2019-26162
Federal Register, Volume 84 Issue 237 (Tuesday, December 10, 2019)
[Federal Register Volume 84, Number 237 (Tuesday, December 10, 2019)]
[Rules and Regulations]
[Pages 67355-67370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26162]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AE76
Registration and Compliance Requirements for Commodity Pool
Operators (CPOs) and Commodity Trading Advisors: Family Offices and
Exempt CPOs
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
is adopting certain amendments to its regulations applicable to
commodity pool operators (CPOs) and commodity trading advisors (CTAs).
The amendments (Final Rules) are consistent with no-action and
exemptive letters issued by the Commission's Division of Swap Dealer
and Intermediary Oversight (DSIO). The amendments provide an exemption
from registration for CPOs and CTAs of family offices; adopt exemptive
relief consistent with the Jumpstart Our Business Startups Act of 2012
by permitting general solicitation under applicable Commission
regulations; and clarify that non-U.S. persons, regardless of financial
sophistication, are permitted participants in pools exempt under the
applicable Commission regulation.
DATES: This rule is effective January 9, 2020.
FOR FURTHER INFORMATION CONTACT: Joshua Sterling, Director, at 202-418-
6056 or [email protected]; Amanda Olear, Associate Director, at 202-
418-5283 or [email protected]; Elizabeth Groover, Special Counsel, at
202-418-5985 or [email protected]; Chang Jung, Special Counsel, at 202-
418-5202 or [email protected]; and Michael Ehrstein, Special Counsel, at
202-418-5957 or [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1151 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
a. Statutory and Regulatory Background
i. Existing Statutory and Regulatory Authorities
ii. The October 2018 Proposal
b. Public Comments and Ex Parte Meetings
c. Scope of the Final Rules
II. Final Rules
a. Family Offices
i. The Proposed Exemptions
ii. No Notice Required for the Family Office CPO Exemption
iii. The CTA Exemption: No Bifurcation Needed and No Notices
Required
iv. Responses to Miscellaneous Comments
v. The Effect of the Final Amendments on CFTC Staff Letters 12-
37 and 14-143: The CPO and CTA Family Office No-Action Letters
b. JOBS Act Amendments: Expanding Marketing and Advertising for
Qualifying Exempt CPOs and Certain Exempt Pools
i. Background of the JOBS Act and the Proposed Amendments
ii. Comments Received and Final Amendments
iii. The Effect of the Final Amendments on CFTC Letter 14-116:
The JOBS Act Relief Letter
c. Permitting Non-U.S. Person Investors in De Minimis Exempt
Pools
III. Related Matters
a. Regulatory Flexibility Act
b. Paperwork Reduction Act
i. Revisions to the Collections of Information
(a) OMB Control Number 3038-0005
(b) OMB Control Number 3038-0023
ii. Information Collection Comments
c. Cost-Benefit Considerations
i. General Costs and Benefits
(a) Summary of the Final Rule
(b) Benefits of the Final Rule Amendments
(c) Costs of the Final Rule Amendments
ii. Section 15(a)
(a) Factor 1: Protection of Market Participants and the Public
(b) Factor 2: Efficiency, Competitiveness, and Financial
Integrity of Markets
(c) Factor 3: Price Discovery
(d) Factor 4: Sound Risk Management
(e) Factor 5: Other Public Interest Considerations
d. Antitrust Considerations
I. Background
a. Statutory and Regulatory Background
i. Existing Statutory and Regulatory Authorities
Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) \1\ established a statutory framework
to reduce risk, increase transparency, and promote market integrity
within the financial system by regulating the swaps market. As amended
by the Dodd-Frank Act, section 1a(11) of the Commodity Exchange Act
(CEA or the Act) defines the term ``commodity pool operator,'' as any
person \2\ engaged in a business that is of the nature of a commodity
pool, investment trust, syndicate, or similar form of enterprise, and
who, with respect to that commodity pool, solicits, accepts, or
receives from others, funds, securities, or property, either directly
or through capital contributions, the sale of stock or other forms of
securities, or otherwise, for the purpose of trading in commodity
interests.\3\ CEA section 1a(12) defines a ``commodity trading
advisor,'' as any person who, for compensation or profit, engages in
the business of advising others, either directly or through
publications, writings, or electronic media, as to the value of or the
advisability of trading in commodity interests.\4\ CEA section 4m(1)
generally requires each person who satisfies the CPO or CTA definitions
to register as such with the Commission.\5\ With respect to CPOs, the
CEA also authorizes the Commission, acting by rule or regulation, to
include within or exclude from the term ``commodity pool operator,''
any person engaged in the business of operating a commodity pool, if
the Commission determines that the rule or regulation
[[Page 67356]]
will effectuate the purposes of the Act.\6\ CEA section 1a(12)(B)
provides multiple exclusions from the CTA definition, and similarly
affords the Commission the authority to exclude such other persons not
within the intent of that provision, as the Commission may specify by
rule, regulation, or order.\7\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010), available at:
https://www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf (last retrieved Jul. 17, 2019).
