[Federal Register: December 18, 2002 (Volume 67, Number 243)]
[Notices]
[Page 77470-77473]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18de02-38]
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COMMODITY FUTURES TRADING COMMISSION
Review by the National Futures Association of Annual Financial
Reports Required To Be Filed by Commodity Pool Operators
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice and order.
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SUMMARY: The Commodity Futures Trading Commission (the "Commission")
is authorizing the National Futures Association ("NFA") to conduct
reviews of annual financial reports filed with the Commission by
commodity pool operators ("CPOs"), as required by Commission Rules
4.22(c) and 4.7(b)(3), and to grant and deny certain requests for
extensions of time to file such reports. In addition, the Commission is
authorizing NFA to maintain and to serve as the official custodian of
Commission records required by Rules 4.22 and 4.7(b)(3).
EFFECTIVE DATE: December 18, 2002; with regard to all commodity pool
annual financial reports for fiscal years ending on December 31, 2002,
and thereafter.
FOR FURTHER INFORMATION CONTACT: Kevin P. Walek, Assistant Director,
Eileen R. Chotiner, Futures Trading Specialist, Audit and Financial
Review Section, or Michael A. Piracci, Attorney Advisor, Compliance and
Registration Section, Division of Clearing and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION:
I. Background
The Commission previously has authorized NFA to conduct many
functions that, until that time, were conducted by Commission staff.
Such delegated functions include: the processing of applications for
registration of intermediaries and floor traders under the Commodity
Exchange Act (the "Act"); \1\ the processing of notices of
eligibility for certain exemptions from registration as a CPO and
commodity trading advisor ("CTA"); \2\ and the review of Disclosure
Documents required to be filed by CPOs and CTAs pursuant to Commission
rules.\3\
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\1\ 7 U.S.C. 1 et seq. (2000). See, e.g., 48 FR 35158 (Aug. 3,
1983) (introducing brokers and associated persons thereof); 49 FR
39593 (Oct. 9, 1984) (futures commission merchants, commodity pool
operators, commodity trading advisors, and associated persons
thereof); 51 FR 34490 (Sep. 29, 1986) (floor brokers); 58 FR 19657
(Apr. 15, 1993) (floor traders).
\2\ See 62 FR 52088 (Oct. 6, 1997) (the "1997 Order").
\3\ Id.
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The Commission has found that NFA exercises its authority in these
areas with particular proficiency. Additionally, authorizing NFA to
perform such functions has enabled Commission staff to devote resources
to other aspects of the Commission's regulatory mission.
The futures industry is continually expanding and transforming
itself. As the industry changes and evolves, the Commission must also
change and evolve, reassessing the manner in which it allocates its
resources. Accordingly, by this order, the Commission is authorizing
NFA to perform certain regulatory functions that may properly be
performed by NFA instead of Commission staff. In particular, the
Commission is authorizing NFA to review commodity pool annual financial
reports for fiscal years ending on December 31, 2002, and thereafter,
that CPOs are required to submit, pursuant to Commission Rules 4.22 and
4.7(b)(3).\4\ In addition, the Commission is authorizing NFA, with
regard to such reports, to receive, grant, and deny, requests submitted
pursuant to Rule 4.22(f)(1) for extensions of time to distribute and
file annual financial reports and to process notices of claims of
extension of time filed pursuant to Rule 4.22(f)(2).
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\4\ Commission rules referred to herein may be found at 17 CFR
Ch. I (2002).
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[[Page 77471]]
II. Authority
Section 4n(3)(A) of the Act provides, among other things, that each
CPO shall "file such reports in such form and manner as may be
prescribed by the Commission." The Commission also notes that, in
amending the Act through passage of the Commodity Futures Modernization
Act of 2000 (the "CFMA"),\5\ Congress intended, as evidenced in
section 2 of the CFMA, to transform the role of the Commission from
that of a frontline regulator to one of an oversight regulator of the
futures industry. Moreover, section 125 of the CFMA required the
Commission to conduct a study of the Act and the Commission's rules and
orders governing the conduct of registrants under the Act, identifying,
among other things, regulatory functions the Commission performs that
can be delegated to NFA.\6\ Additionally, the Commission notes that
NFA, as a registered futures association, is obligated to establish a
program for the protection of customers and customer funds and to
prevent fraudulent acts and practices.\7\
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\5\ Pub. L. 106-554, 114 Stat. 2763 (codified as amended in
scattered sections of 7 U.S.C.).
