, again,

 10 it's an interest to us, and I think that it

 11 certainly makes sense to think about the scope of

 12 the potential filers and to appropriately adjust

 13 whatever final rule goes into place here to pick

 14 up those categories that you think really require

 15 that additional level of oversight.

 16 MR. GROOME: You asked the question

 17 reporting disclosure, books and records,

 18 harmonization, where are the priorities, and just

 19 to back up what Marc said, we're not trying to

 20 overreach, but the answer really is as much as

 21 possible harmonize, it really is, and that's --

 22 and where I would take that to the next level of
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 1 the conversation is, and I apologize in repeating

 2 myself in some respect, ask what it is you're

 3 trying to achieve, if it's just tracking who's in

 4 the industry, we understand that, registration

 5 goes one large step to get there, but not all the

 6 way, use some form of basic, relatively basic

 7 annually gathered type of information to track

 8 who's in the industry, what strategies are being

 9 pursued, how the growth of the industry is going

 10 on, because that's relevant information for you

 11 and, for FSOC for that matter, and then

 12 secondarily, if your information is much more on

 13 the systemic risk side, which is where I read most

 14 of the G-20 calls, the Dodd Frank calls, that's a

 15 very different approach.

 16 And so when I look at Schedules A, B and

 17 C within PQR, I do see substantial differences

 18 from PF, not least of which is on the threshold

 19 side. There are very small people providing --

 20 may have to provide position level data to someone

 21 like yourself under Schedule A, which they would

 22 not have to do under PF, because they wouldn't be
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 1 caught at all, they might even be an exempt

 2 advisor under the SEC approach.

 3 And the SEC has an exempt advisor

 4 reporting approach, which maybe I'm wrong, but

 5 I've broadly described as a tracking mechanism to

 6 see who's in the industry, because the information

 7 is basically so basic. So I apologize, but go

 8 back to what is it you're trying to achieve

 9 through the -- everything above registration.

 10 MR. WALEK: We'll take a longer look at

 11 Schedule A and see what's there, because that does

 12 help. Believe it or not, we were scheduled to

 13 take a break now for five minutes, and we're

 14 exactly where we were supposed to be, so we're

 15 taking a five minute break. When we come back, we

 16 will be talking about 4.13(a)(4), and starting off

 17 with the family office issue, and then the foreign

 18 commodity pool issue, pool operator issue.

 19 (Recess)

 20 MR. WALEK: Okay. I want to start this

 21 panel off with the family office issue, and what

 22 is the family office issue? In at least one
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 1 comment letter that I'm aware of, if not multiple

 2 comments letters, okay, it was raised that by

 3 doing away with 4.13(a)(4), what would happen to a

 4 family office, and how would it, you know, or

 5 should they be exempted or do they fall, you know,

 6 what was going to happen?

 7 And as I mentioned, our colleagues over

 8 at the SEC have already dealt with the family

 9 office issue, and so I guess the real question is,

 10 in terms of what we're working on, one of the

 11 thoughts is, well, we can just adopt what the SEC

 12 did, or by cross referencing it, or are there

 13 still issues. And so with that, I guess I would

 14 turn it over first to Martin. Are there other

 15 issues that still need to be addressed in this

 16 area?

 17 MR. LYBECKER: How about if I answer

 18 that, but not make it the very first answer that

 19 you hear?

 20 MR. WALEK: Okay, however you want to

 21 handle it, however you want to handle it.

 22 MR. LYBECKER: So let's start with
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 1 describing what we're talking about, because it

 2 seems to me you're, more than anything else, and I

 3 think Sarah and Doug would say the same thing, is

 4 that you are missing information, and you'll make

 5 much better decisions if you know what you're

 6 talking about.

 7 MR. WALEK: Absolutely.

 8 MR. LYBECKER: Okay. It usually turns

 9 out that one or more persons, through their

 10 economic prowess, has created wealth, and when

 11 they have progeny, there is - the family will want

 12 to preserve the wealth, share the wealth with

 13 their children. Usually there's charitable and

 14 community involvement, so there's a lot of good

 15 reasons why families band together.

