2016-28388

[Federal Register Volume 81, Number 227 (Friday, November 25, 2016)]

[Rules and Regulations]

[Pages 85147-85156]

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

[FR Doc No: 2016-28388]

=======================================================================

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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AE47

Commodity Pool Operator Financial Reports

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

is amending certain of its regulations applicable to the financial

reports that each person registered or required to be registered as a

commodity pool operator (CPO) must provide for each commodity pool that

it operates. These amendments: Permit the use of additional alternative

generally accepted accounting principles, standards or practices;

provide relief from the Annual Report audit requirement under certain

circumstances; and make clear that an audited Annual Report must be

distributed and submitted at least once during the life of a pool.

DATES: Effective December 27, 2016.

FOR FURTHER INFORMATION CONTACT: Christopher W. Cummings, Special

Counsel, 202-418-5445, [email protected], or Barbara S. Gold,

Associate Director, 202-418-5441, [email protected], Division of Swap

Dealer and Intermediary Oversight, Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st NW., Washington, DC

20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Part 4 of the Commission's Regulations

Part 4 of the Commission's regulations governs the operations and

activities of CPOs.\1\ It requires each CPO registered or required to

be registered with the Commission: To deliver to each participant in

its commodity pool a Disclosure Document for the pool containing

specified information (Regulations 4.21, 4.24, 4.25 and 4.26); to

distribute to each participant periodic unaudited Account Statements

for the pool (Regulation 4.22(a)) and an audited Annual Report for the

pool (Regulation 4.22(c)); to file certain additional financial reports

for the pool (Regulation 4.27); and to make and keep specified books

and records (Regulation 4.23). Additionally, part 4 prohibits certain

activities on the part of all CPOs (Regulations 4.20 and 4.41) and

provides for various CPO definitional exclusions (Regulation 4.5), CPO

registration exemptions (Regulation 4.13), and compliance exemptions

from otherwise applicable CPO requirements (Regulations 4.7, 4.12(b),

and 4.12(c)).

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

\1\ Section 1a(11) of the Commodity Exchange Act (Act or CEA)

defines the term ``commodity pool operator'' and CEA Section 4m(1)

generally requires each person who comes within the CPO definition

to register as a CPO with the Commission. The Act is found at 7

U.S.C. 1 et seq. (2012). The Commission's regulations are found at

17 CFR Ch. I (2016). Both the Act and the Commission's regulations

are accessible through the Commission's Web site, http://www.cftc.gov.

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

B. The Proposal and the Amendments

Over the years, and pursuant to authority delegated to it by

Regulation 140.93, Commission staff has provided exemptive relief from

specific part 4 requirements on a case-by-case basis.\2\ On August 5,

2016, the Commission proposed to codify certain of these exemptions as

applicable to the Annual Report (Proposal).\3\ In response to the

comments received, the Commission is adopting as proposed certain

amendments to its regulations applicable to the Annual Report audit

requirement. Additionally, in response to the comments, the Commission

is adopting various other amendments to its regulations applicable to

the Annual Report and other CPO financial reports. Each of these

amendments (collectively, the Amendments), is intended to provide

relief to CPOs, under specified standards, from otherwise applicable

requirements.

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

\2\ These letters were issued by the Commission's Division of

Swap Dealer and Intermediary Oversight (DSIO) and its predecessors,

the Division of Clearing and Intermediary Oversight and the Division

of Trading and Markets.

Regulation 140.93 currently delegates to the Director of DSIO

``all functions reserved to the Commission'' in Regulation 4.12(a)--

which provides that the Commission may exempt any person or any

class or classes of persons from any provision of part 4 if it finds

that the exemption is not contrary to the public interest and the

purposes of the provisions from which the exemption is sought and,

further, that the Commission may grant the exemption subject to such

terms and conditions as it may find appropriate.

\3\ 81 FR 51828. Part 4 contains many similar provisions

applicable to commodity trading advisors (CTAs). The Proposal did

not also pertain to CTAs, however, because CPOs are required to

distribute Annual Reports and CTAs are not subject to any such

requirement.

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

As is discussed more fully below, these Amendments provide for the

use of certain additional alternative generally accepted accounting

principles, practices or standards (each an Additional Alternative

GAAP) in Annual Reports and periodic Account Statements--whether

distributed pursuant to Regulation 4.22 or Regulation 4.7--and in Form

CPO-PQR. The Amendments provide for relief

[[Page 85148]]

from the Annual Report audit requirement where: (1) The pool's first

fiscal year is four months or less, as measured by the date on which

the CPO first receives funds, securities or other property from a

person who is not a pool ``insider;'' (2) no more than 15 participants

in the pool during its first fiscal year are persons who are not pool

insiders, and their aggregate gross capital contributions to the pool

during that time do not exceed $3 million; (3) a pool insider includes,

among others, the pool's CPO, the pool's CTA, any person controlling,

controlled by, or under common control with the CPO or CTA, and any

principal of the foregoing; (4) the CPO obtains from each participant

other than the insiders listed in (3) above a waiver of their right to

timely receive an audited Annual Report for the pool's first fiscal

year (which waiver the CPO may obtain in advance from a pool

participant by including the waiver in the pool's subscription

agreement or other agreement between the participant and the pool, and

which waiver must be in a form substantially as set forth in the

applicable regulation); and (5) the CPO distributes an audited Annual

Report for the combined time period of the short first fiscal year plus

the subsequent first twelve-month fiscal year. Additionally, the

Amendments provide that a CPO is not required to distribute an audited

Annual Report for any year where the pool had as participants only the

insiders listed in (3) above, provided the CPO obtains a waiver of

their right to receive an audited Annual Report from each such insider

participant. Finally, and notwithstanding the availability of any of

the foregoing relief from the audit requirement of the Annual Report,

the Amendments make clear that regardless of the situation--i.e.,

whether the pool is comprised solely of insiders who have a close

relationship with the CPO, it has other insiders as participants, or it

has one or more participants who are not an insider--and regardless of

whether the CPO has previously qualified for relief from the Annual

Report audit requirement, the CPO must distribute an audited Annual

Report at least once during the life of the pool.

C. Additional Relief

In adopting the standards set forth in these amendments, the

Commission has endeavored to balance the needs of pool participants--

particularly those who are not closely involved with the pool's

operation--for accurate and reliable financial information with the

expense of converting non-United States (U.S.) financial statements to

U.S. generally accepted accounting principles (U.S. GAAP) or the

expense of obtaining an audit of an Annual Report by an independent

public accountant for a relatively short period of time. Thus, although

CPOs may continue to request from staff exemptive relief from financial

reporting requirements, the Commission intends that staff restrict the

issuance of any such relief from the standards it is adopting today to

exceptional circumstances involving unique situations.\4\

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

\4\ Regulation 140.99 governs requests for staff exemptive, no-

action and interpretative letters.