\6\ A copy of the study may be viewed on the Commission's Web
site at: www.cftc.gov/files/opa/opaintermediarystudy.pdf.
\7\ See Commission Rule 170.5; See also section 17(b)(7) of the
Act.
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III. Review of Annual Financial Reports
Commission Rule 4.22(c) requires, among other things, that each CPO
distribute an annual financial report to each participant in each pool
that it operates and file two copies with the Commission. Rule
4.12(b)(2)(iii) modifies the requirements as to the information to be
contained in annual financial reports for certain commodity pools and
the CPOs that operate such pools. CPOs that have claimed relief
pursuant to Rule 4.12(b), with respect to qualifying pools, still must
distribute and file annual financial reports for such pools pursuant to
Commission Rule 4.22(c). Commission Rule 4.7(b)(3) exempts a CPO from
the specific requirements of Rule 4.22(c) for certain commodity pools.
Pursuant to Rule 4.7(b)(3)(i), however, a CPO still must distribute and
file with the Commission an annual financial report for such pools.
Commission staff currently review annual financial reports and issue
letters to the CPO noting any issues concerning the CPO's compliance
with relevant sections of the Act or Commission Rules, and work with
the CPO to resolve such issues.
NFA Compliance Rule 2-13 \8\ requires NFA members to file with NFA
copies of any documents required to be filed with the Commission
pursuant to part 4 of the Commission's rules. NFA staff reviews CPO
annual financial reports during on-site audits as well as through a
desk review program. Through working closely with NFA over the years,
the Commission is confident in the expertise of NFA staff in reviewing
these annual financial reports.
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\8\ NFA Rules may be found on NFA's Web site at:
www.nfa.futures.org.
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Commission and NFA staffs have had extensive discussions concerning
the specific elements of the Commission's review of CPO annual
financial reports under the Act and regulations thereunder. Further,
Commission and NFA staff have worked closely to ensure that NFA's
procedures for review of CPO annual financial reports similarly conform
to the Act and regulations thereunder. Further, NFA has represented it
will take appropriate steps to address deficiencies found in such
reports, that it will maintain records reflecting its review and
corrective activities, and that the information contained in such
reports and such records will be maintained by NFA in electronic format
that shall be accessible to Commission staff by electronic means. Based
on the foregoing, the Commission is satisfied that NFA has established
that it is capable of and willing to receive and to appropriately
review CPO annual financial reports.\9\ Accordingly, the Commission
believes it would be appropriate for NFA to receive and to review CPO
annual financial reports for compliance with the Act and applicable
regulations thereunder.
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\9\ See, e.g., Letter from Regina L. Thoele, Managing Director,
Compliance, National Futures Association, to Jane Kang Thorpe,
Director, Division of Clearing and Intermediary Oversight, Commodity
Futures Trading Commission (Sep. 17, 2002); see also, Letter from
Yvonne Downs, Senior Vice President, Compliance, National Futures
Association, to Jane Kang Thorpe, Director, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission (Nov.
4, 2002); and Letter from Jane Kang Thorpe, Director, Division of
Clearing and Intermediary Oversight, Commodity Futures Trading
Commission, to Yvonne Downs, Senior Vice President, Compliance,
National Futures Association (Nov. 22, 2002).
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In order to avoid disruption of outstanding reviews of annual
financial reports, this authorization is effective only with regard to
commodity pool annual financial reports for fiscal years ending on
December 31, 2002, and thereafter. Stated another way, annual financial
reports of commodity pools for fiscal years ending prior to December
31, 2002, shall still be received and reviewed in the first instance by
the Commission.
IV. Extensions of Time
Commission Rule 4.22(f)(1) provides that if a CPO is unable to
disburse the annual financial report for a pool within the time
specified in Rule 4.22(c) it may apply for an "extension of time to a
specific date not more than 90 calendar days after the date as of which
the Annual Report was to have been distributed." This application must
be filed with the Commission prior to the date on which the annual
financial report is due. The Commission must then notify the CPO,
within ten calendar days after receipt of the application, whether the
application has been granted, denied, or whether additional time is
needed to analyze the application. As part of this order, the
Commission is authorizing NFA to undertake this function. In a separate
notice, published elsewhere today in the Federal Register, the
Commission is amending its rules with regard to the submission of these
applications for extensions of time so as to make clear that they need
be filed only with NFA.