 16 It isn't necessarily that they start in

 17 the first generation. I'll use real people so

 18 that we make this not hypothetical. Bill Gates'

 19 father wasn't the one who founded Microsoft, but

 20 Bill -- certainly are a family office, and the

 21 Gates Foundation certainly is a charitable

 22 foundation that is of some consequence. Bill has
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 1 been generous to his parents, his grandparents,

 2 and his sister, and his children. But if you

 3 count generations, it's him, and then you have to

 4 count generations up to see what the family

 5 actually looks like.

 6 Others that started much more earlier in

 7 our economic life, ones in the 1800's, there are

 8 families who made the things that plowed the

 9 prairie and gave us corn. Those families had

 10 family offices starting in the 1880's. The one

 11 I'm thinking about formed a corporation, put all

 12 the shares of the family company in the

 13 corporation, something every lawyer at this table

 14 would gasp at, but you have to remember, it's

 15 1880, they thought that was a wise idea, and we

 16 didn't have income taxes until 1910, so it seemed

 17 perfectly sensible to them to do it that way.

 18 It causes lots of problems, and the two

 19 of them know both statutes apply to that

 20 situation. So I have a very interesting client.

 21 Others, the family wealth was there, and there is

 22 a patriarch, someone that you can point to, but
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 1 they didn't decide to band together until the

 2 second and third generations. So in the family

 3 office parlance, when you ask about if they use --

 4 the first thing they usually tell you is where

 5 they are, and they'll talk about G-2, G-3, G-4,

 6 it's the first, second, third generation from the

 7 person they're thinking was the patriarch, and he

 8 may have been the one who created the family

 9 wealth, he may not have. You can look at the

 10 Rockefeller's and figure out what Senator

 11 Rockefeller would be compared to his great

 12 grandfather.

 13 To the extent that you're talking about

 14 family offices, you also have to sort of think of

 15 volume, and I'm going to use -- it's easier to

 16 talk about compass than it is anything else.

 17 Almost always, whoever created the family wealth

 18 will take care of his parents, maybe his

 19 grandparents, but, of course, he's more likely

 20 than not to be married, so you have a spouse and

 21 her family coming into the family office. They'll

 22 take care of all of their siblings. So down one
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 1 or two generations, you end up with aunts, nieces,

 2 nephews, because everything gets populated north,

 3 east, south, east and west, and then obviously

 4 what you're doing is counting how far down.

 5 We have one particular family office

 6 that didn't get formed until they were all at the

 7 G-4 level, so every single person was a cousin.

 8 They had common ancestors, but no common parents,

 9 I mean immediate parents. Sometimes the family

 10 office was formed by the patriarch and he was

 11 there to protect his family, so he set up trusts,

 12 and when the children died, their part of the

 13 wealth was made part of the family office, and so

 14 the thing that owns the family office is the trust

 15 that gave an irrevocable trust from the early

 16 1900's or 1800's that gave the money to the family

 17 office.

 18 Others have been formed at sort of the

 19 far end, where professional managers have told the

 20 family, it's really insane for you to all invest

 21 alone, you should invest together, you'll have

 22 much greater buying power, and we can deal with
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 1 you better that way.

 2 So the person who formed the family

 3 office is actually the professional management.

 4 Most families don't manage their own money, that

 5 is, the family members aren't involved. And when

 6 you get to the third, fourth and fifth

 7 generations, the difference is that the first

 8 person may have been immensely wealthy personally,

 9 but usually by the time you get to the third and

 10 fourth generation, the difference is, they all go

 11 to work somewhere, but they have very nice

 12 vacations and they might have a boat and a bigger

 13 house than you would otherwise expect, but when

 14 you look at what the family has got, we're still

 15 talking about a lot of money. So before you were

 16 trying to demographics, the group I represent is a

 17 coalition that was formed out of the whole family

 18 office industry. There's 60 of them. I couldn't

 19 guess at the average assets under management per

 20 family, but it has to be in the billions.

 21 There are 2,500 family offices in the

 22 United States, and I have no way of measuring what
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 1 the effect is. But as we've -- okay, period.

 2 Family offices have bumped into the Investment

 3 Advisors Act routinely, and they've bumped into

 4 your statute. And I'm not going to tell you about

 5 your law, that's not my business.

