2016-18400
Federal Register, Volume 81 Issue 151 (Friday, August 5, 2016)
[Federal Register Volume 81, Number 151 (Friday, August 5, 2016)]
[Proposed Rules]
[Pages 51828-51835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18400]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AE47
Commodity Pool Operator Annual Report
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing to amend certain of its regulations applicable to the
Annual Report that each person registered or required to be registered
as a commodity pool operator (CPO) must distribute for each commodity
pool that it operates (Proposal). Specifically, the Proposal addresses
the use of additional alternative generally accepted accounting
principles, standards or practices, and the Annual Report audit
requirement where the first fiscal year of a pool consists of a period
of three months or less from the date of formation of the pool.
DATES: Comments must be received on or before September 6, 2016.
ADDRESSES: You may submit comments, identified by RIN 3038-AE47 and
``Commodity Pool Operator Annual Report,'' by any of the following
methods:
CFTC Web site: http://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the Web site.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as Mail, above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one of these methods.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that may be exempt from disclosure under the Freedom of
Information Act (FOIA), a petition for confidential treatment of the
exempt information may be submitted according to the procedures
established in Commission Regulation 145.9.\1\
---------------------------------------------------------------------------
\1\ 17 CFR 145.9 (2016). The Commission's regulations are found
at 17 CFR Ch. I (2016). They are accessible through the Commission's
Web site.
---------------------------------------------------------------------------
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the FOIA.
FOR FURTHER INFORMATION CONTACT: Christopher W. Cummings, Special
Counsel, 202-418-5445, [email protected] or Barbara S. Gold, Associate
Director, 202-418-5441, [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Part 4 of the Commission's Regulations
Part 4 of the Commission's regulations governs the operations and
activities of CPOs.\2\ It requires each CPO registered or required to
be registered with the Commission: To deliver to each participant in
its commodity pool a Disclosure Document for the pool containing
specified information (Regulations 4.21, 4.24, 4.25 and 4.26); to
distribute to each participant periodic unaudited Account Statements
for the pool (Regulation 4.22(a)) and an audited Annual Report for the
pool (Regulation 4.22(c)); and to make and keep specified books and
records (Regulation 4.23). Additionally, Part 4 prohibits certain
activities on the part of all CPOs (Regulations 4.20 and 4.41) and
provides for various CPO definitional exclusions (Regulation 4.5), CPO
registration exemptions (Regulation 4.13), and compliance exemptions
from otherwise applicable CPO requirements (Regulations 4.7, 4.12(b),
and 4.12(c)).\3\
---------------------------------------------------------------------------
\2\ Section 1a(11) of the Commodity Exchange Act (Act or CEA), 7
U.S.C. 1a(11) (2012), defines the term ``commodity pool operator''
and CEA Section 4m(1) generally requires each person who comes
within the CPO definition to register as a CPO with the Commission.
The Act is found at 7 U.S.C. et seq. (2012). It similarly is
accessible through the Commission's Web site.
\3\ Part 4 contains many similar provisions applicable to
commodity trading advisors (CTAs). The Proposal does not pertain to
CTAs, however, because CTAs do not operate commodity pools (CPOs do)
and therefore there is no Annual Report requirement applicable to
them.
---------------------------------------------------------------------------
Over the past years, and pursuant to authority delegated to it by
Regulation 140.93, Commission staff has provided exemptive relief from
specific Part 4 requirements on a case-by-case basis.\4\ By this
Federal Register release, the Commission is proposing to codify certain
of these exemptions as applicable to the Annual Report.
---------------------------------------------------------------------------
\4\ These were issued by the Commission's Division of Swap
Dealer and Intermediary Oversight (``DSIO'') and its predecessors,
the Division of Clearing and Intermediary Oversight and the Division
of Trading and Markets.
Regulation 140.93 currently delegates to the Director of DSIO
``all functions reserved to the Commission'' in Regulation 4.12(a)--
which provides that the Commission ``may exempt any person or any
class or classes of persons from any provision of this Part 4 if it
finds that the exemption is not contrary to the public interest and
the purposes of the provisions from which the exemption is sought''
and, further, that the Commission ``may grant the exemption subject
to such terms and conditions as it may find appropriate.''
---------------------------------------------------------------------------
B. Regulation 4.22: The Annual Report Requirement
Regulation 4.22 requires, in general, that each CPO registered or
required to be registered with the Commission to distribute to each
participant in each commodity pool it operates, and to submit to the
National Futures Association (NFA),\5\ an Annual Report for the pool
within 90 calendar days after the end of the pool's fiscal year.\6\
[[Page 51829]]
The regulation: Specifies the financial statements and related
information that the Annual Report must contain (Regulation 4.22(c));
requires that the financial statements must be presented and computed
in accordance with generally accepted accounting principles
consistently applied (U.S. GAAP) and that they must be audited by an
independent public accountant (Regulation 4.22(d)); includes specific
provisions applicable to the Statement of Operations (Regulation
4.22(e)); provides for an extension of an otherwise applicable
distribution deadline (Regulation 4.22(f)); governs fiscal year
election (Regulation 4.22(g)); mandates that the Annual Report be
accompanied by a prescribed oath or affirmation of the CPO (Regulation
4.22(h)); and permits electronic distribution of the Annual Report to a
participant if the participant consents to that method of distribution
(Regulation 4.22(i)).