In granting or denying applications made pursuant to Rule
4.22(f)(1), Commission staff have issued, and made publicly available,
letters that make clear the reasoning for granting or denying such
requests. NFA, in determining whether to grant or deny requests made
pursuant to Rule 4.22(f)(1), shall consult, and comply with, the
guidance provided by the previous letters of Commission staff on this
subject, as well as any future guidance, in whatever form, the
Commission or Commission staff might provide. The Commission notes that
in other contexts, such as determining whether to grant or deny an
application for registration, NFA makes independent decisions based on
general guidance provided by the Commission.\10\ The Commission fully
expects that NFA will exercise the authority granted in this order with
regard to requests for extensions of time in the same skillful manner
as it has with regard to the registration of applicants.
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\10\ See Appendix A to Part 3 of the Commission's rules.
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Commission Rule 4.22(f)(2) provides for a self-executing extension
of time of no more than 60 calendar days for distributing and filing an
annual financial report of a commodity pool where the CPO is unable to
prepare the annual financial report in the time required under the
Commission's rules as a result of the pool's investments in
[[Page 77472]]
another collective instrument vehicle. To obtain the extension of time
provided for in Rule 4.22(f)(2), the CPO must file a notice, in the
form specified in the Rule, with the Commission and NFA. In the
separate notice being published today, as discussed above, the
Commission is amending Rule 4.22(f)(2) to provide that the notice need
only be filed with NFA. As part of this order, the Commission is
authorizing NFA to maintain and to serve as the official custodian of
these notices.
V. Maintenance of and Access to CPO and CTA Filings
As noted above, in a separate document, published elsewhere today
in the Federal Register, the Commission is amending its rules with
regard to the submission of annual financial reports, extensions of
time for filing annual financial reports,\11\ and notices of
eligibility for exemption from registration and certain part 4
requirements required to be filed by CPOs and CTAs.\12\ Specifically,
the Commission is amending the subject rules to make clear that CPOs
and CTAs need only file the relevant documents with NFA and need not
also file them with the Commission. As a result, NFA will act as
official custodian of such records and will receive and maintain all
records required to be filed by CPOs and CTAs with regard to the
authorization made by the Commission in this and the 1997 Order.
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\11\ With regard to annual financial reports and extensions of
time for filing such reports, the rule amendments shall be made
effective for such reports and extensions of time with regard to
commodity pool annual financial reports for fiscal years ending on
December 31, 2002, and thereafter.
\12\ As noted above, in the 1997 Order the Commission authorized
NFA to process notices of eligibility for certain exemptions.
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As the Commission will no longer receive the subject filings,
Commission staff has made NFA staff aware of the requirements that
shall apply to NFA in maintaining these records. In particular, NFA
will maintain these records in accordance with the Commission's Records
Disposition Schedule. In addition, although Commission staff will no
longer be reviewing the subject documents on a regular basis, the work
of the Commission requires that Commission staff have ready electronic
access to the information contained in the documents encompassed by
this and the 1997 Order. NFA and Commission staffs have discussed the
required availability and access by Commission staff to these records
and the information contained therein. Effective March 10, 2003,
Commission staff will have, at all times, immediate electronic access
to a database containing all pertinent information contained in the
subject filings, as well as the results of the NFA's review
thereof.\13\ Moreover, NFA will, at the request of the Commission,
Commission staff, or the Department of Justice,\14\ make available
within 24 hours hard copies of any of the documents encompassed by this
and the 1997 Order.
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\13\ Due to routine maintenance of the system on which this
information will reside, NFA has made the Commission aware that
there may be times at which the system will not be accessible. NFA,
however, has indicated that, whenever possible, all maintenance of
the system will be conducted after business hours.
\14\ See section 4n(3) of the Act.
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The Commission has determined to authorize NFA to maintain and
serve as official custodian of record for the filings, notice, reports,
and claims required by Rules 4.7(b)(3), 4.22(c), 4.22(f)(1), and
4.22(f)(2). This determination is based upon NFA's representations
regarding procedures for maintaining and safeguarding all such records,
in connection with NFA's assumption of the responsibilities for the
activities referenced above. In maintaining the Commission's records
pursuant to this Order, NFA shall be subject to all other requirements
and obligations imposed upon it by the Commission in existing or future
orders or regulations. In this regard, NFA shall also implement such
additional procedures (or modify existing procedures) as are acceptable
to the Commission and as are necessary to: Ensure the security and
integrity of the records in NFA's custody; to facilitate prompt access
to those records by the Commission and its staff, particularly as
described in other Commission orders or rules; to facilitate disclosure
of public or nonpublic information in those records when permitted by
Commission orders or rules and to keep logs as required by the
Commission concerning disclosure of nonpublic information; and
otherwise to safeguard the confidentiality of the records.
