[Federal Register: February 22, 2006 (Volume 71, Number 35)]
[Rules and Regulations]
[Page 8939-8943]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22fe06-10]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AC25
Commodity Pool Operator Electronic Filing of Annual Reports
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rulemaking.
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SUMMARY: The Commodity Futures Trading Commission ("Commission" or
"CFTC") is amending Commission rules to require that commodity pool
annual financial reports submitted by commodity pool operators
("CPOs") to the National Futures Association ("NFA") be filed and
affirmed electronically, in compliance with NFA's electronic filing
procedures. NFA petitioned the Commission to adopt this amendment after
its implementation of a pilot program for electronic filing of
commodity pool annual reports in 2005.
The amendment necessarily eliminates the requirement that the
commodity pool annual report filed with NFA be manually signed, and
replaces it with a requirement that CPOs maintain for five years in
their own business records a manually signed oath or affirmation with
respect to each annual report along with documentation supporting the
compilation of certain key financial balances required to be submitted
to NFA.
In addition to mandating electronic filing, the Commission is also
amending other provisions of its rules applicable to CPOs with respect
to financial reporting to: (i) Explicitly state that commodity pool
monthly and/or quarterly account statements distributed to participants
must be prepared in accordance with generally accepted accounting
principles; (ii) clarify that CPOs must file a notification of a change
in a public accountant for a commodity pool with NFA; (iii) clarify
that a reference to "segregation" with respect to a statement
required to be made in an accountant's letter refers to the prohibition
on commingling of funds of a commodity pool with the assets of any
other person; and (iv) require that notifications concerning CPOs'
election of fiscal years for commodity pools other than the calendar
year or changes in fiscal year be filed solely with NFA and not the
Commission.
These amendments with respect to commodity pool financial reporting
do not impact the distribution of annual reports to pool participants,
which may continue to be provided through hard-copy distribution via
postal mail or electronically if the pool participant consents thereto.
Also, these amendments do not change the requirements or process for
CPOs to request that the Commission provide confidential treatment to
commodity pool annual reports submitted to NFA, in response to requests
from the public made under the Freedom of Information Act.
DATES: Effective Date: March 24, 2006.
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and
Chief Accountant, at (202) 418-5430 or Jennifer C.P. Bauer, Special
Counsel, at (202) 418-5472, Division of Clearing and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail:
[email protected]) or ([email protected]).
SUPPLEMENTARY INFORMATION:
I. Background
Rule 4.22(c) requires a CPO to file with NFA and to provide to each
participant an annual financial report, certified by an independent
public
[[Page 8940]]
accountant, for each commodity pool that it operates within 90 days of
the end of the pool's fiscal year or the permanent cessation of
trading.\1\ Also, Rule 4.7(b)(3) requires a CPO that has claimed an
exemption from certain regulatory requirements pursuant to Rule 4.7 to
file with NFA and to distribute to commodity pool participants an
unaudited annual financial report in lieu of an audited annual
financial report.\2\
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\1\ The rules of the Commission cited in this release may be
found at 17 CFR Ch. I (2005).
\2\ CPOs operating pools offered solely to qualified eligible
participants ("QEPs") pursuant to Rule 4.7 may claim relief from
the certification requirement of Rule 4.22(d) with respect to the
exempt pools' financial statements. See Rule 4.7(b)(3).
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Beginning with reports filed for the year ended December 31, 2004,
the NFA implemented a pilot program permitting CPOs to voluntarily
elect to file commodity pool annual reports through the use of an
electronic filing system, the "EasyFile" system, accessed from the
NFA's Web site.\3\ The NFA pilot program required that the complete
annual report for commodity pools, including the public accountant's
opinion contained in certified statements, be submitted to NFA in the
Portable Document Format ("PDF") file format. In addition to the
electronic submission of the document in a PDF file format,
participating CPOs were required to directly enter certain key
financial statement balances or aggregated balances from the commodity
pools' annual reports into the NFA's EasyFile system. The key financial
statement balances filed electronically through the pilot program
include all the data elements that NFA staff currently manually enter
into the FACTS 2000 database from the information contained in hard
copy annual reports, as well as several data elements that NFA staff
added after consultation with members of the commodity pool industry,
certified public accountants ("CPAs") that serve the commodity pool
industry, and Commission staff. NFA's FACTS 2000 database serves as the
primary means by which NFA and Commission staff access commodity pool
financial information.