 6 But on the Advisors Act side, we had a

 7 lot of rubber. You could find ways -- there was

 8 an exception for private investment advisors, and

 9 we all got used to counting to 14. You could use

 10 your fingers and your hands, but somehow you had

 11 to find a way to get to 14, and if you did, then

 12 you would - all the things being equal, you could

 13 rely on the private advisor exception.

 14 So, of course, Dodd Frank threw us out

 15 along with private equity funds, hedge funds, and

 16 venture capital funds by repealing Section

 17 203(b)(3). Private -- family offices have -- many

 18 of them have grown beyond a size that could have

 19 supported counting to 14 no matter how creative

 20 you were in doing that. So folks like the

 21 Rockefellers and the Pitcairns have given up on

 22 being a private family and have started what both
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 1 Sarah and Bob, I'm sorry, Doug would characterize

 2 as a business, and indeed, they have formed mutual

 3 funds, done all sorts of things, and there are

 4 companies that manage assets for private families,

 5 including companies like Bessemer Trust, U.S.

 6 Trust and Northern Trust.

 7 So there's all sorts of ways that they

 8 can manage their assets and work their affairs.

 9 At the end of the day, the family office almost

 10 always does all the tax returns, all the personal

 11 accounting, and they may or may not have anything

 12 to do with the actual investments, their role may

 13 be limited to looking at private investment

 14 alternatives, hedge fund prospectuses, and then

 15 letting the family choose, or they may have some

 16 advisors who choose. There's lots of different

 17 ways they manage their wealth, it all depends.

 18 We have one family in Florida who --

 19 almost all the families have some sort of core

 20 asset, and if you think of it the way John Grady

 21 would, they've got a core asset that's some part

 22 of the S&P 500, so the last thing they're going to
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 1 do is go out and replicate -- they're never going

 2 to buy S&P 500 index funds because they already

 3 did that with the company that was their family

 4 wealth. So you tend to find them in the '50s and

 5 '60s being the people who were the seed capital

 6 for Infotron or Genentech or something like that.

 7 They went to some other part of the risk factor,

 8 right, to offset the balance, the S&P 500 risk

 9 they already had.

 10 The point is, some of them outgrew

 11 Section 203(b)(3), and I, among others, filed

 12 exemptive applications with the SEC under what was

 13 then Section 202(a)(11)(f), and our argument was

 14 that there was no federal interest in regulating

 15 the family. The family office existed solely for

 16 the family, it was for the benefit of the

 17 descendents of some common ancestor, and so they

 18 were much more likely to take care of themselves

 19 and take care of each other than others would be.

 20 There was no compelling federal

 21 interest, and I would have said, one of the

 22 ancillary benefits is, you didn't have to have
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 1 spats between brothers and sisters in federal

 2 district courts where the SEC would show up as an

 3 expert witness on whether or not spitting on the

 4 sidewalk was a breach of fiduciary duty, right. I

 5 mean they got rid of them, and that I always

 6 thought was a really good thing, all the things be

 7 equal, then at least it was in divorce court, or,

 8 you know, orphans court or something. There were

 9 at least 12 or 13 of those applications that were

 10 processed between 1940 and the time of Dodd Frank.

 11 There was no ability to get an exception for

 12 family offices in the House bill, but there was in

 13 the Senate, and it shows up in the initial drafts

 14 of the Dodd Bill, as Section 409, and stayed in.

 15 There was only one amendment that was

 16 made, it was on the floor of the Senate by then

 17 Senator Lincoln, who put in a grandfathering

 18 provision that's completely incoherent and had to

 19 have been written on the back of an envelope by

 20 one constituent who didn't know what he was doing,

 21 but it's there. Otherwise, everything was the

 22 same from the beginning.
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 1 And the understanding from the beginning

 2 was that the SEC had no, I'll speak for you, but

 3 you can speak for yourself, had no interest in

 4 regulating family offices, and so it was one of

 5 the few times when I worked on something where

 6 there was no opposition, but they did want, and

 7 the statute passed with rulemaking to define what

 8 was a family office, so that's what you alluded

 9 to.

 10 All right, for rulemaking purposes, once

 11 you've said family, then you've actually got to

 12 figure out what that means. And in our modern

 13 times, leaving everything else, there's a whole

 14 lot of social policy questions that pop up that

 15 are not a lot of fun to deal with, and we've I

 16 think managed to get all of that out of the

 17 rulemaking, otherwise, we would have had a dispute

 18 about what DOMA means forever, okay.

