2012-3390

Federal Register, Volume 77 Issue 37 (Friday, February 24, 2012)[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]

[Rules and Regulations]

[Pages 11252-11344]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2012-3390]

[[Page 11251]]

Vol. 77

Friday,

No. 37

February 24, 2012

Part III

Commodity Futures Trading Commission

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17 CFR Parts 4, 145, and 147

Commodity Pool Operators and Commodity Trading Advisors: Compliance

Obligations; Harmonization of Compliance Obligations for Registered

Investment Companies Required To Register as Commodity Pool Operators;

Final Rule and Proposed Rule

Federal Register / Vol. 77 , No. 37 / Friday, February 24, 2012 /

Rules and Regulations

[[Page 11252]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 4, 145, and 147

RIN 3038-AD30

Commodity Pool Operators and Commodity Trading Advisors:

Compliance Obligations

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission is adopting

amendments to its existing part 4 regulations and promulgating one new

regulation regarding Commodity Pool Operators and Commodity Trading

Advisors. The Commission is also adopting new data collections for CPOs

and CTAs that are consistent with a data collection required under the

Dodd-Frank Act for entities registered with both the Commission and the

Securities and Exchange Commission. The adopted amendments rescind the

exemption from registration; rescind relief from the certification

requirement for annual reports provided to operators of certain pools

offered only to qualified eligible persons (QEPs; modify the criteria

for claiming relief); and require the annual filing of notices claiming

exemptive relief under several sections of the Commission's

regulations. Finally, the adopted amendments include new risk

disclosure requirements for CPOs and CTAs regarding swap transactions.

DATES: Effective dates: This final rule is effective on April 24, 2012,

except for the amendments to Sec. 4.27, which shall become effective

on July 2, 2012.

Compliance dates: Compliance with Sec. 4.27 shall be required by

not later than September 15, 2012, for a CPO having at least $5 billion

in assets under management, and by not later than December 14, 2012,

for all other registered CPOs and all CTAs. Compliance with Sec. 4.5

for registration purposes only shall be required not later than the

later of December 31, 2012, or 60 days after the effective date of the

final rulemaking further defining the term ``swap,'' which the

Commission will publish in the Federal Register at a future date.

Entities required to register due to the amendments to Sec. 4.5 shall

be subject to the Commission's recordkeeping, reporting, and disclosure

requirements pursuant to part 4 of the Commission's regulations within

60 days following the effectiveness of a final rule implementing the

Commission's proposed harmonization effort pursuant to the concurrent

proposed rulemaking. CPOs claiming exemption under Sec. 4.13(a)(4)

shall be required to comply with the rescission of Sec. 4.13(a)(4) by

December 31, 2012; however, compliance shall be required for all other

CPOs on April 24, 2012. Compliance with all other amendments, not

otherwise specified above, shall be required by December 31, 2012.

FOR FURTHER INFORMATION CONTACT: Kevin P. Walek, Assistant Director,

Telephone: (202) 418-5463, Email: kwalek@cftc.gov, or Amanda Lesher

Olear, Special Counsel, Telephone: (202) 418-5283, Email:

aolear@cftc.gov, Michael Ehrstein, Attorney-Advisor, Telephone: 202-

418-5957, Email: mehrstein@cftc.gov, Division of Swap Dealer and

Intermediary Oversight, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background on the Proposal To Amend the Registration and Compliance

Obligations for CPOs and CTAs

A. Statutory and Regulatory Background

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ The

legislation was enacted to reduce risk, increase transparency, and

promote market integrity within the financial system by, inter alia,

enhancing the Commodity Futures Trading Commission's (the

``Commission'' or ``CFTC'') rulemaking and enforcement authorities with

respect to all registered entities and intermediaries subject to the

Commission's oversight.

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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

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The preamble of the Dodd-Frank Act explicitly states that the

purpose of the legislation is:

To promote the financial stability of the United States by

improving accountability and transparency in the financial system,

to end `too big to fail', to protect the American taxpayer by ending

bailouts, to protect consumers from abusive financial services

practices, and for other purposes.\2\

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\2\ Id.

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Pursuant to this stated objective, the Dodd-Frank Act has expanded

the scope of federal financial regulation to include instruments such

as swaps, enhanced the rulemaking authorities of existing federal

financial regulatory agencies including the Commission and the

Securities and Exchange Commission (``SEC''), and created new financial

regulatory entities.

In addition to the expansion of the Commission's jurisdiction to

include swaps under Title VII of the Dodd-Frank Act, Title I of the

Dodd-Frank Act created the Financial Stability Oversight Council

(``FSOC'').\3\ The FSOC is composed of the leaders of various state and

federal financial regulators and is charged with identifying risks to

the financial stability of the United States, promoting market

discipline, and responding to emerging threats to the stability of the

country's financial system.\4\ The Dodd-Frank Act anticipates that the

FSOC will be supported in these responsibilities by the federal

financial regulatory agencies.\5\ The Commission is among those

agencies that could be asked to provide information necessary for the

FSOC to perform its statutorily mandated duties.\6\

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\3\ See section 111 of the Dodd-Frank Act.

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

\5\ See sections 112(a)(2)(A) and 112(d)(1) of the Dodd-Frank

Act.

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

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Title IV of the Dodd-Frank Act requires advisers to large private

funds \7\ to register with the SEC.\8\ Through this registration

requirement, Congress

[[Page 11253]]

sought to make available to the SEC ``information regarding [the] size,

strategies and positions'' of large private funds, which Congress

believed ``could be crucial to regulatory attempts to deal with a

future crisis.'' \9\ In section 404 of the Dodd-Frank Act, Congress

amended section 204(b) of the Investment Advisers Act to direct the SEC

to require private fund advisers registered solely with the SEC \10\ to

file reports containing such information as is deemed necessary and

appropriate in the public interest and for investor protection or for

the assessment of systemic risk. These reports and records must include

a description of certain prescribed information, such as the amount of

assets under management, use of leverage, counterparty credit risk

exposure, and trading and investment positions for each private fund

advised by the adviser.\11\ Section 406 of the Dodd-Frank Act also

requires that the rules establishing the form and content of reports

filed by private fund advisers that are dually registered with the SEC

and the CFTC be issued jointly by both agencies after consultation with

the FSOC.\12\

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\7\ Section 202(a)(29) of the Investment Advisers Act of 1940

(``Investment Advisers Act'') defines the term ``private fund'' as

``an issuer that would be an investment company, as defined in

section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3),

but for section 3(c)(1) or 3(c)(7) of that Act.'' 15 U.S.C. 80a-

3(c)(1), 80a-3(c)(7). Section 3(c)(1) of the Investment Company Act

provides an exclusion from the definition of ``investment company''

for any ``issuer whose outstanding securities (other than short term

paper) are beneficially owned by not more than one hundred persons

and which is not making and does not presently propose to make a

public offering of its securities.'' 15 U.S.C. 80a-3(c)(1). Section

3(c)(7) of the Investment Company Act provides an exclusion from the

definition of ``investment company'' for any ``issuer, the

outstanding securities of which are owned exclusively by persons

who, at the time of acquisition of such securities, are qualified

purchasers, and which is not making and does not at that time

propose to make a public offering of such securities.'' 15 U.S.C.

80a-3(c)(7). The term ``qualified purchaser'' is defined in section

2(a)(51) of the Investment Company Act. See 15 U.S.C. 80a-2(a)(51).

\8\ The Dodd-Frank Act requires private fund adviser

registration by amending section 203(b)(3) of the Advisers Act to

repeal the exemption from registration for any adviser that during

the course of the preceding 12 months had fewer than 15 clients and

neither held itself out to the public as an investment adviser nor

advised any registered investment company or business development

company. See section 403 of the Dodd-Frank Act. There are exemptions

from this registration requirement for advisers to venture capital

funds and advisers to private funds with less than $150 million in

assets under management in the United States. There also is an

exemption for foreign advisers with less than $25 million in assets

under management from the United States and fewer than 15 U.S.

clients and private fund investors. See sections 402, 407 and 408 of

the Dodd-Frank Act.

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

\10\ In this release, the term ``private fund adviser'' means

any investment adviser that is (i) registered or required to be

registered with the SEC (including any investment adviser that is

also registered or required to be registered with the CFTC as a CPO

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

commodity pools that satisfy the definition of ``private fund'').

\11\ See section 404 of the Dodd-Frank Act.

\12\ See section 406 of the Dodd-Frank Act.

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The Commodity Exchange Act (``CEA'') \13\ authorizes the Commission

to register Commodity Pool Operators (``CPOs'') and Commodity Trading

Advisors (``CTAs''),\14\ exclude any entity from registration as a CPO

or CTA,\15\ and require ``[e]very commodity trading advisor and

commodity pool operator registered under [the CEA to] maintain books

and records and file such reports in such form and manner as may be

prescribed by the Commission.'' \16\ The Commission also has the

authority to include within or exclude from the definitions of

``commodity pool,'' ``commodity pool operator,'' and ``commodity

trading advisor'' any entity ``if the Commission determines that the

rule or regulation will effectuate the purposes of the CEA.'' \17\ In

addition, the Commission has the authority to ``make and promulgate

such rules and regulations as, in the judgment of the Commission, are

reasonably necessary to effectuate the provisions or to accomplish any

of the purposes of [the CEA].'' \18\ The Commission's discretionary

authority to exclude or exempt persons from registration was intended

to be exercised ``to exempt from registration those persons who

otherwise meet the criteria for registration * * * if, in the opinion

of the Commission, there is no substantial public interest to be served

by the registration.'' \19\ It is pursuant to this authority that the

Commission has promulgated the various exemptions from registration as

a CPO that are enumerated in Sec. 4.13 of its regulations as well as

the exclusions from the definition of CPO that are delineated in Sec.

4.5.\20\

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

\14\ 7 U.S.C. 6m.

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

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

regulations, entities registered as CPOs have reporting obligations

with respect to their operated pools. See 17 CFR. 4.22. Although

CTAs have recordkeeping obligations under part 4, the Commission has

not required reporting by CTAs, See generally, 17 CFR. part 4.

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

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

\19\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p.

20.

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

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As stated previously in this release, and in the Proposal, Congress

enacted the Dodd-Frank Act in response to the financial crisis of 2007

and 2008.\21\ That Act requires the reporting of certain information by

investment advisers to private funds related to potential systemic risk

including, but not limited to, the amount of assets under management,

use of leverage, counterparty credit risk exposure, and trading and

investment positions for each private fund under the reporting entity's

advisement.\22\ This information facilitates oversight of the

investment activities of funds within the context of the rest of a

discrete market or the economy as a whole.

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\21\ See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

\22\ See section 404 of the Dodd-Frank Act.

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The sources of risk delineated in the Dodd-Frank Act with respect

to private funds are also presented by commodity pools. To provide the

Commission with similar information to address these risks, the

Commission has determined to require registration of certain previously

exempt CPOs and to further require reporting of information comparable

to that required in Form PF, which the Commission has previously

adopted jointly with the SEC. To implement this enhanced oversight, the

Commission proposed, and has now determined to adopt, the revision and

rescission of certain discretionary exemptions that it previously

granted.

B. The Proposal

Following the recent economic turmoil, and consistent with the

tenor of the provisions of the Dodd-Frank Act, the Commission

reconsidered the level of regulation that it believes is appropriate

with respect to entities participating in the commodity futures and

derivatives markets. Therefore, on January 26, 2011, the Commission

proposed amendments and additions to its existing regulatory regime for

CPOs and CTAs and the creation of two new data collection instruments,

Forms CPO-PQR and CTA-PR (``Proposal'').\23\ In a concurrent joint

proposal with the SEC, the Commission also proposed Sec. 4.27(d) and

sections 1 and 2 of Form PF.\24\

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

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

not adopt the remainder of proposed Sec. 4.27 at the same time as

it adopted the subsection of Sec. 4.27 implementing Form PF, the

Commission modified the designation of Sec. 4.27(d) to be the sole

text of that section. Additionally, the Commission made some

revisions to the text of Sec. 4.27 to: (1) clarify that the filing

of Form PF with the SEC will be considered substitute compliance

with certain Commission reporting obligations and (2) allow CPOs and

CTAs who are otherwise required to file Form PF the option of

submitting on Form PF data regarding commodity pools that are not

private funds as substitute compliance with certain CFTC reporting

obligations.

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In the Proposal, the Commission specifically proposed the following

amendments: (A) to require the periodic reporting of data by CPOs and

CTAs regarding their direction of commodity pool assets; (B) to

identify certain proposed filings with the Commission as being afforded

confidential treatment; (C) to revise the requirements for determining

which persons should be required to register as a CPO under Sec. 4.5;

(D) to require the filing of certified annual reports by all registered

CPOs; (E) to rescind the exemptions from registration under Sec. Sec.

4.13(a)(3) and (a)(4); (F) to require annual affirmation of claimed

exemptive relief for both CPOs and CTAs; (G) to require an additional

risk disclosure statement from CPOs and CTAs that engage in swaps

transactions; and (H) to make certain conforming amendments to the

Commission's regulations in light of the proposed amendments.

In describing the rationale for the Proposal, the Commission

stated:

[T]o ensure that necessary data is collected from CPOs and CTAs

that are not operators or advisors of private funds, the Commission

is proposing a new Sec. 4.27, which would require quarterly reports

from all CPOs and CTAs to be electronically filed with NFA. The

Commission is promulgating proposed Sec. 4.27 pursuant to the

Commission's authority to require the filing of reports by

registered CPOs and CTAs under section 4n

[[Page 11254]]

of the CEA. In an effort to eliminate duplicative filings, proposed

Sec. 4.27(d) would allow certain CPOs and/or CTAs that are also

registered as private fund advisers with the SEC pursuant to the

securities laws to satisfy certain of the Commission's systemic

reporting requirements by completing and filing the appropriate

sections of Form PF with the SEC with respect to advised private

funds.

In order to ensure that the Commission can adequately oversee

the commodities and derivatives markets and assess market risk

associated with pooled investment vehicles under its jurisdiction,

the Commission is re-evaluating its regulation of CPOs and CTAs.

Additionally, the Commission does not want its registration and

reporting regime for pooled investment vehicles and their operators

and/or advisors to be incongruent with the registration and

reporting regimes of other regulators, such as that of the SEC for

investment advisers under the Dodd-Frank Act. (Footnotes

omitted).\25\

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

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C. Comments on the Proposal

The Commission received 61 comment letters in response to the

Proposal. The commenters represented a diversity of market

participants. Seven commenters were registered investment companies or

registered investment advisers; five commenters were registered or

exempt CPOs; and three commenters were registered investment companies

or registered investment advisers that also claimed exemption from

registration as a CPO under Sec. 4.13. The Commission also received 20

comments from law firms; 14 comments from trade organizations; two

comments from individual interested parties; a comment from a

compliance service provider; and a comment from a registered futures

association.\26\ The majority of the comments received opposed the

adoption of the proposed amendments to Sec. 4.5 and the rescission of

Sec. Sec. 4.13(a)(3) and (a)(4).

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\26\ Additionally, the Commission received six comments that

were not pertinent to the substance of the Proposal. Three concerned

position limits in silver, one consisted of a web address; one was

an advertisement; and one simply said ``nice.''

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Having considered these comments, the Commission has decided to

adopt most of the amendments to part 4 that it proposed, with some

modifications. In addition, the Commission has decided not to rescind

the exemption in Sec. 4.13(a)(3) for entities engaged in a de minimis

amount of derivatives trading. The Commission's amendments to part 4,

and the modifications to its Proposal are discussed below.

The scope of this Federal Register release generally is restricted

to the comments received in response to the Proposal and to the changes

to, and the clarifications of, the Proposal that the Commission is

making in response thereto. The Commission encourages interested

persons to read the Proposal for a fuller discussion of the purpose of

each of the amendments contained in the Proposal.

D. Significant Changes From the Proposal

The significant changes from the Proposal that the Commission is

making in the rules it is adopting today are as follows: (1) The

marketing restriction in Sec. 4.5 no longer contains the clause ``(or

otherwise seeking investment exposure to)''; (2) Sec. 4.5 will be

amended to include an alternative trading threshold test based on the

net notional value of a registered investment company's derivatives

positions; (3) annual notices for exemptions and exclusions will be

filed on an annual calendar year end basis rather than on the

anniversary of the filing date; and (4) changes have been made to the

substance of Forms CPO-PQR and CTA-PR and the filing timelines for both

forms.

II. Responses to Comments on the Proposal

A. Comments Regarding Proposed Amendments to Sec. 4.5

As part of the Proposal, the Commission proposed amendments to

Sec. 4.5(c)(2)(iii), reinstating a trading threshold and marketing

restriction for registered investment companies claiming exclusion from

the definition of CPO under that section. In support of the Proposal,

the Commission stated that it became aware that certain registered

investment companies were offering interests in de facto commodity

pools while claiming exclusion under Sec. 4.5.\27\ The Commission

further stated that it believed that registered investment companies

should not engage in such activities without Commission oversight and

that such oversight was necessary to ensure consistent treatment of

CPOs regardless of their status with respect to other regulators.\28\

The Commission also recognized that operational issues may exist

regarding the ability of registered investment companies to comply with

the Commission's compliance regime.\29\

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

to propose amendments to Sec. 4.5 following the submission of a

petition for rulemaking by the National Futures Association, to

which the Commission has delegated much of its direct oversight

activities relating to CPOs, CTAs, and commodity pools. See, 75 FR

56997 (Sept. 17, 2010).

\28\ Id. at 7984.

\29\ Id.

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The Commission received numerous comments regarding the proposed

amendments to Sec. 4.5. The comments can be broadly categorized into

eight categories: (1) General comments as to the advisability of making

such a change and the Commission's justification for doing so; (2) the

trading threshold; (3) the inclusion of swaps within the trading

threshold; (4) the proposed marketing restriction; (5) harmonization of

compliance obligations with those of the SEC; (6) the appropriate

entity to register as the registered investment company's CPO; (7) the

use and permissibility of controlled foreign corporations by registered

investment companies; and (8) the timeline for implementation.

1. General Comments on Proposed Amendments to Sec. 4.5

Certain comments argued against the adoption of any change to Sec.

4.5 and questioned the Commission's justification for doing so.\30\

Most commenters generally opposed the change because they claimed that

requiring registration and compliance with the Commission's regulatory

regime would provide no tangible benefit to the Commission or investors

because registered investment companies are already subject to

comprehensive regulation by the SEC.

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\30\ Comment letter from the Investment Company Institute (April

12, 2011) (``ICI Letter''); comment letter from the Mutual Fund

Directors Forum (April 12, 2011) (``MFDF Letter'').

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The Commission believes that registration with the Commission

provides two significant benefits. First, registration allows the

Commission to ensure that all entities operating collective investment

vehicles participating in the derivatives markets meet minimum

standards of fitness and competency.\31\ Second, registration provides

the Commission and members of the public with a clear means of

addressing wrongful conduct by individuals and entities participating

in the derivatives markets. The Commission has clear authority to take

punitive and/or remedial action against registered entities for

violations of the CEA or of the Commission's regulations. Moreover, the

Commission has the ability to deny or revoke registration, thereby

expelling an individual or entity from serving as an intermediary in

the industry. Members of the public also may access the Commission's

reparations program or National Futures Association's (``NFA'')

arbitration program to seek redress for wrongful conduct by a

Commission registrant

[[Page 11255]]

and/or NFA member. Therefore, the Commission continues to believe that

its registration requirements further critical regulatory objectives

and serve important public policy goals.

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\31\ See H.R. Rep. No. 565 (Part 1), 97th Cong., 2d Sess. 48

(1982), S. Rep. No. 384, 97th Cong., 2d Sess. 111 (1982). See also,

48 FR 14933 (Apr. 6, 1983).

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A number of commenters who expressed general opposition also

acknowledged that if the Commission determined to proceed with its

proposed changes to Sec. 4.5, certain areas of harmonization with SEC

requirements should be addressed. To that end, concurrently with the

issuance of this rule, the Commission plans to issue a notice of

proposed rulemaking detailing its proposed modifications to part 4 of

its regulations to harmonize the compliance obligations that apply to

dually registered investment companies. Commenters did not question,

however, that the Commission has a regulatory interest in overseeing

entities engaging in derivatives trading. Rather, they argued that the

SEC currently provides adequate oversight of their activities.

The Commission disagrees with the arguments presented by those

commenters who argued against the adoption of any change to Sec. 4.5.

The Commission continues to believe that entities operating collective

investment vehicles that engage in more than a de minimis amount of

derivatives trading should be required to register with the Commission.

The Commission believes that because Congress empowered the Commission

to oversee the derivatives market, the Commission is in the best

position to oversee entities engaged in more than a limited amount of

non-hedging derivatives trading.

Several commenters also asserted that modifying Sec. 4.5 would

result in a significant burden to entities required to register with

the Commission without any meaningful benefit to the Commission.\32\

The Commission believes, as discussed throughout this release, that

entities that are offering services substantially identical to those of

a registered CPO should be subject to substantially identical

regulatory obligations. The Commission also recognizes that

modification to Sec. 4.5 may result in costs for registered investment

companies. For that reason, as stated above, in conjunction with

finalizing the proposed amendments to Sec. 4.5, the Commission has

proposed to adopt a harmonized compliance regime for registered

investment companies whose activities require oversight by the

Commission. Although the Commission believes the modifications to Sec.

4.5 enhance the Commission's ability to effectively oversee derivatives

markets, it is not the Commission's intention to burden registered

investment companies beyond what is required to provide the Commission

with adequate information it finds necessary to effectively oversee the

registered investment company's derivatives trading activities. Through

this harmonization, the Commission intends to minimize the burden of

the amendments to Sec. 4.5.

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\32\ See ICI Letter; comment letter from Vanguard (April 12,

2011) (``Vanguard Letter''); comment letter from Reed Smith LLP

(April 12, 2011) (``Reed Smith Letter''); comment letter from

AllianceBernstein Mutual Funds (April 12, 2011) (``AllianceBernstein

Letter''); comment letter from United States Automobile Association

(April 12, 2011) (``USAA Letter''); comment letter from Principal

Management Corporation (April 12, 2011) (``PMC Letter''); comment

letter from Investment Adviser Association (April 12, 2011) (``IAA

Letter''); comment letter from Dechert LLP and clients (April 12,

2011) (``Dechert II Letter''); comment letter from Janus Capital

Management LLC (April 12, 2011) (``Janus Letter''); comment letter

from Security Traders Association (April 12, 2011) (``STA Letter'');

comment letter from Invesco Advisers, Inc. (April 12, 2011)

(``Invesco Letter''); and comment letter from Equinox Fund

Management, LLC (July 28, 2011) (``Equinox Letter'').

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Second, the Commission disagrees with the commenters' assertion

that the Commission would not receive any meaningful benefit from a

modification to Sec. 4.5. As stated above, the Commission disagrees

that such registration and oversight is redundant, and emphasizes that

it is in the best position to adequately oversee the derivatives

trading activities of entities in which the Commission has a regulatory

interest. As discussed above, the Commission is charged with

administering the Commodity Exchange Act to protect market users and

the public from fraud, manipulation, abusive practices and systemic

risk related to derivatives that are subject to the Act, and to foster

open, competitive, and financially sound markets. The Commission's

programs are structured and its resources deployed in service of that

mission.

One commenter questioned the Commission's reasoning for choosing to

impose additional requirements on registered investment companies but

not proposing to impose such requirements on other categories of

entities.\33\ This commenter also stated that the Commission was

required to detail its reasoning under the Administrative Procedure

Act.\34\ As stated in the Proposal, the Commission remains concerned

that registered investment companies are offering managed futures

strategies, either in whole or in part, without Commission oversight

and without making the disclosures to both the Commission and investors

regarding the pertinent facts associated with the investment in the

registered investment company. The Commission is focused on registered

investment companies because it is aware of increased trading activity

in the derivatives area by such entities that may not be appropriately

addressed in the existing regulatory protections, including risk

management and recordkeeping and reporting requirements. The SEC has

also noted this increased trading activity and is reviewing the use of

derivatives by investment companies.\35\ In its recent concept release

regarding the use of derivatives by registered investment companies,

the SEC noted that although its staff had addressed issues related to

derivatives on a case-by-case basis, it had not developed a

``comprehensive and systematic approach to derivatives related

issues.'' \36\ As aptly noted by the Chairman of the SEC, ``The

controls in place to address fund management in traditional securities

can lose their effectiveness when applied to derivatives. This is

particularly the case because a relatively small investment in a

derivative instrument can expose a fund to potentially substantial gain

or loss--or outsized exposure to an individual counterparty.'' \37\

Despite the commenter's assertion, the Commission is unaware of other

classes of entities that are excluded from the definition of CPO

engaging in significant derivatives trading. Of course, if the

Commission becomes aware of any other categories of excluded entities

engaging in similar levels of derivatives trading, it will consider

appropriate action to ensure that such entities and their derivatives

[[Page 11256]]

trading activities are brought under the Commission's regulatory

oversight. As stated previously, the Commission continues to believe

that entities that are offering services substantially identical to

those of a registered CPO should be subject to substantially identical

regulatory obligations.

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\33\ See ICI Letter.

\34\ Id.

\35\ For example, the SEC recently issued a concept release

seeking comment on use of derivatives by investment companies,

noting: ``The dramatic growth in the volume and complexity of

derivatives investments over the past two decades, and funds'

increased use of derivatives, have led the [Securities and Exchange]

Commission and its staff to initiate a review of funds' use of

derivatives under the Investment Company Act. (footnotes omitted)''

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

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

Securities and Exchange Commission, SEC Seeks Public Comment on Use

of Derivatives by Mutual Funds and Other Investment Companies (Aug.

31, 2011), available at http://www.sec.gov/news/press/2011/2011-175.htm (`` `The derivatives markets have undergone significant

changes in recent years, and the Commission is taking this

opportunity to seek public comment and ensure that our regulatory

approach and interpretations under the Investment Company Act remain

current, relevant, and consistent with investor protection,' '' said

SEC Chairman Mary Shapiro.'').

\37\ Chairman Mary Shapiro, Opening Statement at SEC Open

Meeting Item 1--Use of Derivatives by Funds (Aug. 31, 2011),

available at http://www.sec.gov/news/speech/2011/spch083111mls-item1.htm (``The current derivatives review gives us the opportunity

to re-think our approach to regulating funds' use of derivatives. We

are engaging in this review with a holistic perspective, in the wake

of the financial crisis, and in light of the new comprehensive

regulatory regime for swaps being developed under the Dodd-Frank

Act.'').

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2. Comments on the Proposed Trading Threshold

The Commission also received numerous comments on the proposed

addition of a trading threshold to the exclusion under Sec. 4.5.\38\

The proposed trading threshold provided that derivatives trading could

not exceed five percent of the liquidation value of an entity's

portfolio, without registration with the Commission. The Proposal

excluded activity conducted for ``bona fide hedging'' purposes.\39\

Most commenters stated that a five percent threshold was far too low in

light of the Commission's determination to include swaps within the

measured activities and the limited scope of the Commission's bona fide

hedging definition, but no data was provided to support this assertion.

The Commission, in its adoption of the exemption under Sec.