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

II. Comments and Responses

A. In General

The Commission received five comment letters on the Proposal, as

follows: One from a person registered as a CTA and an investment

adviser; one from a registered futures association; two from

organizations that represent the global alternative investment

industry; and one from a law firm that represents CPOs and CTAs.\5\ On

the whole, the commenters supported the Proposal. Additionally,

commenters recommended further relief from Annual Report requirements,

and from other CPO financial reporting requirements.\6\ For the reasons

provided below, the Commission has included certain of these

recommendations in the amendments being published today but has

declined to include certain other recommendations.

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

\5\ See, respectively, the following: Letter dated September 19,

2016, from Ellen Needham, President, SSGA Funds Management, Inc.

(SSGA); Letter dated September 20, 2016, from Thomas W. Sexton III,

Senior Vice President, General Counsel and Secretary, National

Futures Association (NFA); Letter dated September 16, 2016, from

Stuart J. Kaswell, Executive Vice President & Managing Director,

General Counsel, Managed Funds Association (MFA); Letter dated

September 20, 2016, from Jiri Krol, Deputy Chief Executive Officer

and Global Head of Government Affairs, Alternative Investment

Management Association (AIMA); and Letter dated September 20, 2016,

from Rita M. Molesworth, Esq., Willkie Farr & Gallagher LLP (Willkie

Farr). These comment letters currently are available on the

Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1725.

The Proposal as initially published required comments to be

received by the Commission on or before September 6, 2016. The

Commission subsequently extended the comment period to September 20,

2016. See 81 FR 61147 (Sep. 6, 2016).

\6\ Moreover, one of the commenters recommended including in the

regulations at issue various amendments relative to fund of funds'

operations and to situations where a pool invests in illiquid

assets--for example, providing additional time for the CPO of a fund

of funds to distribute periodic Account Statements. See Willkie Farr

comment letter. However, comments relative to fund of funds'

operations or to situations where a pool invests in illiquid assets

are outside the scope of this rulemaking, and as such, the

Commission is not addressing them in this rulemaking.

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

B. Regulation 4.22(d)(2): Use of Additional Alternative Generally

Accepted Accounting Principles, Practices or Standards

1. In General

The Commission proposed to amend Regulation 4.22(d)(2) to permit

the CPO of a pool organized outside the U.S. in a jurisdiction that

uses the accounting principles, standards or practices followed in the

United Kingdom, Ireland, Luxembourg or Canada to present and compute

the financial statements in the Annual Report for the CPO's pool in

accordance with the accounting principles, standards or practices of

the jurisdiction in which the pool was organized. The proposed

provision was an expansion of the provision in Regulation 4.22(d)(2)

pursuant to which a CPO of a pool organized outside the U.S. could use

International Financial Reporting Standards (IFRS). As the Commission

explained, this proposed amendment was supported by its staff's

experience in providing relief to use an Additional Alternative GAAP on

a case-by-case basis.\7\ The Commission received fully supportive

comments on this proposed amendment to Regulation 4.22(d)(2) \8\ and,

accordingly, is adopting the amendment as proposed.

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

\7\ See 81 FR at 51829.

\8\ See MFA and SSGA comment letters.

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

2. Use of an Additional Alternative GAAP in Other Required CPO

Financial Reports

The Commission also received several comments urging that the

Additional Alternative GAAPs be available for use in other CPO

financial reports,\9\ specifically, in Regulation 4.7(b)(2) account

statements and in Form CPO-PQR. Regulation 4.7 provides certain relief

to the CPO of a commodity pool in which the participants are

exclusively ``qualified eligible persons,'' as that term is defined in

the regulation. For example, Regulation 4.7(b)(2) provides relief from

certain of the requirements of Regulations 4.22(a) and (b) regarding

periodic Account Statements and Regulation 4.7(b)(3) provides relief

from certain of the requirements of Regulation 4.22(c) regarding Annual

Reports. One of the persons commenting on the Proposal recommended that

the Commission amend Regulation 4.7(b)(2) so as to permit a CPO that

has elected an Additional Alternative GAAP to be able to use that

Additional Alternative GAAP in presenting and computing the

[[Page 85149]]

periodic statements of a pool for which a CPO has claimed relief under

Regulation 4.7(b).\10\ As this commenter noted, Regulation 4.7(b)(2)

requires the use of U.S. GAAP in presenting and computing periodic

statements, and Regulation 4.7(b)(2)(v) specifically permits a CPO that

has elected pursuant to Regulation 4.22(d)(2) to use IFRS for its

Annual Report to present and compute periodic statements in accordance

with IFRS. Accordingly, absent the requested amendment, a CPO that had

claimed relief under Regulation 4.7 and that also elected to use an

Additional Alternative GAAP would not be able to prepare and compute

the financial statements in its pool's Annual Report and its pool's

periodic statements in a consistent manner (the Annual Report would be

in accordance with an Additional Alternative GAAP, while the periodic

statements could only be in accordance with U.S. GAAP or IFRS).\11\ The

Commission agrees with this recommendation, because it will enable CPOs

to maintain consistent books and records and should facilitate review

of the pool's operations by both participants and regulators.

Accordingly, the Commission, has amended Regulation 4.7(b)(2)(v) to

permit the use of an Additional Alternative GAAP for periodic financial

statements prepared and distributed for a pool for which the CPO has

claimed relief under Regulation 4.7(b). In this regard, the Commission

notes that Regulation 4.22(d)(2)(i) permits the CPO of a pool that

meets the criteria specified therein to use IFRS (and following

adoption of the amendments to Regulation 4.22(d)(2), any Additional

Alternative GAAP) to present and compute the pool's Annual Report,

whether the CPO is distributing the Annual Report pursuant to

Regulation 4.22(c) or Regulation 4.7(b)(3). Accordingly, it has not

been necessary to amend Regulation 4.7 to permit a CPO claiming relief

under Regulation 4.7 and under Regulation 4.22(d)(2) to use an

Additional Alternative GAAP to present and compute Annual Reports.

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

\9\ See MFA, NFA and Willkie Farr comment letters.

\10\ See NFA comment letter.

\11\ Where, however, a CPO has not claimed exemption under

Regulation 4.7, Regulation 4.22(a)(6) already provides that if the

CPO meets the conditions of Regulation 4.22(d)(2)(i) and files the

required notice, the CPO may follow the same accounting treatment

with respect to the computation and presentation of the account

statement. Accordingly, the issue raised by the commenter only

arises in the context of Regulation 4.7.