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\3\ NFA initially adopted the EasyFile electronic filing system
for financial reporting by introducing brokers ("IBs") in 2004.
The Commission approved NFA's rules adopting EasyFile for IBs on
June 28, 2004.
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NFA requested that the Commission provide CPOs participating in the
pilot program with relief from the requirement of Rule 4.22(h) that the
annual report filed with NFA include a manually signed oath or
affirmation, as NFA implemented an electronic version of the oath or
affirmation applicable to both the document submitted in PDF file
format and the key financial statement balances directly entered into
the EasyFile system. The Commission's Division of Clearing and
Intermediary Oversight issued exemptive relief in January 2005 to CPOs
participating in the pilot program from the requirement that their
pools' annual reports submitted to NFA be manually signed under Rule
4.22(j).\4\ On August 26, 2005, the NFA petitioned the Commission to
formally amend Rules 4.22 and 4.7 to eliminate the requirement that
CPOs file manually signed pool annual reports with NFA, and to further
require CPOs to file such annual reports with NFA electronically using
the EasyFile system implemented in the pilot program.
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\4\ CFTC Letter No. 05-01 may be accessed at http://www.cftc.gov/tm/letters/05letters/tm05-01.htm.
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Mandatory electronic filing of commodity pool annual reports is
anticipated to benefit both the Commission and NFA by increasing the
quality of the financial data from commodity pool annual reports that
will be collected in FACTS 2000 and be available to the Commission.
Direct data entry by the CPO or its CPA, who are most familiar with the
information being submitted, and system-enforced edit and validation
checks,\5\ which are part of the electronic filing system, should
enhance the integrity and quality of data collected. Also, NFA's
guidance for the classification of the key data elements in the pilot
program should increase the uniformity of data available in FACTS 2000,
when utilized by all CPOs with respect to applicable commodity pool
annual report filings.
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\5\ For example, the system will prompt the user for a
correction if the components listed as assets do not total to the
amount entered for total assets, or if certain types of trading
assets and liabilities are reported in the balance sheet but there
are no gains or losses reported in the income statement with respect
to such assets.
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Pursuant to the effectiveness of these amendments, submission of
annual reports in compliance with the NFA's electronic filing
procedures, which require authentication through the use of user ids,
passwords and specific permissions managed by designated Security
Managers \6\ of CPOs, will replace the requirement that a manually
signed oath or affirmation be submitted to NFA with a commodity pool's
annual report. The user interface and system security for NFA's CPO
electronic filing system are patterned after NFA's existing EasyFile
system for IBs' unaudited financial reports. Similar to EasyFile for
IBs, the CPO's Security Manager can establish users and assign them
abilities to enter data and/or submit the report and data in the NFA
electronic filing system.
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\6\ The Security Manager procedure is part of NFA's existing
electronic system for registration processing. The Commission
adopted rule amendments in 2002 to enable NFA to utilize an online
system for registration functions. See 67 FR 38,869 (June 6, 2002).
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By these amendments CPOs will be required to maintain in their
business records a manually signed oath or affirmation along with their
commodity pool annual reports, and also sufficient documentation to
support the compilation of the key balances from the annual report.
Therefore, NFA may verify or corroborate the information submitted
electronically if necessary.
II. Comments
NFA was the only entity to file a comment letter on the proposed
amendments. NFA supported the proposed amendments and stated that
"mandatory participation [in electronic filing] should dramatically
increase * * * efficiencies without imposing any undue hardships on our
CPO Members." NFA also commented in support of the additional
amendments proposed with respect to commodity pool financial reporting
other than mandatory electronic filing, with one recommendation
regarding the notification of changes in commodity pool certified
public accountants. NFA commented that these required notifications to
both the NFA and the Commission should only be submitted to NFA by
CPOs, as they would be available to the Commission in the FACTS 2000
database. The Commission agrees with this comment and has changed the
amendment to reflect that for CPOs, such notification must be made
solely to NFA. NFA will alert the Commission whenever a notification
indicates a disagreement with CPAs or other non-routine circumstances.