\2\ Regulation 1.3 defines ``person'' as including individuals,
associations, partnerships, corporations, and trusts. 17 CFR 1.3.
The Commission's regulations are found at 17 CFR Chapter I (2019).
\3\ 7 U.S.C. 1a(11). The CEA is found at 7 U.S.C. 1, et seq.
(2019). Both the Act and the Commission's regulations are accessible
through the Commission's website, https://www.cftc.gov.
\4\ 7 U.S.C. 1a(12)(A)(i). The CTA definition also includes any
person who for compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning the
value of or advisability of trading in commodity interests, and any
person that is registered with the Commission as a CTA. 7 U.S.C.
1a(12)(A)(ii)-(iii).
\5\ 7 U.S.C. 6m(1).
\6\ 7 U.S.C. 1a(11)(B).
\7\ 7 U.S.C. 1a(12)(B)(vii). The Commission most recently relied
on the authority in this provision in issuing an Order excluding
Farm Credit System institutions from that definition, due to their
similarities to banks, a type of entity that is already excluded by
CEA section 1a(12)(B)(i). See Order Excluding Farm Credit System
Institutions From the Commodity Exchange Act's Definition of
``Commodity Trading Advisor,'' 81 FR 89447 (Dec. 12, 2016). CEA
section 1a(12)(C) requires that the exclusions in CEA section
1a(12)(B) only apply if the furnishing of such excluded CTA services
by such persons is solely incidental to the conduct of their
business or profession. 7 U.S.C. 1a(12)(C).
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Part 4 of the Commission's regulations governs the operations and
activities of CPOs and CTAs.\8\ Those regulations implement the
statutory authority provided to the Commission by the CEA and establish
multiple registration exemptions and exclusions for CPOs and CTAs.\9\
Part 4 also contains regulations that establish the ongoing compliance
obligations applicable to CPOs and CTAs registered or required to be
registered. These requirements relate to the commodity pools and
separate accounts that the CPOs and CTAs operate and advise, and among
other things, provide customer protection, disclosure and reporting of
certain information to a registrant's commodity pool participants or
advisory clients.
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\8\ See generally 17 CFR part 4.
\9\ See, e.g., 17 CFR 4.13 and 4.14 (providing multiple
registration exemptions to qualifying persons meeting the CPO and
CTA definitions, respectively).
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ii. The October 2018 Proposal
In response to information received from members of the public, as
well as CFTC staff's own internal review of the Commission's regulatory
regime, the Commission published for public comment in the Federal
Register on October 18, 2018, a Notice of Proposed Rulemaking (NPRM, or
the Proposal), proposing several amendments to the regulations
applicable to CPOs and CTAs.\10\ Specifically, the Commission proposed
regulatory amendments that would add to 17 CFR part 4:
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\10\ See Registration and Compliance Requirements for Commodity
Pool Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18,
2018) (Proposal).
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(1) An exemption from registration in Regulation 4.13(a)(4) that is
generally consistent with the terms of Staff Advisory 18-96; \11\
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\11\ Offshore Commodity Pools Relief for Certain Registered CPOs
from Rules 4.21, 4.22, and 4.23(a)(10) and (a)(11) and From the
Books and Records Requirement of Rule 4.23, Commodity Futures
Trading Commission, Division of Trading & Markets (Apr. 11, 1996),
available at: https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last retrieved Oct. 10, 2019) (Staff Advisory 18-
96).
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(2) A requirement in Regulation 4.13 that any person claiming or
affirming an exemption from CPO registration pursuant to Regulations
4.13(a)(1)-(a)(5) certify that neither the claimant nor its principals
are statutorily disqualified pursuant to CEA sections 8a(2) or 8a(3);
(3) An exemption from the recordkeeping requirements in Regulation
4.23 for U.S.-based CPOs of offshore commodity pools that permits the
CPO to maintain the pool's original books and records in the pool's
offshore location;
(4) An exemption from registration in Regulations 4.13 and 4.14 for
persons acting as CPOs or CTAs for family offices and/or their family
clients, as those terms are defined in regulations adopted by the
Securities and Exchange Commission (SEC);
(5) A clarification that the exclusion from the CPO definition
currently provided by Regulation 4.5(a)(1) for a registered investment
company (RIC) should be claimed by the entity most commonly understood
to solicit for or ``operate'' the RIC, i.e., the RIC's investment
adviser;
(6) An exclusion in Regulation 4.5 from the CPO definition for the
investment advisers of business development companies (BDCs);
(7) Relief permitting general solicitation in commodity pools
offered by CPOs pursuant to exemptions in Regulations 4.7 and
4.13(a)(3), consistent with the Jumpstart Our Business Start-ups Act of
2012 (JOBS Act); and
(8) Amendments to the ``Reporting Person'' definition in Regulation
4.27 that would eliminate the filing requirements for Forms CPO-PQR and
CTA-PR for certain classes of CPOs and CTAs.\12\
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\12\ Proposal, 83 FR 52903-52904.