4.13(a)(3),\40\ previously determined that five percent is an

appropriate threshold to determine whether an entity warrants oversight

by the Commission.\41\

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\38\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith

Letter; AllianceBernstein Letter; AII Letter; STA Letter; Janus

Letter; PMC Letter; USAA Letter; comment letter from Fidelity

Management and Research Co. (April 12, 2011) (``Fidelity Letter'');

comment letter from Securities Industry and Financial Markets

Association (April 12, 2011) (``SIFMA Letter''); comment letter from

Dechert LLP (July 26, 2011) (``Dechert III Letter''); comment letter

from Rydex/SGI Morgan, Lewis & Bockius LLP (April 12, 2011) (``Rydex

Letter''); comment letter from the United States Chamber of Commerce

(April 12, 2011) (``USCC Letter''); comment letter from Sidley

Austin LLP (April 12, 2011) (``Sidley Letter''); comment letter from

the National Futures Association (April 12, 2011) (``NFA Letter'');

comment letter from Campbell & Company, Inc. (April 12, 2011)

(``Campbell Letter''); comment letter from AQR Capital Management,

LLC (April 12, 2011) (``AQR Letter''); comment letter from Steben &

Company, Inc. (April 12, 2011) (``Steben Letter''); comment letter

from the Investment Company Institute (July 28, 2011) (``ICI II

Letter''); and comment from the Association of Institutional

Investors (April 12, 2011) (``AII Letter'').

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

\40\ 17 CFR 4.13(a)(3).

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

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Despite the views of some commenters, the Commission believes that

the five percent threshold continues to be the appropriate percentage

for exemption or exclusion based upon an entity's limited derivatives

trading. Five percent remains the average required for futures margins,

although the Commission acknowledges that margin levels for securities

product futures are significantly higher and the levels for swaps

margining may be as well. The Commission believes, however, that

trading exceeding five percent of the liquidation value of a portfolio

evidences a significant exposure to the derivatives markets. The

Commission believes that such exposure should subject an entity to the

Commission's oversight. Moreover, the Commission believes that its

adoption of an alternative net notional test to determine eligibility

for exclusion from the definition of CPO, as discussed infra, provides

flexibility to registered investment companies in consideration of the

fact that initial margin for certain commodity interest products may

not permit compliance with the five percent threshold.

Commenters also recommended that the Commission exclude from the

threshold calculation various instruments including broad-based stock

index futures, security futures generally, or financial futures

contracts as a whole.\42\ The Commission does not believe that

exempting any of these instruments from the threshold calculation is

appropriate. The Commission does not believe that there is a meaningful

distinction between those security or financial futures and other

categories of futures. The Commission believes that its oversight of

the use of security or financial futures is just as essential as its

oversight of physical commodity futures. Congress granted the

Commission authority over all futures in Sec. 2 of the CEA.\43\ The

Commission believes that it is in the best position to assess investor

and market risks posed by entities trading in derivatives regardless of

type. Therefore, the Commission has decided not to modify the scope of

the threshold from what was proposed in order to exclude security

futures or financial futures from the trading threshold.

---------------------------------------------------------------------------

\42\ See Rydex Letter; Invesco Letter; ICI Letter.

\43\ 7 U.S.C. 2.

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Commenters requested that the Commission expand its definition of

bona fide hedging as it appears in Sec. 1.3(z) to include risk

management as a recognized bona fide hedging activity for purposes of

Sec. 4.5.\44\ The Proposal excluded activity conducted for ``bona fide

hedging'' purposes as that term was defined in Sec. 1.3 as it existed

at the time of the proposal.\45\ Further, the Proposal noted that the

Commission anticipated that the definition of ``bona fide hedging''

would be modified through future rulemakings,\46\ which were open for

comments from the public.

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\44\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith

Letter; AllianceBernstein Letter; IAA Letter; Janus Letter; and STA

Letter.

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

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

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The Commission recently adopted final rules regarding position

limits and, through that rulemaking, implemented a new statutory

definition of bona fide hedging transactions for exempt and excluded

commodity transactions as part of new Sec. 151.5.\47\ This statutory

definition limits the scope of bona fide hedging transactions for

exempt and agricultural commodities, and does not provide for a risk

management exemption for position limits purposes.\48\ With regard to

position limits and bona fide hedging transactions for excluded

commodities, the Commission amended the pre-Dodd-Frank definition of

bona fide hedging in Sec. 1.3(z) to only apply to excluded

commodities. Further, the Commission allowed DCMs and SEFs that are

trading facilities to provide for a risk management exemption from

position limits for excluded commodity transactions.

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\47\ 7 U.S.C. 6a(c); 76 FR 71626, 71643 (Nov. 18, 2011).

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

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The Commission does not believe that it is appropriate to exclude

risk management transactions from the trading threshold. The Commission

believes that an important distinction between bona fide hedging

transactions and those undertaken for risk management purposes is that

bona fide hedging transactions are unlikely to present the same level

of market risk as they are offset by exposure in the physical markets.

Additionally, the Commission is concerned that in the context of

exclusion under Sec. 4.5, a risk management exclusion would permit

registered investment companies to engage in a greater volume of

derivatives trading than other entities which are engaged in similar

activities, but which are otherwise required to register as CPOs. This

could result in disparate treatment among similarly situated entities.

Moreover, there was no consensus among the commenters as to the

appropriate definition of risk management transactions. Thus, the

Commission believes that it may be difficult in this context to

properly limit the scope of such exclusion as objective criteria are

not universally recognized, which would make such exclusion onerous to

enforce.\49\

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\49\ The Commission notes that Sec. 4.5 references the

definition of bona fide hedging for exempt and agricultural

commodities under Sec. 151.5 as well as the definition of bona fide

hedging for excluded commodities under Sec. 1.3(z). Market

participants should not construe either Sec. 151.5 or Sec. 1.3(z)

as permitting a risk management exemption for purposes of

determining compliance with the trading threshold in Sec. 4.5.

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[[Page 11257]]

During numerous meetings with commenters, the commenters noted that

most registered investment companies use derivatives for risk

management purposes, namely to offset the risk inherent in positions

taken in the securities or bond markets, or to equitize cash

efficiently. Although the Commission recognizes the importance of the

use of derivatives for risk management purposes, it does not believe

that transactions that are not within the bona fide hedging definition

should be excluded from the determination of whether an entity meets

the trading threshold for registration and oversight. Therefore, the

Commission has decided not to exclude risk management activities by

registered investment companies from the trading threshold for purposes

of Sec. 4.5.

Several panelists at the Commission's staff roundtable held on July

6, 2011\50\ (``Roundtable'') suggested that, instead of a trading

threshold that is based on a percentage of margin, the Commission

should focus solely on entities that offer ``actively managed futures''

strategies.\51\ The panelist defined ``actively managed futures''

strategies as those in which the entity or its investment adviser made

its own decisions as to which derivatives to take positions in, as

compared to the ``passive'' use of an index, wherein the entity's

investments simply track those held by an index.\52\

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\50\ See Notice of CFTC Staff Roundtable Discussion on Proposed

Changes to Registration and Compliance Regime for Commodity Pool

Operators and Commodity Trading Advisors, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.

\51\ See Transcript of CFTC Staff Roundtable Discussion on

Proposed Changes to Registration and Compliance Regime for Commodity

Pool Operators and Commodity Trading Advisors (``Roundtable

Transcript''), at 19, 25, 30, 76-77, 87-90, available at http://www.cftc.gov/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.

\52\ Id.

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The Commission does not believe that it is proper to exclude from

the Commission's oversight those entities that are using an index or

other so-called ``passive'' means to track the value of other

derivatives. Establishing ``active'' versus ``passive'' use of

derivatives as a criterion for entitlement to the exclusion would

introduce an element of subjectivity to an otherwise objective standard

and make the threshold more difficult to interpret, apply, and enforce.

It also could have the undesirable effect of encouraging funds to

structure their investment activities to avoid regulation. Moreover,

the use of an index or other passive investment vehicle by a large

number of investment companies can amplify the market assumptions built

into an index or other vehicle. Thus, the Commission has decided not to

adopt the panelist's suggestion that the Commission focus on whether an

entity offers an actively managed futures strategy.

One commenter suggested that the Commission should consider the

adoption of an alternative test that would be identical to the

aggregate net notional value test that is currently available under

Sec. 4.13(a)(3)(ii)(B).\53\ Section 4.13(a)(3)(ii)(B) provides that an

entity can claim exemption from registration if the net notional value

of its fund's derivatives trading does not exceed one hundred percent

of the liquidation value of the fund's portfolio.\54\

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\53\ Dechert III Letter.

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

---------------------------------------------------------------------------

Conversely, several panelists at the Roundtable opposed such a

test, stating that it was not a reliable means to measure an entity's

exposure in the market.\55\ Specifically, certain panelists asserted

that the net notional value of positions may not provide a reliable

measure of the risk posed by certain entities in the market.\56\

---------------------------------------------------------------------------

\55\ See Roundtable Transcript at 69-71.

\56\ See Roundtable Transcript at 70.

---------------------------------------------------------------------------

The Commission first considered the addition of an alternative net

notional trading threshold when it proposed to amend Sec. 4.5 in

2002.\57\ In support of its proposal, the Commission stated that the

alternative test provided otherwise regulated entities that use certain

classes of futures with higher initial margin requirements with an

opportunity to also receive exclusionary relief from the definition of

CPO.\58\ The Commission further stated that the inclusion of an

alternative test enabled entities seeking exclusion to rely on

whichever test was less restrictive based on their futures

positions.\59\ In 2003, the Commission proposed and adopted final rules

amending Sec. 4.5, which eliminated the five percent trading threshold

and did not adopt the alternative net notional test.\60\ In stating its

rationale for rescinding the five percent threshold test and declining

to adopt the alternative net notional test, the Commission stated that

because it was simultaneously proposing, and ultimately adopting, an

exemption from registration in Sec. 4.13(a)(4), which did not impose

any trading restriction, the Commission would remove the trading

restrictions from Sec. 4.5 as well to provide consistent

treatment.\61\

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

\58\ 67 FR 65743, 65744-45.

\59\ 67 FR 65743, 65745.

\60\ 68 FR 12622 (Mar. 17, 2003); 68 FR 47221 (Aug. 8, 2003).

\61\ 68 FR 12622, 12625-26 (noting that although entities

excluded under Sec. 4.5 could solicit retail participants, as

compared to those entities exempt under Sec. 4.13(a)(4), which may

only offer to certain high net worth entities and individuals, the

Commission stated that the fact that the Sec. 4.5 entities were

otherwise regulated supported consistent criteria for relief).

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The Commission no longer believes that its prior justification for

abandoning the alternative net notional test is persuasive. By the

adoption of this final rule, the Commission will reinstate the five

percent trading threshold in Sec. 4.5 for registered investment

companies and rescind the exemption in Sec. 4.13(a)(4), which reverses

the regulatory conditions in existence in 2003. The Commission believes

that the appropriate criteria for exclusion through the use of a net

notional test is delineated in Sec. 4.13(a)(3)(ii)(B),\62\ commonly

known as the ``de minimis exemption,'' albeit with the addition of

allowing unlimited use of futures, options, or swaps for bona fide

hedging purposes, which is not permitted under Sec. 4.13(a)(3).

---------------------------------------------------------------------------

\62\ The net notional test as it appears in Sec. 4.13(a)(3)

will be amended by this rulemaking to provide guidance regarding the

ability to net cleared swaps.

---------------------------------------------------------------------------

As stated previously, the net notional test, as set forth under

Sec. 4.13(a)(3)(ii)(B), permits entities to claim relief if the

aggregate net notional value of the entity's commodity interest

positions does not exceed 100 percent of the liquidation value of the

pool's portfolio.\63\ Notional value is defined by asset class. For

example, the notional value of futures contracts is derived by

multiplying the number of contracts by the size of the contract, in

contract units, and then multiplying by the current market price for

the contract.\64\ The notional value of a cleared swap, however, will

be determined consistent with the provisions of part 45 of the

Commission's regulations. The ability to net positions is also

determined by asset class, with entities being able to net futures

contracts across designated contract markets or foreign boards of

trade, whereas swaps may only be netted if cleared by the same

designated clearing organization (``DCO'') and it is otherwise

appropriate.\65\

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

\64\ Id.

\65\ See discussion of amendments to Sec. 4.13(a)(3)(ii)(B)

infra.

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The Commission believes that the adoption of an alternative net

notional test will provide consistent standards for relief from

registration as a CPO for entities whose portfolios only contain a

[[Page 11258]]

limited amount of derivatives positions and will afford registered

investment companies with additional flexibility in determining

eligibility for exclusion. Therefore, the Commission will adopt an

alternative net notional test, consistent with that set forth in Sec.

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

companies claiming exclusion from the definition of CPO under Sec.

4.5.

The Commission also received several comments supporting both the

imposition of a trading threshold in general and the five percent

threshold specifically.\66\ At least one commenter suggested, however,

that the Commission consider requiring registered investment companies

that exceed the threshold to register, but not subjecting them to the

Commission's compliance regime beyond requiring them to be subject to

the examination of their books and records, and examination by the

National Futures Association.\67\ In effect, this commenter requested

that the Commission subject such registrant to ``notice registration.''

The Commission believes that adopting the commenter's approach would

not materially change the information that the Commission would receive

regarding the activities of registered investment companies in the

derivatives markets, which is one of the Commission's purposes in

amending Sec. 4.5. Moreover, a type of notice registration would not

provide the Commission with any real means for engaging in consistent

ongoing oversight. Notwithstanding such notice registration, the

Commission would still be deemed to have regulatory responsibility for

the activities of these registrants. In the Commission's view, notice

registration does not equate to an appropriate level of oversight. For

that reason, the Commission has determined not to adopt the notice

registration system proposed by the commenter. The Commission is

adopting the amendment to Sec. 4.5 regarding the trading threshold

with the addition of an alternative net notional test for the reasons

stated herein and those previously discussed in the Proposal.

---------------------------------------------------------------------------

\66\ See NFA Letter, Campbell Letter, AQR Letter, Steben Letter.

\67\ See AQR Letter.

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3. Comments on the Inclusion of Swaps in the Trading Threshold

The Commission also received numerous comments opposing its

decision to include swaps within the threshold test discussed

above.\68\ Several commenters expressed concern that the Commission

would require inclusion of swaps within the threshold prior to its

adoption of final rules further defining the term ``swap'' and

explaining the margining requirements for such instruments. The

Commission agrees that it should not implement the inclusion of swaps

within the threshold test prior to the effective date of such final

rules. Therefore, it is the Commission's intention to establish the

compliance date of the inclusion of swaps within the threshold

calculation as 60 days after the final rules regarding the definition

of ``swap'' and the delineation of the margin requirement for such

instruments are effective.\69\ The Commission believes that such

compliance date will provide entities with sufficient time to assess

the impact of such rules on their portfolios and to make the

determination as to whether registration with the Commission is

required.

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\68\ See Janus Letter; Reed Smith Letter; AllianceBernstein

Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA

Letter; Dechert II Letter; AII Letter; and SIFMA Letter.

\69\ Effective Date for Swap Regulation, 76 FR 42508 (issued and

made effective by the Commission on July 14, 2011; published in

Federal Register on July 19, 2011).

---------------------------------------------------------------------------

The Commission also received a comment asking for additional

clarification regarding its decision to include swaps within the

threshold.\70\ The Dodd-Frank Act amended the statutory definition of

the terms ``commodity pool operator'' and ``commodity pool'' to include

those entities that trade swaps.\71\ If the Commission were to adopt

the trading threshold and only include futures and options as the basis

for calculating compliance with the threshold, the swaps activities of

the registered investment companies would still trigger the

registration requirement notwithstanding the exclusion of swaps from

the calculus. That is, the purpose of the threshold test is to define a

de minimis amount of trading activity that would not trigger the

registration requirement. If swaps were excluded, any swaps activities

undertaken by a registered investment company would result in that

entity being required to register because there would be no de minimis

exclusion. As a result, one swap contract would be enough to trigger

the registration requirement. For that reason, if the Commission wants

to permit some de minimis level of swaps activity by registered

investment companies without registration with the Commission, it must

do so explicitly in the exclusion.\72\ Because the Commission has

determined that de minimis activity by registered investment companies

does not implicate the Commission's regulatory concerns, the Commission

has decided to include swaps as a component of the trading threshold.

---------------------------------------------------------------------------

\70\ See Janus Letter; Reed Smith Letter; AllianceBernstein

Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA

Letter; Dechert II Letter; AII Letter; and SIFMA Letter.

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

\72\ Any reference to a de minimis level of swaps activities by

registered investment companies only applies in the context of CPO

registration by registered investment companies.

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4. Comments on the Proposed Marketing Restriction

The marketing restriction, as proposed by the Commission, prohibits

the marketing of interests in the registered investment company ``as a

vehicle for trading in (or otherwise seeking investment exposure to)

the commodity futures, commodity options, or swaps markets.'' \73\

Again, as with the other aspects of the proposed amendments to Sec.

4.5, the Commission received numerous comments on this prohibition.\74\

---------------------------------------------------------------------------

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

\74\ See Rydex Letter; Fidelity Letter; SIFMA Letter; AII

Letter; ICI Letter; Vanguard Letter; Reed Smith Letter;

AllianceBernstein Letter; USAA Letter; PMC Letter; Invesco Letter;

Janus Letter; STA Letter; comment letter from the Managed Futures

Association regarding proposed amendments to Sec. 4.5 (April 12,

2011) (``MFA II Letter''); Dechert II Letter; NFA Letter; comment

letter from Alston & Bird, LLP (April 12, 2011) (``Alston Letter'');

Campbell Letter; AQR Letter; Steben Letter; and Dechert III Letter.

---------------------------------------------------------------------------

The vast majority of comments urged the Commission to remove the

clause ``or otherwise seeking investment exposure to'' as introducing

an unacceptable level of ambiguity into the marketing restriction.\75\

The Commission agrees with these comments and believes that the removal

of this clause is appropriate as the clause does not meaningfully add

to the marketing restriction and only creates uncertainty. Thus, the

Commission will adopt the marketing restriction without the clause ``or

otherwise seeking investment exposure to * * *''

---------------------------------------------------------------------------

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

Vanguard Letter.

---------------------------------------------------------------------------

The Commission also received many comments asking that the

Commission provide some clarification regarding the factors that it

would consider in making the determination whether an entity violated

the marketing restriction.\76\ The Commission agrees that providing

factors to further explain the plain language of the marketing

restriction would be helpful to those who plan to market registered

investment companies

[[Page 11259]]

to investors. The Commission has determined, however, that such factors

should be instructive and that no single factor is dispositive. The

Commission will determine whether a violation of the marketing

restriction exists on a case by case basis through an examination of

the relevant facts. The Commission seeks to discourage entities from

designing creative marketing with the intent to avoid the marketing

restriction.

---------------------------------------------------------------------------

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

Letter; NFA Letter; Campbell Letter; Steben Letter; and AQR Letter.

---------------------------------------------------------------------------

To address commenters' requests for guidance, the Commission

believes that the following factors are indicative of marketing a

registered investment company as a vehicle for investing in commodity

futures, commodity options, or swaps:

The name of the fund;

Whether the fund's primary investment objective is tied to

a commodity index;

Whether the fund makes use of a controlled foreign

corporation for its derivatives trading;

Whether the fund's marketing materials, including its

prospectus or disclosure document, refer to the benefits of the use of

derivatives in a portfolio or make comparisons to a derivatives index;

Whether, during the course of its normal trading

activities, the fund or entity on its behalf has a net short

speculative exposure to any commodity through a direct or indirect

investment in other derivatives;

Whether the futures/options/swaps transactions engaged in

by the fund or on behalf of the fund will directly or indirectly be its

primary source of potential gains and losses; and

Whether the fund is explicitly offering a managed futures

strategy.\77\

---------------------------------------------------------------------------

\77\ These factors are derived in substantial part from the

Steben Letter and AQR Letter.

---------------------------------------------------------------------------

The Commission will give more weight to the final factor in the

list when determining whether a registered investment company is

operating as a de facto commodity pool. In contrast, a registered

investment company that does not explicitly offer a managed futures

strategy could still be found to have violated the marketing

restriction based on whether its conduct satisfied any number of the

other factors enumerated above. Put differently, if a registered

investment company offers a strategy with several indicia of a managed

futures strategy, yet avoids explicitly describing the strategy as such

in its offering materials, that registered investment company may still

be found to have violated the marketing restriction.

The Commission also notes that whether the name of the fund

includes the terms ``futures'' or ``derivatives,'' or otherwise

indicates a possible focus on futures or derivatives, will not be

considered a dispositive factor, but rather one of many that the

Commission will consider in making its determination. Moreover, the

Commission will not consider the mere disclosure to investors or

potential investors that the registered investment company may engage

in derivatives trading incidental to its main investment strategy and

the risks associated therewith as being violative of the marketing

restriction.

At the Roundtable, several panelists questioned the Commission's

reasoning for deeming the use of a controlled foreign corporation

(``CFC'') to be an appropriate factor in determining whether the

registered investment company violates the marketing restriction. Based

on comments received at the Roundtable and during the comment period,

the Commission believes that registered investment companies use

controlled foreign corporations as a mechanism to invest up to 25

percent of the registered investment company's portfolio in

derivatives.\78\ The Commission, therefore, believes that a registered

investment company's use of a CFC may indicate that the company is

engaging in derivatives trading in excess of the trading threshold.

Again, the Commission will consider this factor in the context of the

registered investment company's other conduct and will not view this

factor as being dispositive of a violation of the marketing

restriction.

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\78\ See Roundtable Transcript at 152-53.

---------------------------------------------------------------------------

For these reasons, and those stated in the Proposal, the Commission

adopts the marketing restriction in Sec. 4.5 with the modifications

discussed herein.

5. Comments on the Harmonization of Compliance Obligations

Many commenters raised concerns about the potential conflicts

between the Commission's regulatory regime and that imposed by the SEC

if the Commission were to adopt the proposed amendments as final

rules.\79\ As noted above, in an effort to obtain further information

from interested parties, Commission staff held the Roundtable, and

invited staff from the SEC, the IRS, and members of various trade

organizations. The roundtable focused predominantly on harmonization of

the Commission's compliance regime with that of the SEC. Upon

consideration of the comments and the discussions held as a result of

the Roundtable relating to registered investment companies that will be

required to register under amended Sec. 4.5, the Commission agrees

that it is necessary to harmonize the Commission's compliance

obligations under part 4 of the Commission's regulations with the

requirements of the SEC for registered investment companies. To that

end, concurrently with the issuance of this rule, the Commission is

issuing a notice of proposed rulemaking detailing its proposed

modifications to part 4 of its regulations to harmonize the compliance

obligations that apply to dually registered investment companies. The

Commission will not require entities that must register due to the

amendments to Sec. 4.5 to comply with the Commission's compliance

regime until the adoption of final rules governing the compliance

framework for registered investment companies subject to the

Commission's jurisdiction.

---------------------------------------------------------------------------

\79\ See Vanguard Letter; ICI Letter; Dechert III Letter; Reed

Smith Letter; AllianceBernstein Letter; USAA Letter; PMC Letter;

Invesco Letter; IAA Letter; Dechert II Letter; Fidelity Letter;

Janus Letter; SIFMA Letter; STA Letter; AQR Letter; NFA Letter; MFA

II Letter; Alston Letter; Rydex Letter; and ICI II Letter.

---------------------------------------------------------------------------

6. Comments Regarding the Entity Required to Register as the CPO

The Commission received a number of comments requesting

clarification as to which entity would be required to register as a CPO

if a registered investment company would not qualify for exclusion

under Sec. 4.5, as amended.\80\ The commenters consistently proposed

that the registered investment company's investment adviser is the

appropriate entity to register in the capacity of the investment

company's CPO. The Commission agrees that the investment adviser is the

most logical entity to serve as the registered investment company's

CPO. To require a member or members of the registered investment

company's board of directors to register would raise operational

concerns for the registered investment company as it would result in

piercing the limitation on liability for actions undertaken in the

capacity of director.\81\ Thus, the Commission concludes that the

investment adviser for the registered investment company is the entity

required to register as the CPO.

---------------------------------------------------------------------------

\80\ See ICI Letter; Reed Smith Letter; AllianceBernstein

Letter; Rydex Letter; Fidelity Letter; USAA Letter; PMC Letter; IAA

Letter; Janus Letter; SIFMA Letter; STA Letter; comment letter from

AlphaSimplex Group (April 12, 2011) (``ASG Letter''); NFA Letter;

MFDF Letter; and Campbell Letter.

\81\ See MFDF Letter.

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[[Page 11260]]

7. Comments Regarding the Use of Controlled Foreign Corporations

The Commission received many comments regarding the use of CFCs by

registered investment companies for purposes of engaging in commodities

trading. As stated previously, it is the Commission's understanding

that registered investment companies invest up to 25 percent of their

assets in the CFC, which then engages in actively managed derivatives

strategies, either on its own or under the direction of one or more

CTAs. Operators of CFCs have been exempt from Commission registration

by claiming relief under Sec. 4.13(a)(4) of the Commission's

regulations because the sole participant in the CFC is the registered

investment company. Additionally, at the Roundtable, panelists informed

Commission staff that several registered investment companies that

operated CFCs did not claim relief under Sec. 4.13(a)(4) because it

was their opinion that the CFC was merely a subdivision of the

registered investment company and was not a separate commodity

pool.\82\

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\82\ See Roundtable Transcript at 165.

---------------------------------------------------------------------------

Commenters urged the Commission to continue to permit registered

investment companies to use CFCs and to allow such CFCs to be exempt

from registration with the Commission under Sec. 4.13 or exclude them

under Sec. 4.5 by reason of their sole investor being excluded as

well. Commenters proposed various mechanisms by which the Commission

could obtain information regarding the activities of CFCs, including

requiring disclosure of CFC fees and expenses at the registered

investment company level, requiring a representation that the CFC will

comply with key provisions of the Investment Company Act of 1940

(``Investment Company Act''),\83\ and requiring the registered

investment company to make its CFC's books and records available to the

Commission and NFA for inspection.

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\83\ 15 U.S.C. 80a-1, et seq.

---------------------------------------------------------------------------

The Commission does not oppose the continued use of CFCs by

registered investment companies, but it believes that CFCs that fall

within the statutory definition of ``commodity pool'' should be subject

to regulation as a commodity pool.\84\ The Dodd-Frank Act amended the

CEA to define a commodity pool as ``any investment trust, syndicate, or

similar form of enterprise operated for the purpose of trading in

commodity interests, including any * * * commodity for future delivery,

security futures product, or swap.'' \85\ Based on a plain language

reading of the statutory definition, CFCs wholly owned by registered

investment companies and used for trading commodity interests are

properly considered commodity pools. These entities also satisfy the

definition of ``pool'' delineated in Sec. 4.10(d)(1) of the

Commission's regulations, which is substantively identical to the

statutory definition. There is no meaningful basis for concluding

otherwise. Moreover, the Commission believes that each separate legally

cognizable entity must be assessed on its own characteristics and that

a CFC should not be entitled to exclusion simply because its parent

company is a registered investment company that may be entitled to

exclusion under Sec. 4.5. Therefore, the Commission does not oppose

the use of CFCs for trading in commodity interests by registered

investment companies, but such CFCs will be required to have their CPOs

register with the Commission unless they may claim exemption or

exclusion therefrom on their own merits.