III. Amendments
Rule 4.22(c) requires that a registered CPO file with NFA an annual
report for each pool that it operates within 90 days of the end of the
pool's fiscal year or the permanent cessation of trading. The
Commission is amending Rule 4.22(c) and Rule 4.7(b)(3) to specifically
require that the commodity pool annual reports be submitted to NFA
electronically through NFA's established electronic filing procedures.
Further, the Commission is amending Rule 4.22(h), pursuant to which
each such report, including those provided under Rule 4.7 and Rule
4.12(b), must contain an oath or affirmation that, to the best of the
knowledge and belief of the person making the oath or affirmation, the
information contained in the document
[[Page 8941]]
is accurate and complete. The amendment shall require the oath or
affirmation on annual reports filed with NFA to be made through the use
of electronic filing procedures. The Commission is also deleting Rule
4.22(j) and adding a provision to Rule 4.23(a) requiring CPOs to
maintain in their books and records a manually signed oath or
affirmation for all annual reports and account statements, and to
maintain records of the key financial balances submitted to NFA that
clearly demonstrate how such balances were derived.
Rule 4.7(b)(2) requires that an account statement signed and
affirmed by the CPO be prepared and distributed to pool participants no
less frequently than quarterly within 30 calendar days after the end of
the reporting period. The account statement must indicate: (1) The net
asset value of the exempt pool as of the end of the reporting period;
(2) the change in net asset value from the end of the previous
reporting period; and (3) the net asset value per outstanding unit of
participation in the exempt pool as of the end of the reporting period.
The Commission is amending Rule 4.7(b)(2) to clarify that the account
statement provided to participants must be presented and computed in
accordance with generally accepted accounting principles as are other
financial reports required in Part 4 of the Commission's Rules. By
making this requirement explicit, the Commission is ensuring that
established professional standards are the basis of such calculations.
Rule 4.22(d) requires that the certification of commodity pool
annual reports by independent accountants be made in accordance with
the certification requirements of Rule 1.16 that are applicable to the
financial statements of FCMs and IBs, with specific exceptions. Rule
4.22(d) does not exempt CPOs from Rule 1.16(g), which requires written
notification to be given to the NFA and to the Commission of changes in
the entity's independent accountant. In order to make clear that this
requirement applies to CPOs, the Commission is amending Rule 4.22(d) to
specifically state that Rule 1.16(g) is also applicable to CPOs with
respect to notifications of changes in the independent accountants
engaged for the certification of commodity pool financial statements,
except that such notification may be made solely to NFA. By clarifying
this, the Commission will be assured that NFA receives proper notice of
the circumstances of any changes of independent accountants, which NFA
will report to the Commission if indicative of disagreements with
auditors or similar circumstances of concern with respect to the
commodity pool.
Rule 4.22(f)(1) provides a mechanism for CPOs that cannot
distribute annual reports for pools within the required timeframe
without substantial undue hardship to file applications of extensions
of time with NFA. In the context of requesting such an extension, the
application to NFA must be accompanied by a letter from the pool's
independent public accountant. One of the items that must be addressed
in the letter is whether the independent accountant has any indication
from the audit work in process to indicate that the CPO is not meeting
"segregation" requirements. In response to some perceived confusion
by the use of the term "segregation", the Commission is amending Rule
4.22(f)(1)(ii)(B) to clarify that this does not refer to the
segregation requirements of Rule 1.20 applicable to FCMs, but instead
refers to the prohibition on commingling of funds of a commodity pool
with the assets of any other person contained in Rule 4.20(c).\7\
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\7\ The language originally proposed was "the segregation
requirements of Sec. 4.20(c)" showing the intent of the reference
to reflect Rule 4.20 and not FCM segregation requirements contained
in Commission Rule 1.20. 45 FR 51,600 at 51,610 (August 4, 1980).