---------------------------------------------------------------------------
\5\ NFA is registered as a futures association in accordance
with CEA Section 17. It is the only futures association registered
as such.
\6\ Regulation 4.22(c) further requires the CPO to submit to NFA
certain key financial balances from the Annual Report.
As noted above, Regulation 4.22 also requires each CPO
registered or required to be registered to distribute to each
participant in each commodity pool it operates an unaudited periodic
Account Statement for the pool. Specifically, Regulation 4.22(a)
prescribes the financial information the Account Statement must
contain, and Regulation 4.22(b) prescribes the frequency of
distribution of the Account Statement (quarterly or monthly,
depending on the size of the pool).
---------------------------------------------------------------------------
In connection with the adoption of the Annual Report requirement,
the Commission explained that the purpose of the Annual Report is to
provide pool participants ``with the information necessary to assess
the overall trading performance and financial condition of the pool''
and that the purpose of the requirement that the Annual Report be
audited is to ``promote greater accuracy in financial statements and
provide an independent review of the pool's activities.'' \7\ The
Commission believes that the amendments it is proposing today to
Regulation 4.22 are consistent with these purposes.
---------------------------------------------------------------------------
\7\ 44 FR 1918, 1922 (Jan. 8, 1979).
---------------------------------------------------------------------------
II. The Proposal
A. Proposed Amendment to Regulation 4.22(d)(2): Use of Additional
Alternative Generally Accepted Accounting Principles, Practices or
Standards
Regulation 4.22(d) specifies how the financial statements in the
Annual Report must be presented and computed. Currently, paragraph
(d)(1) of the regulation requires that these financial statements must
be presented and computed in accordance with generally accepted
accounting principles consistently applied, and paragraph (d)(2) of the
regulation makes available an exception to this requirement by
permitting the use of International Financial Reporting Standards
(IFRS) where certain criteria are met. A CPO seeking to avail itself of
Regulation 4.22(d)(2) must claim the relief by filing a signed notice
with NFA representing that: (1) The pool is organized under the laws of
a foreign jurisdiction; (2) the Annual Report will include a schedule
of investments (condensed unless a full schedule is required under
IFRS); (3) the use of IFRS to prepare the Annual Report is not
inconsistent with representations set forth in the pool's disclosures
to participants; (4) any special allocations of ownership equity will
be reported in accordance with Regulation 4.22(e); and (5) in the event
that IFRS requires consolidated financial statements for the pool
(e.g., in a master-feeder fund structure), all applicable disclosures
required by U.S. GAAP will be provided.
At the time that the Commission proposed to amend Regulation
4.22(d) to permit the use of IFRS, it acknowledged that its staff had
also been granting relief on a case-by-case basis to allow CPOs
operating commodity pools located outside the United States to use
accounting standards established in certain other jurisdictions, and it
invited such CPOs if they otherwise met the criteria of Regulation
4.22(d)(2) to continue requesting such relief from staff on a case-by-
case basis.\8\ The Commission now believes that staff's experience with
providing relief to use the accounting principles, standards or
practices followed in the U.K., Ireland, Luxembourg, and Canada
warrants extending relief comparable to that which Regulation 4.22(d)
provides for the use of IFRS. Accordingly, the Commission is proposing
to amend Regulation 4.22(d)(2) so that it would also permit the use of
generally accepted accounting principles, standards or practices
followed in the U.K., Ireland, Luxembourg, or Canada.\9\ A CPO desiring
to avail itself of any of these additional alternative accounting
principles, standards or practices would be required to claim this
relief by filing a notice with NFA containing the same representations
required for CPOs desiring to use IFRS.
---------------------------------------------------------------------------
\8\ See 74 FR 8220, 8224 (Feb. 24, 2009). Subsequent to the
Commission amending Regulation 4.22(d) to permit the use of IFRS,
Commission staff has granted relief to use accounting principles,
standards or practices established in the United Kingdom (U.K.),
Ireland, Luxembourg and Canada. See, e.g., CFTC Staff Letter 09-42
(U.K.) and CFTC Staff Letters 15-57 and 14-10 (Luxembourg). Staff
Letters are accessible through the Commission's Web site.
\9\ In order to clarify the existing text, the Commission is
also proposing to specify in Regulation 4.22(d)(1) that the
regulatory norm is that ``[t]he financial statements in the Annual
Report must be presented and computed in accordance with United
States generally accepted accounting principles. . . .'' (Emphasis
supplied.)