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

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

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8. Comments Regarding Implementation of Amendments

The Commission received several comments with suggestions regarding

implementation of the proposed amendments to Sec. 4.5, if the

Commission decided to adopt the proposed provisions as final rules.\86\

Several commenters recommended that the Commission provide for an

undefined ``substantial transition period for compliance.'' \87\

Conversely, one commenter suggested that the Commission should only

provide a short period of time for compliance.\88\ Another commenter

suggested that at least 12-months would be required for registered

investment companies to come into registration and compliance with

Commission requirements.\89\ Finally, a commenter suggested that the

Commission delay implementation until all mandatory Dodd-Frank Act

rules are implemented.\90\

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

Letter; AllianceBernstein Letter; USAA Letter; PMC Letter; IAA

Letter; Janus Letter; STA Letter; Rydex Letter; Alston Letter; and

comment letter from the Association of Institutional Investors (July

1, 2011) (``AII II Letter'').

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

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

Letter; and STA Letter.

\88\ See Steben Letter.

\89\ See Rydex Letter.

\90\ See AII II Letter.

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In light of the Commission's proposed harmonization effort with

respect to the compliance obligations for dually registered investment

companies and the ongoing efforts to further define the term ``swap''

and the margin requirements for swaps positions, the Commission

recognizes that a short implementation period is not practicable. The

Commission believes that 11 months is an adequate amount of time to

enable compliance by existing registered investment companies.

Recognizing that the definition of swap is not yet finalized, the

Commission has decided that compliance with the amendments to Sec. 4.5

for purposes of registration only will occur on the later of either

December 31, 2012 or within 60-days following the adoption of final

rules defining the term ``swap,'' and establishing margin requirements

for such instruments.\91\ Entities required to register due to the

amendments to Sec. 4.5 shall be subject to the Commission's

recordkeeping, reporting, and disclosure requirements set forth in part

4 of the Commission's regulations within 60 days following the

effectiveness of a final rule implementing the Commission's proposed

harmonization effort pursuant to the concurrent proposed rulemaking.

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\91\ Effective Date for Swap Regulation, 76 FR 42508.

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Several commenters also suggested that the Commission exempt from

compliance those registered investment companies that have already

claimed relief under Sec. 4.5.\92\ The Commission does not believe

that ``grandfathering'' is appropriate in this context. As the

Commission stated in its Proposal, and reaffirms in this preamble, part

of the purpose of amending Sec. 4.5 is to ensure that entities that

are engaged in a certain level of derivatives trading are subject to

the registration and compliance obligations and oversight by the

Commission.\93\ Grandfathering is inconsistent with the goals of the

Commission's amendments. The Commission, however, believes that

harmonization of the Commission's compliance regime with that of the

SEC will minimize the regulatory burden of existing registered

investment companies. In addition, the Commission is permitting a

sufficient amount of time for existing entities to come into compliance

before the compliance dates set forth above. Therefore, the Commission

believes that it is addressing the commenters' concerns through

harmonization while still ensuring that the Commission has the

[[Page 11261]]

information necessary to oversee all participants in the derivatives

markets.

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\92\ See ICI Letter; Reed Smith Letter; AllianceBernstein

Letter; Invesco Letter; IAA Letter; Janus Letter; AII Letter; SIFMA

Letter; and STA Letter.

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

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B. Comments Regarding Proposed Amendment to Sec. 4.7

The Commission proposed two amendments to Sec. 4.7. The first

proposed to amend Sec. Sec. 4.7(a)(3)(ix) and (a)(3)(x) to incorporate

by reference the accredited investor standard from the SEC's Regulation

D \94\ under the Securities Act of 1933,\95\ rather than by direct

inclusion of its specific terms. The Commission stated that this

amendment would ``permit the Commission's definition of QEP to continue

to include the specific terms of the accredited investor standard in

the event that it is later modified by the SEC without requiring the

Commission to amend Sec. 4.7 each time to maintain parity.'' \96\

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

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

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

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The Commission received one comment supporting this proposed

amendment. Specifically, the commenter stated its belief that this

amendment would ``facilitate consistency amongst federal standards for

financial sophistication and reduce investor confusion.'' \97\ The

Commission agrees and, accordingly, is adopting the amendments to

Sec. Sec. 4.7(a)(3)(ix) and (a)(3)(x) as proposed.

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\97\ See MFA II Letter.

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The second proposed amendment to Sec. 4.7 would rescind the relief

provided in Sec. 4.7(b)(3) \98\ from the certification requirement of

Sec. 4.22(c) \99\ for financial statements contained in commodity pool

annual reports. In support of the Proposal, the Commission noted that

approximately 85 percent of all pools operated under Sec. 4.7 in

fiscal year 2009 filed financial statements that were certified by

certified public accountants, ``despite being eligible to claim relief

from certification under Sec. 4.7(b)(3).'' \100\ The number of

uncertified financial statements has continued to decline and, for

fiscal year 2010, approximately 91 percent of all reports filed for

pools operated under Sec. 4.7 included financial statements that were

certified by certified public accountants.\101\ In the Proposal, the

Commission stated its belief that ``requiring certification of

financial information by an independent accountant in accordance with

established accounting standards will ensure the accuracy of the

financial information submitted by its registrants,'' and will further

the stated purposes of the Dodd-Frank Act.\102\

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

\99\ Id. 4.22(c).

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

\101\ In 2010, 951 pools were operated pursuant to Sec. 4.7 and

84 of those pools filed uncertified financial statements for fiscal

year 2010.

\102\ Id. at 7985.

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The Commission received two comments regarding this proposed

amendment. One commenter supported the proposed rescission and the

Commission's stated justification for doing so.\103\ The other

commenter recommended that the Commission retain an exemption from

certification of financial statements for entities where the pool's

participants are limited to the principals of its CPO(s) and CTA(s) and

other categories of employees listed in Sec. 4.7(a)(2)(viii).\104\ It

is unclear how many of the pools operated under Sec. 4.7 would qualify

for such relief if adopted. The Commission believes that rather than

adopt an exemption for such entities without data regarding the scope

of the exemption's applicability, it is more appropriate to rescind the

exemption from certification for all pools operated under Sec.

4.7(b)(3) generally and permit entities to write to the Division of

Swap Dealer and Intermediary Oversight to request exemptive relief from

the certification requirement on a case by case basis under Sec.

140.99.\105\ By requiring entities to request relief from the

Commission, the Commission can better determine whether such an

exemption should be adopted in the future. Therefore, the Commission is

adopting the amendments to Sec. 4.7 as proposed.

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\103\ See NFA Letter.

\104\ See MFA II Letter.

\105\ 17 CFR Sec. 140.99.

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C. Comments Regarding the Proposed Rescission of Sec. Sec. 4.13(a)(3)

and (a)(4)

As stated previously, the Commission proposed to rescind Sec. Sec.

4.13(a)(3) and (a)(4). After considering the comments received, which

are detailed herein, the Commission has determined to retain the de

minimis exemption in Sec. 4.13(a)(3). The Commission concluded that

overseeing entities with less than five percent exposure to commodity

interests is not the best use of the Commission's limited resources.

Moreover, the Commission believes that the retention of the de minimis

exemption in Sec. 4.13(a)(3) provides for consistent treatment of

entities engaging in de minimis levels of trading due to the addition

of a five percent trading threshold in Sec. 4.5 as well. The

Commission received several comments requesting that the Commission

modify Sec. 4.13(a)(3) in various respects. The Commission has

determined, however, that it is appropriate to retain Sec. 4.13(a)(3)

in its current form, for the reasons detailed below.

1. General Comments

In addition to the comments that the Commission received regarding

the specific parts of the Proposal rescinding Sec. Sec. 4.13(a)(3) and

(a)(4), the Commission received numerous comments regarding the

proposed rescissions generally.\106\ Broadly, the comments opposed the

rescission of both provisions.

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\106\ See comment letter from the New York State Bar Association

(April 12, 2011) (``NYSBA Letter''); comment letter from Skadden,

Arps, Slate, Meagher & Flom LLP (April 12, 2011) (``Skadden

Letter''); MFA Letter; comment letter from Katten, Muchin Rosenman

LLP (April 12, 2011) (``Katten Letter''); Fidelity Letter; Dechert

Letter; comment letter from the Alternative Investment Management

Association, Ltd. (April 12, 2011) (``AIMA Letter''); comment letter

from the Alternative Investment Management Association, Ltd. (July

1, 2011) (``AIMA II Letter''); IAA Letter; SIFMA Letter; comment

letter from HedgeOp Compliance, LLC (July 28, 2011) (``HedgeOp

Letter''); comment letter from the Private Investor Coalition; Inc.

(April 12, 2011) (``PIC Letter''); and comment letter Seward &

Kissel, LLP (April 12, 2011) (``Seward Letter'').

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Several commenters asserted that rescission was not necessary

because the Commission has the means to obtain any needed information

from exempt CPOs through its large trader reporting requirements and

its special call authority.\107\ Although the Commission has the means

to obtain certain information through the mechanisms delineated by the

commenters, neither of those mechanisms provide the type of data

requested on Forms CPO-PQR or CTA-PR with the kind of regularity

proposed under Sec. 4.27. For example, large trader reporting may

provide detailed trading information for a particular market

participant, but it does not provide the Commission with information

regarding trends across funds that are not large enough to trigger the

reporting obligation, but that may nevertheless impact the market.

Also, with respect to the Commission's special call authority under

Sec. 21.03, the collection of data under that section is generally

reactive in nature. That is, the Commission would be in a position to

collect data under Sec. 21.03 after it became aware of an issue.

Conversely, it is anticipated that collecting data using Forms CPO-PQR

and CTA-PR will enable the Commission to be more proactive in assessing

possible threats to market stability and in carrying out its duties in

overseeing market participants generally.

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\107\ See Skadden Letter; Katten Letter; and MFA Letter.

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Some commenters suggested that the Commission adopt a limited

exemption for SEC-registered entities that are not ``primarily

engaged'' in trading commodity interests.\108\ Pursuant to the

[[Page 11262]]

terms of Sec. 4m(3) of the CEA, as amended by the Dodd-Frank Act, CTAs

that are registered with the SEC and whose business does not consist

primarily of acting as a CTA, and that do not act as a CTA to any pool

engaged primarily in the trading of commodity interests, are exempt

from registration with the Commission.\109\ The Commission believes

that that statutory exemption for CTAs is explicit as to Congress's

limited intentions regarding exempting entities from registration with

the Commission. By the plain language of Sec. 4m(3), this section

creates an exemption from the CTA registration requirements of the CEA;

commodity pools are discussed in that provision only to the extent that

the characteristics of the pool enable the CTA to claim relief. The

registration category of CPO is not implicated. Therefore, the

Commission concludes that the provisions of Sec. 4m(3) do not mandate

any exemption from the registration requirements for CPOs. Moreover,

the Commission disagrees with the commenter who asserted that

rescission is inconsistent with Congress's asserted intention to avoid

dual registration. The Commission does not believe it is accurate to

state that Congress intended to avoid oversight by both agencies, and

indeed Congress clearly anticipated some overlap when, in the Dodd-

Frank Act, it required the Commission to work with the SEC to adopt a

data collection instrument for dual registrants. Section 406 of the

Dodd-Frank Act explicitly mandated that the Commission and the SEC

jointly promulgate a reporting form for dually registered

entities.\110\ The Commission does not believe that this requirement

could be consistent with any asserted Congressional intention to

absolutely avoid dual registration with the commissions. Therefore, the

Commission concludes that dual registration of certain entities is not

irreconcilable with the Congressional intent underlying the Dodd-Frank

Act.

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\108\ See Dechert Letter; and Katten Letter.

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

\110\ See Section 406 of the Dodd-Frank Act.

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Other commenters asserted that the compliance and regulatory

obligations under the Commission's rules are burdensome and costly for

private businesses and would unnecessarily distract entities from their

primary focus of managing client assets.\111\ The Commission disagrees

with this assertion, which in any event was not fully detailed by any

commenter. The Commission believes that regulation is necessary to

ensure a well functioning market and to provide investor protection.

The Commission further believes that the compliance regime that the

Commission has adopted strikes the appropriate balance between limiting

the burden placed on registrants and enabling the Commission to carry

out its duties under the CEA. Moreover, the compliance and regulatory

obligations imposed on these CPO registrants will be no different from

those imposed on other registered CPOs. Such compliance and regulatory

obligations have not been unduly burdensome for these other

registrants.

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\111\ See MFA Letter; Seward Letter; and Katten Letter.

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2. Comments Regarding the Proposed Rescission of Sec. 4.13(a)(3)

In the Proposal, the Commission proposed rescinding the ``de

minimis'' exemption in Sec. 4.13(a)(3). The Commission stated its

belief that ``it is possible for a commodity pool to have a portfolio

that is sizeable enough that even if just five percent of the pool's

portfolio were committed to margin for futures, the pool's portfolio

could be so significant that the commodity pool would constitute a

major participant in the futures market.'' \112\ Moreover, the

Commission stated that it believed that this rescission was consistent

with the purposes of the Dodd-Frank Act, with specific regard to

increased transparency and accountability of participants in the

financial markets. The Commission did, however, solicit comment as to

whether some form of de minimis exemption should be maintained.

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

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The Commission received ten comments specifically on its proposed

rescission of the ``de minimis'' exemption in Sec. 4.13(a)(3).\113\

The commenters consistently urged the Commission to retain a de minimis

exemption. Some commenters cited to the amendment to Sec. 4m(3) of the

CEA by the Dodd Frank Act, which provides an exemption from

registration for CTAs that are registered with the SEC and whose

business does not consist primarily of acting as a CTA and that does

not act as a CTA to any pool engaged primarily in the trading of

commodity interests.\114\ One commenter stated that the effect of Sec.

4m(3) was to exempt such CTAs from registration as a CPO or CTA; \115\

whereas another commenter asserted that the amendment of Sec. 4m(3) is

evidence that Congress did not intend to have the operator of a

commodity pool register as a CPO if its pool is not primarily engaged

in trading commodity interests.\116\ The Commission notes that under

the tenets of statutory interpretation, where Congress explicitly

enumerates certain exceptions to a general prohibition, additional

exceptions are not to be implied in the absence of evidence of a

contrary legislative intent.\117\ By the plain language of Sec. 4m(3),

this section creates an exemption from the CTA registration

requirements of the CEA; commodity pools are discussed only to the

extent that the characteristics of the pool enable the CTA to claim

relief. The registration category of CPO is not referenced. Therefore,

the Commission concludes that the provisions of Sec. 4m(3) do not

mandate any exemptions from registration for CPOs. The Commission

notes, however, that it has determined to retain the de minimis

exemption set forth in Sec. 4.13(a)(3).

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\113\ See MFA Letter; NYSBA Letter; comment letter from Schulte

Roth & Zabel LLP (April 12, 2011) (``Schulte Letter''); Dechert III

Letter; Skadden Letter; Seward Letter; IAA Letter; NFA Letter; SIFMA

Letter; and comment letter from McGuireWoods LLC (April 12, 2011)

(``McGuireWoods Letter'').

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

\115\ See Skadden Letter.

\116\ See MFA Letter.

\117\ See Andrus v. Glover Construction Co., 446 U.S. 608

(1980).

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Several commenters suggested adding as a prerequisite for exemptive

relief under Sec. 4.13(a)(3), registration with the SEC as an

investment adviser.\118\ The Commission is declining to add SEC

registration as part of the criteria for relief under Sec. 4.13(a)(3)

because the basis for providing relief is the limited nature of the

pool's trading activity rather than its operator's registration status

with the SEC. To require the CPO of an exempt pool to be regulated by

the SEC would limit the applicability of Sec. 4.13(a)(3), which is not

the Commission's intention at this time.

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\118\ See MFA Letter; NFA Letter; Skadden Letter; Schulte

Letter; NYSBA Letter; Dechert III Letter; IAA Letter; and Seward

Letter.

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Most commenters suggesting the additional requirement of SEC

registration also proposed an increase in the trading threshold,

ranging from 20 percent to 50 percent of the pool's liquidation value

due to the inclusion of the pool's swaps activity within the trading

threshold.\119\ As discussed earlier in this release in the context of

Sec. 4.5, the Commission believes that a five percent threshold

continues to be the appropriate level for exemption or exclusion due to

limited derivatives trading. Moreover, the Commission would again note

that the inclusion of an alternative net notional test provides CPOs

with another, perhaps less restrictive means, of qualifying for the

exemption. The Commission believes

[[Page 11263]]

that trading exceeding five percent of the liquidation value of a

portfolio, or a net notional value of commodity interest positions

exceeding 100 percent of the liquidation value of a portfolio,

evidences a significant exposure to the derivatives markets, and that

such exposure should subject an entity to the Commission's oversight.

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\119\ See MFA Letter; Skadden Letter; NYSBA Letter; Dechert III

Letter.

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With respect to the issue of the inclusion of swaps making it more

difficult to satisfy the trading threshold, the Commission believes

that it would be premature to increase the threshold at this time.

Additionally, as stated previously, the inclusion of an alternative net

notional test may provides entities with another mechanism for

qualifying for the exemption in Sec. 4.13(a)(3). The Commission

believes that it may be more appropriate to reassess the trading

threshold after collecting data from registered CPOs through Form CPO-

PQR. Therefore, the Commission has decided not to increase the trading

threshold under Sec. 4.13(a)(3).

Additionally, the Commission believes that it must include swaps

within the threshold to enable the most entities to claim relief under

Sec. 4.13(a)(3). As stated previously with respect to the amendments

to Sec. 4.5, the Dodd-Frank Act amended the statutory definition of

the terms ``commodity pool operator'' and ``commodity pool'' to include

those entities that trade swaps.\120\ If the Commission were to keep

the de minimis test in Sec. 4.13(a)(3) and only include futures and

options as the basis for calculating compliance with the threshold, the

swaps activities of the CPOs would still trigger the registration

requirement notwithstanding the exclusion of swaps from the calculus.

That is, the purpose of the threshold test is to define a de minimis

amount of trading activity that would not trigger the registration

requirement. If swaps were excluded, any swaps activities undertaken by

a CPO would result in that entity being required to register because

there would be no de minimis exclusion for such activity. As a result,

one swap contract would be enough to trigger the registration

requirement. For that reason, if the Commission wants to permit some de

minimis level of swaps activity by CPOs without registration with the

Commission, it must do so explicitly in the exemption.\121\ Because the

Commission has determined that de minimis activity by CPOs does not

implicate the Commission's regulatory concerns, the Commission has

decided that it is appropriate to include swaps within the trading

threshold under Sec. 4.13(a)(3).\122\

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

\121\ Any reference to a de minimis level of swaps activities by

registered investment companies only applies in the context of CPO

registration by registered investment companies.

\122\ The Commission has proposed to amend the definition of

``commodity interest'' as it appears in Sec. 1.3 to include swaps,

consistent with the Dodd-Frank Act. See, 76 FR 33066 (June 7, 2011).

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Additionally, to enable CPOs to fully exercise the alternative net

notional test, the Commission is amending Sec. 4.13(a)(3)(ii)(B) to

provide guidance as to the notional value of cleared swaps positions

and the ability to net swaps cleared by the same DCO. The Commission

believes that this amendment will serve to provide equal ability to

claim relief under Sec. 4.13(a)(3) to all CPOs regardless of the types

of commodity interests held by their operated pools. Therefore, the

Commission is amending Sec. 4.13(a)(3)(ii)(B)(1) to provide that the

notional value of a cleared swap is determined consistent with the

provisions of part 45 of the Commission's regulations and Sec.

4.13(a)(3)(ii)(B)(2) to provide that swaps cleared by the same DCO may

be netted where appropriate.

After consideration of the comments and the Commission's stated

rationale for proposing to rescind the exemption in Sec. 4.13(a)(3),

the Commission has determined to retain the de minimis exemption

currently set forth in that section without modification.\123\

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\123\ The Commission does not need to amend the language of

Sec. 4.13(a)(3) to include swaps within the trading threshold as

this section determines eligibility based on the amount of

``commodity interests'' traded. In a separate rulemaking, the

Commission has proposed to amend the definition of the term

``commodity interest'' to include swaps. See 76 FR 11701 (March 3,

2011).

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3. Comments Regarding a Family Offices Exemption

In response to the Commission's proposed rescission of Sec. Sec.

4.13(a)(3) and (a)(4), the Commission received numerous comments asking

that the Commission adopt an exemption from registration for family

offices that is akin to the exemption adopted by the SEC.\124\ The

commenters noted that prior to the adoption of Sec. Sec. 4.13(a)(3)

and (a)(4), the Commission staff granted relief to family offices on an

ad hoc basis, but that when Sec. Sec. 4.13(a)(3) and (a)(4) were

adopted, most family offices availed themselves of those exemptions

from registration. The commenters argued that the Commission should

have less regulatory concern about family offices because their

clientele is necessarily limited to family members and the family

offices do not solicit outside of the family unit.

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\124\ See 17 CFR 250.202(a)(11)(G)-1.

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Due to the exemptions previously granted by Commission staff, and

the resulting lack of information regarding the activities of CPOs

claiming relief thereunder, the Commission does not yet have a

comprehensive view of the positions taken and interests held by

currently exempt entities. The Commission, therefore, believes that it

is prudent to withhold consideration of a family offices exemption

until the Commission has developed a comprehensive view regarding such

firms to enable the Commission to better assess the universe of firms

that may be appropriate to include within the exemption, should the

Commission decide to adopt one. Therefore, the Commission is directing

staff to look into the possibility of adopting a family offices

exemption in the future.

The Commission notes that family offices previously relying on the

exemption under Regulation Sec. 4.13(a)(3) will not be affected by the

rules adopted herein, as the Commission is not rescinding the Sec.

4.13(a)(3) exemption and it will remain available to entities meeting

its criteria. The Commission further notes that family offices continue

to be permitted to write in on a firm by firm basis to request

interpretative relief from the registration and compliance obligations

under the Commission's rules and to rely on those interpretative

letters already issued to the extent permissible under the Commission's

regulations.\125\ Therefore, the Commission does not believe an

exemption for family offices is necessary at this time.

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\125\ See 17 CFR 140.99(a)(3) (``An interpretative letter may be

relied upon by persons in addition to the Beneficiary.''). The most

recent letter (CFTC letter 10-25) issued affirming the Division's

interpretation that a ``family office'' is not a pool under Sec.

4.10(d) is available at the Commission's Web site at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/10-25.pdf. See, CFTC Interpretative Letter 00-100 [2000-2002 Transfer

Binder] Comm. Fut. L. Rep. (CCH) ] 28,420 (Nov. 1, 2000); CFTC

Interpretative Letter No. 96-24, [1994-1996 Transfer Binder] Comm.

Fut. L. Rep. (CCH) ] 26,653 (March 4, 1996); CFTC Interpretative

Letter No. 97-29, [1996-1998 Transfer Binder] Comm. Fut. L. Rep.

(CCH) ] 27,039 (March 21, 1997); CFTC Interpretative Letter No. 95-

35, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 26,376

(Nov. 23, 1994).

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4. Comments Regarding a Foreign Advisor Exemption

Several commenters suggested that if the Commission determines to

adopt the proposed rescissions, it should adopt a foreign advisor

exemption similar to that set forth in the Dodd-Frank Act under the

Investment Adviser Act of

[[Page 11264]]

1940.\126\ The commenters expressed concern that the rescission of the

exemptions under Sec. Sec. 4.13(a)(3) and (a)(4) would result in

nearly all non-US based CPOs operating a pool with at least one U.S.

investor being required to register with the Commission. Commenters

also expressed concern that foreign CPOs would have to report the

entirety of their derivatives activities to the Commission even if

foreign regulators also oversee such activities.

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\126\ See Section 403 of the Dodd-Frank Act.

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Due to the exemptions previously adopted by the Commission, and the

resulting lack of information regarding the activities of CPOs claiming

relief thereunder, the Commission does not yet have a comprehensive

view of the positions taken and interests held by currently exempt

entities. The Commission, therefore, believes that it is prudent to

withhold consideration of a foreign advisor exemption until the

Commission has received data regarding such firms on Forms CPO-PQR and/

or CTA-PR, as applicable, to enable the Commission to better assess the

universe of firms that may be appropriate to include within the

exemption, should the Commission decide to adopt one. Foreign advisors

to pools that meet the criteria of Sec. 4.13(a)(3) will be able to

continue to operate pursuant to that exemption, if previously claimed,

or file notice of claim of exemption under Sec. 4.13(a)(3). Therefore,

the Commission is not providing an exemption for foreign advisors at

this time.

5. Comments Regarding the Proposed Rescission of Sec. 4.13(a)(4)

In the Proposal, the Commission proposed to rescind the exemption

in Sec. 4.13(a)(4) for operators of pools that are offered only to

individuals and entities that satisfy the qualified eligible person

standard in Sec. 4.7 or the accredited investor standard under the

SEC's Regulation D.\127\ In the Proposal, the Commission stated that it

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

[S]eeks to eliminate the exemptions under Sec. Sec. 4.13(a)(3)

and (4) for operators of pools that are similarly situated to

private funds that previously relied on the exemptions under

Sec. Sec. 3(c)(1) and (7) of the Investment Company Act and Sec.

203(b)(3) of the Investment Advisers Act. It is the Commission's

view that the operators of these pools should be subject to similar

regulatory obligations, including proposed form CPO-PQR, in order to

provide improved transparency and increased accountability with

respect to these pools. The Commission has determined that it is

appropriate to limit regulatory arbitrage through harmonization of

the scope of its data collection with respect to pools that are

similarly situated to private funds so that operators of such pools

will not be able to avoid oversight by either the Commission or the

SEC through claims of exemption under the Commission's

regulations.\128\

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

The Commission received several comments regarding its proposed

rescission.\129\ Several commenters argued that the Commission should

consider retaining the exemption in Sec. 4.13(a)(4) for funds that do

not directly invest in commodity interests, but do so through a fund of

funds structure, and who are advised by an SEC registered investment

adviser. Due to the exemptions previously adopted by the Commission,

and the resulting lack of information regarding the activities of CPOs

claiming relief thereunder, the Commission does not yet have a

comprehensive view of the positions taken and interests held by

currently exempt entities. The Commission, therefore, believes that it

is prudent to withhold consideration of a fund of fund exemption until

the Commission has received data regarding such firms on Forms CPO-PQR

and/or CTA-PR, as applicable, to enable the Commission to better assess

the universe of firms that may be appropriate to include within the

exemption, should the Commission decide to adopt one. Therefore, the

Commission is not providing an exemption for funds of funds at this

time. The Commission notes, however, that staff will consider requests

for exemptive relief for funds of funds on a case by case basis.

---------------------------------------------------------------------------

\129\ See comment letter from Sidley Austin LLP (April 12, 2011)

(``Sidley Letter''); MFA Letter; NYSBA Letter; comment letter from

Cranwood Capital Management (April 12, 20110 (``Cranwood Letter'');

Dechert III Letter; and comment letter from Nantucket Multi

Managers, LLC (April 12, 2011) (``Nantucket Letter'').

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The Commission received two comments that argued that the

rescission of Sec. 4.13(a)(4) is inconsistent with the private

offering framework under the SEC's Regulation D and that the rescission

would result in the end of private offerings.\130\ The Commission

believes that this analysis is flawed and is the result of a mistaken

conflation of the private fund structure under the Commission's rules

and privately-offered ownership interests under the SEC's rules. The

Commission notes that the rescission of Sec. 4.13(a)(4) does not

preclude CPOs from utilizing Regulation D with respect to the offering

of pool interests because the availability of relief from the

registration of an offering under Regulation D does not require that

the entity involved be exempt from regulation. Therefore, the

Commission continues to believe that rescission of Sec. 4.13(a)(4) is

appropriate for the reasons stated in the Proposing Release and that it

is consistent with the registration of investment advisers of such

exempt funds with the SEC.