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

The same commenter and two other commenters recommended that a CPO

electing to use an Additional Alternative GAAP should be able to also

use that Additional Alternative GAAP in connection with the preparation

of the CPO's Form CPO-PQR (Quarterly Report for Commodity Pool

Operators).\12\ The Commission also agrees with this recommendation, as

it similarly will facilitate computation of, and comparison among, CPO

financial reports. Accordingly, the Commission is amending Regulation

4.27(c)(2) to provide that a CPO who has elected to use Alternative

Additional GAAP for its pool's Annual Report may also use that

Alternative Additional GAAP in connection with reporting financial

information on Form CPO-PQR.\13\

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

\12\ See NFA, MFA and Willkie Farr comment letters.

\13\ Form CPO-PQR currently provides at Item 9 of the

Instructions that All financial statements in this Report must be

presented and computed in accordance with U.S. GAAP consistently

applied. The Commission intends to begin the process of amending

Form CPO-PQR and its instructions upon publication of this Federal

Register release. In this regard, and as amended, Regulation

4.27(c)(2) provides that notwithstanding anything in the Form CPO-

PQR or its instructions to the contrary, a CPO that meets the

conditions to use an Additional Alternative GAAP and has filed

notice to use it may use that Additional Alternative GAAP in its

Form CPO-PQR.

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

C. Regulation 4.22(g)(2): Audit Requirement for a Pool's First Fiscal

Year

1. In General

The Commission proposed to amend Regulation 4.22(g)(2) by making an

exemption from the requirement to have the first fiscal year Annual

Report audited available thereunder for the CPO of a pool for which the

first fiscal year was three months or less and where the participants

and their contributions meet certain limits, discussed below.

Referencing prior staff relief, the Commission explained that ``where

there are a limited number of participants in the pool and a limited

amount of funds have been committed . . . the cost of an audit for the

short period of time of the pool's operation would likely be unduly

burdensome.'' \14\ As proposed, an unaudited Annual Report for the

short first fiscal year would be distributed, and the subsequent

audited Annual Report for the first twelve-month fiscal year would also

cover that first short fiscal year. Most of the comments that the

Commission received on the Proposal addressed this provision, and

though generally favorable, some raised additional issues. In response

to these comments, the Commission is adopting the amendments to

Regulation 4.22(g)(2) it proposed, with certain modifications.

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

\14\ See 81 FR at 51829. The Commission notes that none of the

commenters on the Proposal offered any empirical data regarding the

cost of an audit for a three-month fiscal year or the difference, if

any, in the cost for other partial-year periods.

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

2. Stub Period

The Commission proposed to measure the pool's first fiscal year,

for purposes of determining whether it met the proposed three-month

criterion, from the date of formation of the pool (the stub

period).\15\ The Commission explained that it had proposed this date

``to ensure that all CPOs and their pool participants are on a level

playing field with respect to both what information the Annual Report

must contain for the pool's first fiscal year, and the requirement that

such information be audited.'' \16\

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

\15\ Regulation 4.22(g)(1) provides that a pool is deemed to be

formed as of the date the pool operator first receives funds,

securities or other property for the purchase of an interest in the

pool.

\16\ See 81 FR at 51830.

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

One commenter asked the Commission to consider whether using this

date would unduly restrict a CPO's ability to avail itself of the

relief.\17\ Another commenter stated that the stub period should be

expanded to six months, and that it be measured from the day that the

pool began trading.\18\ Still another commenter recommended either

measuring the stub period from the day the pool began trading or

expanding the stub period to six months from the date on which the pool

first received subscription amounts from non-insiders (i.e., from those

persons whose participation and capital contributions would be counted

for purposes of determining eligibility for the exemption).\19\ The

Commission believes that pool participants should have access to

audited financial information about the pool as promptly as practical,

but that insiders such as the CPO, the pool's CTA and their principals

and affiliates (who may have direct access to the pool's books and

trading records) have less pressing need for audited financial

statements or to have them quickly. Moreover, a pool may hold

participant money for a substantial period of time before it enters its

first trade, and its participants should be able to know to what use

their money has, in the meantime, been put. Thus, in response to the

foregoing comments, the Commission has decided to adopt a four-month

stub period and to calculate the stub period from the day on which the

CPO first receives funds,

[[Page 85150]]

securities or other property from a person who is not a pool insider.

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

\17\ See NFA comment letter.

\18\ See AIMA comment letter; see also, NFA comment letter.

\19\ See MFA comment letter. Pool insiders are discussed below,

at Paragraph C.4 of this section.

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

3. Size of the Pool

The Commission had also proposed that in order to be eligible for

the audit requirement exemption, the CPO may have accepted no more than

$1,500,000 in aggregate gross capital contributions from non-insiders.

One commenter urged the Commission to ignore the size of the pool.\20\

Another recommended that the Commission either ignore the size of the

pool, or increase the maximum aggregate gross capital contribution

amount to $6 million and require that the pool satisfy either the

proposed 15-participant non-insider limit or the $6 million capital

contribution amount.\21\ After considering these comments, the

Commission has determined to increase the aggregate gross capital

contribution limit from non-insiders to $3 million, and to maintain as

proposed the requirement that the pool meet both the participant and

the (now $3 million) aggregate gross capital contribution limits (from

non-insiders). Based on staff's experience in this area, and in the

absence of any data required by the Commission or provided by the

commenters regarding capital collected during the first four months of

a pool's operation, the Commission believes that this amount ($3

million) strikes a reasonable balance between the amounts advanced in

the Proposal and in the comments thereon, and that this amount will

satisfy the needs of CPOs for stub period relief in the future.

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

\20\ See AIMA comment letter.

\21\ See MFA comment letter.

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

Another commenter asked for clarification as to whether the term

``aggregate gross capital contributions'' as used in the Proposal has

the same meaning as ``aggregate gross capital subscriptions'' as used

in Regulation 4.25(a)(i)(1)(D).\22\ The Commission confirms that both

terms include all capital contributed to the pool, notwithstanding any

subsequent withdrawals.

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

\22\ See Willkie Farr comment letter.

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

4. Insiders

The Proposal included a list of persons who would not be counted as

participants and whose contributions would not be counted in

determining whether the aggregate gross capital contributions received

by the CPO for the pool would exceed the criteria for eligibility for

the proposed audit requirement exemption. As the Commission explained,

those insiders were the same persons whose contributions are not

counted in determining a CPO's eligibility for the registration

exemption for the operator of a family, club or small pool in

Regulation 4.13(a)(2).\23\ Two commenters urged that the list be

expanded--for example, to include any entity that controls, is

controlled by or is under common control with any of the listed

persons.\24\ One of these commenters further suggested that for an

exempt pool under Regulation 4.7, the Commission include among the list

of insiders ``knowledgeable employees'' and certain other qualified

eligible persons.\25\ Upon further consideration of the purpose of this

amendment to Regulation 4.22(g), and in response to these comments, the

Commission has added to the list of insiders any person controlling,

controlled by, or under common control with the pool's CPO or CTA,

along with any principal of the foregoing. As one of the commenters

noted, this augmentation is consistent with the Commission's inclusion

of such persons in other Annual Report regulations.\26\

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

\23\ See 81 FR at 51830.