---------------------------------------------------------------------------
B. Proposed Amendment to Regulation 4.22(g)(2): Audit Requirement Where
the First Fiscal Year Is a Period of Three Months or Less From the Date
of Formation of the Pool
As stated above, Regulation 4.22(g) governs the election of a
fiscal year by a CPO. It: Permits the CPO to initially elect any fiscal
year for its pool, provided that the pool's first fiscal year does not
end more than one year after the pool's formation; \10\ requires notice
to participants and NFA if the CPO elects other than a calendar year
for the pool's fiscal year; and requires notice to participants and NFA
prior to changing the previously-elected fiscal year (paragraphs
(g)(1), (g)(2), and (g)(3), respectively).
---------------------------------------------------------------------------
\10\ Regulation 4.22(g)(1) provides that for these purposes, a
pool is deemed to be formed as of the date the pool operator first
receives funds, securities or other property for the purchase of an
interest in the pool.
---------------------------------------------------------------------------
Because Regulation 4.22(c) requires that an Annual Report be
distributed to pool participants and submitted to NFA within 90
calendar days after the end of the pool's fiscal year, and because
Regulation 4.22(d) requires that the Annual Report be audited by an
independent public accountant, the CPO of a pool that was formed, for
example, two months before the end of the pool's first fiscal year
would be required to distribute and submit an audited Annual Report for
that two-month fiscal year, regardless of particular circumstances--for
example, where there are a limited number of participants in the pool
and a limited amount of funds have been contributed to the pool. In
those circumstances, the cost of an audit for the short period of time
of the pool's operation would likely be unduly burdensome relative to
the size of the pool.\11\ Over the past years, in circumstances such as
the foregoing, Commission staff has issued exemptions from the
requirement that a separate audited Annual Report be distributed and
submitted for the pool's first fiscal year.\12\
---------------------------------------------------------------------------
\11\ See CFTC Staff Letter 01-13.
\12\ See, e.g., CFTC Staff Letters 16-50 and 15-10.
---------------------------------------------------------------------------
The Commission is now proposing to amend Regulation 4.22(g)(2) to
provide for an exemption from the audit requirement applicable to the
Annual Report for a pool's first fiscal year when the period from
formation of the pool to the end of the pool's first fiscal year is
[[Page 51830]]
a short period of time.\13\ The existing text of the regulation would
be found in new paragraph (g)(2)(i) of Regulation 4.22 and the proposed
exemption would be contained in new paragraph (g)(2)(ii) of Regulation
4.22. As discussed below, the proposed exemption would specify the
criteria for eligibility and the procedure to be followed to claim the
exemption. It would also be subject to compliance with the condition
that the next Annual Report the CPO distributes and submits is audited
and covers the time period from the formation of the pool to the end of
the pool's first 12-month fiscal year. Under the Proposal, a CPO could
claim this relief where: (1) The time period from the formation of the
pool to the end of the pool's first fiscal year is three months or
less; (2) from the formation of the pool to the end of the pool's first
fiscal year the pool had no more than fifteen participants; and (3)
from the formation of the pool to the end of the pool's first fiscal
year the total gross capital contributions received by the CPO for
units of participation in the pool did not exceed $1,500,000. The
Commission is proposing to use the formation of the pool as the
starting point of the stub period, and thus the point for determining
eligibility for relief, to ensure that all CPOs and their pool
participants are on a level playing field with respect to both what
information the Annual Report must contain for the pool's first fiscal
year, and the requirement that such information be audited.
---------------------------------------------------------------------------
\13\ In addition to the substantive changes described below,
because the Proposal would add another exception to the general
Annual Report audit requirement, the introductory text of Regulation
4.22(d)(1) would be revised to read ``Subject to the provisions of
paragraphs (d)(2) and (g)(2) of this section.''
---------------------------------------------------------------------------
For the purpose of determining eligibility for relief, the
following persons and their capital contributions would not be counted:
(1) The pool's CPO, its CTA, and any of their principals; (2) a child,
sibling, or parent of the participants described in category (1); (3)
the spouse of any of the participants described in category (1) or (2);
(4) any relative of one of the participants described in categories (1)
through (3); and (5) an entity that is wholly-owned by one or more of
the participants described in categories (1) through (4). In this
regard, the Commission notes that the CPO could count a non-natural
person as a single participant. But if that non-natural person was also
a commodity pool, its CPO would have to separately qualify for relief
under (proposed) Regulation 4.22(g)(2)(ii) in order for that (second)
CPO to claim the relief. The 15-participant limit and the categories of
participants and respective contributions that need not be counted are
taken from Regulation 4.13(a)(2), which makes available a CPO
registration exemption for the operator of a family, club or small
pool.\14\ The Commission believes that structuring the proposed
exemption in this way would avoid unnecessary burdens while maintaining
customer protections.
---------------------------------------------------------------------------
\14\ Briefly stated, Regulation 4.13(a)(2) provides that a
person is not required to register as a CPO if: (1) None of the
commodity pools operated by it has more than 15 participants; and
(2) the total gross capital contributions it receives from
participants in all of its pools does not in the aggregate exceed
$400,000. The regulation further provides that for the purpose of
determining eligibility for the exemption, the person may exclude,
among others, the following participants and their contributions:
The pool's CPO, the pool's CTA, and the principals thereof.