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\130\ See MFA Letter; and NYSBA Letter.

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One commenter expressed concerns about the fact that the class of

eligible participants in a pool operated pursuant to Sec. 4.13(a)(4)

is broader than that for a pool qualifying under Sec. 4.7.\131\

Specifically, this commenter noted that under Sec. 4.13(a)(4),

participants may include non-natural participants that are QEPs under

Sec. 4.7 or accredited investors under Sec. 230.501(a)(1)-(3), (a)(7)

or (a)(8),\132\ whereas Sec. 4.7 does not include such participants as

QEPs.\133\ The Commission recognizes that this discrepancy may result

in certain entities being unable to claim relief under Sec. 4.7;

however, due to the exemptions previously adopted by the Commission,

and the resulting lack of information regarding the activities of CPOs

claiming relief thereunder, the Commission does not yet have a

comprehensive view of the positions taken and interests held by

currently exempt entities and until the Commission has more information

regarding the universe of entities affected, the Commission does not

believe that it is appropriate to amend Sec. 4.7 to reflect the nature

of participants in funds previously entitled to relief under Sec.

4.13(a)(4). After the Commission has collected data from such entities

through Form CPO-PQR, the Commission may reconsider this issue. The

Commission also notes that staff will consider requests for exemptive

relief from the limitations of Sec. 4.7 on a case-by-case basis.

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\131\ MFA raised this concern during several meetings with

Commission staff, although it did not provide any detail regarding

the scope of its concerns and the topic was not discussed in the

written comments submitted regarding this rulemaking.

\132\ 17 CFR Sec. 4.13(a)(4)(ii)(B).

\133\ 17 CFR Sec. 4.7(a).

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One commenter argued that rescission is not necessary because any

fund that seeks to attract qualified eligible purchasers is already

required to maintain oversight and controls that exceed those mandated

by part 4 of the Commission's regulations such that any regulation

imposed would be duplicative and unnecessarily burdensome.\134\ That

commenter further stated that:

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\134\ See Cranwood Letter.

We are accustomed to intense scrutiny from potential investors

that frequently includes independent background checks of our key

employees, onsite visits that include

[[Page 11265]]

interviews with our traders and other key personnel, interviews of

our third-party administrator and our auditors, interviews of

officials of our clearing broker, interviews of officers at our

custodial bank, and bulk delivery of transactional data for

independent analysis. To say that such information-gathering goes

far beyond the contents of a mandated disclosure document is a gross

understatement.\135\

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\135\ See Cranwood Letter.

The commenter primarily focused on the significant level of

controls that the fund operator implements independent of regulation.

The Commission believes that, contrary to the commenter's arguments as

to the import of that fact, such controls and internal oversight should

facilitate compliance with the Commission's regulatory regime.

Moreover, the Commission continues to believe that registration serves

important regulatory purposes as stated previously in this release in

the context of the amendments to Sec. 4.5.

The Commission has determined to eliminate the exemption in Sec.

4.13(a)(4) because, as stated in the proposal, there are no limits on

the amount of commodity interest trading in which pools operating under

this regulation can engage. That is, it is possible that a commodity

pool that is exempted from registration under Sec. 4.13(a)(4) could be

invested solely in commodities, which, in the Commission's view,

necessitates Commission oversight to ensure adequate customer

protection and market oversight. Therefore, the Commission adopts the

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

The Commission received several comments regarding the timing of

the implementation of the rescission of Sec. 4.13(a)(4).\136\ Two

commenters suggested that 18 months is the appropriate time period to

permit entities to prepare for compliance with the Commission's

registration and compliance regime.\137\ One commenter suggested that

the Commission provide ``sufficient time,'' but provided no proposed

specific period of time.\138\ Several commenters asserted that

currently exempt entities should be grandfathered.\139\

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\136\ See NYSBA Letter; AIMA Letter; Schulte Letter; comment

letter from Fulbright & Jaworski L.L.P. (April 12, 2011)

(``Fulbright Letter''); SIFMA Letter; Seward Letter; Katten Letter;

and comment letter from TIF Fund Management LLC (May 19, 2011)

(``TIF Letter''); NFA Letter; IAA Letter; and Dechert Letter.

\137\ See Schulte Letter; and Fulbright Letter.

\138\ See NFA Letter. See also, IAA Letter.

\139\ See NYSBA Letter; AIMA Letter; Schulte Letter; Fulbright

Letter; SIFMA Letter; Seward Letter; and Katten Letter.

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The Commission recognizes that entities will need time to come into

compliance with the Commission's regulations. The Commission does not,

however, believe that the process of preparing for Commission oversight

necessitates an 18 month time period. Based on the comments received

indicating that a certain portion of entities currently claiming relief

under Sec. 4.13(a)(4) already have robust controls in place

independent of Commission oversight, the Commission believes that

entities currently claiming relief under Sec. 4.13(a)(4) should be

capable of becoming registered and complying with the Commission's

regulations within 12 months following the issuance of the final rule.

For entities that are formed after the effective date of the

rescission, the Commission expects the CPOs of such entities to comply

with the Commission's regulations upon formation and commencement of

operations.

The Commission does not believe that ``grandfathering'' is

appropriate in this context. As the Commission stated in its Proposal,

part of the purpose of rescinding Sec. 4.13(a)(4) is to ensure that

entities that are engaged in derivatives trading are subject to

substantively identical registration and compliance obligations and

oversight by the Commission.\140\ Grandfathering is not consistent with

the stated goals of the Commission's rescission and would result in

disparate treatment of similarly situated entities.

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\140\ 76 FR 7976, 7986 (Feb. 12, 2011).

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Therefore, the Commission will implement the rescission of Sec.

4.13(a)(4) for all entities currently claiming exemptive relief

thereunder on December 31, 2012, but the rescission will be implemented

for all other CPOs upon the effective date of this final rulemaking.

D. Comments Regarding the Proposed Annual Notices for Continued

Exemptive or Exclusionary Relief

In the Proposal, the Commission proposed to require annual

reaffirmance of a claim of exemption or exclusion from registration as

a CPO or CTA. In the Proposal, the Commission stated its position that

an annual notice requirement would promote improved transparency

regarding the number of entities either exempt or excluded from the

Commission's registration and compliance programs, which is consistent

with one of the primary purposes of the Dodd-Frank Act. Moreover, the

Commission stated its belief that an annual notice requirement would

enable the Commission to determine whether exemptions and exclusions

should be modified, repealed, or maintained as part of the Commission's

ongoing assessment of its regulatory scheme.

The Commission received three comments on this provision in the

Proposal.\141\ One commenter supported the adoption of an annual notice

requirement, but suggested that the due date of the notice be changed

from the exemption's original filing date to a calendar-year end for

all filers.\142\ The Commission agrees that moving the due date for the

annual notice requirement to the calendar-year end for all filers may

be more operationally efficient. Therefore, the Commission will adopt

the annual notice requirement mandating that the notice be filed at the

calendar year-end rather than the anniversary of the original filing.

---------------------------------------------------------------------------

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

\142\ See NFA Letter.

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Two commenters suggested that the 30-day time period for filing was

not adequate to enable firms to comply.\143\ One commenter proposed a

60-day time period,\144\ whereas the other commenter proposed 90 days

as the necessary amount of time.\145\ The Commission recognizes that

the proposed 30-day filing period may not be adequate due to the

ramifications of an entity's failure to file its annual notice in a

timely manner, which would result in the exemption or exclusion being

deemed withdrawn. This issue is particularly important because of the

NFA's Bylaw 1101, which prohibits NFA members from conducting business

with non-members. Should an entity fail to file its annual notice

within the requisite time frame, its NFA membership could be deemed

withdrawn, which could potentially impact numerous other NFA members.

The Commission believes that extending the filing period from 30 days

to 60 days will provide NFA with adequate time to follow up with filing

entities to ensure that a filing is not omitted inadvertently and to

limit the adverse consequences for other NFA members. The Commission

does not, however, believe that 90 days is necessary as it intends for

such notice to be filed electronically with NFA and for NFA's filing

system to pre-populate the notice with the names and NFA IDs of all

exempt pools operated by the CPO with an option to choose to reaffirm

the exemptions for all exempt pools. The Commission believes that this

minimizes both the time and expense burdens on the CPO and should

enable

[[Page 11266]]

all entities to comply with the requirement within 60 days.

---------------------------------------------------------------------------

\143\ See NFA Letter; and SIFMA Letter.

\144\ See NFA Letter.

\145\ See SIFMA Letter.

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E. Comments Regarding the Proposed Risk Disclosure Statement for Swaps

in Sec. 4.24 and Sec. 4.34

The Commission also proposed adding standard risk disclosure

statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.

4.24(b) and 4.34(b), respectively.\146\

---------------------------------------------------------------------------

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

---------------------------------------------------------------------------

The Commission received three comments with respect to the proposed

standard risk disclosure statement for swaps.\147\ Two argued that a

standard risk disclosure statement is not the appropriate way to

disclose the risks inherent in swaps activity to participants or

clients.\148\ Specifically, those commenters argued that the use of

swaps by CPOs and CTAs varies and depending on the reason for using

swaps, different risks may be implicated. Furthermore, those commenters

also noted that the proposed risk disclosure statement is inconsistent

with recent SEC guidance to registered investment companies to avoid

generic disclosures. The Commission respectfully disagrees with the

assertions of those commenters who believe that a standard risk

disclosure statement is not appropriate. The Commission believes that a

standardized risk disclosure statement addressing certain risks

associated with the use of swaps is necessary due to the revisions to

the statutory definitions of CPO, CTA, and commodity pool enacted by

the Dodd-Frank Act.\149\ Moreover, it is the Commission's position that

concerns about ``one-size-fits-all'' disclosure of risks are addressed

through additional disclosures required under Sec. Sec. 4.24(g) and

4.34(g), which govern disclosures regarding the risks associated with

participating in the offered commodity pool or program.

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\147\ See SIFMA Letter; Fidelity Letter; and comment letter from

Chris Barnard (Feb. 26, 2011) (``Barnard Letter'').

\148\ See SIFMA Letter; and Fidelity Letter.

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

---------------------------------------------------------------------------

With respect to the comments submitted regarding the conflicting

requirements imposed on registered investment companies whose advisers

are required to register as CPOs pursuant to amended Sec. 4.5,\150\

such concerns will be addressed through the proposed modifications to

the Commission's compliance regime that will be applicable to

registered investment companies overseen by both the SEC and the

Commission.

---------------------------------------------------------------------------

\150\ See SIFMA Letter; and Fidelity Letter.

---------------------------------------------------------------------------

Additionally, the Commission received one comment that supported

the adoption of the standard risk disclosure statement for swaps, but

suggested that the Commission consider whether the wording needed to be

modified depending on whether the swaps were cleared or uncleared.\151\

Based on the language proposed, the Commission does not believe that

different language must be adopted to account for the differences

between cleared and uncleared swaps. In particular, the Commission

notes that the proposed risk disclosure statement is not intended to

address all risks that may be associated with the use of swaps, but

that the CPO or CTA is required to make additional disclosures of any

other risks in its disclosure document pursuant to Sec. Sec. 4.24(g)

and 4.34(g) of the Commission's regulations. Moreover, the language of

the proposed risk disclosure statement is conditional and does not

purport to assert that all of the risks discussed are applicable in all

circumstances. For the reasons discussed above and those stated in the

Proposal, the Commission adopts the proposed risk disclosure statements

for CPOs and CTAs regarding swaps.\152\ These additional risk

disclosure statements will be required for all new disclosure documents

and all updates filed after the effective date of this final

rulemaking.

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\151\ See Barnard Letter.

\152\ These risk disclosure statements do not affect the swap

disclosure requirements mandated in CEA Section 4s(h)(3)(B) and

rules relating to that statutory provision. See proposed Sec.

23.431 Disclosure of Material Information, Business Conduct

Standards for Swap Dealers and Major Swap Participants with

Counterparties, 75 FR 80638 (Dec. 22, 2010). In addition, managed

accounts that do not convey discretionary authority to the CTA will

require the pass through of the swap disclosures in any final rule

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

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F. Section 4.27 and Forms CPO-PQR and CTA-PR

1. General Comments

The Commission received numerous comments in response to proposed

Sec. 4.27, which requires CPOs and CTAs to report certain information

to the Commission on Forms CPO-PQR and CTA-PR, respectively. Several

commenters questioned whether the data collection was necessary for the

Commission's oversight of its registrants.\153\ Others asserted that

certain groups, such as registered investment companies or family

offices, should be exempted from completing the data collection.\154\

---------------------------------------------------------------------------

\153\ See Fidelity Letter; and AIMA Letter.

\154\ See ICI Letter; AIMA Letter; and comment letter from K&L

Gates LLP (Feb. 12, 2011) (``K&L Letter'').

---------------------------------------------------------------------------

The Commission's new reporting requirements supplement SEC

reporting requirements for dual registrants that must file Form PF with

the SEC by virtue of their dual registration status. Information about

CTAs and CPOs that are non-dual registrants is necessary for the

Commission to identify significant risk to the stability of the

derivatives market and the financial market as a whole. Following the

recent economic turmoil, the Commission has reconsidered the level of

regulation that it believes is appropriate for entities participating

in the commodity futures and derivatives markets. With respect to the

assertion that registered investment companies should not be required

to file Form CPO-PQR, the Commission believes that it is important to

collect the data in Form CPO-PQR from registered investment companies

whose activities require CPO registration to assess the risk posed by

such investment vehicles to derivatives markets and the broader

financial system. Consequently, the Commission intends to require from

registered investment companies that are also registered as CPOs the

same information that it is requiring from entities solely registered

as CPOs. Additionally, the Commission notes that to the extent that the

entity registered as the CPO for the registered investment company is

registered as an investment adviser and is required to file Form PF

with the SEC, the activities of the registered investment company may

be reported on Form PF as well.

The Commission further believes that the same reasoning applies

with respect to the collection of data from family offices. To enable

the Commission to evaluate a potential family offices exemption

following the collection and analysis of data regarding their

activities, the Commission believes that it is essential that family

offices remain subject to the data collection requirements to the

extent that such entities are not entitled to claim relief pursuant to

the Commission's interpretative guidance regarding family offices.

One commenter recommended that the Commission clarify the filing

obligations for CPOs and CTAs that are required to file Form PF with

the SEC and to streamline the reporting obligations.\155\ Another

commenter argued that a very large private fund that has a limited

amount of derivatives trading should not be subject to Schedule C of

Form CPO-PQR.\156\ As

[[Page 11267]]

stated in the Proposal, CPOs that are dually registered with the SEC

and that file Form PF must still file Schedule A with the Commission,

and CTAs must still file Form CTA-PR. The Commission intends to adopt

Sec. 4.27 as proposed and permit dual registrants to file Form PF with

the SEC in lieu of completing Schedules B and/or C of Form CPO-PQR. The

Commission never intended to require very large dual registrants to

file anything more than the general identifying information required on

Schedule A with the Commission, and neither Sec. 4.27 nor the forms

require dual registrants to file Schedules B or C if they are filing

Form PF.

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\155\ See Fidelity Letter.

\156\ See AIMA Letter; SIFMA Letter; and Fidelity Letter.

---------------------------------------------------------------------------

The Commission has modified both Schedule A of Form CPO-PQR and

Form CTA-PR so that both documents are only soliciting general

demographic data. The Commission has moved Question 12, which asked for

information regarding position information, from proposed Schedule A to

Schedule B of Form CPO-PQR in an effort to avoid collecting redundant

information from dual registrants. Additionally, the Commission is not

adopting Schedule B from Form CTA-PR, and therefore, will be limiting

the information collected from registered CTAs to demographic data and

the names of the pools advised by the CTA.

One commenter questioned whether the information collected on Forms

CTA-PR and CPO-PQR will provide the Commission with real-time data that

will enable it to have an accurate and timely picture of a CTA's

activities and operating status.\157\ The Commission recognizes the

limitations of the data collection instruments with respect to the

timeliness of the information requested. The Commission believes,

however, that the forms strike the appropriate balance between the time

needed to compile complex data and the Commission's need for timely

information. Moreover, the Commission believes that the information

required on Form CPO-PQR and CTA-PR will be useful because it will

allow the Commission to better deploy its enforcement and examination

resources.

---------------------------------------------------------------------------

\157\ See Barnard Letter.

---------------------------------------------------------------------------

Another commenter questioned whether the Commission possessed the

staffing and financial resources necessary to meaningfully use such

data as part of its oversight.\158\ The Commission recognizes that the

resources available to it are limited. To that end, the Commission, as

stated in the Proposal, intends to coordinate with the NFA to

accomplish the analysis necessary to make full use of the data

collected from Commission registrants.

---------------------------------------------------------------------------

\158\ See Dechert Letter.

---------------------------------------------------------------------------

In addition, the Commission intends for the data to be collected

from registrants in an electronic format, which will enable the

Commission to leverage its technology and to require less intensive

staff time to achieve the desired results. The use of an electronic

format will enable the FSOC to conduct additional analysis of the data

collected in the event that the FSOC requests such information from the

Commission, without significant consumption of Commission resources.

For these reasons, the Commission believes that it has the tools

necessary to make full use of the data that it intends to collect on

Forms CPO-PQR and CTA-PR, notwithstanding the Commission's current

staffing and financial resources.

2. Comments Regarding the Reporting Thresholds

The Commission received several comments regarding the appropriate

reporting thresholds for the various schedules of Form CPO-PQR.\159\

The commenters stated that $150 million in assets under management was

too low of a threshold for entities to be categorized as mid-sized and

required to file Schedule B. Rather, the commenters urged the

Commission to increase the threshold to $500 million in assets under

management.\160\ The Commission believes that $150 million in assets

under management is still the appropriate threshold for mid-sized CPOs.

The Commission will retain this threshold because it is consistent with

the threshold for advisers filing Section 1 of Form PF, which is

substantively similar to Schedule B of Form CPO-PQR, and it will ensure

comparable treatment of entities of similar magnitude.

---------------------------------------------------------------------------

\159\ See AIMA Letter; MFA II Letter; Seward Letter. See also,

AIMA II Letter.

\160\ See AIMA Letter.

---------------------------------------------------------------------------

These commenters also suggested that the Commission increase the

threshold for large CPOs from $1 billion to $5 billion in assets under

management.\161\ The Commission has decided not to increase the large

CPO threshold to $5 billion. The Commission has decided, however, to

increase the threshold from $1 billion to $1.5 billion. The Commission

believes that increasing the threshold to $1.5 billion will reduce the

number of CPOs required to file Schedule C of Form CPO-PQR, but will

still represent a substantial portion of the assets under management by

registered CPOs. Moreover, the Commission notes that this modification

is consistent with the revised threshold for large hedge fund advisers

that it recently adopted with respect to Form PF.\162\ The Commission

believes that increasing the threshold beyond $1.5 billion could limit

the Commission's access to information necessary to oversee entities

that could pose a risk to the derivatives markets or the financial

system as a whole.

---------------------------------------------------------------------------

\161\ See AIMA Letter; MFA II Letter; Seward Letter.

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

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3. Comments Regarding Harmonization With the SEC's Compliance Regime

The Commission received numerous comments on harmonizing Forms CPO-

PQR and CTA-PR with Form PF.\163\ The Commission has considered

comments received on the Form PF proposed jointly with the SEC that

address harmonization of the CFTC and SEC forms in addition to the

comments received specifically on the Proposal. Two commenters argued

that the Commission and the SEC should use the same metrics for

measuring assets under management for purposes of determining filing

obligations.\164\ As noted several times in this preamble, the

Commission has sought to harmonize Forms CPO-PQR and CTA-PR to the

extent possible; however, it is not appropriate in all circumstances.

For example, the SEC and the CFTC use different methods for determining

the threshold for reporting assets under management. In order to

determine whether a CPO meets the asset threshold for classification as

a mid-sized or large CPO, Form CPO-PQR requires the use of the

aggregated gross pool assets under management. Conversely, Form PF

defines ``regulatory assets under management'' as the gross value of

the securities portfolio as reported on the SEC's Form ADV.\165\

Additionally, Form CPO-PQR uses net assets under management as the

method for determining whether a commodity pool is a large commodity

pool for filing purposes, whereas Form PF uses net regulatory assets.

In the Commission's view, gross assets under management and net asset

value are more appropriate means for determining filing obligations for

CPOs and large commodity pools because entities registered with the

Commission are familiar with the use of net asset value for other

purposes including

[[Page 11268]]

determining the required frequency of reporting to participants.\166\

Moreover, the Commission believes that it is inappropriate for it to

incorporate the SEC definitions of regulatory assets under management

and net regulatory assets under management into Form CPO-PQR as those

terms are not consistent with the existing CFTC regulatory

framework.\167\ The use of net asset value is consistent with the

longstanding utilization of net asset value in U.S. GAAP and in the

Commission's regulations.\168\ Therefore, the Commission does not

believe that its use of net asset value requires any additional

calculation by dual registrants beyond that required to complete Form

PF.

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\163\ See AIMA Letter; MFA II Letter; Dechert Letter; Seward

Letter; IAA Letter; Fidelity Letter; AIMA II Letter; K&L Letter; MFA

Letter; and SIFMA Letter.

\164\ See AIMA Letter; and MFA II Letter.

\165\ Form PF defines net assets under management as regulatory

assets under management less liabilities 76 FR 71128, 71136 (Nov.

16, 2011).

\166\ Id.

\167\ Id. Additionally, the Commission notes that Form PF also

asks for net assets under management in question 3 of Section 1.

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

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Several commenters argued that the Commission does not need to

collect information through Forms CPO-PQR and CTA-PR because it already

receives information through the Large Trader Reporting System and Form

40.\169\ Large Trader Reporting and Form 40 do not provide the

information regarding the relationship between a large position held by

a pool and the rest of the pool's other derivatives positions and

securities investments. The Commission believes that the scope of

information sought through Forms CPO-PQR and CTA-PR will provide it

with substantially more detail regarding the activities of entities

engaged in derivatives trading and will better enable it to assess the

risk posed by a pool or CPO as a whole.

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\169\ See Fidelity Letter; and K&L Letter.

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Several commenters also urged the Commission to consider

coordinating with the SEC to promulgate a single form.\170\ The

Commission believes that it is most efficient for Commission-only

registrants to use a form that is based upon the format of NFA's Form

PQR, with which current registrants are already familiar. Currently

registered CPOs have been filing NFA's Form PQR on a quarterly basis

for more than one year and have experience using NFA's interface for

the collection of data. The Commission recognizes that new registrants

will not have any experience with NFA's Form PQR or NFA's filing

system; however, the same would be true if the Commission were to

implement an altogether new system. Therefore, the Commission believes

that by continuing to use the system developed by NFA for collecting

data from CPOs and CTAs, it is minimizing the burden on current

registrants because they will not be required to learn a new system,

without adding any additional burden to new registrants.

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\170\ See AIMA II Letter; Seward Letter; MFA Letter; AIMA

Letter; and SIFMA Letter.

---------------------------------------------------------------------------

Several commenters raised concerns about how affiliated entities

will be treated on the forms.\171\ The Commission believes that

affiliated entities should be permitted, but should not be required, to

report on a single form with respect to all affiliates and the pools

that they advise. This position is consistent with the treatment of

affiliated entities on Form PF. Furthermore, the Commission believes

that where a pool is operated by one or more co-CPOs, only one CPO

should report on the activities of the jointly operated pool, but that

CPO must disclose the identities of the other co-CPOs. The Commission

believes that this will eliminate the potential for double counting of

pool assets if all co-CPOs were required to report on the jointly

operated pool.

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\171\ See MFA II Letter; MFA Letter; AIMA Letter; SIFMA Letter;

and Seward Letter.

---------------------------------------------------------------------------

4. Comments Regarding Funds of Funds

The Commission also received one comment regarding issues unique to

fund of funds and feeder funds.\172\ Specifically, this commenter

asserted that funds of funds that invest in unaffiliated commodity

pools are ``not in the business of trading commodity interests,'' and

therefore, should not be subject to reporting obligations on Form CPO-

PQR.\173\ This commenter further argues that funds of funds reporting

is not necessary because either the Commission or the SEC will oversee

the investee fund and that funds of funds likely do not have access to

information with sufficient detail to respond to the questions in Form

CPO-PQR regarding size, strategy, or positions held by the investee

fund.\174\

---------------------------------------------------------------------------

\172\ See MFA II Letter.

\173\ Id.

\174\ Id.

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The Commission disagrees with the commenter's assertion that funds

investing in unaffiliated commodity pools are not in the business of

trading commodity interests. Although it is true that the fund does not

directly engage in such trading, it is the position of the Commission

that a fund investing in an unaffiliated commodity pool is itself a

commodity pool. This interpretation is consistent with the statutory

definition of commodity pool, which draws no distinctions between

direct and indirect investments in commodity interests.\175\ Moreover,

the Commission believes that permitting indirect investment in

commodity interests to occur without Commission oversight would create

an incentive for entities to avoid direct investment in commodity

interests and possibly increase the opacity of the market. Therefore,

the Commission concludes that a fund that invests in an unaffiliated

commodity pool is a commodity pool for purposes of the CEA and the

Commission's regulations promulgated thereunder.

---------------------------------------------------------------------------

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

---------------------------------------------------------------------------

With respect to the commenter's assertion that the funds of funds

need not report because the investee fund will be subject to the

jurisdiction of either the Commission or the SEC, the Commission must

again disagree. As the commenter itself noted in its comment, the funds

of funds could be invested in a fund whose adviser or operator is not

required to report due to exemptive relief granted by either the

Commission or the SEC. The Commission acknowledges that a fund of funds

may not have access to the kind of information necessary to respond to

all of the data elements in Schedules B and C with respect to the

investment activities of its investee funds. Nevertheless, the

Commission believes that requiring basic information about the

investment in the investee funds without requiring that funds of funds

complete the additional detail strikes an appropriate balance between

recognizing the limitations of the information available to funds of

funds and enabling the Commission to analyze and monitor the levels of

interconnectedness among a CPO's funds. The Commission believes that a

fund of funds should still be required to provide at a minimum the name

of the investee fund(s) and the size of its investment(s) in such

funds.

Accordingly, the Commission is adding a question to Schedule A of

Form CPO-PQR requesting the names of the investee funds and the size of

the fund of funds' investment in the investee funds. The Commission is

also adding an instruction to Form CPO-PQR permitting the CPO of a fund

of funds to exclude any assets invested in the equity of commodity

pools or private funds for purposes of determining the CPO's reporting

obligations. The CPO must, however, treat these assets consistently for

purposes of Form CPO-PQR. For example, an adviser may not include these

assets for purposes of certain questions such as those regarding

borrowing, but disregard such assets for purposes of determining the

reporting thresholds. This new instruction will permit a CPO to

disregard investments in commodity pools or private funds,

[[Page 11269]]

but would not allow a CPO to disregard the liabilities of the fund,

even if incurred due to the investment in the underlying fund.