\24\ See MFA and SSGA comment letters.

\25\ See MFA comment letter.

\26\ See MFA comment letter, referring to Regulation 4.22(c)(8).

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

5. Waivers

Under the Proposal, before a CPO could claim relief from the audit

requirement for the pool's stub period under Regulation 4.22(g)(2), the

CPO would be required to obtain written waivers of the right to receive

an audited Annual Report from each participant who would have been

entitled to receive an audited Annual Report. One commenter made

several recommendations concerning the proposed waiver requirement.\27\

The first was to permit waivers to be obtained ahead of time by

including them in the subscription agreement for the pool or other

agreement with the participant. The Commission believes that this is a

useful suggestion, and has included it in the regulation as adopted.

However, to ensure that the waiver is not obscured or overlooked, the

regulation provides that the waiver must constitute a page separate

from any other text in the agreement, and that the participant must

separately sign and date it. The second recommendation was to eliminate

the proposed prescribed language for the waiver, in favor of simply

stating the information that must be included. In response to this

comment, although the regulation as adopted retains the specified

language, it now provides that the written waiver be in a form

substantially similar to the text. The third recommendation was to not

require a waiver from any person whose participation and contribution

were excluded from the limits of the stub period relief. The Commission

agrees that a waiver should not be required of those participants who

have a particularly close relationship to the pool, and as adopted,

Regulation 4.22(g)(2)(ii)(c)(1) provides that waivers need not be

obtained from the pool's CPO, the pool's CTA, any person controlling,

controlled by, or under common control with the pool's CPO or the

pool's CTA, or any principal of the foregoing.

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

\27\ See id.

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

6. Case-by-Case Relief

Finally, two commenters asked the Commission to confirm that the

staff will continue to entertain case-by-case requests for relief from

the audit requirement with respect to stub period Annual Reports.\28\

As stated, above, the Commission intends that staff restrict the

issuance of any such relief from the standards it is adopting today to

exceptional circumstances involving unique situations.

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

\28\ See AIMA and MFA comment letters.

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

D. Regulation 4.22(c)(7): Unavailability of Audit Requirement Exception

In order to ensure that an audit is conducted at least once during

the life of a commodity pool, the Commission proposed to amend

Regulation 4.22(c)(7)(iii) to make the audit requirement exemption for

the final report upon liquidation of a pool unavailable where the CPO

has not previously distributed an audited Annual Report.\29\ Thus, if a

CPO claimed the stub period relief under amended Regulation 4.22(g)(2),

the CPO could not subsequently claim the relief under Regulation

4.22(c)(7)(iii) for the final report upon liquidation unless in the

intervening time the CPO had distributed at least one audited Annual

Report for the pool. The Commission received one comment on this

proposed amendment, urging it to require instead that the required

waiver include an acknowledgment that the pool participant will not be

receiving any audited Annual Report.\30\ The Commission has not adopted

this recommendation, because it does not believe that the suggested

alternative is consistent with the customer protection goal of the

Annual Report audit requirement--i.e., to promote greater

[[Page 85151]]

accuracy in financial statements and provide an independent review of

the pool's activities.\31\

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

\29\ See 81 FR at 51830.

\30\ See MFA comment letter.

\31\ 44 FR 1918, 1922 (Jan. 8, 1979).

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

Additionally, the Commission received comments urging it generally

not to require a CPO to obtain waivers from insiders. The Commission

believes that such a position would not be inconsistent with the

purpose of the Annual Report requirement (stated above). Accordingly,

the Commission has determined to amend Regulation 4.22(c)(7) to provide

that a CPO seeking to claim relief from the audit requirement with

respect to a final report upon liquidation of a pool need not obtain

waivers from persons who have a particularly close relationship with

the operation of the pool (the pool's CPO, its CTA, any person

controlling, controlled by, or under common control with the pool's CPO

or the pool's CTA, or any principal of the foregoing).\32\

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

\32\ To reflect these amendments, paragraph (c)(7)(iii) of

Regulation 4.22 is now divided into subparagraphs (A) and (B).

As is stated in the preceding paragraph, the CPO must have

distributed an audited Annual Report at least once during the life

of the pool.

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

E. Specific Requests for Comments

The Commission posed several specific questions in the Proposal

seeking public input on particular issues. The following is the only

question that elicited a response:

Should the Commission adopt a provision whereby a CPO could

claim relief from the Annual Report audit requirement for a pool in

which the only participants were the CPO and one or more other

`insiders' (i.e., the persons identified in proposed Regulation

4.22(g)(2)(ii)), regardless of the amount of capital contributed to

the pool? What other criteria, if any, should be required? \33\

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

\33\ 81 FR at 52830. The Commission also asked whether any

information that would be included in the Annual Report under U.S.

GAAP would not be included under any of the Additional Alternative

GAAPs, and if so whether such information should be separately

included, or if a reconciliation should be provided. Finally, the

Commission asked for any other issues relevant to the Proposal that

the Commission should consider. See id.

The sole commenter responding to this question recommended that the

Commission adopt such an exemption, and that the range of insiders

include not only the persons listed in proposed Regulation

4.22(g)(2)(ii), but also any entity that wholly owns or is under common

ownership with the pool's CPO, the pool's CTA or any principal of the

CPO or CTA.\34\ The commenter further recommended that: Insiders should

include trusts beneficially owned and controlled by principals of the

CPO or CTA, or their respective parents, spouses, siblings or children;

such an exemption should impose no limit on capital contributions or on

the number of participants; and the pool's organizational or offering

documents should disclose ``that no audited annual report will be

provided so long as only insiders are permitted investors.'' The

Commission agrees in part with this commenter's suggestions, and is

adopting a further amendment to Regulation 4.22(d)(1) to provide that

the requirement that a pool Annual Report be audited does not apply for

any fiscal year during which the only participants in the pool are one

or more of the following: The pool's CPO; its CTA; any person

controlling, controlled by or under common control with the CPO or CTA;

or any principal of the foregoing, provided that the CPO: (1) Obtains

written waivers from the participants of their right to receive an

audited Annual Report for that fiscal year; (2) keeps those waivers as

records pursuant to Regulation 4.23; and (3) distributes an audited

Annual Report at least once during the life of the pool.

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

\34\ See AIMA comment letter.