The Commission explained that it had adopted this registration
exemption ``because the costs of compliance with the Part 4 rules
outweighs the benefits to be gained from regulating family, club and
small pools.'' 44 FR 1918, 1919 (Jan. 8, 1979).
---------------------------------------------------------------------------
To avail itself of the relief, a CPO would be required to obtain,
prior to the date on which the Annual Report for the pool's first
fiscal year is due, a specified written waiver of the right to receive
an audited Annual Report for that fiscal year from each person who has
been a participant in the pool during the first fiscal year. The CPO
would be required to retain the waiver in accordance with Regulation
4.23. Then, on or before the date on which the Annual Report for the
pool's first fiscal year is due, the CPO would be required to file a
notice of claim with NFA, along with a certification that the CPO had
received the specified written waiver from each of the pool's
participants. This notice would be based on the notice required to
claim relief to present and compute an Annual Report in accordance with
IFRS, under existing Regulation 4.22(d)(2)(ii). Finally, the CPO would
be required to include on the cover of each Annual Report for which
relief had been claimed under Regulation 4.22(g)(2) a prescribed
statement that provided information on whether the Annual Report was
unaudited or audited and the period of time that the Annual Report
covered.
C. Proposed Amendment to Regulation 4.22(c)(7): Unavailability of Audit
Requirement Exception
Regulation 4.22(c)(7) makes available various exceptions to Annual
Report requirements to the CPO of a pool that ceases operation prior
to, or at the end of, the pool's fiscal year. In particular, paragraph
(c)(7)(iii) provides that a report distributed and submitted pursuant
to Regulation 4.22(c)(7) is not required to be audited if the CPO
complies with the conditions stated in the regulation. To ensure that
an audit is conducted at least once in the life of a commodity pool,
the Commission is proposing an amendment to paragraph (c)(7)(iii) of
Regulation 4.22 that would make the audit requirement relief under that
paragraph unavailable where a CPO has not previously distributed an
audited Annual Report to pool participants or submitted the audited
Annual Report to NFA--e.g., where the CPO has claimed relief pursuant
to (proposed) Regulation 4.22(g)(2) and the pool has ceased operations
before the end of its first twelve-month fiscal year.
III. Request for Comments
The Commission requests comment generally on all aspects of the
Proposal. In particular, the Commission requests comment on the
following:
1. Is there any information required to be included in an Annual
Report prepared in accordance with U.S. GAAP that would not be included
under generally accepted accounting principles, standards or practices
in the U.K., Ireland, Luxembourg or Canada? If so, what is that
information and should the Commission require that such information be
separately presented in an Annual Report prepared under any such
alternative accounting principles, standards or practices? Are there,
for example, any specific line items where treatment under one of the
referenced sets of accounting principles, standards or practices (or
under IFRS) differs from the treatment under U.S. GAAP and for which
reconciliation to U.S. GAAP should be required?
2. Should the Commission adopt a provision whereby a CPO could
claim relief from the Annual Report audit requirement for a pool in
which the only participants were the CPO and one or more other
``insiders'' (i.e., the persons identified in proposed Regulation
4.22(g)(2)(ii)), regardless of the amount of capital contributed to the
pool? What other criteria, if any, should be required?
3. Are there any other issues relevant to the Proposal that the
Commission should consider?
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires Federal agencies to
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
to provide a regulatory flexibility analysis regarding the
[[Page 51831]]
economic impact on those entities. The Commission previously has
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its rules on such entities in
accordance with the requirements of the RFA.\15\ With respect to CPOs,
the Commission previously has determined that a CPO is a small entity
for the purpose of the RFA if it meets the criteria for an exemption
from registration under Regulation 4.13(a)(2).\16\ Thus, because the
Proposal applies to persons registered or required to be registered as
a CPO with the Commission, the RFA is not applicable to it.
---------------------------------------------------------------------------
\15\ See, e.g., 47 FR 18618 (Apr. 30, 1982).
\16\ Id. at 18619-20.
---------------------------------------------------------------------------
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 6065(b) that the Proposal, if adopted,
will not have a significant economic impact on a substantial number of
small entities.
B. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act of 1995 (PRA) \17\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with conducting or sponsoring any collection of information
as defined by the PRA. If adopted, the Proposal would result in a
collection of information within the meaning of the PRA, as discussed
below. The Commission therefore is submitting the Proposal to the
Office of Management and Budget (OMB) for review.
---------------------------------------------------------------------------
\17\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Proposal contains collections of information for which the
Commission has previously received control numbers from OMB. The title
for these collections of information is ``Registration under the
Commodity Exchange Act, OMB control number 3038-0005.''
The responses to these collections of information are mandatory. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number issued by OMB.
The collections of information in this Proposal would provide to
eligible CPOs: (1) An optional alternative to complying with the
requirement to compute and present the financial statements in a pool
Annual Report in accordance with U.S. GAAP (or in accordance with
IFRS); and (2) an optional alternative to complying with the audit
requirement for the Annual Report for a pool's first fiscal year, all
as described above. In each case, eligible persons would have the
option to elect the alternative, but no obligation to do so. For this
reason, except to the extent that the Commission is amending the
subject OMB control number for PRA purposes to reflect these
alternatives, the Proposal is not expected to impose any new burdens on
CPOs. Rather, to the extent that the Proposal provides alternative
means to comply with existing requirements, and an alternative is
elected by a CPO, it is reasonable for the Commission to infer that the
alternative is less burdensome to such CPO.