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Several of the proposed amendments are consistent with, or
expansions of relief that is currently available through a staff
advisory or through no-action and exemptive letters issued over the
years by staff of the Commission's DSIO and its predecessors. The
Commission proposed these amendments intending to simplify the
regulatory landscape for CPOs and CTAs without reducing the protections
or benefits provided by those regulations, to increase public awareness
about available relief by incorporating commonly relied upon no-action
or exemptive relief in Commission regulations, and to generally reduce
the regulatory burden without sacrificing the Commission's customer
protection and other regulatory interests.
b. Public Comments and Ex Parte Meetings
The Commission requested comment generally on all aspects of the
Proposal, and also solicited comment through targeted questions about
each of the proposed amendments. Overall, the Commission received 28
individual comment letters responsive to the NPRM: Six from legal and
market professional groups; 13 from law firms; seven from individual
family offices; one from a government-sponsored enterprise (GSE)
actively involved in the domestic housing market; and one from the
National Futures Association (NFA), a registered futures
association,\13\ who through delegation by the Commission, assists the
Commission staff in administering the CPO and CTA regulatory
program.\14\ Additionally, Commission staff participated in multiple ex
parte meetings concerning the Proposal.\15\
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\13\ See CEA section 17, 7 U.S.C. 21.
\14\ Comments were submitted by the following entities: Alscott,
Inc.* (Dec. 7, 2018); Alternative Investment Management Association
(AIMA) (Letter 1: Dec. 17, 2018, and Letter 2: Oct. 7, 2019);
Buchanan, Ingersoll, and Rooney, PC* (Dec. 12, 2018); Commodore
Management Company* (Dec. 12, 2018); Dechert, LLP (Dechert) (Dec.
17, 2018); Freddie Mac (Dec. 17, 2018); Fried, Frank, Harris,
Shriver, & Jacobson, LLP (Fried Frank) (Dec. 17, 2018); Investment
Adviser Association (IAA) (Dec. 17, 2018); Kramer, Levin, Naftalis,
& Frankel, LLP* (Dec. 17, 2018); LBCW Investments* (Dec. 5, 2018);
Managed Funds Association (MFA) (Dec. 14, 2018); Marshall Street
Capital* (Dec. 13, 2018); McDermott, Will, & Emery, LLP* (Dec. 17,
2018); McLaughlin & Stern, LLP* (Dec. 5, 2018); Moreland Management
Company* (Dec. 13, 2018); Morgan, Lewis, & Bockius, LLP* (Dec. 18,
2018); NFA (Dec. 17, 2018); New York City Bar Association, the
Committee on Futures and Derivatives (NYC Bar Derivatives Committee)
(Jan. 4, 2019); Norton, Rose, Fulbright US, LLP* (Dec. 17, 2018);
Perkins Coie, LLP* (Dec. 17, 2018); the Private Investor Coalition,
Inc. (PIC) (Nov. 28, 2018); Ridama Capital* (Dec. 13, 2018); Schiff
Hardin, LLP (two offices)* (Dec. 13 and 17, 2018); the Securities
Industry and Financial Management Association Asset Management Group
(SIFMA AMG) (Letter 1: Dec. 17, 2018, and Letter 2: Sept. 13, 2019);
Vorpal, LLC* (Dec. 17, 2018); Willkie, Farr, and Gallagher, LLP
(Willkie) (Dec. 11, 2018); and Wilmer Hale, LLP (Wilmer Hale) (Dec.
7, 2018). Those entities marked with an ``*'' submitted
substantively identical, brief comments, specifically supporting the
detailed comments and suggested edits submitted to the Commission by
PIC.
\15\ Comments for Proposed Rule 83 FR 52902, available at:
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2925
(last retrieved Oct. 15, 2019).
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c. Scope of the Final Rules
As noted above, the Commission proposed to add to Regulation 4.13
an exemption for qualifying CPOs
[[Page 67357]]
operating commodity pools outside of the U.S. consistent with
Commission Staff Advisory 18-96, known in the Proposal as the ``18-96
Exemption.'' In conjunction with that amendment, the Commission also
proposed to add a prohibition against statutory disqualifications
listed in CEA sections 8a(2) and 8a(3) that would apply generally to
CPOs claiming a registration exemption under Regulation 4.13, as well
as a number of technical and substantive changes to Regulation 4.23
intended to preserve recordkeeping relief also provided by that
advisory, and enhance the regulation's readability. The Commission
received many comments regarding the proposed relief based on Staff
Advisory 18-96 and the proposed prohibition on statutory
disqualifications for certain exempt CPOs.
Based on the comments received and the recommendations of
Commission staff, the Commission is not finalizing or adopting these
amendments at this time. Commenters noted the 18-96 Exemption, if
adopted as proposed, could have a significant impact on the compliance
burdens of CPOs operating outside of the United States. In
consideration of the comments, the Commission is withdrawing that
aspect of the Proposal, but may undertake a more comprehensive review
of the extraterritorial application of Commission regulations in the
CPO-CTA space in the future. Commenters also addressed the statutory
disqualification prohibition in great detail,\16\ and the Commission
believes those comments likewise require further consideration.