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

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) requires Federal agencies to

consider whether the rules they propose will have a significant

economic impact on a substantial number of small entities and, if so,

to provide a regulatory flexibility analysis regarding the economic

impact on those entities. In the Proposal, the Commission explained

that previously it had established certain definitions of ``small

entities'' to be used by the Commission in evaluating the impact of its

rules on such entities in accordance with the requirements of the RFA

and that, with respect to CPOs, a CPO was a small entity for the

purpose of the RFA if it met the criteria for an exemption from

registration under Regulation 4.13(a)(2).\35\ Thus, because the

Proposal applied to persons registered or required to be registered as

a CPO, the Commission determined that the RFA was not applicable to

it.\36\ The Commission did not receive any comments on this

determination.

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

\35\ See 81 FR 51828 at 51830.

\36\ Id.

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

The amendments to its regulations that the Commission is publishing

today continue to apply solely to CPOs registered or required to be

registered with the Commission. Accordingly, the Chairman, on behalf of

the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the

amendments to its regulations being published by this Federal Register

release will not have a significant economic impact on a substantial

number of small entities.

B. Paperwork Reduction Act

1. Overview

The Paperwork Reduction Act of 1995 (PRA) \37\ imposes certain

requirements on Federal agencies (including the Commission) in

connection with conducting or sponsoring any collection of information

as defined by the PRA.

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

\37\ 44 U.S.C. 3501 et seq.

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

As discussed in the Proposal, the Amendments contain collections of

information for which the Commission has previously received control

numbers from the Office of Management and Budget (OMB). The title for

these collections of information is ``Rules Relating to the Operations

and Activities of Commodity Pool Operators and Commodity Trading

Advisors and to Monthly Reporting by Futures Commission Merchants,\38\

OMB control number 3038-0005.''

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

\38\ Subsequent to the publication of the Proposal, the

Commission changed the title of the collection to more accurately

reflect the matters covered by the subject collections of

information.

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

The responses to these collections of information are mandatory. An

agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless it displays a currently

valid control number issued by OMB.

The collections of information in the Amendments provide to

eligible CPOs: (1) An optional alternative to complying with the

requirement to compute and present the financial statements in a pool

Annual Report in accordance with U.S. GAAP (or in accordance with

IFRS); and (2) an optional alternative to complying with the audit

requirement for the Annual Report for a pool's first fiscal year, all

as described above. In each case, eligible persons have the option to

elect the alternative, but no obligation to do so. For this reason,

except to the extent that the Commission has amended the subject OMB

control number for PRA purposes to reflect these alternatives, the

Amendments are not expected to impose any new burdens on CPOs. Rather,

to the extent that the Amendments provide alternative means to comply

with existing requirements, and an alternative is elected by a CPO, it

is reasonable for the Commission to infer that the alternative is less

burdensome to such CPO.

[[Page 85152]]

2. Revisions to Collection 3038-0005

Collection 3038-0005 is currently in force with its control number

having been provided by OMB. As discussed above, the Amendments add a

new exemption to permit a CPO to use accounting principles, standards

or practices established in the U.K., Ireland, Luxembourg or Canada. In

order to qualify for this exemption, an eligible CPO must take the

steps stated in the Amendments, including providing appropriate

notification in the pool's Disclosure Document and submitting the

required notice to NFA. The Amendments further add a new exemption to

permit a CPO to distribute and submit an unaudited Annual Report for

its pool's first (partial) fiscal year and an audited Annual Report for

the combined period covered by the pool's first (partial) fiscal year

plus the pool's first twelve-month fiscal year. In order to qualify for

this exemption, an eligible CPO must take the steps stated in the

Amendments, including obtaining waivers from pool participants,

submitting the required notice and certification to NFA, providing

appropriate notification in the Annual Report, and maintaining the

waivers as records. Requiring such actions on the part of an eligible

CPO requires revisions to collection 3038-0005. Therefore, the

Commission submitted a request to amend collection 3038-0005 to OMB and

invited public comment on its paperwork burdens in the Proposal. In

particular, as further described in the Proposal, the Commission

estimates that CPOs will submit approximately 10 notices per year to

take advantage of the alternative to permit the use of accounting

principles, standards or practices established in the U.K., Ireland,

Luxembourg or Canada, and that CPOs will submit approximately 12

notices per year to take advantage of the alternative to permit

distribution and submission of an unaudited Annual Report for a pool's

first (partial) fiscal year. Accordingly, the Commission estimates the

additional hour burden for collection 3038-0005 to be 34 hours as

calculated below.

a. Estimated Additional Hour Burden for Collection 3038-0005 Due to

Alternative To Complying With Requirement To Present and Compute a

Pool's Financial Statements According to U.S. GAAP

Anticipated number of claimants: 10.

Frequency of collection: As needed (initial filing and subsequent

compliance).

Estimated annual responses per claimant: 1.

Estimated aggregate number of annual responses: 10.

Estimated annual hour burden per registrant: 1 hr.

Estimated aggregate annual hour burden: 10 (10 claimants x 1 hour

per claimant).

b. Estimated Additional Hour Burden for Collection 3038-0005 Due to

Alternative To Complying With Requirement To Distribute and Submit an

Audited Annual Report for a Pool's First Fiscal Year

Number of claimants: 12.

Frequency of collection: As needed (initial filing and subsequent

compliance and recordkeeping).

Estimated annual responses per claimant: 1.

Estimated aggregate number of annual responses: 12.

Estimated annual hour burden per claimant: 2.\39\

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

\39\ This figure for annual hour burden per claimant includes

one hour for reporting and one hour for recordkeeping.

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

Estimated aggregate annual hour burden: 24 (12 claimants x 2 hours

per claimant).

3. Information Collection Comments

In the Proposal, the Commission invited the public and other

Federal agencies to comment on any aspect of the information collection

requirements discussed above. The Commission did not receive any such

comments.

C. Cost-Benefit Considerations

Section 15(a) of the Act \40\ requires the Commission to consider

the costs and benefits of its actions before promulgating a regulation

or issuing certain orders under the Act. Section 15(a) further requires

the Commission to evaluate the costs and benefits of any such proposed

action in light of five specified areas of consideration, discussed

below. The baseline against which the Commission compares the costs and

benefits of this final rule is Regulations 4.22(c)(7), 4.22(d)(2) and

4.22(g) as they are currently in effect.

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

\40\ 7 U.S.C. 19(a).