2. Revisions to Collection 3038-0005
Collection 3038-0005 is currently in force with its control number
having been provided by OMB. As discussed above, the Proposal would add
a new exemption to permit a CPO to use accounting principles, standards
or practices established in the U.K., Ireland, Luxembourg or Canada. In
order to qualify for this exemption, an eligible CPO would be required
to take the steps stated in the Proposal, including providing
appropriate notification in the pool's Disclosure Document and
submitting the required notice to NFA. The Proposal would further add a
new exemption to permit a CPO to distribute and submit an unaudited
Annual Report for its pool's first (partial) fiscal year and an audited
Annual Report for the combined period covered by the pool's first
(partial) fiscal year plus the pool's first twelve-month fiscal year.
In order to qualify for this exemption, an eligible CPO would be
required to take the steps stated in the Proposal, including obtaining
waivers from pool participants, submitting the required notice and
certification to NFA, providing appropriate notification in the Annual
Report, and maintaining the waivers as records. Requiring such actions
on the part of an eligible CPO would result in revisions to collection
3038-0005. Therefore, the Commission proposes to revise collection
3038-0005.
Commission staff has received approximately 8 requests in each of
2014 and 2015 from CPOs asking for relief from the requirement to
prepare the pool's financial statements in accordance with U.S. GAAP.
If the same relief can be claimed with a notice filing (without
submitting a request for an individual exemptive letter) additional
CPOs are likely to apply. Therefore, the Commission estimates that CPOs
will submit 10 notices per year to take advantage of the alternative
provided in this Proposal. Similarly, because staff has received
approximately 10 requests in each of 2014 and 2015 from CPOs asking for
relief from the requirement to distribute and submit an audited Annual
Report for a pool's first fiscal year, the Commission estimates that
CPOs will submit 12 notices per year to take advantage of the
alternative provided in this Proposal.
Collection 3038-0005 relates to collections of information from
CPOs and other Commission registrants. Based on the above, the
estimated additional hour burden for collection 3038-0005 of 34 hours
is calculated as follows:
a. Estimated Additional Hour Burden for Collection 3038-0005 Due to
Proposed Alternative to Complying With Requirement To Present and
Compute a Pool's Financial Statements According to U.S. GAAP
Anticipated number of claimants: 10.
Frequency of collection: As needed (initial filing and subsequent
compliance).
Estimated annual responses per claimant: 1.
Estimated aggregate number of annual responses: 10.
Estimated annual hour burden per registrant: 1 hr.
Estimated aggregate annual hour burden: 10 (10 claimants x 1 hour
per claimant).
b. Estimated Additional Hour Burden for Collection 3038-0005 Due to
Proposed Alternative to Complying With Requirement To Distribute and
Submit an Audited Annual Report for a Pool's First Fiscal Year
Number of claimants: 12.
Frequency of collection: As needed (initial filing and subsequent
compliance and recordkeeping).
Estimated annual responses per claimant: 1.
Estimated aggregate number of annual responses: 12.
Estimated annual hour burden per claimant: 2.\18\
---------------------------------------------------------------------------
\18\ This figure for annual hour burden per claimant includes
one hour for reporting and one hour for recordkeeping.
---------------------------------------------------------------------------
Estimated aggregate annual hour burden: 24 (12 claimants x 2 hours
per claimant).
3. Information Collection Comments
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicits comments in order to: (1) Evaluate whether the
proposed collection of information is necessary for the proper
[[Page 51832]]
performance of the functions of the Commission, including whether the
information will have practical utility; (2) evaluate the accuracy of
the Commission's estimate of the burden of the proposed collection of
information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566, or by email at
[email protected]. Please provide the Commission with a copy
of submitted comments so that all comments can be summarized and
addressed in the preamble of the adopting Federal Register release.
Refer to the ADDRESSES section of this notice of proposed rulemaking
for instructions on submitting comments to the Commission. A copy of
the supporting statements for the collection of information discussed
above may be obtained by visiting http://RegInfo.gov. OMB is required
to make a decision concerning the collection of information between 30
and 60 days after publication of this document in the Federal Register.
Therefore, a comment is best assured of having its full effect if OMB
receives it within 30 days of publication.
C. Cost-Benefit Considerations
Section 15(a) of the Act \19\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
or issuing certain orders under the Act. Section 15(a) further requires
the Commission to evaluate the costs and benefits of any such proposed
action in light of five specified areas of consideration, discussed
below. The baseline against which the Proposal is compared is the
status quo, i.e., current Regulations 4.22(c)(7), 4.22(d)(2) and
4.22(g).
