U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5430 

Facsimile: (202) 418-5547 

aradhakrishnan@cftc.gov

Division of Clearing and 

Intermediary Oversight

CFTC letter No. 06-26 

September 26, 2006 

Exemption 

Division of Clearing and Intermediary Oversight 

Re: Regulations 4.21, 4.22 and 4.23 

Request for exemption from certain Disclosure Document, recordkeeping and 

reporting requirements in connection with the operation of the Trust 

Dear : 

This is in response to your letter dated August 23, 2006, to the Division of Clearing and 

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

“Commission”), as supplemented by your e-mail messages and telephone conversations with 

Division staff (the “correspondence”). By the correspondence, you request, on behalf of “A”, a 

registered commodity pool operator (“CPO”), exemption from certain provisions of Commission 

Regulations 4.21, 4.22, and 4.23,1

 which concern, respectively, the disclosure, reporting and 

recordkeeping requirements applicable to registered CPOs, in connection with “A” serving as the 

registered CPO of each of the two series funds (each a “Fund” and collectively the “Funds”) 

comprising (the “Trust”). 

Background

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

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

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

Commission (“SEC”) (the “Registration Statement”).2

 The Shares of each Fund will be both 

 

1

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

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

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

2

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

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

Ananda Radhakrishnan 

 Director 
Page 2 

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

the requested exemption.3

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

similar to an exchange-traded fund, or ETF.4 Each Fund will seek to track the performance of a 

futures index (each an “Index”), each of which is described in your correspondence.5

 To this 

end, and as more fully described in your correspondence, each Fund will establish positions in 

the futures contracts tracked by the respective Index. 

Shares will be issued only in one or more blocks of Shares (“Baskets”), and in the first 

instance, only to an initial purchaser, anticipated to be (the “Initial Purchaser”), an affiliate of 

“A” that is a registered broker-dealer, registered with the Commission as a futures commission 

merchant, and the clearing broker for each Fund. The Initial Purchaser will commit to purchase 

the entire initial public offering of each Fund. The Initial Purchaser will not solicit or actively 

seek purchasers for Shares, and no person (other than the Initial Purchaser) will have any 

opportunity to purchase Shares prior to effectiveness of the Registration Statement and the listing 

 

3

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

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

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

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

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

and the Disclosure Document for the Fund. 

 Further, you have represented that “B” listing will not affect “A”’s obligation to comply 

with any other provision of the Commodity Exchange Act (the “Act”) or the Commission’s 

regulations issued thereunder applicable to CPOs in particular or to persons in general. The Act 

is found at 7 U.S.C. §1, et seq. (2000), and also may be accessed through the Commission’s 

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

4

 Unlike a typical ETF, however, each Fund will trade indirectly through a corresponding 

second fund that is a separate series (each a “Master Fund”) of (the “Master Trust”). The units 

of participation in each Master Fund are owned by “A” and the corresponding Fund. 

 The purpose of a two-tiered structure is to permit each Fund, which, as a commodity 

pool, would otherwise have to report its income to direct investors on a Form K-1, to provide 

information on a Form 1099 or substantially similar form, and thus in a format more akin to that 

given to ETF investors. This structure is not expected, however, to entail any material additional 

fees or costs for investors. 

 For the purpose of this letter, the Division is treating each Fund and Master Fund pair as a 

single commodity pool. 

5

 Each Fund will seek to track a version of the “C” over time. One Fund will track the “C” 

Index as calculated to reflect the performance of long (the “Long Index”), and the other Fund 

will track the “C” Index as calculated to reflect the performance of short (the “Short Index”). 
Page 3 

of the Shares on the “B”.6

 Subsequent to effectiveness of the Registration Statement, the Initial 

Purchaser will accept and fill orders and make an orderly market for the Shares.7

 Additionally, 

each Fund may sell Baskets to “Authorized Participants” (certain registered broker-dealers who 

are also participants in the “D”), rather than directly to the public. 

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

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

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

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

the secondary market. 

Discussion

Regulation 4.21 

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

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

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

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

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

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

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

regarding the pool before they commit their funds.”8

 

The sale of Shares to the Initial Purchaser or to any Authorized Participant will be 

conducted in compliance with Regulation 4.21. The Initial Purchaser or Authorized Participant, 

as the case may be, will receive (and will acknowledge such receipt in writing) a Disclosure 

Document, which will comply in full with the requirements in Part 4 of the Commission’s 

regulations, and which “A” will update in accordance with Commission requirements.9

You request exemption from the Disclosure Document delivery requirement of 

Regulation 4.21 in the case of sales by the Initial Purchaser to the public and to the extent, if any, 

 

6

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

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

7

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

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

although the Initial Purchaser may receive commissions and/or fees from investors who purchase 

the Shares. 

8

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

9

 See, e.g., Regulation 4.26, which contains various Disclosure Document updating 

requirements. 
Page 4 

that Authorized Participants may subsequently create additional Baskets and sell those Shares to 

the public. In support of your request for exemption, you state that the Internet websites 

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

current Disclosure Document for each Fund. You further state that “A” expects that prospective 

or actual investors will utilize the services of a registered broker-dealer, who will either inform 

them where they can obtain the current Disclosure Document, or, upon request, will deliver a 

copy of the current Disclosure Document.10 

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

subject to Regulation 4.21. The Division agrees with this conclusion.11 

Regulations 4.22(a) and (b) 

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

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

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

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

at least quarterly.12 The purpose of these rules is to “ensure that participants have a reasonably 

current knowledge of the pool’s trading performance and operating costs.”13 

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

Fund) typically does not readily know the identities of its ultimate beneficial owners. You 

request exemption from the Account Statement delivery requirement on the grounds that it 

would be unduly burdensome and costly to require “A” to ascertain on a monthly basis the 

 

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

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

requirement to register as a broker-dealer. 