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

1. Background

As proposed and as adopted, a CPO must make a notice filing in

order to be able either to use alternative accounting principles,

standards or practices other than U.S. GAAP or IFRS, or to distribute

and submit an unaudited Annual Report for its pool's first (partial-

year) fiscal year and an audited Annual Report that combines

information for the pool's first (partial-year) fiscal year with

information for the following, first twelve-month fiscal year. In

either case, the required filing is patterned after the notice required

by existing Regulation 4.22(d)(2) that a CPO must submit in order to

use IFRS. Thus, the notice contains such information as the CPO's name,

address and telephone number, the NFA identification numbers of the CPO

and the pool, and representations that the CPO complies with the

requisite criteria. Additionally, in the second case, the notice

includes a certification that the CPO has obtained written waivers from

pool participants (other than the pool operator, the pool's commodity

trading advisor, any person controlling, controlled by, or under common

control with the pool operator or trading advisor, or any principal of

the foregoing) of their right to receive an audited Annual Report for

the pool's first (partial-year) fiscal year. A notice filing is not

required for relief from the Annual Report audit requirement for a

fiscal year in which the pool has no participants other than its CPO,

its CTA, any person controlling, controlled by, or controlling the CPO

or CTA, or any principal of the foregoing. Finally, and as proposed,

the Amendments make unavailable the audit requirement exemption in

Regulation 4.22(c)(7) for the final report upon liquidation of a pool

where the CPO has not previously distributed an audited Annual Report.

Thus, for example, if a CPO has claimed the stub period relief under

amended Regulation 4.22(g)(2), the CPO cannot subsequently claim the

relief under Regulation 4.22(c)(7)(iii) for the final report upon

liquidation unless in the intervening time the CPO has distributed at

least one audited Annual Report for the pool.

2. Costs

The Commission continues to believe that the differences in the

costs of compliance with the Amendments and Regulations 4.22(d)(2) and

4.22(g) as they existed before the Amendments will be small, because

the notice filing is designed to mimic the relevant features of

existing Regulation 4.22(d)(2). Moreover, the Commission believes that

the Amendments will lower costs to CPOs relative to a case-by-case

staff-issued exemption, because the Amendments provide a standardized

approach to alternative compliance. In addition, due to the

unavailability of the audit requirement exemption, there is a cost to

the CPO of a pool that is closed without previously having distributed

an audited Annual Report, because the CPO now must distribute and

submit an audited Annual Report for the pool.

There may also be some cost savings if the conditions of the

exemption are

[[Page 85153]]

met, because a CPO who operated a pool that met those conditions may

distribute to pool participants and submit to NFA an unaudited Annual

Report for the pool's first (partial-year) fiscal year and an audited

Annual Report that combines information for the pool's first (partial-

year) fiscal year with information for the following, first twelve-

month fiscal year. These costs savings would be due to the independent

public accountant only needing to conduct an audit of the pool once and

only issuing one opinion on the pool's financial statements. In the

case of audit requirement relief for a pool in which during a given

fiscal year the participants are exclusively one or more of the pool's

CPO, its CTA, any person controlling, controlled by, or under common

control with the pool's CPO or CTA, or any principal of the foregoing,

there would also be a cost saving.

In the Proposal, the Commission sought comment concerning whether

or not the Proposal would reduce costs for CPO relative to existing

Regulations 4.22(d)(2) and 4.22(g). One comment letter addressed the

request and stated that ``the notice filings required under the

proposed rules would result in more timely relief being provided [to

CPOs] and decrease the cost of obtaining such relief.'' \41\

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

\41\ See MFA comment letter.

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

3. Benefits

As the Commission explained in the Proposal, an advantage of a

notice filing over a Commission staff-processed exemption is

timeliness. Thus, a CPO that files a notice under the Amendments will

not have to wait for Commission staff to process a request for an

individual exemption letter. As the Commission further explained, there

is also the benefit that pool participants will receive financial

statements for the pool's first fiscal year.

The Commission continues to believe there will be no net benefit

from the Amendments as compared to Regulations 4.22(d)(2) and 4.22(g)

prior to the Amendments with respect to financial disclosures. By

codifying exemptions previously provided by Commission staff on a case-

by-case basis, the Amendments continue to assist pool participants by

providing them the information necessary to assess the overall trading

performance and financial condition of their pool, but with a lower

overall burden to certain CPOs. Pool participants are knowledgeable

enough to evaluate financial statements prepared under principles,

standards or practices established in the U.K., Ireland, Luxembourg or

Canada, provided that the relevant accounting principles, standards or

practices are properly disclosed to them. While the Commission sought

public comment concerning whether or not use of the specified different

systems of accounting principles, standards and practices might lead to

material differences in financial statements that pool participants

might not be able to understand, the Commission did not receive any

comments in response. Nor did the Commission receive any comments

responding to its belief that, if it were to adopt the Proposal, there

would be minimal loss in the level of confidence of pool participants

in their pool's financial statements, because an independent public

accountant will still have to issue an opinion on an audited Annual

Report that combines information for the pool's first (partial-year)

fiscal year with information for the following, first twelve-month

fiscal year.

4. Section 15(a) Factors

As noted above, Section 15(a) of the CEA requires the Commission to

consider the costs and benefits of its actions before promulgating a

regulation or issuing certain orders. As also noted above, CEA Section

15(a) further specifies that the Commission shall evaluate the costs

and benefits of its actions in light of five specific concerns. Those

concerns relate to: (i) Protection of market participants and the

public; (ii) efficiency, competitiveness, and financial integrity of

futures markets; (iii) price discovery; (iv) sound risk management

practices; and (v) other public interest considerations.

i. Protection of Market Participants and the Public

The Commission believes that the Amendments will provide the same

level of protection to commodity pool participants through the

disclosure of financial statements as do existing Regulations

4.22(d)(2) and 4.22(g). The Commission believes that pool participants

are knowledgeable enough to evaluate financial statements prepared

under accounting principles, standards and practices established in the

U.K., Ireland, Luxembourg or Canada, provided that the relevant

accounting principles, standards and practices are properly disclosed

to them. By codifying exemptions previously provided by Commission

staff on a case-by-case basis, the Amendments continue to assist pool

participants by providing them the information necessary to assess the

overall trading performance and financial condition of their pool, but

with a lower overall burden to certain CPOs. Additionally, the

Commission believes that there will be minimal loss in the level of

confidence of pool participants in their pool's financial statements,

because an independent public accountant will still have to issue an

opinion on the financial statements included in an Annual Report that

combines information for the pool's first (partial-year) fiscal year

with information for the following, first twelve-month fiscal year.

Relief from the audit requirement where all pool participants are

insiders is balanced by the close relationship between those insiders

and the operation of the pool.

ii. Efficiency, Competitiveness, and Financial Integrity of Markets

The Commission does not believe there are any significant impacts

that the Amendments will have on efficiency, competitiveness, and

financial integrity of markets.

iii. Price Discovery

The Commission does not believe there are any significant impacts

that the Amendments will have on price discovery.

iv. Sound Risk Management Practices

The Commission does not believe there are any significant impacts

that the Amendments will have on sound risk management practices.

v. Other Public Interest Considerations

The Commission has not identified any impact on any other public

interest considerations that the Amendments will have.