---------------------------------------------------------------------------
\19\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
1. Summary of the Proposal
The Proposal would require a CPO to make a notice filing in order
to be able either to use alternative accounting principles, standards
or practices other than U.S. GAAP or IFRS, or to distribute and submit
an unaudited Annual Report for its pool's first (partial-year) fiscal
year and an audited Annual Report that combines information for the
pool's first (partial-year) fiscal year with information for the
following, first twelve-month fiscal year. In either case, the required
filing is patterned after that required by existing Regulation
4.22(d)(2) that a CPO must submit in order to use IFRS. Thus, the
notice would contain such information as the CPO's name, address and
telephone number, the NFA identification numbers of the CPO and the
pool, and representations that the CPO complies with the requisite
criteria. Additionally, in the second case, the notice would include a
certification that the CPO had obtained written waivers from pool
participants of their right to receive an audited Annual Report for the
pool's first (partial-year) fiscal year. Finally, the Proposal makes
unavailable the audit requirement exemption in Regulation 4.22(c)(7),
such that the CPO of a pool that is opened and closed in the same
fiscal year must distribute and submit audited financial statements.
2. Costs
The Commission believes that the differences in the costs of
compliance between the Proposal and existing Regulations 4.22(d)(2) and
4.22(g) would be small because the notice filing is designed to mimic
the relevant features of existing Regulation 4.22(d)(2). Nevertheless,
the Commission believes that the Proposal will lower costs to CPOs
relative to a case-by-case staff-issued exemption, because the Proposal
is more standardized. In addition, due to the unavailability of the
audit requirement exemption, there is a small cost to the CPO of a pool
that is opened and closed in the same fiscal year, because the CPO
would now have to distribute and submit audited financial statements
for the pool.
There may also be some cost savings if the conditions of the
exemption are met, because a CPO who operated a pool that met those
conditions would be allowed to distribute to shareholders and submit to
NFA an unaudited Annual Report for its pool's first (partial-year)
fiscal year and an audited Annual Report that combines information for
the pool's first (partial-year) fiscal year with information for the
following, first twelve-month fiscal year. The Commission believes that
the envisioned costs savings would be due to the independent public
accountant only needing to conduct an audit of the pool once and only
issuing one opinion on the pool's financial statements. The Commission
seeks comment concerning whether or not the Proposal will reduce costs
for CPOs relative to existing Regulations 4.22(d)(2) and 4.22(g).
3. Benefits
An advantage of a notice filing over a Commission staff-processed
exemption is timeliness. For instance, a CPO that filed a notice under
the Proposal would not have to wait for Commission staff to process a
request for an individual exemption letter. There is also the benefit
that pool participants would receive financial statements for the
pool's first fiscal year.
The Commission believes there will be no net benefit from the
Proposal as compared to existing Regulations 4.22(d)(2) and 4.22(g)
with respect to financial disclosures. By codifying exemptions
previously provided by Commission staff on a case-by-case basis, the
Proposal would continue to assist pool participants by providing them
the information necessary to assess the overall trading performance and
financial condition of their pool, but with a lower overall burden to
certain CPOs. The Commission believes that pool participants are
knowledgeable enough to evaluate financial statements prepared under
principles, standards or practices established in the U.K., Ireland,
Luxembourg or Canada, provided that the relevant accounting principles,
standards or practices are properly disclosed to them. The Commission
seeks public comment concerning whether or not use of the specified
different systems of accounting principles, standards and practices
might lead to material differences in financial statements that pool
participants might not be able to understand. For example, should the
Commission require CPOs to disclose in the footnotes to the pool's
financial statements when material difference exist between U.S. GAAP
and alternative accounting principles, standards or practices?
Additionally, the Commission believes that there will be minimal loss
in the level of confidence of pool participants in their pool's
financial statements, because an independent public accountant will
still have to issue an opinion on an audited Annual Report that
combines information for the pool's first (partial-year) fiscal year
with information for the following, first twelve-month fiscal year. The
Commission seeks public comment concerning whether this belief is
correct or not.
4. Section 15(a) Factors
As noted above, Section 15(a) of the Commodity Exchange Act (CEA or
Act) requires the Commission to consider the costs and benefits of its
actions before promulgating a regulation or issuing
[[Page 51833]]
certain orders. As also noted above, CEA Section 15(a) further
specifies that the Commission shall evaluate the costs and benefits of
its actions in light of five specific concerns. Those concerns relate
to: (i) Protection of market participants and the public; (ii)
efficiency, competitiveness, and financial integrity of futures
markets; (iii) price discovery; (iv) sound risk management practices;
and (v) other public interest considerations.
i. Protection of Market Participants and the Public
The Commission believes that the Proposal will provide the same
level of protection to commodity pool participants through the
disclosure of financial statements as do existing Regulations
4.22(d)(2) and 4.22(g). The Commission believes that pool participants
are knowledgeable enough to evaluate financial statements prepared
under accounting principles, standards and practices established in the
U.K., Ireland, Luxembourg or Canada, provided that the relevant
accounting principles, standards and practices are properly disclosed
to them. By codifying exemptions previously provided by Commission
staff on a case-by-case basis, the Proposal would continue to assist
pool participants by providing them the information necessary to assess
the overall trading performance and financial condition of their pool,
but with a lower overall burden to certain CPOs. Additionally, the
Commission believes that there will be minimal loss in the level of
confidence of pool participants in their pool's financial statements,
because an independent public accountant will still have to issue an
opinion on the financial statements included in an Annual Report that
combines information for the pool's first (partial-year) fiscal year
with information for the following, first twelve-month fiscal year.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission has not identified any impact that the Proposal
would have on efficiency, competitiveness, and financial integrity of
markets.