Therefore, the Commission intends to reconsider these amendments in a
future rulemaking.
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\16\ The Commission received several comments raising logistical
and scoping issues with respect to this particular proposed
amendment. See, e.g., Dechert Letter, at 8; AIMA Letter, at 10; MFA
Letter, at 4; SIFMA AMG Letter, at 19.
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II. Final Rules
a. Family Offices
i. The Proposed Exemptions
The Commission proposed amendments to Regulations 4.13 and 4.14
that would establish CPO and CTA registration exemptions for persons
meeting the definition of ``family office,'' (the Family Offices)
consistent with the regulatory exclusion from the definition of
``investment adviser,'' for Family Offices adopted by the SEC in
2012.\17\ The proposed exemptions, which the Commission intends to
adopt with certain modifications, are substantively similar to no-
action relief from CPO and CTA registration currently provided through
CFTC Letter Nos. 12-37 and 14-143.\18\ Through the Proposal, the
Commission intended that the exemptions would provide Family Offices
regulatory certainty and make unnecessary the no-action relief program
for Family Office CPOs and CTAs, administered by Commission staff since
2012 and 2014, respectively.\19\ Thus, the Commission proposed to
incorporate by reference the definitions of ``family office'' and
``family client'' from Sec. 275.202(a)(11)(G)-1, as adopted by the
SEC, into each of the proposed exemptions.\20\
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\17\ See Proposal, 83 FR 52927 (proposing new CPO and CTA
exemptions for qualifying Family Offices at Regulations 4.13(a)(8)
and 4.14(a)(11), respectively).
\18\ CFTC Letter No. 12-37 (Nov. 29, 2012), available at:
https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/12-37.pdf (last retrieved Oct. 10,
2019) (CPO Family Office No-Action Letter); CFTC Letter No. 14-143
(Nov. 5, 2014), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/14-143.pdf
(last retrieved Oct. 10, 2019) (CTA Family Office No-Action Letter).
\19\ Proposal, 83 FR 52909 (citing Commission staff's experience
``gained through the continued availability of the CPO Family Office
No-Action Letter and the subsequent issuance and utilization by
industry of the CTA Family Office No-Action Letter'').
\20\ Id. at 52907-09, citing CPO Family Office No-Action Letter
and CTA Family Office No-Action Letter (defining ``family offices''
and explaining the SEC exclusion for Family Offices and the
available no-action relief).
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Proposed Regulation 4.13(a)(8) would provide an exemption from CPO
registration to a person with respect to a qualifying commodity pool,
if: (a) Interests in the pool are exempt from registration under the
Securities Act of 1933, and such interests are sold only to ``family
clients;'' (b) the commodity pool qualifies as a ``family office;'' and
(c) the person reasonably believes, at the time of investment, or at
the time of conversion for an existing pool, that each person who
participates in the pool is a ``family client'' of the ``family
office.'' \21\ The Commission proposed to require that Family Offices
claiming the CPO exemption submit an initial notice filing, to be
affirmed on an annual basis, pursuant to Regulation 4.13(b).\22\ The
Commission proposed this requirement to ``ensure at least an annual
assessment of whether the CPO of the Family Office remains eligible to
rely upon the proposed exemption.'' \23\
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\21\ Id. at 52927.
\22\ Id. (proposing to amend Regulation 4.13(b)(1)(ii) to add
Proposed Regulation 4.13(a)(8), the CPO exemption for Family
Offices); and 17 CFR 4.13(b)(1) and (b)(4).
\23\ Proposal, 83 FR at 52915.
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Proposed Regulation 4.14(a)(11) would provide an exemption from CTA
registration to a person who directs commodity trading advice solely
to, and for the sole use of, ``family clients.'' \24\ Like most of the
other exemptions contained in Regulation 4.14, the Commission proposed
to make this exemption self-executing, requiring no filing with the
Commission or NFA prior to its efficacy. The Commission further
explained in the Proposal that it thought certain CTA services provided
to the exempt commodity pools of Family Offices would be covered by
Regulation 4.14(a)(5), which currently provides an exemption from CTA
registration to a person who: (a) Is also exempt from CPO registration;
and (b) only advises pool(s) for which that person is so exempt.\25\
Therefore, the Commission limited the proposed CTA exemption for Family
Offices to the commodity trading advice provided to ``individual Family
Clients.'' \26\
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\24\ Id. at 52927.
\25\ Id. at 52915 (citing 17 CFR 4.14(a)(5)).
\26\ Id. (explaining the Commission's preliminary belief that
``Family Offices that are also claiming relief under proposed Sec.
4.13(a)(8) would already be eligible for relief from CTA
registration by virtue of the existing exemption in Sec.
4.14(a)(5)'').