VI. Advisory 18-96
CFTC Advisory 18-96 makes generally available to certain registered
CPOs relief from disclosure, reporting, and certain recordkeeping
requirements in connection with the operation of offshore commodity
pools.\15\ In order to obtain the relief provided for in the advisory,
a CPO must file a claim for exemption with the Commission and NFA, as
required in the advisory. In the 1997 Order, the Commission authorized
NFA to process notices of claims filed by qualifying CPOs pursuant to
CFTC Advisory 18-96. As discussed above, in a separate document
published elsewhere today in the Federal Register, the Commission is,
among other things, amending Commission rules with regard to notices of
eligibility for exemption from registration and certain part 4
requirements required to be filed by CPOs and CTAs to make clear that
CPOs and CTAs need only file the relevant documents with NFA and need
not also file them with the Commission. In order to conform the process
for all claims for exemptions that the Commission has authorized NFA to
process, the Commission is also ordering that as of January 1, 2003,
all claims for exemption filed pursuant to CFTC Advisory 18-96 need
only be filed with NFA and not also with the Commission.
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\15\ CFTC Advisory No. 18-96, (1994-1996 Transfer Binder), Comm.
Fut. L. Rep. (CCH) ] 26,659 (Apr. 11, 1996).
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VII. Conclusion and Order
For the reasons discussed above, and pursuant to its authority
under the Act, the Commission has determined to authorize NFA, with
regard to commodity pool annual financial reports for fiscal years
ending on December 31, 2002, and thereafter, to: (1) Receive and review
annual financial reports required to be filed by CPOs pursuant to
Commission Rules 4.7(b)(3) and 4.22(c), including annual financial
reports required to be filed by CPOs that have claimed relief pursuant
to Rule 4.12(b) with respect to qualifying pools, and to review such
reports for compliance with the Act and the Commission Rules thereunder
and to provide notice of deficiencies; (2) receive and grant or deny
applications filed pursuant to Commission Rule 4.22(f)(1) for
extensions of time to distribute annual financial reports; and (3)
process notices of claims of extension of time to distribute and file
annual financial reports filed pursuant to Commission Rule 4.22(f)(2).
In addition, the Commission has determined to authorize NFA to maintain
and to serve as the official custodian of such records. The Commission
has also determined that, as of January 1, 2003, all claims for
exemption filed pursuant to CFTC Advisory 18-96 need only be filed with
NFA and need not also be filed with the Commission.
These determinations are based upon: (1) The Congressional intent
that the Commission be permitted to determine the best manner in which
to oversee CPOs; (2) the Congressional intent that NFA, where
appropriate, assume responsibility under the Act for regulatory
functions the Commission has deemed unnecessary to retain; and (3)
NFA's representation and
[[Page 77473]]
demonstration of its willingness and ability to administer the required
regulatory functions in accordance with the standards established by
the Act, the Commission's regulations and orders promulgated
thereunder, any supplemental direction established by the Commission or
Commission staff, and relevant case law, and to provide the Commission
with whatever information, reports, summaries, or records the
Commission may determine are necessary for effective oversight of NFA's
administration of the functions delegated herein, or for the Commission
to fulfill its role of regulatory oversight of the futures markets.
This order does not authorize NFA to accept or act upon requests
for exemption from the requirements of Rule 4.7(b)(3) or Rule 4.22(c),
except applications for extensions of time filed pursuant to Commission
Rule 4.22(f)(1), as discussed in this order. Moreover, NFA is not
authorized to issue any interpretations, "no-action" positions, or
exemptions with respect to the requirements of Rules 4.7(b)(3) and
4.22(c).
NFA is authorized to perform all functions specified in this order
until the Commission orders otherwise. Nothing in this order shall
prevent the Commission from exercising the authority delegated herein.
NFA may submit to the Commission for decision any specific matter
regarding the functions delegated to it by this order. Nothing in this
order affects the applicability of any previous orders issued by the
Commission.
Issued in Washington, DC on December 11, 2002, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-31684 Filed 12-17-02; 8:45 am]
BILLING CODE 6351-01-P