Moreover, if any of the CPO's commodity pools invests substantially all

of its assets in the equity of other commodity pools or private funds

and, aside from those investments, holds only cash, cash equivalents,

and instruments intended to hedge currency risk, the CPO may complete

only Schedules A and B with respect to that fund and otherwise

disregard such assets for reporting purposes. These instructions are

consistent with those instructions adopted as part of the joint Form

PF, and the Commission believes that this treatment of funds of funds

reduces the burden of reporting for CPOs and improves the quality of

the data obtained by the Commission. Therefore, the Commission is

adding a general question regarding funds of funds, but is otherwise

permitting CPOs to disregard the assets of such funds that are invested

in other commodity pools or private funds for reporting purposes.

5. Adopted Modifications to Form CPO-PQR

The Commission has decided to make several additional revisions to

Form CPO-PQR in addition to those discussed previously. The Commission

believes that these revisions are necessary to provide clarification,

decrease the burden imposed on registrants, and further harmonize Form

CPO-PQR with Form PF.

a. Instructions

As discussed previously, the Commission has decided to revise

certain instructions governing the completion of Form CPO-PQR.

Specifically, the Commission has determined that it is appropriate to

raise the threshold for large CPOs from $1 billion to $1.5 billion in

an effort to reduce the number of CPOs required to report on a

quarterly basis and respond to commenters' concerns, but still provide

the Commission with the information necessary to effectively oversee

such large market participants. The Commission has also determined to

modify the frequency of reporting for filers of Form CPO-PQR. As

adopted, all CPOs, other than large CPOs, will be required to file

Schedule A on an annual basis; mid-size CPOs will be required to file

Schedule B on an annual basis; and large CPOs will be required to file

Schedules A, B, and C on a quarterly basis.

The Commission received several comments asserting that the 15-day

period for reporting was not sufficient to permit reporting CPOs to

complete and file the form and all suggested extending the period to 30

or 45 days.\176\ The Commission agrees that reporting CPOs will need

additional time in which to submit the various schedules of Form CPO-

PQR.

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\176\ See NFA Letter; Seward Letter; and AIMA Letter.

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Upon further consideration, the Commission believes that it is

appropriate to require all CPOs, other than large CPOs, to file

Schedule A within 90 days of the end of the calendar year. This time

period coincides with the annual questionnaire required by NFA of its

entire population of member CPOs and with the vast majority of annual

report filings for commodity pools. The revised deadline will enable

CPOs, other than large CPOs, to benefit from the availability of the

NFA annual questionnaire and the availability of the information in CPO

annual report filings. Moreover, because the Commission has transferred

the pool position information from Schedule A to Schedule B, the

Commission believes that non-large CPOs should be able to comply with

filing basic demographic data within 90 days.

With respect to mid-sized CPOs filing Schedule B, the Commission

believes that 90 days is an adequate time period for compiling data and

completing that schedule. The Commission notes that CPOs are generally

required to file annual reports for their pools within 90 days of their

fiscal year end, most of which coincide with the calendar year end. The

Commission believes that the alignment of pools' fiscal years with the

calendar year end should facilitate the preparation of Schedule B and

reduce the burden imposed on mid-size CPOs because some of the

information required will be similar to that included in a pool's

annual financial statements.

With respect to the quarterly reporting by large CPOs on Schedules

A, B, and C, the Commission believes that 60 days is a sufficient

amount of time to complete those schedules for large CPOs. The

Commission notes that the entities required to file on a quarterly

basis have a significant amount of assets under management, and as

such, the Commission anticipates that such entities routinely generate

the type of information requested on Schedules B and C as part of their

internal governance. Accordingly, the Commission will require large

CPOs to file Schedules B and C within 60 days following the end of the

reporting period as defined in Form CPO-PQR.

In October 2011, the Commission adopted Form PF as a joint

reporting form with the SEC. The terms of Form PF permit dually

registered entities that are filing the form for their private funds

under advisement to report on the activities of their other commodity

pools as well. Entities that choose to file Form PF for all of their

funds under advisement will still be required to file Schedule A on an

annual basis, which is consistent with the terms of the Proposal. The

instructions of Form CPO-PQR have been modified to reflect this change.

The Commission has also determined to omit the statement that the

failure to answer all required questions completely and accurately may

severely impact your ability to operate. The Commission does not

believe that such language is necessary to inform registered CPOs of

their obligations under the CEA and the Commission's regulations to

comply with such obligations in good faith.

Additionally, the Commission has concluded that it should clarify

the obligations of co-CPOs of a pool with respect to the submission of

Form CPO-PQR. The Commission has amended the instructions to the form

to clarify that for co-CPOs, the CPO with the greater assets under

management overall is required to report for the co-operated pool.

Furthermore, if a pool is operated by co-CPOs and one of the CPOs is

also a registered investment adviser, the non-investment adviser CPO

will still be obligated to file the applicable sections of Form CPO-PQR

regardless of whether the investment adviser CPO filed a Form PF. The

Commission believes that this will prevent the possibility of double

counting and unnecessary duplicative filings regarding co-operated

pools.

b. Schedule A

Schedule A seeks basic identifying information about the CPO, each

of its pools, and any services providers used. The Commission has

decided to adopt Schedule A as proposed with the following revisions.

In question 3 of part 2, the Commission has added a question asking

whether the pool is operated by co-CPOs and for the name of the other

CPO(s). This question will enable the Commission to ensure that only

one CPO is filing with respect to each co-operated commodity pool. In

addition, question 12 of part 2, which asked for information regarding

the pool's trading strategies, has been moved to Schedule B, both in

response to a commenter's suggestion \177\ and in an effort to ensure

that dual registrants are not required to file extensive duplicative

information

[[Page 11270]]

on Schedule A that they are already providing on Form PF.

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\177\ See AIMA Letter.

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The Commission added a question asking for the telephone number and

email for the contact person for the reporting CPO as this was

inadvertently omitted in the Proposal. Also, the Commission added a

subpart h. to question 10 regarding the base currency used by the CPO

for the particular pool for which it is reporting. This question was

inadvertently omitted but is necessary for the Commission to fully

utilize the information reported regarding the changes in the pool's

assets under management.

The Commission added subparts to question 12 regarding prospective

risks for the imposition of ``gates'' and restrictions on redemption of

participant withdrawals. The terms of question 12, as proposed, only

seek information on a retrospective basis, which, although useful to

the Commission in assessing overall issues regarding the imposition of

restrictions on redemption, does not assist the Commission in assessing

possible sources of prospective risk to the market and pool

participants. Moreover, question 12, as proposed, did not capture

information about pools that have procedures in place governing the

imposition of restrictions on redemptions, but whose restrictions have

not been triggered. The Commission believes that the modifications to

this question solicits such information and will provide the Commission

with a more complete understanding of the role of restrictions on

redemptions in the operation of commodity pools. Moreover, the

Commission believes that the request for additional information

regarding the potential imposition of restrictions on redemptions is

consistent with the tenor and intent of question 12 as proposed.

The Commission also has made numerous non-substantive technical

amendments in Schedule A, including formatting corrections, the

deletion of the term ``carrying'' from question 5 in part 2, and the

addition of two months that were inadvertently omitted from the monthly

rate of return table in part 2, question 11.

c. Schedule B

Mid-sized and large CPOs will be required to complete Schedule B,

which will solicit data about each pool operated by these CPOs. The

Commission has decided to adopt Schedule B with the following

revisions.

In question 1, subpart d, the Commission has decided to change the

format of the question from a pull-down list of options to a chart,

consistent with the format used for substantively identical question

20, section 1c in Form PF. The Commission believes that the chart

format change will add clarity to the question and will facilitate the

completion by registrants. The Commission also has added a column

requesting the percentage of the pool's capital invested in each

strategy. This additional information aligns Form CPO-PQR with the

information requested in Form PF and also provides the Commission with

the means to assess the risk that a pool derives from its borrowing

activities.

The Commission has also amended question 1 to add a subpart g

asking the reporting CPO to report the percentage of the commodity

pool's net asset value that is traded pursuant to a high frequency

trading strategy. This subpart previously appeared as part of the chart

in question 1 regarding investment strategies. The Commission believes

that denoting the issue of high frequency trading as its own subpart of

question 1 will enhance the clarity of the question and make the data

gained by the Commission more usable in its assessment of risks posed

to the derivatives markets.

The Commission is amending question 2 to include the percentage of

a pool's borrowings from U.S. and non-U.S. creditors that are not

``financial institutions,'' as that term is defined in Form CPO-PQR, as

separate line items. This revision parallels the structure of subparts

b and c of that question.

Finally, the Commission has made several non-substantive

corrections/alterations, including modifying the format of question 3

to provide a more user-friendly interface for reporting funds and

combining several subparts into charts, correcting a typographical

error in question 5, adding the question that was formerly question 12

of Schedule A to Schedule B as question 6, and expanding several

categories of investments to provide a parallel level of detail among

the asset classes.

d. Schedule C

Schedule C requests information about the pools operated by large

CPOs on an aggregated and pool by pool basis. The Commission is

adopting Schedule C as proposed with the following revisions.

Part 1

The questions in part 1 of Schedule C seek information for all of

the pools operated by the large CPO on an aggregate basis.

Question 1 requires a CPO to report a geographical breakdown of

investments held by the pools that it operates. The Commission has

modified this question to require a less detailed breakdown by focusing

on regions as opposed to individual countries and has added a separate

disclosure regarding investment in certain countries of interest. The

Commission expects that this revision will reduce the burden of

responding to this question because the less granular categories should

permit more CPOs to rely on classifications that they already use.

The Commission has determined that question 3, which seeks

information regarding the duration of the pools' fixed income

investments on an aggregate basis, is redundant in light of question 9

in part 2 of Schedule C. Question 9 in part 2 of Schedule C asks for

the same information on a pool by pool basis. For that reason, the

Commission has deleted question 3 from part 1 of Schedule C.

Part 2

Part 2 of Schedule C seeks information from large CPOs on an

individual pool basis for each operated ``large pool'' as that term is

defined in Form CPO-PQR. The Commission has revised subpart c of

question 3 to be a yes/no response with respect to whether the pool

used a central clearing counterparty (``CCP'') during the reporting

period. The Commission believes that this is less burdensome and

provides it with sufficient information regarding the use of CCPs

because the CPO's relationship is with the swap dealer, futures

commission merchant, or direct clearing member rather than directly

with the CCP.

In subpart b of question 4, the Commission has made several

revisions correcting the technical terminology used with respect to

``value at risk'' (``VaR''). These revisions are non-substantive. The

Commission also added a new subpart c to question 4, which asks the CPO

whether it uses any metrics other than VaR for risk management purposes

for the reporting fund. The Commission believes that this information

will be useful as it continues to amend Form CPO-PQR as necessary to

obtain relevant information from registrants. Because of the addition

of a new subpart c to question 4, subpart c of question 4 as proposed

has been redesignated as subpart d of question 4. The Commission also

added a category of ``relevant/not formally tested'' to subpart d of

question 4 in an effort to capture all possible opinions of the

reporting CPO with respect to the listed market factors. The Commission

believes that this modification will reduce the burden on reporting

CPOs

[[Page 11271]]

because fewer CPOs will need to provide detailed responses, and because

those CPOs without existing quantitative models will not be required to

build or acquire them to respond to the question. The Commission

continues to believe that this question will provide valuable risk

information to the Commission with respect to specific large pools.

The Commission is revising subpart a of question 5 to include the

percentage of a pool's borrowings from U.S. and non-U.S. creditors that

are not ``financial institutions'' as that term is defined in Form CPO-

PQR, as separate line items. This revision parallels the structure of

the question as proposed with respect to financial institutions.

The Commission is also amending question 9, regarding the duration

of each large pool's fixed income instruments. This question, as

amended, requires the CPO to report the duration, weighted average

tenor, or 10-year equivalents of fixed income portfolio holdings,

including asset-backed securities. This is a difference from the

question as proposed, which would have required all large CPOs to

report duration. Through this revision, the Commission is giving large

CPOs the option of instead reporting weighted average tenor or 10-year

bond equivalents because the Commission understands that CPOs may use a

wide range of metrics to measure interest rate sensitivity. The

Commission expects that this revised approach will reduce the burden on

CPOs because they will generally be able to utilize their existing

practices when providing this information on the form.

6. Form CTA-PR

The Commission received several comments regarding the content of

Form CTA-PR.\178\ Most commenters urged the Commission to eliminate the

form in its entirety.\179\ Although the Commission does not believe

that the complete elimination of Form CTA-PR is appropriate, it

believes that Schedule B of the form contains redundant information

that will already be collected through Form CPO-PQR. To reduce the

burden on CTAs, the Commission will eliminate Schedule B. Instead, the

Commission has decided to adopt only Schedule A of Form CTA-PR and will

add a question asking the reporting CTA to identify the pools under its

advisement so that the Commission can analyze the relationships among

the various registrants to better assess sources of risk to the market

and measure their potential reach. Because Form CTA-PR will be limited

to demographic data, the Commission believes that it is appropriate for

CTAs to file the form on an annual basis within 45 days of the end of

the fiscal year. Therefore, the Commission has amended the text of

Sec. 4.27 to reflect this modification of the reporting obligations of

CTAs.

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

Letter; and Fidelity Letter.

\179\ Id.

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7. Implementation

The effective date for Sec. 4.27 and Forms CPO-PQR and CTA-PR is

July 2, 2012. The Commission is adopting a two-stage phase-in period

for compliance with Form CPO-PQR filing requirements. The compliance

date for Sec. 4.27 is September 15, 2012 for any CPO having at least

$5 billion in assets under management attributable to commodity pools

as of the last day of the fiscal quarter most recently completed prior

to September 15, 2012. Therefore, a CPO with $5 billion in commodity

pool assets under management as of June 30, 2012, must file its first

Form CPO-PQR within 60 days following September 30, 2012. Reporting

CPOs must file all schedules of Form CPO-PQR.

For all other registered CPOs and all CTAs, the compliance date for

Sec. 4.27 is December 15, 2012. As a result, most advisers must file

their first Form CPO-PQR or CTA-PR based on information as of December

31, 2012. This delay in compliance should allow sufficient time for

CPOs and CTAs to develop systems for collecting the information

required on the forms and prepare for filing. The Commission

anticipates that this timeframe will also enable the NFA to have

adequate time to program a system to accept the filings. The Commission

has determined that the extension of the compliance dates is necessary

because the rule and forms are being adopted later than expected.

G. Amendments to Sec. Sec. 145.5 and 147.3: Confidential Treatment of

Data Collected on Forms CPO-PQR and CTA-PR

As the Commission stated in the Proposal, the collection of certain

proprietary information through Forms CPO-PQR and CTA-PR raises

concerns regarding the protection of such information from public

disclosure.\180\ The Commission received two comments requesting that

the Commission treat the disclosure of a pool's distribution channels

as nonpublic information,\181\ and numerous other comments urging the

Commission to be exceedingly circumspect in ensuring the

confidentiality of the information received as a result of the data

collections.\182\

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

\181\ See MFA II Letter and Seward & Kissel Letter.

\182\ See Roundtable transcript. Commission staff also had

numerous meetings with commenters that addressed this issue of

confidentiality of information.

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The Commission agrees that the distribution and marketing channels

used by a CPO for its pools may be sensitive information that

implicates other proprietary secrets, which, if revealed to the general

public, could put the CPO at a competitive disadvantage. Accordingly,

the Commission is amending Sec. Sec. 145.5 and 147.3 to include

question 9 of Schedule A of Form CPO-PQR as a nonpublic document.

Additionally, the Commission is amending Sec. Sec. 145.5 and 147.3

to remove reference to question 13 in Schedule A of Form CPO-PQR

because such question no longer exists due to amendments to that

schedule. Similarly, the Commission will be designating question

subparts (c) and (d) of question 2 of Form CTA-PR as nonpublic because

it identifies the pools advised by the reporting CTA.

Therefore, as adopted, the parts of Form CPO-PQR that are

designated nonpublic under parts 145 and 147 of the Commission

regulations are:

Schedule A: Question 2, subparts (b) and (d); Question 3,

subparts (g) and (h); Question 9; Question 10, subparts (b), (c), (d),

(e), and (g); Question 11; and Question 12.

Schedule B: All.

Schedule C: All; and

Form CTA-PR: question 2, subparts c and d.

H. Conforming Amendments to Part 4

As a result of the amendments adopted herein, the Commission must

amend various provisions in part 4 of the Commission's regulations for

purposes of making conforming changes. Specifically, the Commission is

deleting references to repealed Sec. 4.13(a)(4) in other sections of

the Commission's regulations.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA)\183\ requires that agencies,

in proposing rules, consider the impact of those rules on small

businesses. The Commission has previously established certain

definitions of ``small entities'' to be used by the Commission in

evaluating the impact of its rules on

[[Page 11272]]

such entities in accordance with the RFA.\184\

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

\184\ 47 FR 18618 (April 30, 1982).

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CPOs: The Commission has determined previously that registered CPOs

are not small entities for the purpose of the RFA.\185\ With respect to

CPOs exempt from registration, the Commission has previously determined

that a CPO is a small entity if it meets the criteria for exemption

from registration under current Rule 4.13(a)(2).\186\ Such CPOs will

continue to qualify for either exemption or exclusion from registration

and therefore will not be required to report on proposed Form CPO-PQR;

however, they will have an annual notice filing obligation confirming

their eligibility for exemption or exclusion from registration and

reporting. The Commission estimates that the time required to complete

this new requirement will be approximately 0.25 of an hour, which the

Commission has concluded will not be a significant time expenditure.

The Commission has determined that the proposed regulation will not

create a significant economic impact on a substantial number of small

entities.

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

\186\ See 47 FR at 18619-20.

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CTAs: The Commission has previously decided to evaluate, within the

context of a particular rule proposal, whether all or some CTAs should

be considered to be small entities, and if so, to analyze the economic

impact on them of any such rule.\187\ Form CTA-PR is proposed to be

required of all registered CTAs, which necessarily includes entities

that would be considered small. The majority of the information

requested on Form CTA-PR is information that is readily available to

the CTA or readily calculable by the CTA, regardless of size.

Therefore, the Commission estimates that the time required to complete

the items contained in Form CTA-PR will be approximately 0.5 hours as

it is comprised of only two questions, which solicit information that

is expected to be readily available. The Commission has determined that

Form CTA-PR will not create a significant economic impact on a

substantial number of small entities. Accordingly, the Chairman, on

behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)

that the proposed rules, will not have a significant impact on a

substantial number of small entities.

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\187\ See 47 FR at 18620.

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The Commission did not receive any comments on its analysis of the

application of the RFA to the instant part 4 amendments.

B. Paperwork Reduction Act

This rulemaking contains information collection requirements. The

Paperwork Reduction Act (``PRA'') imposes certain requirements on

Federal agencies in connection with their conducting or sponsoring any

collection of information as defined by the PRA.\188\ An agency may not

conduct or sponsor, and a person is not required to respond to, a

collection of information unless it displays a currently valid control

number from the Office of Management and Budget (``OMB'').

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

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The Commission is amending Collection 3038-0023 to allow for an

increase in response hours for the rulemaking resulting from the

rescission of Sec. Sec. 4.13(a)(4) and the modification of Sec. 4.5.

This amendment differs from that in the Proposal due to the

Commission's decision to retain the exemption set forth in Sec.

4.13(a)(3). The Commission is amending Collection 3038-0005 to allow

for an increase in response hours for the rulemaking associated with

new and modified compliance obligations under part 4 of the

Commission's regulations resulting from these revisions. The titles for

these collections are ``Part 3--Registration'' (OMB Control number

3038-0023) and ``Part 4--Commodity Pool Operators and Commodity Trading

Advisors'' (OMB Control number 3038-0005). Responses to this collection

of information will be mandatory.

Both amendments differ from those set forth in the Proposal due to

comments received asserting that, absent harmonization of the

Commission's compliance regime for CPOs with that of the SEC for

registered investment companies, entities operating registered

investment companies that would be required to register with the

Commission would not be able to comply with the Commission's

regulations and would have to discontinue its activities involving

commodity interests.\189\ The Commission acknowledges that there are

certain provisions of its compliance regime that conflict with that of

the SEC and that it would not be possible to comply with both. For this

reason, the Commission is considering issuing a notice of proposed

rulemaking regarding the areas of potential harmonization between the

Commission's compliance obligations and those of the SEC. Until such

time as the harmonized compliance regime is adopted as final rules, the

Commission will not be requiring compliance with the provisions of

Sec. 4.5 for registered investment companies. Therefore, the

Commission is excluding Sec. 4.5 compliance from the PRA burden

calculation for these final rules, and is recalculating the information

collection requirements associated with Sec. 4.5 in the proposed

harmonized compliance rules.

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

Letter.

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The Commission will protect proprietary information according to

the Freedom of Information Act (``FOIA'') and 17 CFR part 145,

``Commission Records and Information.'' In addition, section 8(a)(1) of

the CEA strictly prohibits the Commission, unless specifically

authorized by the CEA, from making public ``data and information that

would separately disclose the business transactions or market position

of any person and trade secrets or names of customers.'' \190\ The

Commission is also required to protect certain information contained in

a government system of records according to the Privacy Act of

1974.\191\

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\190\ See 7 U.S.C. 12.

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

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1. Additional Information Provided by CPOs and CTAs

a. OMB Control Number 3038-0023

Part 3 of the Commission's regulations concern registration

requirements. The Commission is amending existing Collection 3038-0023

to reflect the obligations associated with the registration of new

entrants, i.e., CPOs that were previously exempt from registration

under Sec. Sec. 4.5 and 4.13(a)(4), that had not previously been

required to register. The Commission is omitting those CPOs continuing

to claim relief under Sec. 4.13(a)(3), as that section will remain

effective, and those CPOs that would be required to register under

revised Sec. 4.5, as those entities will not be able to register and

comply with the Commission's compliance obligations until such time as

the harmonization of its requirements with those of SEC is finalized.

Because the registration requirements are in all respects the same as

for current registrants, the collection has been amended only insofar

as it concerns the increased estimated number of respondents and the

corresponding estimated annual burden.

Accordingly, the Commission is amending existing Collection 3038-

0023 to provide, in the aggregate:

Estimated number of respondents: 75,425.

[[Page 11273]]

Annual responses by each respondent: 75,932.

Estimated average hours per response: 0.09.

Annual reporting burden: 6,833.9.

In addition to the reporting burdens, each CPO or CTA not

previously subject to registration will be obligated to submit a $200

registration fee, an $85 registration fee for each associated person,

and a $15 fee for fingerprinting services for each associated person.

Those entities that do not already provide certified annual reports

will now incur public accounting costs as a result of the newly adopted

rules requiring certification. Moreover, the Commission anticipates

that reporting entities may hire external service providers, such as

law firms or accounting firms, to prepare and submit some of the

documents required both in Collection 3038-0023 and in Collection 3038-

0005, which is accounted for below.

b. OMB Control Number 3038-0005

Part 4 of the Commission's regulations concerns the operations of

CTAs and CPOs, and the circumstances under which they may be exempted

or excluded from registration. Under existing Collection 3038-0005 the

estimated average time spent per response has not been altered;

however, adjustments have been made to the collection to account for

current information available from NFA concerning CPOs and CTAs

registered or claiming exemptive relief under the part 4 regulations,

and the new burden expected under proposed Sec. 4.27. The Commission

estimates that a total of 300 entities annually will file the Notice of

Exemption from CTA Registration under Sec. 4.14(a)(8), with an

estimated burden of 0.5 hours per notice filing. An estimated 253

entities will annually file 7,890 Notices of Exclusion from CPO

Definition under Sec. 4.5, with an estimated burden of 0.5 hours per

notice filing. The rules also require certain reports by each entity

registered as a CPO or CTA. These include certain disclosure documents,

pool account statements and pool annual reports, and requests for

extensions of the annual report deadline. The Commission estimates that

180 entities will prepare an average of 1.5 pool account statements as

required under Sec. 4.22(a) an average of 9 times per year, with a

per-response burden of 3.85 hours. The Commission estimates that these

same 180 entities will prepare and file an average of 1.5 annual

reports, with a burden of 9.58 hours per report. In addition, the

Commission anticipates that 962 entities will file a request for a

deadline extension for the annual report each year, with a burden of

0.5 hours per request.

These burden estimates, together with those associated with the

increases necessary to account for the filing of forms CPO-PQR, PF, and

CTA-PR discussed below, will result in an amendment to Collection 3038-

0005 to provide, in the aggregate:

Estimated number of respondents: 43,168.

Annual responses for all respondents: 61,868.

Estimated average hours per response: 8.77.

Annual reporting burden: 257,635.8.

Proposed Sec. 4.27 is expected to be the main reason for the

increased burden under Collection 3038-0005.

The Commission has amended its burden estimates with respect to

Form CPO-PQR to reflect the fact that dually registered entities that

operate pools that are not private funds may report the activities for

such funds on Form PF.\192\ The Commission expects that any entity that

is eligible to file form PF will file that form and not the form CPO-

PQR, and has excluded from the estimates for form CPO-PQR those

entities. As most of the burden associated with filing form PF for CPOs

newly required to register with the Commission has been accounted for

by the Commission in an information collection request associated with

a rulemaking adopted jointly with the SEC, the amendment to Collection

3038-0005 accounts only for the burden of filing form PF by dually

registered CPOs for pools that are not private funds as defined in the

joint rulemaking.

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\192\ Based on information that the Commission received from

registrants on their annual financial report filings, the Commission

determined that \1/3\ of all pools reporting to the Commission in

2009 reported gains or losses from securities or a combination of

securities and futures. Based on the provisions of Form PF, which

permits filers of the form to file with respect to commodity pools

that are not private funds, the Commission anticipates that all

entities entitled to file Form PF for their commodity pools will do

so, as it is less burdensome on the filer. Therefore, the Commission

has included burden estimates for CPOs to file Form PF for their

commodity pools that are not private funds, which is an incremental

increase over the burden imposed by the obligation to file Form PF

for the entity's private funds.

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i. Comments on Sec. 4.27 Reporting Requirements

The Commission received numerous comments in response to proposed

Sec. 4.27, and in response has adopted a number of cost-mitigating

measures. Several commenters questioned whether the data collection was

necessary for the Commission's oversight of its registrants.\193\

Others asserted that certain groups, such as registered investment

companies or family offices, should be exempted from completing the

data collection.\194\ In the Commission's judgment, in order to fulfill

the Commission's systemic-risk mitigation mandate, it is necessary to

obtain information from the full universe of registrants to fully

assess the activities of CPOs and CTAs in the derivatives markets.

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\193\ See Fidelity Letter; and AIMA Letter.

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

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With respect to the assertion that registered investment companies

should not be required to file form CPO-PQR, the Commission believes

that it is important to collect the data in form CPO-PQR from

registered investment companies whose activities require CPO

registration to assess the risk posed by such investment vehicles in

the derivatives markets and the financial system generally. In this

respect, the Commission intends to require the same information from

the CPOs of registered investment companies as it is requiring from

other registered CPOs. Additionally, the Commission notes that to the

extent that the entity registered as the CPO for the registered

investment company is registered as an investment adviser and is

required to file Form PF with the SEC, the activities of the registered

investment company may be reported on Form PF rather than form CPO-PQR.

The Commission further believes that the same reasoning applies

with respect to the collection of data from family offices. To enable

the Commission to evaluate a potential family offices exemption

following the collection and analysis of data regarding their

activities, the Commission believes that it is essential that family

offices remain subject to the data collection requirements.