 19 So it's fairly standard, you bounce up

 20 against practical problems. If the organizing

 21 principal is, everything is connected by blood,

 22 and you're all lineal descendants, as soon as you
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 1 have a non-blood relative, it gets a little harder

 2 to explain why that's a really good idea.

 3 So stepmothers, adopted children,

 4 step-children, gay and lesbian children, all of

 5 the normal social problems are right there, and

 6 once you hit any one of them, it all has to depend

 7 on lineal descendants, you basically have a

 8 circuit breaker, and that is difficult, okay.

 9 So I was very grateful that from the

 10 beginning, the SEC staff showed real sensitivity

 11 to that. And we processed an exemptive

 12 application with probably the worse set of

 13 conditions in it, factual conditions, basically in

 14 order to give them an opportunity to handle that.

 15 It was done deliberately on behalf of the

 16 community. So it was husband and wife, they got a

 17 divorce, kids go with the mom, he remarries, she

 18 comes with children, the children are in their

 19 teens, and at that point, it is very hard to

 20 explain why you have to adopt them, they are

 21 step-children, they've living in the house, but in

 22 the greater scheme of things, the point is that if
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 1 the wealth husband takes everybody into his house,

 2 it's pretty hard to explain why Advisors Act

 3 policy should explain who's part of the family and

 4 who's not.

 5 And gratefully, we didn't have to have

 6 that conversation, and there was only two really

 7 rogue and random comment letters in the comment

 8 file that they had to deal with, so that was good.

 9 But after you've figured out what the

 10 nuclear family is, then you have to figure out

 11 what the rest of the family is. So the way we

 12 always proposed it was to figure out who the

 13 person you wanted to point out was, and you can't

 14 say it's the person who created the wealth,

 15 because he wasn't necessarily the one that created

 16 the family office. But you've always -- to the

 17 extent that anybody here is married, you know

 18 you've got another side of your family you

 19 inherited on the day that you got married, so if

 20 you follow life down through descendants, you have

 21 a spouse whose family thinks she belongs in the

 22 family, too, so you've got to find a way to deal
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 1 with mother-in-law, sisters, brothers, all from

 2 the non-ancestor side of the family, and siblings.

 3 So it's north, south, east, west,

 4 families preserve their wealth through a lot of

 5 different things, usually trusts, they have a lot

 6 of different ways to set up trusts, many families

 7 support foundations. I'll name the one that's the

 8 most obvious, the Bill and Linda Gates Foundation,

 9 it's not only their money, their personal money,

 10 but at this point, it's Warren Buffet's money that

 11 comes in in a segment every single year, and that

 12 they must spend every single year.

 13 I'm not saying anything isn't a public

 14 record, so, you know, that's why I keep using

 15 them, and everybody knows them, so it's easier

 16 than trying to make up a mythical family.

 17 But the point is, families support all

 18 sorts of foundations, some of their own personal

 19 foundations, some are the things they feel

 20 strongly about. Almost everybody, if you've done

 21 your own personal estate planning, discovers that

 22 when in all of the imaginary lawyer discussions
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 1 about who's died, you have to make everybody in

 2 the family die in one horrific, you know,

 3 hypothetical plane crash or car crash, then what

 4 you want to do is always what the person says, and

 5 not surprisingly, people frequently don't want

 6 their money just to escheat and pay off the debt

 7 of New York State or the United States, they would

 8 like it to go somewhere else, and so you often

 9 find charities.

 10 So one of the distinguishing features

 11 about this is, tax exempt institutions who are

 12 both income beneficiaries and remain -- but are

 13 not clients in the sense that there is any

 14 investment advisory relationship between the

 15 family and the foundation. That's not true of

 16 Bill and Linda Gates, but that's something else

 17 again.

 18 And then there's always people invest.

 19 In the same way that you had a discussion earlier

 20 about subsidiaries, that's exactly what people do.

 21 If you want to develop a strip mall, you create a

 22 limited partnership, it has a general partner, the
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 1 general partner is normally an employee of the

 2 family office or a member of the family office,

 3 that general partner decides what the limited

 4 partnership does, the limited partnership offers

 5 its interest to the family, everybody -- no one

 6 has personal liability, it's tax planning

 7 efficient, but you look around and there's all

 8 sorts of stuff, and in the old days, we used to

 9 have to figure out how you counted that stuff

 10 towards 14.