iii. Price Discovery
The Commission has not identified any impact that the Proposal
would have on price discovery.
iv. Sound Risk Management Practices
The Commission has not identified any impact that the Proposal
would have on sound risk management practices.
v. Other Public Interest Considerations
The Commission has not identified any impact on any other public
interest considerations that the Proposal would have, but seeks public
comment on any public interest the Commission should consider in this
rulemaking.
5. Request for Comments
The Commission invites public comment on its cost-benefit
considerations, including the Section 15(a) factors described above.
Commenters are invited to submit with their comment letters any data or
other information that they may have that quantifies or qualifies the
costs and benefits of the Proposal.
List of Subjects in 17 CFR Part 4
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Reporting and
recordkeeping requirements.
For the reasons set forth in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 4 as follows:
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
0
1. The authority citation for part 4 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a,
and 23.
0
2. Amend Sec. 4.22 as follows:
0
a. Revise paragraphs (c)(7)(iii) and (d);
0
b. Redesignate paragraph (g)(2) as paragraph (g)(2)(i); and
0
c. Add paragraph (g)(2)(ii).
The revisions and addition to read as follows:
Sec. 4.22 Reporting to pool participants.
* * * * *
(c) * * *
(7) * * *
(iii) A report filed pursuant to paragraph (c)(7) of this section
that would otherwise be required by paragraph (c) of this section is
not required to be audited in accordance with paragraph (d) of this
section if the commodity pool operator obtains from all participants
written waivers of their rights to receive an audited Annual Report,
and at the time of filing the Annual Report with the National Futures
Association, certifies that it has received waivers from all
participants. The commodity pool operator must maintain the waivers in
accordance with Sec. 1.31 of this chapter and must make the waivers
available to the Commission or National Futures Association upon
request. Notwithstanding the provisions of paragraph (g)(2)(ii) of this
section, the relief made available by this paragraph (c)(7)(iii) shall
not be available where the commodity pool operator has not previously
distributed an audited Annual Report to pool participants and submitted
an audited Annual Report to the National Futures Association.
* * * * *
(d)(1) Subject to the provisions of paragraphs (d)(2) and (g)(2) of
this section, the financial statements in the Annual Report required by
this section or by Sec. 4.7(b)(3) must be presented and computed in
accordance with United States generally accepted accounting principles
consistently applied and must be audited by an independent public
accountant. The requirements of Sec. 1.16(g) of this chapter shall
apply with respect to the engagement of such independent public
accountants, except that any related notifications to be made may be
made solely to the National Futures Association, and the certification
must be in accordance with Sec. 1.16 of this chapter, except that the
following requirements of that section shall not apply:
* * * * *
(2)(i) Where a commodity pool is organized in a jurisdiction other
than the United States, the financial statements in the Annual Report
required by this section or by Sec. 4.7(b)(3) may be presented and
computed in accordance with the generally accepted accounting
principles, standards or practices followed in such other jurisdiction;
Provided, That:
(A) The other jurisdiction follows accounting principles, standards
or practices set forth in paragraph (d)(2)(ii) of this section and the
Annual Report presents and computes the financial statements of the
pool in accordance with the applicable accounting principles, standards
or practices followed by such other jurisdiction;
(B) The Annual Report includes a condensed schedule of investments,
or, if required by the applicable accounting principles, standards or
practices followed by such other jurisdiction, a full schedule of
investments;
(C) The Annual Report reports special allocations of ownership
equity in accordance with paragraph (e)(2) of this section;
(D) The Disclosure Document or offering memorandum for the pool
identifies the accounting principles, standards or practices of the
other jurisdiction pursuant to which the Annual Report presents and
computes the financial statements of the pool; and
[[Page 51834]]
(E) Where the accounting principles, standards or practices of the
other jurisdiction require consolidated financial statements for the
pool, such as a feeder fund consolidating with its master fund, all
applicable disclosures required by United States generally accepted
accounting principles for the feeder fund must be presented with the
reporting pool's consolidated financial statements.
(ii) For purposes of paragraph (d)(2)(i) of this section, the
following alternative accounting principles, standards or practices may
be employed in the preparation and computation of the financial
statements in the Annual Report of the commodity pool; Provided, That
any such alternative accounting principles, standards or practices so
employed are those followed by the jurisdiction other than the United
States in which the commodity pool is organized:
(A) International Financial Reporting Standards;
(B) Generally Accepted Accounting Practice in the United Kingdom;
(C) New Irish Generally Accepted Accounting Practice;
(D) Luxembourg Generally Accepted Accounting Principles; or
(E) Canadian Generally Accepted Accounting Principles.