5. Summary of Comments

The Commission invited public comment on its cost-benefit

considerations, including the Section 15(a) factors described above.

Commenters were invited to submit with their comment letters any data

or other information that they had that quantified or qualified the

costs and benefits of the Proposal. None of the persons who commented

on the Proposal submitted any data or other information that quantified

or qualified the costs and benefits of the Proposal, nor did they

otherwise comment on the cost-benefit considerations as stated in the

Proposal.

List of Subjects in 17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Consumer protection, Reporting and

recordkeeping requirements.

[[Page 85154]]

For the reasons set forth in the preamble, the Commodity Futures

Trading Commission hereby amends 17 CFR part 4 as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0

1. The authority citation for part 4 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a,

and 23.

0

2. Amend Sec. 4.7 by revising paragraph (b)(2)(v) 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.

* * * * *

(b) * * *

(2) * * *

(v) A commodity pool operator of a pool that meets the conditions

specified in Sec. 4.22(d)(2)(i) to present and compute the commodity

pool's financial statements contained in the Annual Report other than

in accordance with generally accepted accounting principles and has

filed notice pursuant to Sec. 4.22(d)(2)(iii) may also use the

alternative accounting principles, standards or practices identified in

the notice with respect to the computation and presentation of the

account statement.

* * * * *

0

3. Amend Sec. 4.22 as follows:

0

a. Revise paragraphs (a)(6), (c)(7)(iii), (d)(1) introductory text, and

(d)(2);

0

b. Revise paragraph (g)(2).

The revisions to read as follows:

Sec. 4.22 Reporting to pool participants.

* * * * *

(a) * * *

(6) A commodity pool operator of a pool that meets the conditions

specified in paragraph (d)(2)(i) of this section and has filed notice

pursuant to paragraph (d)(2)(iii) of this section may elect to follow

the same accounting treatment with respect to the computation and

presentation of the account statement.

* * * * *

(c) * * *

(7) * * *

(iii) A report filed pursuant to paragraph (c)(7) of this section

that would otherwise be required by paragraph (c) of this section is

not required to be audited in accordance with paragraph (d) of this

section if the commodity pool operator:

(A) Obtains a written waiver of their right to receive an audited

Annual Report from each participant other than the pool operator, the

pool's commodity trading advisor, any person controlling, controlled

by, or under common control with the pool operator or trading advisor,

and any principal of the foregoing; and

(B) At the time of filing the Annual Report with the National

Futures Association, certifies that it has received a written waiver

from each participant from whom it is required to obtain a waiver to

qualify for the relief available under this paragraph (c)(7). The

commodity pool operator must maintain the waivers in accordance with

Sec. 4.23 and must make the waivers available to the Commission or

National Futures Association upon request. Notwithstanding the

provisions of paragraph (g)(2)(ii) of this section, the relief made

available by this paragraph (c)(7)(iii) will not be available where the

commodity pool operator has not previously distributed an audited

Annual Report to pool participants and submitted an audited Annual

Report to the National Futures Association.

* * * * *

(d)(1) Subject to the provisions of paragraphs (d)(2) and (g)(2) of

this section, the financial statements in the Annual Report required by

this section or by Sec. 4.7(b)(3) must be presented and computed in

accordance with United States generally accepted accounting principles

consistently applied and must be audited by an independent public

accountant; Provided, however, and subject to the exception in

paragraph (c)(7)(iii)(B) of this section, that the requirement that the

Annual Report be audited by an independent public accountant does not

apply for any fiscal year during which the only participants in the

pool are one or more of the pool operator, the pool's commodity trading

advisor, any person controlling, controlled by, or under common control

with the pool operator or trading advisor, and any principal of the

foregoing; and Provided further, that the CPO obtains a written waiver

from each such pool participant of their right to receive an audited

Annual Report for such fiscal year, maintains such waivers in

accordance with Sec. 4.23, and makes such waivers available to the

Commission or National Futures Association upon request. The

requirements of Sec. 1.16(g) of this chapter shall apply with respect

to the engagement of such independent public accountants, except that

any related notifications to be made may be made solely to the National

Futures Association, and the certification must be in accordance with

Sec. 1.16 of this chapter, except that the following requirements of

that section shall not apply:

* * * * *

(2)(i) Where a commodity pool is organized in a jurisdiction other

than the United States, the financial statements in the Annual Report

required by this section or by Sec. 4.7(b)(3) may be presented and

computed in accordance with the generally accepted accounting

principles, standards or practices followed in such other jurisdiction;

Provided, That:

(A) The other jurisdiction follows accounting principles, standards

or practices set forth in paragraph (d)(2)(ii) of this section and the

Annual Report presents and computes the financial statements of the

pool in accordance with the applicable accounting principles, standards

or practices followed by such other jurisdiction;

(B) The Annual Report includes a condensed schedule of investments,

or, if required by the applicable accounting principles, standards or

practices followed by such other jurisdiction, a full schedule of

investments;

(C) The Annual Report reports special allocations of ownership

equity in accordance with paragraph (e)(2) of this section;

(D) The Disclosure Document or offering memorandum for the pool

identifies the accounting principles, standards or practices of the

other jurisdiction pursuant to which the Annual Report presents and

computes the financial statements of the pool; and

(E) Where the accounting principles, standards or practices of the

other jurisdiction require consolidated financial statements for the

pool, such as a feeder fund consolidating with its master fund, all

applicable disclosures required by United States generally accepted

accounting principles for the feeder fund must be presented with the

reporting pool's consolidated financial statements.

(ii) For purposes of paragraph (d)(2)(i) of this section, the

following alternative accounting principles, standards or practices may

be employed in the preparation and computation of the financial

statements in the Annual Report of the commodity pool; Provided, That

any such alternative accounting principles, standards or practices so

employed are those followed by the jurisdiction other than the United

States in which the commodity pool is organized:

(A) International Financial Reporting Standards;

(B) Generally Accepted Accounting Practice in the United Kingdom;

[[Page 85155]]

(C) New Irish Generally Accepted Accounting Practice;

(D) Luxembourg Generally Accepted Accounting Principles; or

(E) Canadian Generally Accepted Accounting Principles.

(iii) To claim the relief available under this paragraph (d)(2), a

commodity pool operator must file a notice with the National Futures

Association within 90 calendar days after the end of the pool's first

fiscal year.