One commenter recommended that the Commission clarify the filing

obligations for CPOs and CTAs that are required to file form PF with

the SEC and streamline the reporting obligations.\195\ Another

commenter argued that a very large private fund that has a limited

amount of derivatives trading should not be subject to schedule C of

form CPO-PQR.\196\

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\195\ See Fidelity Letter.

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

Letter.

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As stated in the Proposal, CPOs that are dually registered with the

SEC and that file form PF must still file schedule A, containing basic

demographic information, with the Commission, and CTAs must still file

form CTA-PR. The Commission intends to adopt Sec. 4.27 as proposed and

permit dual registrants to

[[Page 11274]]

file form PF with the SEC in lieu of completing schedules B and/or C of

form CPO-PQR.

However, the Commission did not intend to require very large dual

registrants to file anything more than the general identifying

information required on schedule A with the Commission, and neither

Sec. 4.27 nor the forms require dual registrants to file schedules B

or C if they are filing form PF. Similarly, the Commission is not

adopting schedule B from form CTA-PR, and therefore, will be limiting

the information collected from registered CTAs to demographic data and

the names of the pools advised by the CTA. These measures will mitigate

costs to market participants by limiting the number of registrants that

must file these forms with the Commission.

One commenter questioned whether the information collected on forms

CTA-PR and CPO-PQR will provide the Commission with real-time data that

will enable it to have an accurate and timely picture of a CTA's

activities and operating status.\197\ Another commenter questioned

whether the Commission possessed the staffing and financial resources

necessary to meaningfully use such data as part of its oversight.\198\

The Commission recognizes the limitations of the data collection

instruments with respect to the timeliness of the information

requested. The Commission believes, however, that the forms strike the

appropriate balance between the time needed to compile complex data and

the Commission's need for timely information. Information that is less

than real-time is nevertheless useful in assisting the Commission in

overseeing registrants as it will provide additional information upon

which the Commission can base future program adjustments to ensure

efficient deployment of the Commission's resources.

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\197\ See Barnard Letter.

\198\ See Dechert Letter.

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As an offset to the costs otherwise associated with additional

reporting, the Commission intends for the data to be collected from

registrants in an electronic format. The Commission anticipates that

electronic data filing will be less time-intensive and should lower

compliance costs for participants, as well as processing costs for the

Commission. Moreover, the Commission believes that, over time,

participants will develop certain efficiencies in the filing of their

annual CPO-PQR and CTA-PR forms, allowing costs to continue to decrease

over time. Further, the Commission recognizes that the resources

available to it are variable. As a further cost-mitigating measure, the

Commission will leverage any limits on its resources through its

coordination with NFA to accomplish the analysis necessary to make full

use of the data collected from Commission registrants.

The Commission received several comments regarding the appropriate

reporting thresholds for the various schedules of form CPO-PQR.\199\

The commenters stated that $150 million in assets under management was

too low of a threshold for entities to be categorized as mid-sized and

required to file schedule B. Rather, the commenters urged the

Commission to increase the threshold to $500 million in assets under

management.\200\ These commenters also suggested that the Commission

increase the threshold for large CPOs to $5 billion in assets under

management.\201\

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\199\ See AIMA Letter; MFA II Letter; Seward Letter. See also,

AIMA II Letter.

\200\ See AIMA Letter.

\201\ See AIMA Letter; MFA II Letter; and Seward Letter.

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The Commission believes that $150 million in assets under

management is still the appropriate threshold for mid-sized CPOs. The

Commission will retain this threshold because it is consistent with the

threshold for advisers filing section 1 of form PF, which is

substantively similar to schedule B of form CPO-PQR, and it will ensure

comparable treatment of entities of similar magnitude. In addition, the

Commission has decided not to increase the large CPO threshold to $5

billion. The Commission has decided, however, to increase the threshold

for large CPOs from $1 billion to $1.5 billion. The Commission

anticipates that increasing the threshold to $1.5 billion will lower

costs by reducing the number of CPOs required to file schedule C of

form CPO-PQR, while still capturing data concerning a substantial

portion of the assets under management by registered CPOs. The

Commission believes that increasing the threshold beyond $1.5 billion,

however, could limit the Commission's access to information necessary

to oversee entities that could pose a risk to the derivatives markets

or the financial system as a whole.

In response to comments, the Commission has also determined to

mitigate costs and promote efficiency by modifying the frequency of

reporting for filers of form CPO-PQR. As adopted, all CPOs other than

large CPOs will be required to file schedule A on an annual basis; mid-

size CPOs will be required to file schedule B on an annual basis; and

large CPOs will be required to file schedules A, B, and C on a

quarterly basis.

The Commission received several comments asserting that the 15-day

period for reporting was not sufficient to permit reporting CPOs to

complete and file the form and all suggested extending the period to 30

or 45 days.\202\ The Commission agrees that reporting CPOs will need

additional time in which to submit the various schedules of form CPO-

PQR. In a further effort to reduce costs to participants, all CPOs

other than large CPOs will be required to file schedule A within 90

days of the end of the calendar year. This time period was chosen for

efficiency and cost mitigation inasmuch as it coincides with the annual

questionnaire required by NFA of its entire population of member CPOs

and with the vast majority of annual report filings for commodity

pools. Moreover, because the Commission has transferred the pool

position information from schedule A to schedule B, the Commission

believes that CPOs should be able to comply with filing basic

demographic data within 90 days.

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\202\ See NFA Letter; Seward Letter; and AIMA Letter.

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For schedule B, mid-sized CPOs are required to submit that schedule

within 90 days; the Commission believes this is an adequate time period

for compiling and reporting that schedule. The Commission notes that

CPOs are generally required to file annual reports for their pools

within 90 days of their fiscal year end, most of which coincide with

the calendar year end. The Commission believes that the alignment of

pools' fiscal years with the calendar year end should facilitate the

preparation of schedule B and reduce the burden imposed on mid-size

CPOs because some of the information required will be similar to that

included in a pool's annual financial statements.

With respect to the quarterly reporting by large CPOs on schedules

A, B, and C, the Commission believes that 60 days is a sufficient

amount of time to complete those schedules for large CPOs. The

Commission notes that the entities required to file on a quarterly

basis have a significant amount of assets under management, and as

such, the Commission anticipates that such entities routinely generate

the type of information requested on schedules B and C as part of their

internal governance. Accordingly, the Commission will require large

CPOs to file schedules A, B, and C within 60 days following the end of

the reporting period as defined in form CPO-PQR.

[[Page 11275]]

The Commission received several comments regarding the content of

form CTA-PR.\203\ Most commenters urged the Commission to eliminate the

form in its entirety.\204\ The Commission does not believe that the

complete elimination of form CTA-PR is appropriate; however, the

Commission agrees that schedule B of the form contains redundant

information that will already be collected through form CPO-PQR.

Accordingly, the Commission has decided to adopt only schedule A of

form CTA-PR. In so doing, the Commission believes the burden on CTAs

should be significantly reduced. Because form CTA-PR will be limited to

demographic data, the Commission believes that it is appropriate for

CTAs to file the form on an annual basis within 45 days of the end of

the fiscal year.

---------------------------------------------------------------------------

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

Letter; and Fidelity Letter.

\204\ Id.

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Finally, because the regulations have been modified to allow dually

registered entities to file only form PF (plus the first schedule A of

form CPO-PQR) for all of their commodity pools, even those that are not

``private funds,'' the Commission expects that such entities should not

be burdened by the costs of dual registration and dual filing.

ii. Information Collection Estimates for Forms CPO-PQR, PF, and CTA-PR

The Commission expects the following burden with respect to the

various schedules of Forms CPO-PQR, PF, and CTA-PR:

Form CPO-PQR: Schedule A:

Estimated number of respondents (excluding large CPOs): 3,890.

Annual responses by each respondent: 1.

Estimated average hours per response: 6.

Annual reporting burden: 23,340.

Estimated number of respondents (large CPOs): 170.

Annual responses by each respondent: 4.

Estimated average hours per response: 6.

Annual reporting burden: 4,080.

Form CPO-PQR: Schedule B:

Estimated number of respondents (mid size CPOs): 440.

Annual responses by each respondent: 1.

Estimated average hours per response: 4.

Annual reporting burden: 1,760.

Estimated number of respondents (large CPOs): 170.

Annual responses by each respondent: 4.

Estimated average hours per response: 4.

Annual reporting burden: 2,720.

Form CPO-PQR: Schedule C:

Estimated number of respondents: 170.

Annual responses by each respondent: 4.

Estimated average hours per response: 18.

Annual reporting burden: 12,240.

Form PF (non-large CPOs):

Estimated number of respondents: 220.

Annual responses by each respondent: 1.

Estimated average hours per response: 4.

Annual reporting burden: 880.

Form PF (large CPOs):

Estimated number of respondents: 90.

Annual responses by each respondent: 4.

Estimated average hours per response: 18.

Annual reporting burden: 6,480.

Form CTA-PR:

Estimated number of respondents: 450.

Annual responses by each respondent: 1.

Estimated average hours per response: 0.5.

Annual reporting burden: 225.

C. Considerations of Costs and Benefits

The Commission has historically exercised its authority to exempt

certain categories of entity from the CPO and CTA registration

requirement set forth in Section 4m(1) of the CEA, which states that it

is otherwise ``unlawful for any commodity trading advisor or commodity

pool operator, unless registered under this Act'' to conduct business

in interstate commerce.\205\ Exempted entities have included certain

investment companies registered with the SEC pursuant to the Investment

Company Act of 1940, and certain entities whose only participants are

``qualified eligible persons.'' \206\ This system of exemptions was

appropriate because such entities engaged in relatively little

derivatives trading, and dealt exclusively with qualified eligible

persons, who are considered to possess the resources and expertise to

manage their risk exposure.

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\205\ 7 U.S.C. 6m.

\206\ 17 CFR Sec. Sec. 4.5(a)(1), 4.13(a)(4).

---------------------------------------------------------------------------

In the Commission's judgment, changed circumstances warrant

revisions to these rules. The Commission is aware, for example, of

increased derivatives trading activities by entities that have

previously been exempted from registration with the Commission, such

that entities now offering services substantially identical to those of

registered entities are not subject to the same regulatory oversight.

Meanwhile, the Dodd-Frank Act has given the Commission a more robust

mandate to manage systemic risk and to ensure safe trading practices by

entities involved in the derivatives markets, including qualified

eligible persons and other participants in commodity pools. Yet, while

the Commission must execute this mandate, there currently is no source

of reliable information regarding the general use of derivatives by

registered investment companies.

The Commission, therefore, is adopting a new registration and data

collection regime for CPOs and CTAs that is consistent with the data

collection required under the Dodd-Frank Act. In these final rules, the

adopted amendments to part 4 of the Commission's regulations will do

the following: (A) Rescind the exemption from CPO registration provided

in Sec. 4.13(a)(4) of the Commission's regulations; (B) rescind relief

from CTA registration for those CTAs who advise pools with relief under

Sec. 4.13(a)(4); (C) rescind relief from the certification requirement

for annual reports provided to operators of certain pools only offered

to qualified eligible persons (``QEPs'') under Sec. 4.7(b)(3); (D)

modify the criteria for claiming relief under Sec. 4.5 of the

Commission's regulations; (E) require the annual filing of notices

claiming exemptive relief under Sec. 4.5, Sec. 4.13, and Sec. 4.14

of the Commission's regulations; and (F) require additional risk

disclosures for CPOs and CTAs regarding swap transactions and, certain

conforming amendments. By these amendments, the Commission seeks to

eliminate informational ``blind spots,'' which will benefit all

investors and market participants by enhancing the Commission's ability

to form and frame effective policies and procedures.

Section 15(a) \207\ of the CEA requires the Commission to consider

the costs and benefits of its actions before promulgating a regulation

under the CEA or issuing an order. Section 15(a) further specifies that

the costs and benefits shall be evaluated in light of the following

five broad areas of market and public concern: (1) Protection of market

participants and the public; (2) efficiency, competitiveness, and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations. To the extent that these new regulations reflect the

statutory requirements of the Dodd-

[[Page 11276]]

Frank Act, they will not create costs and benefits beyond those

resulting from Congress's statutory mandates in the Dodd-Frank Act.

However, to the extent that the new regulations reflect the

Commission's own determinations regarding implementation of the Dodd-

Frank Act's provisions, such Commission determinations may result in

other costs and benefits. It is these other costs and benefits

resulting from the Commission's own determinations pursuant to and in

accordance with the Dodd-Frank Act that the Commission considers with

respect to the Section 15(a) factors.

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\207\ 7 U.S.C. 19(a).

---------------------------------------------------------------------------

The Commission has quantified estimated costs and benefits where it

is reasonably practicable to do so. The Commission notes that, unless

otherwise specified, all costs discussed herein are estimates based on

the Commission's knowledge of the operations and registration statuses

of CPOs and CTAs. Moreover, the Commission is obligated to estimate the

burden of and provide supporting statements for any collections of

information it seeks to establish under considerations contained in the

PRA, 44 U.S.C. 3501 et seq., and to seek approval of those requirements

from the OMB. Therefore, the estimated burden and support for the

collections of information in this this rulemaking, as well as the

consideration of comments thereto, are discussed in the PRA section of

this rulemaking and the information collection requests filed with OMB

as required by that statute. All estimates are based on average costs;

actual costs may vary depending on the entity's individual business

model and compliance procedures.

The Commission is sensitive to costs incurred by market

participants and has attempted in a variety of ways to minimize burdens

on affected entities. These include the Commission's efforts to

harmonize its compliance requirements with those of the SEC, including

through specific harmonizing provisions in the joint SEC-CFTC rule for

dually registered investment advisers, as well as through tailoring of

the current amendments.\208\ A number of other cost-mitigation measures

are discussed later in this section.

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\208\ See Reporting by Investment Advisers to Private Funds and

Certain Commodity Pool Operators and Commodity Trading Advisors on

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

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In its Proposal, the Commission invited commenters to ``to submit

any data and other information that they may have quantifying or

qualifying the costs and benefits of this proposed rule with their

comment letters.'' \209\ Many comments addressed the costs and benefits

of the proposed rule in qualitative terms. These comments are

considered below.

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

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In the following discussion, the Commission sets forth its own

assessment of the benefits and costs of the amendments; addresses

relevant comments on the Proposal and alternatives to the Proposal

submitted by commenters; and evaluates the benefits and costs in light

of the five broad areas of market and public concern set forth in

Section 15(a) of the CEA. The analysis begins by addressing general

comments related to cost-benefit analysis in the context of the

Proposal as a whole, and then proceeds to examine the specific issues

according to the following three categories of regulation contained

within the Proposal: (1) registration (including changes to Sec. 4.5,

Sec. 4.13(a), and Sec. 4.14); (2) data collection (including the

adoption of forms CPO-PQR and CTA-PR); and (3) complementary amending

provisions (including changes to Sec. 4.7, Sec. 4.24, Sec. 4.34, and

parts 145 and 147).

1. General Comments

Several commenters claimed that the Commission did not provide a

sufficient consideration of costs and benefits in the Notice of

Proposed Rulemaking.\210\ One commenter noted that the cost-benefit

considerations focused on benefits that are already provided by other

federal securities laws, making the regulations duplicative.\211\

Another commenter asserted that until other rules, such as the further

definition of ``swaps,'' as well as capital and margin requirements,

have been finalized, it is not possible to determine the costs and

benefits of these rules.\212\ Other commenters suggested there be

another roundtable meeting to discuss the proposed rules.\213\

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\210\ See SIFMA Letter; USCC Letter; Reed Smith Letter; NFA

Letter; Invesco Letter; Dechert II Letter; and ICI Letter.

\211\ See ICI Letter.

\212\ See Dechert II Letter.

\213\ See Vanguard Letter; MFA Letter.

---------------------------------------------------------------------------

In response to these comments, the Commission has further

considered costs and benefits as they relate to the final rules. As

explained below in the discussion concerning dual SEC and Commission

registrants, the Commission believes that the benefits provided by

these rules are supplementary to, and not duplicative or redundant of,

benefits provided by the federal securities laws. The Commission does

not believe that the adoption of these regulations should be postponed

until after other regulations are finalized and believes that the costs

and benefits are sufficiently clear at this point and that delay is not

justified.\214\ In addition, the Commission has no reason to believe

that another roundtable meeting would yield information substantially

different from that gleaned from prior roundtables, comment letters,

and meetings with industry representatives.

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\214\ As noted above, however, the Commission agrees that it

should not implement the inclusion of swaps within the threshold

test prior to the effective date of such relevant final rules.

Therefore, it is the Commission's intention to delay the effective

date of the inclusion of swaps into the threshold calculation until

60 days after the final rules regarding the definition of ``swap''

and the delineation of the margin requirement for such instruments

are effective.

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The Commission has determined that these amendments will create

additional compliance costs for affected participants. These costs

include, but may not be limited to, the cost to prepare and file new

forms CPO-PQR and CTA-PR; the cost to file an annual notice to claim

exemptive relief under Sec. Sec. 4.5, 4.13, and 4.14; the cost of

preparing, certifying, and submitting annual reports as required for

registrants; the cost of preparing required disclosure documents; the

cost of preparing and distributing account statements on a periodic

basis to participants; the cost of keeping certain records as required;

and the cost of registering as a CPO or CTA. These costs each relate to

collections of information subject to PRA compliance, and therefore

have been accounted for in the PRA section of this rulemaking and the

information collection requests filed with OMB as required by that

statute.

Notably, many of the benefits associated with the requirements

adopted or amended in these regulations are recognized not only by the

Commission in its mission to protect derivatives markets and the

participants in them but also by the industry. Several ``best

practices'' manuals highlight the benefits of being registered with the

Commission, preparing and disseminating risk disclosure documents,

confirming receipt of disclosure documents, and ensuring independent

audit of financial statements and annual reports.\215\ These benefits

include increased consumer

[[Page 11277]]

confidence in offered pools and funds as well as increased internal

risk management structures.

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\215\ See, e.g. ``Sound Practices for Hedge Fund Managers.''

Managed Funds Association (MFA). Washington DC, 2007.; ``Principles

and Best Practices for the Hedge Fund Industry.'' Investors

Committee Report to the President's Working Group on Financial

Markets, Washington DC, 2008.; and ``Best Practices for the Hedge

Fund Industry.'' Asset Managers Committee Report to the President's

Working Group on Financial Markets, Washington DC, 2009.

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2. Regulations Regarding Registration Requirements for CPOs and CTAs

As discussed above, the amendments to the registration provisions

under part 4 include rescissions of the exemptions for entities

functioning as commodity pools with only ``qualified eligible persons''

as participants and the exclusion of registered investment companies

under the Investment Company Act of 1940, unless those investment

companies fall below a certain threshold level of derivatives

investment activity. With respect to those entities that will continue

to claim exemption or exclusion from registration as CPOs or CTAs under

the rules, the amendments will also require annual reaffirmance of

those claims of exemption or exclusion.

a. Benefits of Registration Provisions

As discussed above in II.A.1, the Commission believes that

registration provides two significant interrelated benefits. First,

registration allows the Commission to ensure that entities with greater

than a de minimis level of participation in the derivatives markets

meet minimum standards of fitness and competency. Second, registration

provides the Commission and members of the public with a direct means

to address wrongful conduct by participants in the derivatives markets.

The Commission has direct authority to take punitive and/or remedial

action against registered entities for violations of the CEA or of the

Commission's regulations. The Commission also has the ability to deny

or revoke registration, thereby prohibiting an unfit individual or

entity from serving as an intermediary in the industry. Members of the

public also may access the Commission's reparations program to seek

redress for wrongful conduct by a Commission registrant.

The Commission believes that the registration procedures enacted as

part of its regulatory regime upgrade the overall quality of market

participants, which, in turn, strengthens the derivatives industry by

minimizing lost business due to customer dissatisfaction and by

reducing litigation arising from acts of market participants.

Therefore, the Commission believes that its registration requirements

further critical regulatory objectives and serve important public

policy goals.

By expanding the Commission's regulatory oversight of entities

performing the functions of CPOs and CTAs, the Commission believes that

the final rules related to registration will help to ensure that such

entities meet basic standards of competency and fitness, which in turn

will provide a greater level of protection to market participants.

Ensuring that CPOs and CTAs are qualified in the first instance--as

opposed to relying solely on after-the-fact enforcement actions to

deter and remedy misconduct--should reduce such instances of misconduct

and resulting litigation, and thereby promote overall market

confidence. Therefore, the Commission believes that its registration

requirements are integral to its regulatory objectives and are in the

public interest.

With specific respect to the annual reaffirmance requirement, this

amendment will promote transparency regarding the number of entities

either exempt or excluded from the Commission's registration and

compliance programs. One primary purpose of the Dodd Frank Act is the

promotion of transparency in the financial system, particularly in the

derivatives market. This requirement is consistent with and will

further that purpose. Finally, the annual notice requirement will

enable the Commission to determine whether exemptions and exclusions

should be modified, repealed, or maintained as part of the Commission's

ongoing assessment of its regulatory scheme.

These benefits--enhancing the quality of entities operating within

the market, and the screening of unfit participants from the markets--

are substantial, even if unquantifiable. Through registration, the

Commission will be better able to protect the public and markets from

unfit persons and conduct that may threaten the integrity of the

markets subject to its jurisdiction.

b. Costs of Registration Provisions

Because of the amendments to part 4 as adopted here, the Commission

recognizes that some participants who previously were excluded or

exempted from registering as a CPO or CTA will now be required to

register with the Commission through NFA. In addition to costs

associated with registration accounted for under the PRA, which one

commenter said would ``vary significantly depending on a range of

factors, including the number of employees who will need to pass

examinations, the number of funds advised, investment strategy and

complexity, existing IT systems, and whether or not an adviser is

already registered or authorized and subject to a different regulatory

regime,'' \216\ the commenter estimated ongoing costs to be in the

range of $150,000 to $250,000 per year, a substantial part of which

would be made up of additional compliance personnel, information

technology development and legal/accounting advice that will be

required, and again vary significantly depending on the factors

mentioned above.\217\ The Commission presents these estimates for the

consideration of affected entities, reiterating the high variability of

costs depending on the factors enumerated by the commenter. This

variability is one reason the Commission presented its own estimates of

costs on a per-requirement basis; affected entities should be aware

that the total cost of registration and compliance will most likely be

the sum of any number of the estimates presented in this section and

under the PRA. In addition to the information collection costs

addressed by the Commission under the PRA, entities that will be

required to register with the Commission also will become subject to

NFA rules and to NFA audit procedures. NFA assesses annual membership

dues on CPOs and CTAs, currently $750, and charges $90 for the National

Commodity Futures Examination (NCFE) or Series 3 Examination for each

AP. The Commission understands that NFA audits CPOs and CTAs, on

average, every two to three years, though the frequency of audit

depends greatly on individual risk factors, and NFA generally conducts

an audit within the first year following registration of an

entity.\218\ The cost of such an audit may be incurred by the CPO or

CTA through an ``audit fee'' imposed by NFA; however, the audit fee

varies greatly by individual entity and individual audit and thus is

difficult to quantify on any sort of aggregated basis. Notwithstanding

the difficulty of quantifying such a burden, the Commission notes this

cost will most likely arise in the first year of registration and on

average every few years thereafter, and entities should expect such a

fee to be incurred.

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\216\ See AIMA II Letter.

\217\ Id.

\218\ For more information on audit procedures, visit the NFA

Web site, currently at http://www.nfa.futures.org/NFA-compliance/NFA-general-compliance-issues/nfa-audits.HTML.

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c. Comments Regarding Registration Provisions

1. Sec. 4.5 Amendments

Commenters who opposed the changes to Sec. 4.5 claimed that

requiring registered investment companies to register and comply with

the Commission's regulatory regime would

[[Page 11278]]

provide no benefit, because such entities are already subject to

comprehensive regulation by the SEC.\219\ The Commission disagrees.

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\219\ See, e.g., ICI Letter.

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While the Commission and the SEC share many of the same regulatory

objectives, including protecting market users and the public from fraud

and manipulation, the Commission administers the CEA to foster open,

competitive, and financially sound commodity and derivatives markets.

The Commission's programs are structured and its resources deployed to

meet the needs of the markets it regulates. In light of this

Congressional mandate, it is the Commission's view that entities

engaging in more than a de minimis amount of derivatives trading should

be required to register with the Commission. The alternative approaches

suggested by commenters would, as discussed above, detract from the

benefits of registration.

As also discussed above, the Commission is aware that currently

unregistered entities are offering services substantially identical to

those of registered CPOs. Several commenters also asserted that

modifying Sec. 4.5 would result in a significant burden on entities

required to register with the Commission without any meaningful benefit

to the Commission.\220\ The Commission recognizes that significant

burdens may arise from the modifications to Sec. 4.5; however, the

Commission believes, as discussed throughout this release, that

entities that are offering services substantially identical to those of

a registered CPO should be subject to substantially identical

regulatory obligations.

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\220\ See ICI Letter; Vanguard Letter; Reed Smith Letter;

AllianceBernstein Letter; USAA Letter; PMC Letter; IAA Letter;

Dechert II Letter; Janus Letter; STA Letter; Invesco Letter; and

Equinox Letter.

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Nevertheless, the Commission has not eliminated altogether the

exemption available under Sec. 4.5. Where an entity's trading does not

exceed five percent of the liquidation value of its portfolio, that

entity will remain exempt from registration. In the Commission's

judgment, trading exceeding five percent of the liquidation value of a

portfolio evidences a significant exposure to the derivatives

markets.\221\ This threshold was adopted by the Commission in its

earlier enactment of Sec. 4.13(a)(3).\222\ In promulgating that

exemption for de minimis activity, the Commission determined that five

percent is an appropriate threshold beyond which oversight by the

Commission is warranted.\223\ Because current data and information does

not allow the Commission to evaluate the difference in market impact at

various threshold levels \224\ the Commission believes it is prudent to

maintain the current threshold level. Further, as discussed above, no

facts have been put before the Commission that would warrant deviation

from the five-percent threshold, including data respecting the costs

and benefits of the same. The Commission also received numerous

comments on the proposed addition of a trading threshold to the

exclusion under Sec. 4.5.\225\ Some commenters stated that a five

percent de minimis threshold is too low in light of the Commission's

determination to include swaps within the measured activities. Although

these commenters presented alternatives to this five percent threshold

(some said twenty percent would be more reasonable, for example) the

Commission believes, as stated in the Proposal, that trading exceeding

five percent of the liquidation value of a portfolio evidences a

significant exposure to the derivatives markets.\226\ Moreover, in its

adoption of the exemption under Sec. 4.13(a)(3),\227\ the Commission

previously determined that five percent is an appropriate threshold to

determine whether an entity warrants oversight by the Commission.\228\

Current data and information does not allow the Commission to evaluate

the difference in market impact at various threshold levels; \229\

thus, the Commission believes it is prudent to maintain the current

threshold level. Commenters also recommended that the Commission

exclude from the threshold calculation various instruments including

broad-based stock index futures, security futures generally, or

financial futures contracts as a whole.\230\ As discussed above, the

Commission does not believe that a meaningful distinction can be drawn

between those security or financial futures and other categories of

futures for the purposes of registration; thus, the Commission does not

believe that exempting any of these instruments from the threshold

calculation is appropriate.