(iii) To claim the relief available under this paragraph (d)(2), a
commodity pool operator must file a notice with the National Futures
Association within 90 calendar days after the end of the pool's first
fiscal year.
(A) The notice must contain: The name, main business address, main
telephone number and National Futures Association registration
identification number of the commodity pool operator; the name and
identification number of the commodity pool for which the pool operator
is claiming relief; and the alternative accounting principles,
standards or practices pursuant to which the financial statements in
the Annual Report will be presented and computed;
(B) The notice must include a representation that the commodity
pool operator complies with each of the conditions specified in
paragraphs (d)(2)(i)(A) through (D) of this section and, if applicable,
paragraph (d)(2)(i)(E) of this section; and
(C) The notice must be signed by the commodity pool operator in
accordance with paragraph (h) of this section.
* * * * *
(g) * * *
(2)(i) If a commodity pool operator elects a fiscal year other than
the calendar year, it must give written notice of the election to all
participants and must file the notice with the National Futures
Association within 90 calendar days after the date of the pool's
formation. If this notice is not given, the pool operator will be
deemed to have elected the calendar year as the pool's fiscal year.
(ii) If the time period from the formation of the pool to the end
of the pool's first fiscal year is three months or less, the first
Annual Report for the pool may be unaudited; Provided, That:
(A) Throughout the period of formation through the end of the
pool's first fiscal year, the pool had no more than fifteen
participants and no more than $1,500,000 in aggregate gross capital
contributions. For the purpose of satisfying these criteria, the
commodity pool operator may exclude the following persons and their
contributions:
(1) The pool operator, the pool's commodity trading advisor, and
any principal thereof;
(2) A child, sibling, or parent of any of these participants;
(3) The spouse of any participant specified in paragraph
(g)(2)(i)(A)(1) or (2) of this section;
(4) Any relative of a participant specified in paragraph
(g)(2)(i)(A)(1), (2) or (3) of this section, its spouse or a relative
of its spouse, who has the same principal residence as such
participant; and
(5) An entity that is wholly-owned by one or more participants
specified in paragraph (g)(2)(ii)(A)(1), (2), (3) or (4) of this
section; and
(B) The next Annual Report for the pool is audited and covers the
time period from the formation of the pool to the end of the pool's
first 12-month fiscal year.
(C) To claim the relief available under paragraph (g)(2)(ii) of
this section, a commodity pool operator must:
(1) Prior to the date upon which it is required to distribute and
submit an audited Annual Report for the pool's first fiscal year,
obtain from each pool participant who otherwise would have been
entitled to such an Annual Report a written waiver of the participant's
right to receive an audited Annual Report for the pool's first fiscal
year. The waiver must be signed by the pool participant and must state
as follows: ``[Name of participant], a participant in [Name of pool],
voluntarily waives the right under CFTC Regulation 4.22(d) to receive
an audited Annual Report for the fiscal year ended [end date of the
pool's first fiscal year] and will accept in lieu thereof an unaudited
Annual Report covering the period [date of formation of the pool]
through [end of the pool's first fiscal year] and an audited Annual
Report covering the period [date of formation of the pool] through [end
date of the pool's first twelve-month fiscal year].''; and
(2) On or before the date upon which it is required to distribute
and submit the Annual Report for the pool's first fiscal year, file a
notice with the National Futures Association, along with a
certification that it has received the required written waiver from
each person who has been a participant in the pool for its first fiscal
year.
(i) The notice must contain: The name, main business address, main
telephone number and National Futures Association registration
identification number of the commodity pool operator; the name and
identification number of the commodity pool for which the pool operator
is claiming relief; and the dates of formation of the pool and the
first fiscal year end of the pool;
(ii) The notice must include a representation that the commodity
pool operator meets the criteria of paragraph (g)(2)(ii)(A) of this
section and that it will comply with the condition of paragraph
(g)(2)(ii)(B) of this section; and
(iii) The notice must be signed by the commodity pool operator in
accordance with paragraph (h) of this section.
(D)(1) Each unaudited Annual Report for which the relief available
under paragraph (g)(2)(ii) of this section has been claimed must
prominently disclose on the cover page thereof: ``Pursuant to an
exemption from the Commodity Futures Trading Commission, this unaudited
Annual Report covers the period from the date of formation of the pool
to the end of the pool's first fiscal year, a period of [number]
months.''
(2) The next Annual Report for the pool must prominently disclose
on the cover page thereof: ``Pursuant to an exemption from the
Commodity Futures Trading Commission, this audited Annual Report covers
the period from the date of formation of the pool to the end of the
pool's first 12-month fiscal year, a period of [number] months.''
(E) The commodity pool operator must maintain in accordance with
Sec. 4.23 of this chapter each waiver it has obtained to claim the
relief available under paragraph (g)(2)(ii) of this section.
* * * * *
Issued in Washington, DC, on July 29, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
[[Page 51835]]
Appendix to Commodity Pool Operator Annual Report--Commission Voting
Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2016-18400 Filed 8-4-16; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: August 5, 2016