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In addition to the general solicitation of comments, the Commission
also posed several specific questions in the Proposal regarding the
Family Office exemptions. The Commission solicited comment on the
following issues:
(1) Whether persons claiming the CPO exemption in Proposed
Regulation 4.13(a)(8) should be required to annually recertify their
ongoing eligibility for that exemption and what the costs of such a
requirement would be;
(2) Whether the identifying information submitted by Family Offices
in order to claim the proposed CPO exemption should be included in
NFA's Background Affiliation Status Information Center (``BASIC'')
database, consistent with the treatment of other registered and exempt
persons, or whether the limitation of their prospective and actual
clients to non-public, ``family clients,'' warranted different
treatment;
(3) Whether the proposed bifurcation of relief for CTAs of Family
Offices between existing Regulation 4.14(a)(5) for pools for which the
CTA is also the exempt CPO and Proposed Regulation 4.14(a)(11) for
other non-pool, individual ``family clients'' made sense, or whether a
more efficient or effective approach was available; and
(4) Whether the Commission should require persons claiming the
exemption from CTA registration in Proposed Regulation 4.14(a)(11) to
file any notice, initial, annual, or otherwise, and what
[[Page 67358]]
the costs of such a requirement would be.\27\
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\27\ Proposal, 83 FR 52916-52917, questions 7-10.
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The Commission received multiple comments in response to the
proposed CPO and CTA exemptions for Family Offices. For instance, a
detailed comment letter addressing each of the Commission's questions,
as well as multiple other issues, was submitted by the Private Investor
Coalition (PIC), an individual Family Office professional group, and
was specifically supported by 13 other comment letters submitted by a
variety of Family Offices and their counsel.\28\ Additionally, several
other groups and national law firms representing Family Offices
commented on this aspect of the Proposal.\29\ Overall, the Commission
received generally favorable comments regarding its effort to add CPO
and CTA registration exemptions for Family Offices to 17 CFR part 4.
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\28\ PIC Letter; see, e.g., Marshall Street Capital Letter,
Alscott, Inc. Letter, Commodore Management Co. Letter (all
supporting ``the adoption of the Proposed Rule for the reasons set
forth and with the modifications proposed in the comment letter
submitted by [PIC] on November 28, 2018'').
\29\ See, e.g., Wilmer Hale Letter, Fried Frank Letter, Willkie
Letter.
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For the reasons discussed in the Proposal, the Commission is adding
the CPO and CTA exemptions for Family Offices, with procedural
modifications in light of comments received, as Regulations 4.13(a)(6)
and 4.14(a)(11). The Commission continues to believe that familial
relationships inherent in Family Offices provide a reasonable mechanism
for protecting the interests of family clients and resolving disputes
amongst them, and that the regulatory interest is lower than in
typical, arms-length transactions where the CPO and the pool
participants, or the CTA and its advisory clients, do not have close
relationships and/or long-standing family history between them. The
Commission also understands that Family Offices are not operations of
the type and nature that warrant regulatory oversight by the
Commission, because, by definition, a Family Office is not a vehicle in
which non-family clients would be solicited or permitted to invest.\30\
The Commission continues to believe that these unique characteristics
reduce the need for and utility of the benefits and protections
generally afforded by the Commission's regulatory regime for CPOs and
CTAs and further justify providing Family Offices relief from that
regime. The Commission further addresses significant comments on this
aspect of the Proposal and details the exemptions below.
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\30\ Proposal, 83 FR 52909-10 (citing prior claims by Family
Office representatives that ``a Family Office is comprised of
participants with close relationships, and there is a direct
relationship between the clients and the CPO or advisor, . . . [and]
such relationships greatly reduce the need for the customer
protections available pursuant to . . . 17 CFR part 4''); Id. at
52915.
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ii. No Notice Required for the Family Office CPO Exemption
The Commission received multiple comments in response to its
question regarding the notice requirement for Family Offices claiming
the proposed CPO exemption. The commenters generally opposed requiring
Family Offices to file any notice to claim and/or maintain eligibility
for the proposed CPO exemption, citing multiple reasons. Those included
the resulting lack of regulatory harmonization between the SEC's
exclusion and the proposed CTA exemption, the asserted limited utility
of such notices to the Commission, and the generally stable nature of
Family Offices. Conversely, one commenter supported a one-time, initial
notice filing with no ongoing annual requirement,\31\ and another
stated that any mandatory notice should require information from the
Family Office claiming the exemption only, omitting any collection of
information regarding a Family Office's exempt pools (or, as the
commenter referred to them, ``investment entities'').\32\
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\31\ AIMA Letter, at 10.
\32\ Willkie Letter, at 3.
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The commenters emphasized that neither the SEC's exclusion for
Family Offices from the definition of ``investment adviser,'' nor the
Commission's own proposed CTA exemption would require a notice filing
of any kind.\33\ Commenters further cited the Commission's historic and
consistent recognition that its consumer protection concerns are much
lower in the context of Family Offices and their family clients.\34\
For uniformity across regulatory regimes, several commenters argued in
favor of making the CPO exemption for Family Offices self-
executing.\35\ Though the Commission inquired, commenters did not offer
any estimates as to how much an initial or annual notice filing for the
CPO exemption would cost a Family Office.