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Rules 4.22(g)(2) and (3) require notifications to be made to the
Commission concerning CPOs' election of fiscal years for commodity
pools other than the calendar year or subsequent changes in fiscal
year-ends. The Commission is amending these Rules so that such
notifications are solely required to be filed with NFA and not the
Commission, consistent with other financial reporting filings that are
now made to NFA directly as a result of functions the Commission has
authorized NFA to perform.\8\ NFA is hereby authorized to maintain and
serve as official custodian of these notifications as well as the
notifications of changes in certified public accountant for commodity
pools.
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\8\ By order dated December 11, 2002, the Commission authorized
NFA to: (1) Receive and review annual financial reports required to
be filed by CPOs pursuant to 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 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 Rule 4.22(f)(2). In addition, the Commission
authorized NFA to maintain and to serve as the official custodian of
such records. 67 FR 77,470 (December 18, 2002).
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IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601 et. seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission previously has
established certain definitions of "small entities" to be used by the
Commission in evaluating the impact of its rules on such entities in
accordance with the RFA.\9\ The Commission has determined previously
that registered CPOs are not small entities for the purpose of the
RFA.\10\ The proposed amendments to Rule 4.7 and Rule 4.22 would apply
only to registered CPOs. Therefore, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
action taken herein will not have a significant economic impact on a
substantial number of small entities.
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\9\ 47 FR 18618 (April 30, 1982).
\10\ 47 FR at 18619.
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B. Paperwork Reduction Act
This rulemaking alters the method of collection for a required
collection of information under Part 4 of the Commissions Rules. As
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)),
the Commission submitted a copy of this section to the Office of
Management and Budget (OMB) for its review. No comments were received
in response to the Commission's invitation in the notice of proposed
rulemaking to comment on any change in the potential paperwork burden
associated with these rule amendments.
C. Cost-Benefit Analysis
Section 15(a) of the Act, as amended by Section 119 of the CFMA,
requires the Commission to consider the costs and benefits of its
action before issuing a new Rule under the Act. By its terms, Section
15(a) as amended does not require the Commission to quantify the costs
and benefits of a new Rule or to determine whether the benefits of the
Rule outweigh its costs. Rather, Section 15(a) simply requires the
Commission to "consider the costs and benefits" of its action.
Section 15(a) of the Act further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
[[Page 8942]]
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
The Commission's proposal contained an analysis of its
consideration of these costs and benefits and solicited public comment
thereon. 70 FR at 74244. No comments were received with respect to the
analysis of the Commission's consideration. Therefore, pursuant to such
consideration, the Commission has decided to adopt these amendments as
discussed above.
List of Subjects in 17 CFR Part 4
Advertising, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
0
In consideration of the foregoing, 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, 6b, 6c, 6l, 6m, 6n, 6o, 12a, and
23.
0
2. Section 4.7 is amended by revising paragraphs (b)(2) 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.
* * * * *
(b) * * *
(2) Periodic reporting relief. Exemption from the specific
requirements of Sec. Sec. 4.22(a) and (b); Provided, That a statement
signed and affirmed in accordance with Sec. 4.22(h) is prepared and
distributed to pool participants no less frequently than quarterly
within 30 calendar days after the end of the reporting period. This
statement must be presented and computed in accordance with generally
accepted accounting principles and indicate:
(i) The net asset value of the exempt pool as of the end of the
reporting period;
(ii) The change in net asset value from the end of the previous
reporting period; and
(iii) The net asset value per outstanding unit of participation in
the exempt pool as of the end of the reporting period.
(3) Annual report relief. (i) Exemption from the specific
requirements of Sec. Sec. 4.22(c) and (d); Provided, That within 90
calendar days after the end of the exempt pool's fiscal year, 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 those sections, an
annual report for the exempt pool, affirmed in accordance with Sec.