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\221\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the]

Commission believes that it is possible for a commodity pool to have

a portfolio that is sizeable enough that even if just five percent

of the pool's portfolio were committed to margin for futures, the

pool's portfolio could be so significant that the commodity pool

would constitute a major participant in the futures market'').

\222\ 17 CFR 4.13(a)(3).

\223\ 68 FR 47221, 47225 (Aug. 8, 2003).

\224\ The Commission currently only has information on the

positions held by CPOs in futures markets, i.e., those entities

already registered as CPOs, as opposed to those excluded from the

definition of CPO under Sec. 4.5. The Commission does not have

access to information on the total liquidation value of funds

operated by registered CPOs or those operated by excluded CPOs,

values that are needed to determine the universe of entities

affected by one particular percentage threshold versus another.

These data limitations are one reason why the Commission is pursuing

additional data collection initiatives under these final rules.

\225\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed

Smith Letter; AllianceBernstein Letter; AII Letter; STA Letter;

Janus Letter; PMC Letter; USAA Letter; Fidelity Letter; SIFMA

Letter; Dechert III Letter; Rydex Letter; USCC Letter; Sidley

Letter; NFA Letter; Campbell Letter; AQR Letter; Steben Letter; ICI

II Letter; and AII Letter.

\226\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the]

Commission believes that it is possible for a commodity pool to have

a portfolio that is sizeable enough that even if just five percent

of the pool's portfolio were committed to margin for futures, the

pool's portfolio could be so significant that the commodity pool

would constitute a major participant in the futures market'').

\227\ 17 CFR 4.13(a)(3).

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

\229\ The Commission currently only has information on the

positions held by CPOs in futures markets, i.e., those entities

already registered as CPOs, as opposed to those excluded from the

definition of CPO under Sec. 4.5. The Commission does not have

access to information on the total liquidation value of funds

operated by registered CPOs or those operated by excluded CPOs,

values that are needed to determine the universe of entities

affected by one particular percentage threshold versus another.

These data limitations are one reason why the Commission is pursuing

additional data collection initiatives under these final rules.

\230\ See Rydex Letter; Invesco Letter; and ICI Letter.

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Several panelists at the Roundtable suggested that, instead of a

trading threshold that is based on a percentage of margin, that the

Commission should focus solely on entities that offer ``actively

managed futures'' strategies.\231\ As discussed in section II.A.2, the

Commission does not find it appropriate to establish a differentiation

between ``active'' and ``passive'' derivative investments because, in

addition to other reasons,\232\ establishing such differentiation would

introduce an element of subjectivity to an otherwise objective standard

and make the threshold more difficult to interpret, apply, and enforce.

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\231\ See Transcript of CFTC Staff Roundtable Discussion on

Proposed Changes to Registration and Compliance Regime for Commodity

Pool Operators and Commodity Trading Advisors (``Roundtable

Transcript''), at 19, 25, 30, 76-77, 87-90, available at http://www.cftc.gov/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.

\232\ Additional reasons for not accepting this alternative are

discussed in section II.A.2 of this release.

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One commenter suggested that the Commission should consider the

adoption of an alternative test that would be identical to the

aggregate net notional value test that is currently available under

Sec. 4.13(a)(3)(ii)(B).\233\ Section 4.13(a)(3)(ii)(B) provides that

an entity can claim exemption from

[[Page 11279]]

registration if the net notional value of its fund's derivatives

trading does not exceed one hundred percent of the liquidation value of

the fund's portfolio.\234\

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\233\ See Dechert III Letter.

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

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Conversely, several panelists at the Roundtable opposed such a

test, stating that it was not a reliable means to measure an entity's

exposure in the market.\235\ As stated previously herein, the

Commission believes that the adoption of an alternative net notional

test will provide consistent standards for relief from registration as

a CPO for entities whose portfolios only contain a limited amount of

derivatives positions and will afford registered investment companies

with additional flexibility in determining eligibility for exclusion.

Therefore, the Commission will adopt an alternative net notional test,

consistent with that set forth in Sec. 4.13(a)(3)(ii)(B) as amended

herein, for registered investment companies claiming exclusion from the

definition of CPO under Sec. 4.5.

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\235\ See Roundtable Transcript at 69-71.

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The Commission also received several comments supporting both the

imposition of a trading threshold in general and the five percent

threshold specifically.\236\ At least one commenter suggested, however,

that the Commission consider requiring registered investment companies

that exceed the threshold to register, but not subjecting them to the

Commission's compliance regime beyond requiring them to be subject to

the examination of their books and records, and examination by

NFA.\237\ In effect, this commenter requested that the Commission

subject such registrant to ``notice registration.'' The Commission

believes that adopting the approach proposed by the commenter would not

materially change the information that the Commission would receive

regarding the activities of registered investment companies in the

derivatives markets, which is one of the Commission's purposes in

amending Sec. 4.5. Moreover, a type of notice registration would not

provide the Commission with any real means for engaging in consistent

ongoing oversight. Notwithstanding such notice registration, the

Commission would still be deemed to have regulatory responsibility for

the activities of these registrants. In the Commission's view, notice

registration does not equate to an appropriate level of oversight. For

that reason, the Commission has determined not to adopt the alternative

proposed by the commenter. The Commission is adopting the amendment to

Sec. 4.5 regarding the trading threshold without modification for the

reasons stated herein and those previously discussed in the Proposal.

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\236\ See NFA Letter, Campbell Letter, AQR Letter, and Steben

Letter.

\237\ See AQR Letter.

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

In addition to the comments that the Commission received regarding

the specific parts of the Proposal rescinding Sec. Sec. 4.13(a)(3) and

(a)(4), the Commission received numerous comments regarding the

proposed rescissions generally.\238\ Broadly, the comments opposed the

rescission of the provisions. In the Proposal, the Commission proposed

rescinding the ``de minimis'' exemption in Sec. 4.13(a)(3). The

Commission received ten comments specifically on this aspect of the

Proposal, which consistently urged the Commission to retain a de

minimis exemption. As discussed above in section II.C.2, the

Commission, after consideration of the comments and the Commission's

stated rationale for proposing to rescind the exemption in Sec.

4.13(a)(3), has determined to retain the ``de minimis'' exemption

currently set forth in that section without modification.

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\238\ See NYSBA Letter; Skadden Letter; MFA Letter; Katten

Letter; Fidelity Letter; Dechert Letter; AIMA Letter; AIMA II

Letter; IAA Letter; SIFMA Letter; HedgeOp Letter; PIC Letter; and

Seward Letter.

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Several commenters asserted that rescission was not necessary

because the Commission has the means to obtain any needed information

from exempt CPOs through its large trader reporting requirements and

its special call authority.\239\ Although the Commission has those

means, neither of those rules were intended to provide the kind of data

requested of registered entities on forms CPO-PQR or CTA-PR with the

regularity proposed under Sec. 4.27.

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\239\ See Skadden Letter; Katten Letter; and MFA Letter.

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Another commenter asserted that the compliance and regulatory

obligations under the Commission's rules are burdensome for private

businesses and would unnecessarily distract entities from their primary

focus of managing client assets.\240\ The Commission believes that

regulation is necessary to ensure a well functioning market and to

provide protection of those clients. The Commission further believes

that the compliance regime that the Commission has adopted strikes the

appropriate balance between limiting the burden placed on registrants

and enabling the Commission to carry out its duties under the Act.

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\240\ See MFA Letter; Seward Letter; and Katten Letter.

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In the Proposal, the Commission also proposed to rescind the

exemption in Sec. 4.13(a)(4) for operators of pools that are offered

only to individuals and entities that satisfy the qualified eligible

person standard in Sec. 4.7 or the accredited investor standard under

the SEC's Regulation D.\241\ Several commenters argued that the

Commission should consider retaining the exemption in Sec. 4.13(a)(4)

for funds that do not directly invest in commodity interests, but do so

through a fund of funds structure, and who are advised by an SEC

registered investment adviser. The Commission has not developed a

comprehensive view regarding the role of funds of funds in the

derivatives markets, in part, due to a lack of data regarding their

investment activities. The Commission, therefore, believes that it is

prudent to withhold consideration of a fund of funds exemption until

the Commission has received data regarding such firms on forms CPO-PQR

and/or CTA-PR, as applicable, to enable the Commission to better assess

the universe of firms that may be appropriate to include within the

exemption, should the Commission decide to adopt one. Therefore, the

Commission declines to adopt the commenter's alternative to provide an

exemption for funds of funds at this time.

One commenter argued that rescission is not necessary because any

fund that seeks to attract qualified eligible persons is already

required to maintain oversight and controls that exceed those mandated

by part 4 of the Commission's regulations such that any regulation

imposed would be duplicative and unnecessarily burdensome.\242\ The

commenter primarily focused on the significant level of controls that

the fund operator implements independent of regulation. The Commission

believes that, contrary to the commenter's arguments as to the import

of that fact, such controls and internal oversight should make

compliance with the Commission's regulatory regime easier and cheaper

rather than more burdensome. If the information required to be

disclosed under the Commission's regulations is to a large extent

already being disclosed by the firm, the Commission anticipates that

this would limit the costs of compliance to those costs directly

involved with formatting such information as required by the

Commission's disclosure and reporting

[[Page 11280]]

rules. The Commission adopts the rescission of Sec. 4.13(a)(4) as

proposed.

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\242\ See Cranwood Letter.

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The Commission has also elected to mitigate costs by phasing in

gradually the rescission of Sec. 4.13(a)(4). As discussed in section

II.C.5, in response to certain comments, the Commission will implement

the rescission of Sec. 4.13(a)(4) for all entities currently claiming

exemptive relief thereunder on December 31, 2012, but the rescission

will be implemented for all other CPOs upon the effective date of this

final rulemaking. This timeline reflects the Commission's belief that

entities currently claiming relief under Sec. 4.13(a)(4) should be

capable of becoming registered and complying with the Commission's

regulations within 11 months following the issuance of the final rule.

For entities that are formed after the effective date of the

rescission, the Commission expects the CPOs of such entities to comply

with the Commission's regulations upon formation and commencement of

operations.

3. Annual Notice of Exemption or Exclusion Requirement

The amendments will require annual reaffirmance of any claim of

exemption or exclusion from registration as a CPO or CTA.\243\ In the

Proposal, the Commission stated that an annual notice requirement would

promote transparency, a primary purpose of the Dodd Frank Act,

regarding the number of entities either exempt or excluded from the

Commission's registration and compliance programs. Moreover, the

Commission stated that an annual notice requirement would enable the

Commission to determine whether exemptions and exclusions should be

modified, repealed, or maintained as part of the Commission's ongoing

assessment of its regulatory scheme.

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

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Two commenters suggested that the 30-day time period for filing was

not adequate to enable firms to comply.\244\ One commenter proposed a

60-day time period,\245\ whereas the other commenter proposed 90 days

as the necessary amount of time.\246\ As a further cost-mitigating

measure, and for the reasons discussed in section II.D, the Commission

has elected to extend the filing period from 30 days to 60 days.

Further, the Commission will adopt the annual notice requirement with

one significant modification designed, among other things, to mitigate

costs--that the notice be filed at the end of the calendar year and not

the anniversary of the original filing. The Commission believes this

alternative presented by a commenter will be more operationally

efficient.\247\

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\244\ See NFA Letter; and SIFMA Letter.

\245\ See NFA Letter.

\246\ See SIFMA Letter.

\247\ See NFA Letter.

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d. Section 15(a)

In this section, the Commission considers the costs and benefits of

its actions in light of five broad areas of market and public concern

set forth in Sec. 15(a) of the CEA: (1) protection of market

participants and the public; (2) efficiency, competitiveness, and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations.

1. Protection of Market Participants and the Public

Registration provides many benefits for both the registrants and

their customers. The registration process allows the Commission to

ensure that all entities participating in derivative markets meet a

minimum standard of fitness and competency. The regulations governing

who must register and what registrants must do provide clear direction

for CPOs and CTAs. At the same time, clients wishing to invest with

registered entities have the knowledge that such entities are held to a

high financial standard through periodic account statements, disclosure

of risk, audited financial statements, and other measures designed to

provide transparency to investors. The Commission believes its

regulations protect market participants and the public by requiring

certain parties previously excluded or exempt from registration to be

held to the same standards as registered operators and advisors, which

ensures the fitness of such market participants and professionals.

Additionally furthering the goal of investor protection, NFA

provides an on-line, public database with information on the

registration status of market participants and their principals as well

as certain additional registrant information such as regulatory actions

taken by the NFA or Commission.\248\ This information is intended to

assist the public in making investment decisions regarding the use of

derivatives professionals. Although those previously exempt entities

may incur costs associated with registering and the compliance

obligations arising therefrom, or may incur costs to inform the

Commission of their exempt status, the Commission believes the benefits

of transparency in the derivatives markets in the long term will

outweigh these costs, which should decrease over time as efficiencies

develop.

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\248\ The National Futures Association's Background Affiliation

Status Information Center (BASIC) is currently available at http://www.nfa.futures.org/basicnet/.

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2. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

The amendments adopted herein will result in the registration of

more CPOs and CTAs, which will enable the Commission to better oversee

their activities in the derivatives markets, thereby protecting the

integrity of the markets. Indeed, even including those entities still

exempt under revised part 4 that are required to file notice with the

Commission on an annual basis, the Commission will be able to better

understand who is operating in derivatives markets and identify any

threats to the efficiency, competitiveness, or integrity of markets.

Moreover, because similarly situated entities in the derivatives

markets will be subject to the same regulatory regime, the

competitiveness of market participants will be enhanced.

3. Price Discovery

The Commission has not identified any impact on price discovery

through the registration of additional CPOs and CTAs as a result of

these regulations.

4. Sound Risk Management

The information the Commission gains from the registration of

entities allows the Commission to better understand the participants in

the derivatives markets and the interconnectedness of all market

participants. Such an understanding allows the Commission to better

assess potential threats to the soundness of derivatives markets and

thus the financial system of the United States. The Commission also

believes that the information required of registrants, to the extent

that producing such information requires entities to examine their

internal systems and operations in a manner not previously assessed,

provides registrants with an additional method of understanding the

risk inherent in their day-to-day businesses.

5. Other Public Interest Considerations

The Commission has not identified any other public interest

considerations impacted by the registration of additional CPOs and CTAs

as a result of these regulations.

3. Data Collection

In these final rules, the Commission is enacting new Sec. 4.27,

which requires CPOs and CTAs to report certain

[[Page 11281]]

information to the Commission on forms CPO-PQR and CTA-PR,

respectively. The forms, reporting thresholds, and filing deadlines are

further detailed in section II.F of this release.

a. Benefits of Data Collection

The Commission expects that the data collected from forms CPO-PQR

and CTA-PR will increase the amount and quality of information

available to the Commission regarding a previously opaque area of

investment activity. Entities that are required to file all three

schedules of the forms are large enough to have, potentially, a great

impact on derivatives markets should such entities default, whereas

smaller entities are required to file only basic demographic

information. Because the data currently available to the Commission

regarding CPOs and CTAs is limited in scope, the Commission does not

have complete information as to who is transacting in derivatives

markets. With the additional information that the Commission will have

as a result of the new requirements under Sec. 4.27, the Commission

will be able to tailor its regulations to the needs of, and risks posed

by, entities in the market, and to protect investors and the general

public from potentially negative or overly risky behavior.

The Dodd-Frank Act charged the Commission, as a member of FSOC and

as a financial regulatory agency, with mitigating risks that may impact

the financial stability of the United States. The Commission is

dedicated to assisting FSOC in that goal, and these final regulations

are essential for the Commission to be able to fulfill that role

effectively because the Commission cannot protect against risks of

which it is not aware. By creating a reporting regime that makes the

operations of commodity pools more transparent to the Commission, the

Commission is better able to identify and address potential threats.

The total benefit of risk mitigation as it pertains to the overall

financial stability of the United States is not quantifiable, but it is

significant insofar as the Commission may be able to use this data to

prevent further future shocks to the U.S. financial system.

b. Costs of Data Collection

The Commission has not identified costs of data collection that are

not associated with an information collection subject to the PRA. These

costs therefore have been accounted for in the PRA section of this

rulemaking and the information collection requests filed with OMB, as

required by the PRA.

c. Section 15(a) Determination

This section analyzes the data collection rules according to the

five factors set forth in section 15(a) of the CEA: (1) protection of

market participants and the public; (2) efficiency, competitiveness,

and financial integrity of futures markets; (3) price discovery; (4)

sound risk management practices; and (5) other public interest

considerations.

1. Protection of Market Participants and the Public

The Commission believes that the information to be gathered from

forms CPO-PQR and CTA-PR increases the amount and quality of

information available regarding a previously opaque area of investment

activity and, thereby, enhances the ability of the Commission to

protect investors and oversee derivatives markets. This enhanced

ability provides a better understanding of the participants in

derivatives markets and their operations, and as such, the Commission

is better able to protect the public from the potential risk that

large, unregulated entities could bring to markets under the

Commission's jurisdiction, many of which are essential to society at

large. Moreover, to mitigate reporting costs to regulated entities that

may be registered both with the Commission and with the SEC, the

regulations have been modified to allow dually registered entities to

file only form PF (plus the first schedule A of form CPO-PQR) for all

of their commodity pools, even those that are not ``private funds.''

The cost mitigation has been accounted for in the PRA section of this

rulemaking and the information collection requests filed with OMB, as

required by the PRA.

2. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

Although the Commission does not believe this rule relates directly

to the efficiency or competitiveness of futures markets, the Commission

does recognize that the interconnectedness of the participants within

derivatives markets can be extensive such that the proper oversight of

each category of participants affects proper oversight of derivatives

markets and the financial system as a whole. To the extent that the

information collected by form CPO-PQR and form CTA-PR and the adopted

amendments to the Commission's compliance regime assist the Commission

in identifying threats in derivatives markets, the regulations herein

protect the integrity of futures markets.

3. Price Discovery

The Commission has not identified any impact on price discovery as

a result of this data collection initiative.

4. Sound Risk Management

The Dodd-Frank Act tasks FSOC and its member agencies (including

both the SEC and the Commission) with mitigating risks to the financial

stability the United States. The Commission believes these regulations

are necessary to fulfill that obligation. These regulations improve the

ability of the Commission to oversee the derivatives markets. As the

Commission's understanding of the regulated entities, their behavior in

derivatives markets, and the overall riskiness of their positions

increases through the data collection in these rules, the Commission

will be able to better understand any risks posed to the financial

system as a whole arising from markets under the Commission's

jurisdiction. These benefits are shared by market participants, at

least indirectly, as a part of the United States financial system. In

addition, CPOs and CTAs may benefit from these regulations to the

extent that reporting form CPO-PQR and form CTA-PF requires such

entities to review their firms' portfolios, trading practices, and risk

profiles; thus, the CFTC believes that these regulations may improve

the sound risk management practices within their internal risk

management systems.

5. Other Public Interest Considerations

The Commission has not identified any other public interest

considerations impacted by this data collection initiative.

4. Complementary Provisions

As part of these final regulations, the Commission is also adopting

other amending provisions that complement the registration and data

collection provisions, including changes to Sec. 4.7, Sec. 4.22,

Sec. Sec. 4.24 and 4.34, and parts 145 and 147. This section sets

forth the Commission's consideration of related costs and benefits in

general, responds to relevant comments, and then analyzes the

complementary provisions in light of the five factors enumerated in

Sec. 15(a) of the CEA.

a. Benefits of the Complementary Provisions

The provisions in this category amend additional sections of part 4

in order to improve the Commission's ability to effectively regulate

derivatives markets and their participants. Some of these complementary

provisions are specifically designed to protect

[[Page 11282]]

investors, e.g., requiring certified annual reports and disclosure of

swaps risk ensures investors are getting complete and accurate

information regarding their investment, which increases consumer

confidence in the financial system. As the information available to

consumers becomes more accurate and complete, a prospective investor

can more easily compare investment vehicles to choose the investment

vehicle best suited to the investor's individual financial plan and

risk tolerance.

Other provisions protect market participants by amending the

Commission's internal procedures to provide for the confidentiality of

certain proprietary information. Moreover, the Commission's planned

harmonization rules are designed to limit the impact to entities

regulated by multiple entities, protecting those participants from

overly burdensome regulatory regimes.

b. Costs of the Complementary Provisions

The Commission has identified no costs of the complementary

provisions that are not associated with an information collection

subject to the PRA. These costs therefore have been accounted for in

the PRA section of this rulemaking and the information collection

requests filed with OMB, as required by the PRA.

c. Comments on the Complementary Provisions

1. Sec. 4.7 Amendments

As stated previously, the Commission is adopting an amendment to

Sec. 4.7 that would rescind the relief provided in Sec. 4.7(b)(3)

from the certification requirement of Sec. 4.22(c) for financial

statements contained in commodity pool annual reports. The Commission

received two comments regarding this proposed amendment. One commenter

supported the proposed rescission and the Commission's stated

justification for doing so. The other commenter recommended that the

Commission retain an exemption from certification of financial

statements for entities where the pool's participants are limited to

the principals of its CPO(s) and CTA(s) and other categories of

employees listed in Sec. 4.7(a)(2)(viii). It is unclear how many of

the pools operated under Sec. 4.7 would qualify for such relief if

adopted. The Commission is therefore unable to agree that such

exclusions would materially reduce costs or increase any benefit

achieved by the rule.

2. Sec. 4.24 and Sec. 4.34 Amendments

The Commission also proposed adding standard risk disclosure

statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.

4.24(b) and 4.34(b), respectively. The Commission received three

comments with respect to the proposed standard risk disclosure

statement for swaps. Two argued that a standard risk disclosure

statement does not beneficially disclose the risks inherent in swaps

activity to participants or clients. A third recommended that the

Commission consider whether the wording of the standard disclosure

should be modified depending on whether the swaps were cleared or

uncleared.

The Commission respectfully disagrees with the assertions of those

commenters who believe that a standard risk disclosure statement is not

beneficial. The Commission believes that a standardized risk disclosure

statement addressing certain risks associated with the use of swaps is

necessary due to the revisions to the statutory definitions of CPO,

CTA, and commodity pool enacted by the Dodd-Frank Act. In addition,

based on the language proposed, the Commission does not believe that

different language must be adopted to account for the differences

between cleared and uncleared swaps. In particular, the Commission

notes that the proposed risk disclosure statement is not intended to

address all risks that may be associated with the use of swaps, but

that the CPO or CTA is required to make additional disclosures of any

other risks in its disclosure document pursuant to Sec. Sec. 4.24(g)

and 4.34(g) of the Commission's regulations. Moreover, the language of

the proposed risk disclosure statement is conditional and does not

purport to assert that all of the risks discussed are applicable in all

circumstances.

For the reasons discussed above in section II.E and those stated in

the Proposal, the Commission adopts the proposed risk disclosure

statements for CPOs and CTAs regarding swaps. These additional risk

disclosure statements will be required for all new disclosure documents

and all updates filed after the effective date of this final

rulemaking.

3. Harmonization of Regulations and Fund-of-Fund Investments

The Commission received numerous other comments regarding such

subjects as harmonizing CFTC regulations with SEC regulations and fund

of fund investments. These comments are discussed in detail in sections

II.F.3 and 4 and adopted by reference herein.

4. Confidentiality of Submitted Data

Additionally, as the Commission stated in the Proposal, the

collection of certain proprietary information through forms CPO-PQR and

CTA-PR raises concerns regarding the protection of such information

from public disclosure. The Commission received two comments requesting

that the Commission treat the disclosure of a pool's distribution

channels as nonpublic information, and numerous other comments urging

the Commission to be exceedingly circumspect in ensuring the

confidentiality of the information received as a result of the data

collections.

The Commission agrees that the distribution and marketing channels

used by a CPO for its pools may be sensitive information that

implicates other proprietary secrets, which, if revealed to the general

public, could put the CPO at a competitive disadvantage. Accordingly,

and to mitigate costs and eliminate risks to participants, the

Commission is amending Sec. Sec. 145.5 and 147.3 to include question 9

of schedule A of form CPO-PQR as a nonpublic document. Additionally,

the Commission is amending Sec. Sec. 145.5 and 147.3 to remove

reference to question 13 in Schedule A of Form CPO-PQR because that

such question no longer exists due to amendments to that schedule.

Similarly, the Commission will be designating subparts c. and d. of

question 2 of form CTA-PR as nonpublic because it identifies the pools

advised by the reporting CTA.

d. Section 15(a) Determination

This section considers these costs and benefits in light of the

five broad areas of market and public concern set forth in section

15(a) of the CEA: (1) protection of market participants and the public;

(2) efficiency, competitiveness, and financial integrity of futures

markets; (3) price discovery; (4) sound risk management practices; and

(5) other public interest considerations.

1. Protection of Market Participants and the Public

The complementary provisions discussed in this section protect

market participants and the public in a variety of ways. The changes

under Sec. 4.7 require entities to have their annual financial

statements independently audited; such a requirement protects the

investors in pools registered under Sec. 4.7 by ensuring that the

financial statements provided to participants are accurate and correct.

As most CPOs registered under Sec. 4.7 currently file audited annual

reports, the burden to the industry as a whole will be relatively minor

whereas the benefits, including increased consumer confidence, are

likely to be

[[Page 11283]]

large. The dollar value of improvements to overall accuracy of

financial reporting is not quantifiable, but is a significant benefit.

Registered entities can remain confident in the confidentiality of

their reports to the Commission, as the revised parts 145 and 147

protect proprietary information from being released to the public,

while still giving the Commission needed information to protect

derivatives markets and their participants.

The amending provisions that require similar information from CPOs

transacting in swaps products and markets increase the Commission's

awareness of transactions in the previously unregulated over-the-

counter markets. That awareness will help to bring transparency to the

swaps markets, as well as to the interaction of swaps and futures

markets, protecting the participants in both markets from potentially

negative behavior.

2. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

Although the Commission does not believe this part of these

regulations has a direct impact on the efficiency of futures markets,

the Commission does recognize that the protection of proprietary

information is essential for the competitiveness and integrity of

futures markets. The Commission believes that requiring all registered

CPOs to provide participants and the Commission with annual financial

statements that are certified by independent public accountants will

increase the reliability of the information provided, which will serve

to enhance the financial integrity of market participants, and by

extension, the market as a whole. Moreover, the Commission also

believes that requiring such certified statement of all registrants

serves to make market participants more competitive as it enables

prospective participants to more easily compare various investment

vehicles.

3. Price Discovery

The Commission has not identified any impact on price discovery as

a result of these regulations.

4. Sound Risk Management

The Commission has not identified any other impacts on sound risk

management as a result of the other amending provisions that are

different from the impacts of the registration and data collection

initiatives described in sections III.A.3 and 4.

5. Other Public Interest Considerations

The Commission has not identified any other public interest

considerations impacted by as a result of these regulations.

5. Conclusion

The Commission recognizes that the final regulations will impose

some significant costs on the industry, as described above and in the

PRA section. Notwithstanding the costs, the Commission has determined

to adopt this rule because the Commission believes that proper

regulation and oversight of market participants is necessary to promote

fair and orderly derivatives markets.

List of Subjects

17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Consumer protection, Reporting and

recordkeeping requirements.

17 CFR Part 145

Commission records and information.

17 CFR Part 147

Open commission Meetings.

Accordingly, 17 CFR Chapter I is amended as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0

1. The authority citation for part 4 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o,

12a, and 23.