 11 In the last application that was

 12 processed, the staff was gracious enough to buy

 13 until we got one more concept, which was that it's

 14 very hard for family offices to keep their

 15 employees unless you can offer them incentives.

 16 And so we argued that the key employees, who were

 17 the ones actually involved in developing the

 18 investment advice to the extent the family always

 19 did that, ought to be allowed to co-invest with

 20 the family, and that was allowed.

 21 So family turns out to be more

 22 complicated than you might think. It's not only
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 1 the nuclear family, but all the people become part

 2 of the family, looking north, both sides of the

 3 husband/wife pyramid, and it's siblings, so you

 4 get nieces and nephews, and then down, where you

 5 look south, and then all the ways in which the

 6 money is invested, because the family is actually

 7 giving investment advice in some respect or

 8 another to all of those things.

 9 You asked the comment at the beginning,

 10 we've had the family office rule for a couple of

 11 weeks, we've had a number of meetings, we've had a

 12 lot of conversations about it, and I've been

 13 quoted publicly to say, and I believe it to be

 14 true, that the division is to congratulated. They

 15 went from a rule that, with all respect, was 100

 16 percent unsatisfactory, or some other number

 17 higher than that if you can do that in math, to a

 18 rule that was to 95 percent satisfactory.

 19 There are things that we're still

 20 mulling over, and I've opened the door to more

 21 discussions. Now that the rule has been adopted,

 22 the rulemaking period isn't there, and we can go
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 1 talk in a way that's a little more comfortable.

 2 But more than anything else, I'm going

 3 to do a plebiscite, so we'll know amongst -- and

 4 get information. So we'll actually know this

 5 problem doesn't work for 65 families, this problem

 6 doesn't work for 100 families, this -- whatever it

 7 is, so I don't want to characterize things as

 8 didn't work, there are things that I think there

 9 are -- I would, again, with all respect, are

 10 probably drafting errors, where there's a singular

 11 used and the plural makes more sense, you know,

 12 that's one thing.

 13 There are things where parts of whole

 14 families disappeared because of the genealogy and

 15 the way they defined the term ancestor. We may

 16 have to go after -- ask for some sort of amendment

 17 to deal with that. As I said to Doug before,

 18 there's, you know, we live in Washington, there's

 19 88 keys on a piano, you know, we can figure out

 20 which way to deal with each problem, but it's not

 21 over, and thankfully the comment -- the extended

 22 period for compliance means that we've got nine
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 1 months to figure this out and there's really no

 2 one who's going to be opposed to any of this.

 3 We've also, for whatever it's worth, and

 4 just so you know, Representative Ben Sarlin and

 5 others have submitted a bill in the House, it's HR

 6 2225, that would deal with family offices, and to

 7 cut to the chase, it would take away the SEC's

 8 ability to define the term family and would put

 9 instead a definition of family that's more like

 10 what -- is patterned more the way we did it in our

 11 comment letter, and that's just -- I mean all

 12 things being equal, that's what we would always

 13 prefer your own work, and I won't even begin to

 14 comment on the likelihood that something that

 15 comes out of that committee can get past in this

 16 Congress or any Congress.

 17 MR. WALEK: Thank you very much. I

 18 don't think you could have been more thorough that

 19 that, I appreciate the time you took to put that

 20 together, and I think it helps us, and it may help

 21 the SEC, as well. And what I would ask, though,

 22 is that anything you plan on sharing with the SEC,
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 1 if it's in the near future, or even in the longer

 2 future, please, if you would not mind sharing that

 3 with us, as well, so that we can take the benefit

 4 of your knowledge in this area.

 5 MS. OLEAR: And as we continue to work

 6 and consider whether or not our adoption of a

 7 family office's exemption would be appropriate, I

 8 know that I will be in contact with you, if that

 9 is all right.

 10 MR. LYBECKER: That's fine. I actually

 11 did that a capella, without written preparation.

 12 MS. OLEAR: We're going to have a

 13 transcript.