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

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

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

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

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

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

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

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

pool participants. You have not requested exemption from Regulation 4.22(c) in connection 

with the operation of the Fund, and, in fact, you represent that “A” will comply with Regulation 

4.22(c) in connection with its operation of the Fund. Delivery of the Annual Report is required 

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

changes in ownership of shares. 

13 44 Fed. Reg. at 1922 (Jan. 8, 1979). 
Page 5 

identities of purchasers of Shares in the secondary market in order to comply with the 

requirement under Rules 4.22(a) and (b) to deliver monthly Account Statements to participants in 

each Fund.14 In this regard, you explain that, while publicly-offered commodity pools typically 

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

market for each Fund’s shares on the “B”, ownership of a Fund’s shares is expected to change 

frequently on a daily basis. 

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

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

the certification required by Rule 4.22(h), will be readily available via the Website Sources, of 

which availability the Disclosure Document will advise participants.15 In this regard, we 

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

of delivering the Annual Report and that, if the requested exemption is granted, the distribution 

expense of each Fund (an expense that is passed on to shareholders) will be approximately 1/12 

of what it would be otherwise. 

Regulation 4.23 

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

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

business office. The books and records must be available to pool participants for inspection and 

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

representative of the Commission or the United States Department of Justice. The purpose of the 

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

dealing properly with pool funds.”16 

You request exemption from the location requirement of Regulation 4.23(a) such that 

books and records of the Trust, the Master Trust, and each Fund (including the corresponding 

Master Fund) may be kept by its administrator, the “E”, a banking corporation subject to 

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

 

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

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

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

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

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

15 Further, the “B” website will link to the “A” and Fund websites for other financial 

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

duly authorized to bind the CPO must sign an oath or affirmation that, to the best of the 

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

in the Account Statement is accurate and complete. 

16 44 Fed. Reg. at 1922.
Page 6 

a registered broker-dealer that provides certain distribution-related services to the Trust, the 

Master Trust, and each Fund (with respect to records related to Basket creations and redemptions 

and certain other functions), at their respective addresses as specified in your August 8, 2006 

letter.17 

You further ask for confirmation that neither “E” nor “G” will be deemed to be acting as 

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

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

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

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

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

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

change) a Fund’s futures commission merchant.18

Conclusion

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

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

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

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

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

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

respect to sales of Shares by the Initial Purchaser and by Authorized Participants when 

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

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

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

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

 

17 Each of “E” and “G” has provided the Division with signed acknowledgments that the 

books and records of the Trust, the Master Trust, and each Fund (including its corresponding 

Master Fund) may be inspected and copied by any representative of the Commission or the 

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

hours by Fund participants. Included are schedules specifying the classes of books and records, 

by subparagraph of Regulation 4.23, that each of “E” and “G” will be keeping. 

You note that “A” will maintain all of the trading records for the Master Trust as required 

by Regulation 4.23(a)(1). 

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

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

CFTC Staff Letter No. 06-15 [http://www.cftc.gov/files/tm/letters/06letters/tm06-15.pdf] (July 

12, 2006) (Division granted a CPO an exemption to keep pool books and records with the pool’s 

administrator and its distributor, neither of which was thereby deemed to be acting as a CPO of 

the pool.) 
Page 7 

would otherwise be contained in such reports is maintained on the Fund and “A” websites; and 

(3) the requirement of Regulation 4.23 to keep required books and records at “A”’s main 

business office to the extent that such books and records are maintained at the offices of “E” or 

“G”. Consistent with prior practice,19 the exemption from the books and records location 

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

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

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

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

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

authorized to review such books and records in accordance with the Act and Commission 

regulations; (3) within forty-eight hours after a request by a representative of the foregoing, “A” 

obtain the original books and records from “E”’s offices in “H” or from “G”’s offices in “I”, as 

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

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

required under Regulation 4.23; and (5) “A” remain fully responsible for compliance with 

Regulation 4.23. 

This letter exempts “A” from Regulations 4.21, 4.22 and 4.23, as stated above. It does 

not excuse “A” from compliance with any other aspect of the Commission’s disclosure, reporting 

and recordkeeping requirements for registered CPOs, nor does it excuse “A” from compliance 

with any other applicable requirements contained in the Act or in the Commission’s regulations 

issued thereunder. For example, “A” remains subject to Regulation 1.31, and the Commission 

maintains its right under that regulation to inspect the required books and records of “A” at “E”’s 

offices in “H” and at “G”’s offices in “I”. Additionally, “A” remains subject to all antifraud 

provisions of the Act and the Commission’s regulations, to the reporting requirements for traders 

set forth in Parts 15, 18 and 19 of the Commission’s regulations, and to all other applicable 

provisions of Part 4. 

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

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

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

immediately in the event that the operations of “A”, the Trust, any Fund, the Master Trust, or any 

Master Fund change in any material way from those represented to us. 

 

19 See, e.g., Staff Letter 06-15. 
Page 8 

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

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

 Very truly yours, 

 Ananda Radhakrishnan 

 Director