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\33\ PIC Letter, at 4-6 (stating that uniform treatment across
exemptions would ``facilitate compliance with and lower the
regulatory burdens of each separate regime''); Willkie Letter, at 3;
Fried Frank Letter, at 2 (stating that the Commission should not
refer to the adoption of this exemption as ``harmonization'' with
the SEC's requirements because requiring a notice for this exemption
would make it fundamentally different from the SEC's exclusion for
Family Offices).
\34\ PIC Letter, at 4-5; Willkie Letter, at 2 (summarizing
Commission's staff's historic position regarding Family Offices as,
``no substantial public interest is served in regulating investment
entities whose primary purpose is investing family assets'').
\35\ PIC Letter, at 4-6; Fried Frank Letter, at 2-3; Willkie
Letter, at 3; Wilmer Hale Letter, at 2-3 and 6.
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The Commission understands, both from the comments and from its
regulatory experience with Family Offices, that Family Offices
typically exist to manage the assets solely of persons within a single
family, frequently involving multiple generations of family members, as
well as the investment entities, trusts, or accounts formed to benefit
those family members. It is also not uncommon for Family Offices to
continue their operations for extended periods of time with little to
no change in their legal or financial structures or arrangements. With
that in mind, the Commission has carefully considered the comments
received on the Proposal and has determined to eliminate the filing
requirement in its entirety with respect to the CPO Exemption for
Family Offices.
As a result, the Commission has determined not to adopt several of
the proposed amendments to Regulation 4.13(b). The Commission is,
however, adding language to Regulation 4.13(b)(1) to clarify that an
exemption notice is not required to be filed by persons claiming the
new CPO exemption for Family Offices. Upon its adoption as Regulation
4.13(a)(6), the Commission intends the CPO registration relief provided
by this exemption to be available on a self-executing basis for
qualifying Family Offices. Exempt Family Offices will still be subject
to the same recordkeeping requirements and special call authority as
all other exempt CPOs.\36\ Therefore, the Commission is also amending
the introductory language to Regulation 4.13(c), such that the
provisions in subparagraph (c)(1) will apply to all persons claiming an
exemption from CPO registration under that regulation, regardless of
whether a notice of exemption is required to claim such relief.
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\36\ See 17 CFR 4.13(c)(1) (generally requiring CPOs exempt
under Regulation 4.13 to make and keep books and records related to
their CPO activities for five years, and to submit to such special
calls as the Commission may make to demonstrate eligibility for and
compliance with the applicable criteria of the claimed exemption).
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This approach harmonizes the filing requirements for the regulatory
exclusions and exemptions available to Family Offices, including the
relief previously adopted by the SEC. It also ensures that Family
Offices can rely on these exemptions without needing to determine
whether an initial filing was completed, and without tracking annual
updates or claims to maintain the
[[Page 67359]]
exemption. Family Office CPOs do not broadly solicit the public for
investment in commodity pools, as they are limited, by common
understanding and by the regulations adopted herein, to providing
services to their ``family clients.'' Therefore, as the Commission has
historically stated, these intermediaries do not pose the same
regulatory concerns as those of other CPOs that routinely engage in
wider solicitation, whether registered or exempt from such
registration, and from whom the Commission would generally require
either a registration application or a notice filing for such
exemption. Because of their unique characteristics, and for the myriad
reasons cited by commenters,\37\ the Commission has determined not to
adopt a notice filing requirement for exempt Family Office CPOs in the
Final Rule.
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\37\ Those reasons discussed above include the benefit of
harmonization of regulatory requirements across SEC and CFTC regimes
with respect to Family Offices, the CFTC's lowered regulatory
interest in Family Offices limited to serving family clients, and
the typical historic stability in the operations of Family Offices,
generally. See PIC Letter, at 4-6; Willkie Letter, at 2-3; Fried
Frank Letter, at 2-3; Wilmer Hale Letter, at 2-3 and 6.
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The Commission also solicited comment on whether any information
collected through the notices submitted by Family Offices claiming the
proposed CPO exemption should be submitted for inclusion in NFA's BASIC
database. That issue is mooted by the Commission's decision not to
require any notice for the CPO exemption; nonetheless, the Commission
notes that commenters overwhelmingly argued against including in the
BASIC database any data or information collected from notices filed by
Family Offices.\38\ By determining not to collect this information in
the first place, the Commission will also avoid the resolution of
potentially complex and novel legal issues involving intermediary
privacy, information confidentiality, and data storage and management.
In the interest of harmonizing Family Office relief across multiple
financial regulatory areas, while also wishing to protect the privacy
of Family Offices and their family clients, the Commission has
determined it appropriate not to require a filing to claim the CPO
exemption, as discussed above.
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\38\ PIC Letter, at 7-9 (strongly objecting to any requirement
that Family Offices post their claims for exemption or any other
identifying information on BASIC or any other public forum or
database); Fried Frank Letter, at 2-3; Willkie Letter, at 3; cf.