 14 MR. LYBECKER: I understand, that's why

 15 I did it.

 16 MS. OLEAR: So we appreciate that.

 17 MR. WALEK: And so if there's anything

 18 you need to correct, it'll be --

 19 MR. LYBECKER: No, what I didn't want to

 20 do is just read something to you, so --

 21 MR. WALEK: Yeah, I appreciate that, we

 22 definitely appreciate that. Next up on our agenda
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 1 is foreign commodity pool operators, and I'm

 2 guessing that, Todd --

 3 MR. GROOME: Yes; in large part, I think

 4 we've talked about it under the last session,

 5 under 4.13, in many respects, or I tried to bring

 6 it out. The foreign private advisor exemption as

 7 proposed by the SEC is something we would like to

 8 see applied here. I mean, once again, just to

 9 quickly summarize, multiple registration,

 10 different registration, different -- multiple and

 11 different reporting requirements is what we're

 12 trying to avoid.

 13 We're trying to avoid it here in this

 14 country between the CFTC and the SEC, and then, as

 15 I alluded to in my initial comments, you multiply

 16 that when you think that another 25 percent of the

 17 industry is in the UK, you add more now with the

 18 EU process out of Brussels, and Hong Kong,

 19 Singapore and Australia are also very important

 20 jurisdictions in this conversation for our

 21 industry sector.

 22 MS. OLEAR: So if I can just -- so would
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 1 your group be comfortable if we were to adopt

 2 something that would be substantively identical to

 3 what -- or at least propose something that would

 4 be substantively identical to what the SEC is

 5 going to be operating under?

 6 MR. GROOME: I believe so, yes, in the

 7 sense that, you know, we are not opposed to

 8 information sharing and all of that, so if we

 9 ended up in a place where say a UK advisor may or

 10 may not be registered with the SEC for business

 11 reasons, as well as regulatory, and they do file

 12 reports with the FSA, and they share them with the

 13 SEC, and the SEC shares them with you and/or

 14 directly or through the FSOC treasury process,

 15 that's the result that we envision as the

 16 appropriate end game.

 17 MR. WALEK: Marc.

 18 MR. BAUM: Yeah, just one minor point,

 19 which is, you know, our issue, to the extent --

 20 our understanding is the Commission thinks it's

 21 sort of with this exemption in place, they're sort

 22 of certain system -- systemically important pools
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 1 that might be caught up under the SEC that you're

 2 not seeing, and the only thing we would say is

 3 that, you know, to the extent they fall outside

 4 your oversight at this point, you know, we

 5 recommend that the Commission figure out, again,

 6 figure out how to get -- the information is

 7 somewhere, and if it's at the SEC at this point,

 8 figure out how to get it without taking away, you

 9 know, without, you know, sort of craft your

 10 conclusions narrowly rather than broadly.

 11 MR. WALEK: Okay. Anybody else have

 12 anything on the foreign commodity pool issue, or

 13 4.13(a)(4), otherwise generally, or not generally?

 14 It looks like -- I see no red lights coming on,

 15 and it's 2:00, so you guys did a marvelous job,

 16 and I appreciate everything you've provided us

 17 with. We are truly working towards harmonization,

 18 whether you believe it or not, and whether I sound

 19 like it or not, but nonetheless, I appreciate your

 20 time and trouble because I know this has been, you

 21 know, takes something away from your regular work

 22 day, but we are taking it seriously.
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 1 (Whereupon, at 2:00 p.m., the

 2 PROCEEDINGS were adjourned.)

 3 * * * * *

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 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Stephen K. Garland, notary public in and for

 4 the District of Columbia, do hereby certify that

 5 the forgoing PROCEEDING was duly recorded and

 6 thereafter reduced to print under my direction;

 7 that the witnesses were sworn to tell the truth

 8 under penalty of perjury; that said transcript is

 9 a true record of the testimony given by witnesses;

 10 that I am neither counsel for, related to, nor

 11 employed by any of the parties to the action in

 12 which this proceeding was called; and,

 13 furthermore, that I am not a relative or employee

 14 of any attorney or counsel employed by the parties

 15 hereto, nor financially or otherwise interested in

 16 the outcome of this action.

 17 -----------------------------------

 18 Notary Public, in and for the District of Columbia

 19 My Commission Expires: May 31, 2014

 20

 21

 22