(A) The notice must contain: The name, main business address, main

telephone number and National Futures Association registration

identification number of the commodity pool operator; the name and

identification number of the commodity pool for which the pool operator

is claiming relief; and the alternative accounting principles,

standards or practices pursuant to which the financial statements in

the Annual Report will be presented and computed;

(B) The notice must include a representation that the commodity

pool operator complies with each of the conditions specified in

paragraphs (d)(2)(i)(A) through (D) of this section and, if applicable,

paragraph (d)(2)(i)(E) of this section; and

(C) The notice must be signed by the commodity pool operator in

accordance with paragraph (h) of this section.

* * * * *

(g) * * *

(2)(i) If a commodity pool operator elects a fiscal year other than

the calendar year, it must give written notice of the election to all

participants and must file the notice with the National Futures

Association within 90 calendar days after the date of the pool's

formation. If this notice is not given, the pool operator will be

deemed to have elected the calendar year as the pool's fiscal year.

(ii) For purposes of this paragraph (g)(2), the time period from

the date on which the commodity pool operator first receives funds,

securities or other property from a participant in the pool that is not

a person listed in paragraphs (g)(2)(ii)(A)(1) through (g)(2)(ii)(A)(5)

of this section to the end of the pool's first fiscal year is the stub

period of the pool. Where the stub period is four months or less, the

first Annual Report for the pool may be unaudited; Provided, however,

That:

(A) Throughout the stub period, the pool had no more than fifteen

participants and no more than $3,000,000 in aggregate gross capital

contributions. For the purpose of satisfying these criteria, the

commodity pool operator may exclude the following persons and their

contributions:

(1) The pool operator, the pool's commodity trading advisor, any

person controlling, controlled by, or under common control with the

pool operator or trading advisor, and any principal of the foregoing;

(2) A child, sibling, or parent of any of these participants;

(3) The spouse of any participant specified in paragraph

(g)(2)(ii)(A)(1) or (2) of this section;

(4) Any relative of a participant specified in paragraph

(g)(2)(ii)(A)(1), (2) or (3) of this section, their spouse or a

relative of their spouse, who has the same principal residence as such

participant; and

(5) An entity that is wholly-owned by one or more participants

specified in paragraph (g)(2)(ii)(A)(1), (2), (3) or (4) of this

section; and

(B) The next Annual Report for the pool is audited and covers the

stub period plus the pool's first 12-month fiscal year.

(C) To claim the relief available under paragraph (g)(2)(ii) of

this section, a commodity pool operator must:

(1) Prior to the date upon which it is required to distribute and

submit an audited Annual Report for the pool's first fiscal year,

obtain a written waiver of the pool participant's right to receive an

audited Annual Report for the pool's first fiscal year from each

participant other than a participant who is the pool operator, the

pool's commodity trading advisor, any person controlling, controlled

by, or under common control with the pool operator or trading advisor,

or any principal of the foregoing. The waiver may be included in the

subscription agreement for the pool or other agreement with the

participant; Provided, however, That the waiver is a separate page in

the agreement and the pool operator requires the participant to

separately sign and date it. The waiver must be in a form substantially

as follows: ``[Name of participant], a participant in [Name of pool],

voluntarily waives the right under CFTC Regulation 4.22(d) to receive

an audited Annual Report for the fiscal year ended [end date of the

pool's first fiscal year] and will accept in lieu thereof an unaudited

Annual Report covering [the stub period] and an audited Annual Report

covering [the start date of the stub period] through [the end date of

the pool's first twelve-month fiscal year].''; and

(2) On or before the date upon which it is required to distribute

and submit the Annual Report for the pool's first fiscal year, file a

notice with the National Futures Association, along with a

certification that it has received the required written waiver from

each participant who is not the pool operator, the pool's commodity

trading advisor, any person controlling, controlled by, or under common

control with the pool operator or trading advisor, or any principal of

the foregoing, and who has been a participant in the pool for its first

fiscal year.

(i) The notice must contain: The name, main business address, main

telephone number and National Futures Association registration

identification number of the commodity pool operator; the name and

identification number of the commodity pool for which the pool operator

is claiming relief; and the beginning and end dates of the stub period

of the pool;

(ii) The notice must include a representation that the commodity

pool operator meets the criteria of paragraph (g)(2)(ii)(A) of this

section and that it will comply with the condition of paragraph

(g)(2)(ii)(B) of this section; and

(iii) The notice must be signed by the commodity pool operator in

accordance with paragraph (h) of this section.

(D)(1) Each unaudited Annual Report for which the relief available

under paragraph (g)(2)(ii) of this section has been claimed must

prominently disclose on the cover page thereof: ``Pursuant to an

exemption from the Commodity Futures Trading Commission, this unaudited

Annual Report covers the period from [beginning date of the stub period

of the pool] to the end of the pool's first fiscal year, a period of

[number] months.''

(2) The next Annual Report for the pool must prominently disclose

on the cover page thereof: ``Pursuant to an exemption from the

Commodity Futures Trading Commission, this audited Annual Report covers

the period from [beginning date of the stub period of the pool] to the

end of the pool's first 12-month fiscal year, a period of [number]

months.''

(E) The commodity pool operator must maintain in accordance with

Sec. 4.23 of this chapter each waiver it has obtained to claim the

relief available under paragraph (g)(2)(ii) of this section.

* * * * *

* * * * *

0

4. Amend Sec. 4.27 by revising paragraph (c)(2) to read as follows:

Sec. 4.27 Additional reporting by advisors of certain commodity

pools.

* * * * *

(c) * * *

(2) All financial information shall be reported in accordance with

generally

[[Page 85156]]

accepted accounting principles consistently applied. Notwithstanding

the foregoing, or anything in the instructions to appendix A of this

part to the contrary, a commodity pool operator of a pool that meets

the conditions specified in Sec. 4.22(d)(2)(i) to present and compute

the commodity pool's financial statements contained in the Annual

Report other than in accordance with United States generally accepted

accounting principles and has filed notice pursuant to Sec.

4.22(d)(2)(iii) may also use the alternative accounting principles,

standards or practices identified in the notice in reporting

information required to be reported pursuant to paragraph (c)(1) of

this section.

* * * * *

Issued in Washington, DC, on November 21, 2016, by the

Commission.

Robert N. Sidman,

Deputy Secretary of the Commission.

Note: The following appendix will not appear in the Code of

Federal Regulations.

Appendix to Commodity Pool Operator Financial Reports--Commission

Voting Summary

On this matter, Chairman Massad and Commissioners Bowen and

Giancarlo voted in the affirmative. No Commissioner voted in the

negative.

[FR Doc. 2016-28388 Filed 11-23-16; 8:45 am]

BILLING CODE 6351-01-P

 

Last Updated: November 25, 2016