0

2. In Sec. 4.5, add paragraphs (c)(2)(iii) and (c)(5) to read as

follows:

Sec. 4.5 Exclusion from the definition of the term ``commodity pool

operator.''

* * * * *

(c) * * *

(2) * * *

(iii) Furthermore, if the person claiming the exclusion is an

investment company registered as such under the Investment Company Act

of 1940, then the notice of eligibility must also contain

representations that such person will operate the qualifying entity as

described in Rule 4.5(b)(1) in a manner such that the qualifying

entity:

(A) Will use commodity futures or commodity options contracts, or

swaps solely for bona fide hedging purposes within the meaning and

intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5);

Provided however, That in addition, with respect to positions in

commodity futures or commodity option contracts, or swaps which do not

come within the meaning and intent of Rules 1.3(z)(1) and 151.5, a

qualifying entity may represent that the aggregate initial margin and

premiums required to establish such positions will not exceed five

percent of the liquidation value of the qualifying entity's portfolio,

after taking into account unrealized profits and unrealized losses on

any such contracts it has entered into; and, Provided further, That in

the case of an option that is in-the-money at the time of purchase, the

in-the-money amount as defined in Rule 190.01(x) (17 CFR 190.01(x)) may

be excluded in computing such five percent;

(B) The aggregate net notional value of commodity futures,

commodity options contracts, or swaps positions not used solely for

bona fide hedging purposes within the meaning and intent of Rules

1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5), determined at the

time the most recent position was established, does not exceed 100

percent of the liquidation value of the pool's portfolio, after taking

into account unrealized profits and unrealized losses on any such

positions it has entered into. For the purpose of this paragraph:

(1) The term ``notional value'' shall be calculated for each

futures position by multiplying the number of contracts by the size of

the contract, in contract units (taking into account any multiplier

specified in the contract, by the current market price per unit, for

each such option position by multiplying the number of contracts by the

size of the contract, adjusted by its delta, in contract units (taking

into account any multiplier specified in the contract, by the strike

price per unit, for each such retail forex transaction, by calculating

the value in U.S. Dollars for such transaction, at the time the

transaction was established, excluding for this purpose the value in

U.S. Dollars of offsetting long and short transactions, if any, and for

any cleared swap by the value as determined consistent with the terms

of 17 CFR part 45; and

(2) The person may net futures contracts with the same underlying

commodity across designated contract markets and foreign boards of

trade; and swaps cleared on the same designated clearing organization

where appropriate; and

(C) Will not be, and has not been, marketing participations to the

public as or in a commodity pool or otherwise as or in a vehicle for

trading in the commodity futures, commodity options, or swaps markets.

* * * * *

(5) Annual notice. Each person who has filed a notice of exclusion

under

[[Page 11284]]

this section must affirm on an annual basis the notice of exemption

from registration, withdraw such exemption due to the cessation of

activities requiring registration or exemption therefrom, or withdraw

such exemption and apply for registration within 30 days of the

calendar year end through National Futures Association's electronic

exemption filing system.

* * * * *

0

3. In Sec. 4.7:

0

a. Revise paragraphs (a)(3)(ix), (a)(3)(x), and (b)(3) to read as

follows:

Sec. 4.7 Exemption from certain part 4 requirements for commodity

pool operators with respect to offerings to qualified eligible persons

and for commodity trading advisors with respect to advising qualified

eligible persons.

* * * * *

(a) * * *

(3) * * *

(ix) A natural person whose individual net worth, or joint net

worth with that person's spouse at the time of either his purchase in

the exempt pool or his opening of an exempt account would qualify him

as an accredited investor as defined in Sec. 230.501(a)(5) of this

title;

(x) A natural person who would qualify as an accredited investor as

defined in SSec. 203.501(a)(6) of this title;

* * * * *

(b) * * *

(3) Annual report relief. (i) Exemption from the specific

requirements of Sec. 4.22(c) of this part; Provided, that within 90

calendar days after the end of the exempt pool's fiscal year or the

permanent cessation of trading, whichever is earlier, the commodity

pool operator electronically files with the National Futures

Association and distributes to each participant in lieu of the

financial information and statements specified by that section, an

annual report for the exempt pool, affirmed in accordance with Sec.

4.22(h) which contains, at a minimum:

(A) A Statement of Financial Condition as of the close of the

exempt pool's fiscal year (elected in accordance with Sec. 4.22(g));

(B) A Statement of Operations for that year;

(C) Appropriate footnote disclosure and such further material

information as may be necessary to make the required statements not

misleading. For a pool that invests in other funds, this information

must include, but is not limited to, separately disclosing the amounts

of income, management and incentive fees associated with each

investment in an investee fund that exceeds five percent of the pool's

net assets. The income, management and incentive fees associated with

an investment in an investee fund that is less than five percent of the

pool's net assets may be combined and reported in the aggregate with

the income, management and incentive fees of other investee funds that,

individually, represent an investment of less than five percent of the

pool's net assets. If the commodity pool operator is not able to obtain

the specific amounts of management and incentive fees charged by an

investee fund, the commodity pool operator must disclose the percentage

amounts and computational basis for each such fee and include a

statement that the CPO is not able to obtain the specific fee amounts

for this fund;

(D) Where the pool is comprised of more than one ownership class or

series, information for the series or class on which the financial

statements are reporting should be presented in addition to the

information presented for the pool as a whole; except that, for a pool

that is a series fund structured with a limitation on liability among

the different series, the financial statements are not required to

include consolidated information for all series.

(ii) Legend. If a claim for exemption has been made pursuant to

this section, the commodity pool operator must make a statement to that

effect on the cover page of each annual report.

* * * * *

0

4. In Sec. 4.13:

0

a. Revise paragraphs (a)(3)(ii)(B)(1) and (2);

0

b. Remove and reserve paragraph (a)(4);

0

c. Revise paragraph (b)(1)(ii);

0

d. Redesignate paragraph (b)(4) as paragraph (b)(5) and add new

paragraph (b)(4); and

0

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

The revisions and additions read as follows:

Sec. 4.13 Exemption from registration as a commodity pool operator.

* * * * *

(a) * * *

(3) * * *

(ii) * * *

(B) * * *

(1) The term ``notional value'' shall be calculated for each

futures position by multiplying the number of contracts by the size of

the contract, in contract units (taking into account any multiplier

specified in the contract, by the current market price per unit, for

each such option position by multiplying the number of contracts by the

size of the contract, adjusted by its delta, in contract units (taking

into account any multiplier specified in the contract, by the strike

price per unit, for each such retail forex transaction, by calculating

the value in U.S. Dollars of such transaction, at the time the

transaction was established, excluding for this purpose the value in

U.S. Dollars of offsetting long and short transactions, if any, and for

any cleared swap by the value as determined consistent with the terms

of part 45 of the Commission's regulations; and

(2) The person may net futures contracts with the same underlying

commodity across designated contract markets and foreign boards of

trade; and swaps cleared on the same designated clearing organization

where appropriate; and

* * * * *

(b) * * *

(2) * * *

(ii) Contain the section number pursuant to which the operator is

filing the notice (i.e., Sec. 4.13(a)(1), (2), or (3)) and represent

that the pool will be operated in accordance with the criteria of that

paragraph; and

* * * * *

(4) Annual Notice. Each person who has filed a notice of exemption

from registration under this section must affirm on an annual basis the

notice of exemption from registration, withdraw such exemption due to

the cessation of activities requiring registration or exemption

therefrom, or withdraw such exemption and apply for registration within

30 days of the calendar year end through National Futures Association's

electronic exemption filing system.

* * * * *

(e) * * *

(2) If a person operates one or more commodity pools described in

paragraph (a)(3) of this section, and one or more commodity pools for

which it must be, and is, registered as a commodity pool operator, the

person is exempt from the requirements applicable to a registered

commodity pool operator with respect to the pool or pools described in

paragraph (a)(3) of this section; Provided, That the person:

* * * * *

0

5. In Sec. 4.14:

0

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

0

b. Redesignate paragraph (a)(8)(iii)(D) as (a)(8)(iii)(E) and add a new

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

The revision and addition read as follows:

Sec. 4.14 Exemption from registration as a commodity trading adviser.

* * * * *

(a) * * *

[[Page 11285]]

(8) * * *

(i) * * *

(D) A commodity pool operator who has claimed an exemption from

registration under Sec. 4.13(a)(3), or, if registered as a commodity

pool operator, who may treat each pool it operates that meets the

criteria of Sec. 4.13(a)(3) as if it were not so registered; and

* * * * *

(iii) * * *

(D) Annual notice. Each person who has filed a notice of exemption

from registration under this section must affirm on an annual basis the

notice of exemption from registration, withdraw such exemption due to

the cessation of activities requiring registration or exemption

therefrom, or withdraw such exemption and apply for registration within

30 days of the calendar year end through National Futures Association's

electronic exemption filing system.

* * * * *

0

6. In Sec. 4.24, add paragraph (b)(5) to read as follows:

Sec. 4.24 General disclosures required.

* * * * *

(b) * * *

(5) If the pool may engage in swaps, the Risk Disclosure Statement

must further state:

SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A

VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A

PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE

TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS

TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,

COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL

RISK.

HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE

LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY

LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN

VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF

AN UNDERLYING OR RELATED MARKET FACTOR.

IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH

A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP

TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE

ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED

TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL

OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE

POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS

SCHEDULED TERMINATION DATE.

* * * * *

0

7. In Sec. 4.34, add paragraph (b)(4) to read as follows:

Sec. 4.34 General disclosures required.

* * * * *

(b) * * *

(4) If the commodity trading advisor may engage in swaps, the Risk

Disclosure Statement must further state:

SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A

VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A

PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE

TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS

TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,

FUNDING RISK, AND OPERATIONAL RISK.

HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE

LIQUIDITY RISK, WHICH MAY RESULT IN YOUR ABILITY TO WITHDRAW YOUR FUNDS

BEING LIMITED. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL

GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE

VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.

IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH

A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP

TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE

ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED

TERMS. THEREFORE, IT MAY NOT BE POSSIBLE TO MODIFY, TERMINATE, OR

OFFSET YOUR OBLIGATIONS OR YOUR EXPOSURE TO THE RISKS ASSOCIATED WITH A

TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.

* * * * *

0

8. Effective July 2, 2012, revise Sec. 4.27, as added November 16,

2011, at 76 FR 71114, and effective March 31, 2012 to read as follows:

Sec. 4.27 Additional reporting by advisors of certain large commodity

pools.

(a) General definitions. For the purposes of this section:

(1) Commodity pool operator or CPO has the same meaning as

commodity pool operator defined in section 1a(11) of the Commodity

Exchange Act;

(2) Commodity trading advisor or CTA has the same meaning as

defined in section 1a(12);

(3) Direct has the same meaning as defined in section 4.10(f);

(4) Net asset value or NAV has the same meaning as net asset value

as defined in section 4.10(b);

(5) Pool has the same meaning as defined in section 1(a)(10) of the

Commodity Exchange Act;

(6) Reporting period means the reporting period as defined in the

forms promulgated hereunder;

(b) Persons required to report. A reporting person is:

(1) Any commodity pool operator that is registered or required to

be registered under the Commodity Exchange Act and the Commission's

regulations thereunder; or

(2) Any commodity trading advisor that is registered or required to

be registered under the Commodity Exchange Act and the Commission's

regulations thereunder.

(c) Reporting. (1) Except as provided in paragraph (c)(2) of this

section, each reporting person shall file with the National Futures

Association, a report with respect to the directed assets of each pool

under the advisement of the commodity pool operator consistent with

appendix A to this part or commodity trading advisor consistent with

appendix C to this part.

(2) All financial information shall be reported in accordance with

generally accepted accounting principles consistently applied.

(d) Investment advisers to private funds. Except as otherwise

expressly provided in this section, CPOs and CTAs that are dually

registered with the Securities and Exchange Commission and are required

to file Form PF pursuant to the rules promulgated under the Investment

Advisers Act of 1940, shall file Form PF with the Securities and

Exchange Commission in lieu of filing such other reports with respect

to private funds as may be required under this section. In addition,

except as otherwise expressly provided in this section, CPOs and CTAs

that are dually registered with the Securities and

[[Page 11286]]

Exchange Commission and are required to file Form PF pursuant to the

rules promulgated under the Investment Advisers Act of 1940, may file

Form PF with the Securities and Exchange Commission in lieu of filing

such other reports with respect to commodity pools that are not private

funds as may be required under this section. Dually registered CPOs and

CTAs that file Form PF with the Securities and Exchange Commission will

be deemed to have filed Form PF with the Commission for purposes of any

enforcement action regarding any false or misleading statement of a

material fact in Form PF.

(e) Filing requirements. Each report required to be filed with the

National Futures Association under this section shall:

(1)(i) Contain an oath and affirmation that, to the best of the

knowledge and belief of the individual making the oath and affirmation,

the information contained in the document is accurate and complete;

Provided, however, That it shall be unlawful for the individual to make

such oath or affirmation if the individual knows or should know that

any of the information in the document is not accurate and complete and

(ii) Each oath or affirmation must be made by a representative duly

authorized to bind the CPO or CTA.

(2) Be submitted consistent with the National Futures Association's

electronic filing procedures.

(f) Termination of reporting requirement. All reporting persons

shall continue to file such reports as are required under this section

until the effective date of a Form 7W filed in accordance with the

Commission's regulations.

(g) Public records. Reports filed pursuant to this section shall

not be considered Public Records as defined in Sec. 145.0 of this

chapter.

0

9. Revise appendix A to part 4 to read as follows:

Appendix A to Part 4--Form CPO-PQR

BILLING CODE 6351-01-P

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0

10. Add appendix C to part 4 to read as follows:

Appendix C to Part 4--Form CTA-PR

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BILLING CODE 6351-01-C

PART 145--COMMISSION RECORDS AND INFORMATION

0

11. The authority citation for part 145 continues to read as follows:

Authority: Publ. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80

Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.

1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389

(5 U.S.C. 4a(j)).

0

12. In Sec. 145.5, revise paragraphs (d)(1)(viii) and (h) to read as

follows:

Sec. 145.5 Disclosure of nonpublic records.

* * * * *

(d) * * *

(1) * * *

(viii) The following reports and statements that are also set forth

in paragraph (h) of this section, except as specified in 17 CFR

1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant

to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR

pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to

17 CFR 31.13; the accountant's report on material inadequacies filed in

accordance with 17 CFR 1.16(c)(5); all reports and statements required

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

(A)(1) The following portions of Form CPO-PQR required to be filed

pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d);

Question 3, subparts (g) and (h); Question 9; Question 10, subparts

(b), (c), (d), (e), and (g); Question 11; Question 12; and Schedules B

and C;

(2) The following portions of Form CTA-PR required to be filed

pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d);

* * * * *

(h) Contained in or related to examinations, operating, or

condition reports prepared by, on behalf of, or for the use of the

Commission or any other agency responsible for the regulation or

supervision of financial institutions, including, but not limited to

the following reports and statements that are also set forth in

paragraph (d)(1)(viii) of this section, except as specified in 17 CFR

1.10(g)(2) and 17 CFR 31.13(m): Forms 1-FR required to be filed

pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms

1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed

pursuant to 17 CFR 31.13; the accountant's report on material

inadequacies filed in accordance with 17 CFR 1.16(c)(5); all reports

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

(1) The following portions of Form CPO-PQR required to be filed

pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d);

Question 3, subparts (g) and (h); Question 9; Question 10, subparts

(b), (c), (d), (e), and (g); Question 11; Question 12; and Question 13;

and Schedules B and C;

(2) The following portions of Form CTA-PR required to be filed

pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d); and

* * * * *

PART 147--OPEN COMMISSION MEETINGS

0

13. The authority citation for part 147 continues to read as follows:

Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.

552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.

4a(j) (Supp. V, 1975)).

0

14. In Sec. 147.3, revise paragraphs (b)(4)(i)(H) and (b)(8) to read

as follows:

Sec. 147.3 General requirement of open meetings; grounds upon which

meetings may be closed.

* * * * *

(b) * * *

(4)(i) * * *

(H) The following reports and statements that are also set forth in

paragraph (b)(8) of this section, except as specified in 17 CFR

1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant

to 17 CFR 1.10;

[[Page 11343]]

FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR

1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the

accountant's report on material inadequacies filed in accordance with

17 CFR 1.16(c)(5); all reports and statements required to be filed

pursuant to 17 CFR 1.17(c)(6); the following portions of Form CPO-PQR

required to be filed pursuant to 17 CFR 4.27: Schedule A: Question 2,

subparts (b) and (d); Question 3, subparts (g) and (h); Question 9;

Question 10, subparts (b), (c), (d), (e), and (g); Question 11; and

Question 12; and Schedules B and C; and the following portions of Form

CTA-PR required to be filed pursuant to 17 CFR 4.27: Question 2,

subparts (c) and (d);

* * * * *

(8) Disclose information contained in or related to examination,

operating, or condition reports prepared by, on behalf of, or for the

use of the Commission or any other agency responsible for the

regulation or supervision of financial institutions, including, but not

limited to the following reports and statements that are also set forth

in paragraph (b)(4)(i)(H) of this section, except as specified in 17

CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed

pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms

1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR pursuant to 17 CFR 31.13;

the accountant's report on material inadequacies filed in accordance

with 1.16(c)(5); and all reports and statements required to be filed

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

(i) The following portions of Form CPO-PQR required to be filed

pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D;

Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),

(e), and (g); Question 11; Question 12; and Question 13; and Schedules

B and C; and

(ii) The following portions of Form CTA-PR required to be filed

pursuant to 17 CFR 4.27: Schedule B: Question 4, subparts (b), (c),

(d), and (e); Question 5; and Question 6;

* * * * *

Issued in Washington, DC, on February 8, 2012, by the

Commission.

David A. Stawick,

Secretary of the Commission.

Note: The following appendices will not appear in the Code of

Federal Regulations:

Appendices to Commodity Pool Operators and Commodity Trading Advisors:

Amendments to Compliance Obligations--Commission Voting Summary and

Statements of Commissioners

Appendix 1--Commission Voting Summary

On this matter, Chairman Gensler, Commissioners Chilton, O'Malia

and Wetjen voted in the affirmative; Commissioners Sommers voted in

the negative.

Appendix 2--Statement of Chairman Gary Gensler

I support the final rule increasing the transparency to

regulators of commodity pool operators (CPOs) and commodity trading

advisors (CTAs) acting in the derivatives marketplace--for both

futures and swaps. This rule reinstates the regulatory requirements

in place prior to 2003 for registered investment companies that

trade over a de minimis amount in commodities or market themselves

as commodity funds. This rule enhances transparency in a number of

ways and increases customer protections through amendments to the

compliance obligations for CPOs and CTAs.

First, these amendments are consistent with the Dodd-Frank Wall

Street Reform and Consumer Protection Act (Dodd-Frank Act), as these

changes bring the swaps activities of CPOs and CTAs under the CFTC's

oversight. If CPOs and CTAs are trading swaps, they will have to

register with the Commission, giving their customers the benefit of

the protections in the Dodd-Frank Act.

Second, these amendments addressed the concerns raised by the

National Futures Association (NFA) in its petition requesting the

Commission to reinstate Commission oversight of CPOs and CTAs for

futures that existed prior to 2003. Since 2003, the participation of

registered investment companies in commodity futures, swaps, and

options markets has increased significantly. Some registered

investment companies have been marketing commodity pools to retail

investors and are operating without the supervision of the CFTC and

the NFA. In addition, foreign advisors with U.S. customers have been

exempt from supervision since 2003. The final rule reinstates the

protections that futures customers of CPOs and CTAs had prior to the

exemptions the Commission granted in 2003. It is critical to bring

the pools that have been in the dark since 2003 back into the light

so their customers can benefit from the CFTC's oversight.

Third, the final rule increases transparency to regulators by

enhancing data available to the Commission and the NFA, providing a

much more complete understanding of how these pools are operating in

the derivatives markets for futures and swaps. The data, which CPOs

and CTAs will submit through Form CPO-PQR and Form CTA-PR, will help

the Commission develop further regulatory protections for customers

of these entities, market participants and the American public.

The Commission benefited from significant public comment on this

rule. Some commenters raised questions about the definition of bona

fide hedging under section 4.5, in particular that risk mitigation

positions were not included in such bona fide hedging transactions.

The final rule provides treatments consistent with the Commission's

treatment of registered investment companies prior to 2003, and, in

fact, this rule reinstates criteria in place before 2003. The

Commission determined not to include risk management positions

within the bona fide hedging exemption because many, if not most,

positions in a portfolio could potentially be characterized as

serving a risk management purpose. This would result in an overly

broad exclusion from the definition of CPO.

Further, bona fide hedging transactions are excluded from

determining whether a registered investment company has to register

under 4.5, though these transactions are not excluded when

determining whether commodity pools not registered with the

Securities and Exchange Commission (SEC) will be required to

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

consideration of bona fide hedging positions under 4.13(a)(3), the

Commission previously stated its position that bona fide hedging

positions should not be excluded within the de minimis exemption in

4.13(a)(3) when it proposed that rule. In the proposal for

4.13(a)(3) (68 FR 12622, 12627), the Commission stated its belief

that 4.13(a)(3) should not differentiate between trading for bona

fide hedging and non-hedging purposes because the rule is intended

to apply to strictly de minimis situations, where trading is limited

regardless of purpose. Conversely, the exclusion under 4.5 was not

solely determined by the de minimis nature of the trading, but

rather the combination of the de minimis amount of trading and the

fact that the investment vehicle was otherwise regulated by the SEC.

See 67 FR 65743.

Several commenters asked the Commission to reconsider the

treatment of family offices under these rules. The Commission will

continue to permit family offices to rely on existing guidance for

family offices seeking relief from the requirements of Part 4. The

Commission also is directing staff to look into the possibility of

adopting a family offices exemption that is similar to the rule

recently adopted by the SEC and is soliciting comment from the

public.

Appendix 3--Dissenting Statement of Commissioner Jill E. Sommers

The amendments to the Commission's Part 4 regulations we are

adopting with these final rules were prompted by a petition from the

NFA seeking to reinstate certain operating restrictions that were in

place prior to 2003 for entities excluded from the definition of CPO

under Sec. 4.5. Had we limited the amendments to address the issues

raised by the NFA's petition, we could have met our regulatory

objectives without disrupting a significant number of business

structures. I would have supported such an approach. As it is, we

have gone far beyond what was needed to resolve NFA's concerns and I

must dissent.

Section 404 of the Dodd-Frank Act requires certain advisors of

private funds to register

[[Page 11344]]

with the SEC and to report to the SEC information ``as necessary and

appropriate * * * for the protection of investors or for the

assessment of systemic risk by the Financial Stability Oversight

Council.'' With the finalization of these rules, the Commission has

determined that the ``sources of risk delineated in the Dodd-Frank

Act with respect to private funds are also presented by commodity

pools'' and that registration of certain previously exempt or

excluded CPOs is therefore necessary ``to assess the risk posed by

such investment vehicles in the derivatives markets and the

financial system generally.'' The Commission states that the data it

will collect as a consequence of registration is necessary ``in

order to fulfill the Commission's systemic risk mitigation

mandate.'' While I agree that the Commission has a regulatory

interest in the activities of commodity pools, this overstates the

case and gives a false impression that the data we gather will

enable us to actively monitor pools for systemic risk, that we have

the resources to do so, and that we will do so. Moreover, Congress

was aware of the existing exclusions and exemptions for CPOs when it

passed Dodd-Frank and did not direct the Commission to narrow their

scope or require reporting for systemic risk purposes. The

Commission justifies the new rules as a response to the financial

crisis of 2007 and 2008 and the passage of Dodd-Frank, yet there is

no evidence to suggest that inadequate regulation of commodity pools

was a contributing cause of the crisis, or that subjecting entities

to a dual registration scheme will somehow prevent a similar crisis

in the future.

I could nevertheless support a revision of the current

exclusions and exemptions that would give us access to information

we determine is necessary to carry out our regulatory mission if

supported by a sufficient cost-benefit analysis. The rationale

underlying a number of the decisions encompassed by the rules is

sorely lacking, however, and is not supported by the existing cost-

benefit analysis. The Commission concludes, for example, that bona

fide hedging transactions are unlikely to present the same level of

risk as risk mitigation positions because they are offset by

exposure in the physical markets. A risk mitigation position is, by

definition, a position that mitigates or ``offsets'' exposure in

another market. Both are hedges and there is no explanation as to

why the Commission believes that bona fide hedges are less risky.

The preamble states that the alternative net notional test under

Sec. 4.5 is meant to be consistent with the net notional test set

forth in Sec. 4.13(a)(3), except the Sec. 4.5 test allows

unlimited use of futures, options or swaps for bona fide hedging

purposes, while the Sec. 4.13(a)(3) test does not. No explanation

is given for the differing treatment. We reject an exemption for

foreign advisors similar to the exemption allowed by the Investment

Advisors Act of 1940 under Section 403 of Dodd-Frank because we lack

information on the activities of foreign pools, even though, as some

commenters observed, this may result in nearly all non-U.S. based

CPOs operating a pool with at least one U.S. investor having to

register and report all of their derivatives activities to the

Commission, including activity that may be subject to comparable

foreign regulation. While we leave open the possibility of future

exemptions based on information we collect on Forms CPO-PQR and CTA-

PR, the more likely result of this new policy is that U.S.

participants will be excluded from investing in foreign pools. The

Commission may have good reasons for this course of action, but no

rationale is given.

Our ``split the baby'' approach on the issue of family offices

is illogical. The Commission states that it is ``essential that

family offices remain subject to the data collection requirements''

to fulfill our regulatory mission and to develop a comprehensive

view of such firms to determine whether an exemption may be

appropriate in the future. At the same time, we are allowing an

unknown percentage of family offices to rely on previously issued

interpretive letters to avoid registration, reporting and other

compliance obligations. This makes no sense. We either need this

data or we do not. Family offices may fit within the parameters of

the existing interpretive letters, in which case we will not develop

the comprehensive view we are seeking. On the other hand, we ignore

the fact that we have consistently found, for more than three

decades, that family offices are not the type of collective

investment vehicle that Congress intended to regulate in adopting

the CPO and commodity pool definitions, a finding that Congress

confirmed in Sec. 409 of Dodd-Frank with respect to investment

advisors. Moreover, our repeal of the family office exemption is

inconsistent with the exclusion recently adopted by the SEC pursuant

to Sec. 409 at a time when Dodd-Frank has urged us to harmonize our

rules to the fullest extent possible.

It is unlikely, in my view, that the cost-benefit analysis

supporting the rules will survive judicial scrutiny if challenged.

And, although I am relieved that the recordkeeping, reporting and

disclosure obligations required by the rules will be delayed until

after proposed harmonization rules are finalized, the rules contain

a confusing and needlessly complicated set of compliance dates for

other provisions.

While I have felt that many of the rules we have finalized in

the last few months were far too overreaching, our justification

that a particular rule was required by statute was largely accurate.

With regard to these rules the same justification does not hold

true. These rules are not mandated by Dodd-Frank, and I do not

believe that the benefits articulated within the final rules

outweigh the substantial costs to the fund industry. We admit in the

preamble that we do not have enough information to determine the

validity of requiring some of these entities to register. A more

prudent approach would have been to gather the information first and

then decide what constitutes sound policy. For these and other

reasons, I cannot support the final rules.

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

BILLING CODE 6351-01-P

Last Updated: February 24, 2012