AIMA Letter, at 10 (stating that adding exempt Family Offices to the
BASIC database would make Bylaw 1101 due diligence easier for other
NFA Members). With respect to determining compliance with Bylaw
1101, Wilmer Hale argues that, ``there are other equally as
effective means of ascertaining that information on family
offices.'' Wilmer Hale Letter, at 4. PIC further urged the
Commission to consider that Family Offices and their family clients
are individual market participants, rather than commercial market
participants, and as a result of their private status, they have
very different, additional privacy concerns. PIC Letter, at 9.
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iii. The CTA Exemption: No Bifurcation Needed and No Notices Required
Regarding the proposed CTA exemption for qualifying Family Offices,
the Commission also received largely favorable comments. Commenters
responded directly to the two remaining questions of whether CTA relief
should be bifurcated between two exemptions and whether the Commission
should require a notice filing for the relief. Regarding the former,
PIC commented that it disagreed with the concept of bifurcating relief
for Family Office CTAs between exemptions in Regulation 4.14(a)(5) and
Proposed Regulation 4.14(a)(11), based on whether they are advising a
pooled vehicle or individual family client. Instead, PIC stated that
the exemptive relief for CTAs of all types of family client should
ideally be housed in one exemption, to the extent possible.\39\ One law
firm suggested editing the proposed exemption to provide additional
coverage for ``any collective investment vehicle, the operator of which
would be subject to Part 4, absent exemption.'' \40\ PIC disagreed,
arguing that the language in Proposed Regulation 4.14(a)(11) would, in
fact, already cover CTAs of all family clients, regardless of type or
structure.\41\
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\39\ PIC Letter, at 9-10.
\40\ Wilmer Hale Letter, at 7 (stating that this edit would
cover situations where, ``there is a slim chance where a commodity
pool might not be a `family client' '').
\41\ PIC Letter, at 10.
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The Commission agrees with PIC's comments: Because the exemption,
which is adopted as proposed, is limited to ``commodity trading advice
. . . solely directed to family clients,'' the exemption would cover
CTA activities on behalf of both individual family clients and pools
comprised of family client assets.\42\ This approach greatly simplifies
the compliance analysis for Family Offices and provides them a single
CTA registration exemption to cover their advisory activities on behalf
of all persons and entities meeting the SEC's ``family client''
definition.
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\42\ PIC Letter, at 10 (adding that, consequently, a CTA to a
Family Office would need to claim only the exemption in Regulation
4.14(a)(11) for complete exemptive relief coverage of its advisory
activities, without having to consider its status under the
exemption in Regulation 4.14(a)(5)).
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Additionally, the Commission agrees with comments received
suggesting that no notice be required for the CTA exemption for Family
Offices to claim that relief. Almost all of the other exemptions under
Regulation 4.14 operate on a self-executing basis and have done so
since its inception.\43\ Further, the Commission has not found a unique
characteristic about Family Offices that would justify their disparate
treatment under the Commission's existing part 4 regulations. The
Commission believes that harmonizing the requirements across the SEC's
``investment adviser'' exclusion and the CPO and CTA exemptions adopted
herein is a significant benefit to Family Offices navigating the
federal regulatory regimes applicable to them without negatively
affecting the Commission's interests in regulating CPOs and CTAs more
generally. Therefore, for the reasons stated in the Proposal \44\ and
pursuant to the analysis above, the Commission has determined to adopt
the CTA exemption for Family Offices with no notice requirement and
with the intent that this exemption be relied upon for CTA services
provided to all types of ``family client.''
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\43\ See, e.g., 17 CFR 4.14(a)(1)-(a)(7) and (a)(9)-(a)(10).
Conversely, Regulation 4.13 generally requires a notice filing to
claim the exemptions therein, with the exception of the exemption
added by this Final Rule for qualifying Family Offices. The
Commission justifies this approach for Family Offices, different
from other exempt CPOs required to file a notice, based primarily on
their distinctly limited clientele, i.e., ``family clients.'' See
supra section II.A.ii for further discussion.
\44\ See Proposal, 83 FR 52909 and 52915.
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iv. Responses to Miscellaneous Comments
Several commenters also requested a specific correction to the
proposed CPO Family Office exemption. For instance, multiple commenters
pointed out that a correction should be made to the proposed CPO
exemption's requirement that the commodity pool subject to the
exemption meet the SEC's ``family office'' definition. PIC suggested
that this proposed requirement be changed to instead require the
covered pool meet the SEC's ``family client'' definition,\45\ whereas
Willkie suggested that the requirement be changed, such that it would
instead require the person claiming the CPO exemption, rather than the
pool, to meet the SEC's ``family office'' definition.\46\ In the
Proposal, the Commission intended to draft an exemption from CPO
registration with substantive conditions applicable to
[[Page 67360]]
both the exempt CPO and the exempt pool(s) operated on behalf of family
clients. Because conditions applicable to the exempt commodity pool are
already found in the first paragraph of the exemption,\47\ the
Commission is adopting the CPO exemption with that provision corrected
to require that the CPO, i.e., the person claiming the exemption, meets
the SEC's ``family office'' definition.