4.22(h) which contains, at a minimum:
* * * * *
0
3. Section 4.22 is amended by:
0
a. Revising paragraph (c) introductory text;
0
b. Revising paragraph (d) introductory text;
0
c. Revising paragraph (f)(1)(ii)(B);
0
d. Revising paragraphs (g)(2) and (3);
0
e. Revising paragraph (h); and
0
f. Removing paragraph (j), to read as follows:
Sec. 4.22 Reporting to pool participants.
* * * * *
(c) Except as provided in paragraph (c)(6) of this section, each
commodity pool operator registered or required to be registered under
the Act must distribute an Annual Report to each participant in each
pool that it operates, and must electronically submit a copy of the
Report and key financial balances from the Report to the National
Futures Association pursuant to the electronic filing procedures of the
National Futures Association, within 90 calendar days after the end of
the pool's fiscal year or the permanent cessation of trading, whichever
is earlier, but in no event longer than 90 days after funds are
returned to pool participants; Provided, however, That if during any
calendar year the commodity pool operator did not operate a commodity
pool, the pool operator must so notify the National Futures Association
within 30 calendar days after the end of such calendar year. The Annual
Report must be affirmed pursuant to paragraph (h) of this section and
must contain the following:
* * * * *
(d) The financial statements in the Annual Report must be presented
and computed in accordance with generally accepted accounting
principles consistently applied and must be certified by an independent
public accountant. The requirements of Sec. 1.16(g) of this chapter
shall apply with respect to the engagement of such independent public
accountants, except that any related notifications to be made may be
made solely to the National Futures Association, and the certification
must be in accordance with Sec. 1.16 of this chapter, except that the
following requirements of that section shall not apply:
* * * * *
(f) * * *
(1) * * *
(ii) * * *
(B) Do you have any indication from the part of your audit
completed to date that would lead you to believe that the commodity
pool operator was or is not meeting the recordkeeping requirements of
this part 4 or was or is not complying with the Sec. 4.20(c)
prohibition on commingling of property of any pool with the property of
any other person?
* * * * *
(g)(1) * * *
(2) 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.
(3) The commodity pool operator must continue to use the elected
fiscal year for the pool unless it provides written notice of any
proposed change to all participants and files such notice with the
National Futures Association at least 90 days before the change and the
National Futures Association does not disapprove the change within 30
days after the filing of the notice.
(h)(1) Each Account Statement and Annual Report, including an
Account Statement or Annual Report provided pursuant to Sec. 4.7(b) or
4.12(b), must contain an oath or affirmation that, to the best of the
knowledge and belief of the individual making the oath or affirmation,
the information contained in the 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.
(2) Each oath or affirmation must be made by a representative duly
authorized to bind the pool operator, and
(i) for the copy of a commodity pool's Annual Report submitted to
the National Futures Association, such representative shall satisfy the
required oath or affirmation through compliance
[[Page 8943]]
with the National Futures Association's electronic filing procedures,
and
(ii) for a commodity pool Account Statement or Annual Report
distributed to participants, a facsimile of the manually signed oath or
affirmation of such representative may be used so long as the manually
signed original is retained in accordance with Sec. 4.23.
(3) For each manually signed oath or affirmation, there must be
typed beneath the signed oath or affirmation:
(i) The name of the individual signing the document;
(ii) The capacity in which he is signing;
(iii) The name of the commodity pool operator for whom he is
signing; and
(iv) The name of the commodity pool for which the document is being
distributed.
* * * * *
0
4. Section 4.23 is amended by adding a new paragraph (a)(12) to read as
follows:
Sec. 4.23 Recordkeeping.
* * * * *
(a) * * *
(12) A manually signed copy of each Account Statement and Annual
Report provided pursuant to Sec. 4.22, 4.7(b) or 4.12(b), and records
of the key financial balances submitted to the National Futures
Association for each commodity pool Annual Report, which records must
clearly demonstrate how the key financial balances were compiled from
the Annual Report.
* * * * *
Issued in Washington, DC, on February 16, 2006 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06-1615 Filed 2-21-06; 8:45 am]
BILLING CODE 6351-01-P