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\45\ PIC Letter, at 2-3. This suggested edit was also
specifically supported in comments submitted by Fried Frank,
McDermott, Will & Emery, and Perkins Coie. Fried Frank Letter, at 3,
n.6; McDermott, Will & Emery Letter, at 1; and Perkins Coie Letter,
at 1.
\46\ AIMA suggested a similar edit, stating that the proposed
requirement should read, ``the operator of the pool qualifies,'' not
``the pool qualifies.'' AIMA Letter, at 10.
\47\ Proposed Regulation 4.13(a)(8)(i) would require that
interests in the exempt pool are exempt from registration under the
Securities Act of 1933, and such interests are offered and sold only
to ``family clients,'' as defined in Sec. 275.202(a)(11)(G)-1 of
CFR title 17. See Proposal, 83 FR 52927. The Commission intends to
adopt this requirement, though the internal numbering in the final
amendments has changed due to other edits made to the Proposal.
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Finally, the Commission also received several comments that,
although not directly responding to specific questions posed, did
nonetheless raise issues relevant to continued Family Office operations
in the Commission's jurisdiction. For instance, several commenters
requested that the Commission confirm the ongoing validity of historic
Commission staff letters, which continue to provide interpretative
relief to any Family Office choosing to rely upon them, as permitted by
Regulation 140.99,\48\ notwithstanding the adoption herein of CPO and
CTA exemptions in 17 CFR part 4 for Family Offices.\49\ In response to
those commenters, the Commission confirms that the Final Rules do not
supersede prior staff letters providing that a particular entity is
``not a pool,'' provided that a Family Office has determined its own
situation to be substantively identical to the outlined facts and
circumstances precipitating the letter relief.
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\48\ 17 CFR 140.99(a)(3) (stating that an interpretative letter
may be relied upon by persons other than the Beneficiary).
\49\ Fried Frank Letter, at 3; Willkie Letter, at 2. In the
Proposal, the Commission stated, ``Family Offices unable to meet the
requirements of the exemptions proposed herein today may still avail
themselves of the relief provided in Sec. 4.13(a)(3), if they so
qualify, or they may continue to seek relief on an individual firm-
by-firm basis through requests submitted to Commission staff.''
Proposal, 83 FR 52909.
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v. The Effect of the Final Amendments on CFTC Staff Letters 12-37 and
14-143: The CPO and CTA Family Office No-Action Letters
The Commission does intend the adoption of the CPO and CTA
exemptions for Family Offices at Regulations 4.13(a)(6) and 4.14(a)(8),
respectively (which are effective 30 days after publication in this
Federal Register release), however, to supersede the staff no-action
relief previously provided by the CPO and CTA Family Office No-Action
Letters. Therefore, Family Offices qualifying for those exemptions
should instead, as soon as practicable after these amendments go into
effect, create and maintain an internal record documenting the relevant
exemption they wish to claim, as well as their qualifications for that
exemption, similar to the requirements to claim other self-executing
exemptions in 17 CFR part 4.
b. JOBS Act Amendments: Expanding Marketing and Advertising for
Qualifying Exempt CPOs and Certain Exempt Pools
i. Background of the JOBS Act and the Proposed Amendments
The JOBS Act amended various sections of the Securities Act of 1933
(33 Act) and required, among other things, that the SEC revise its
regulations to implement the new JOBS Act provisions, including the
loosening of marketing restrictions generally applicable to securities
that are privately offered, or resold pursuant to Rule 144A.\50\ To
that end, the SEC adopted amendments to Regulation D and Rule 144A that
were consistent with those congressional directives.\51\ Specifically,
the SEC amended Regulation D by adding Sec. 230.506(c), which permits
issuers to engage in general solicitation or general advertising in the
offer and sale of securities under that regulation, subject to certain
conditions. These include that the issuer meets the terms and
conditions of 17 CFR 230.501 and 230.502(a) and (d), that all
purchasers of the offered securities are accredited investors, and that
the issuer takes reasonable steps to verify the accredited investor
status of each purchaser.\52\ The SEC also adopted substantively
similar amendments to its Rule 144A, which is a non-exclusive safe
harbor exemption from the registration and prospectus delivery
requirements under the 33 Act for resales of certain securities to
qualified institutional buyers (QIBs), as defined in Sec.
230.144A(a)(1), provided that certain conditions are met.\53\ Through
the JOBS Act Adopting Release, the SEC also eliminated offering and
marketing restrictions in the resale of certain securities to QIBs.\54\
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\50\ Public Law 112-206, 126 Stat. 306 (Apr. 5, 2012). The 33
Act may be found at 15 U.S.C. 77a, et seq.
\51\ See Eliminating the Prohibition Against General
Solicitation and General Advertising in Rule 506 and Rule 144A
Offerings, 77 FR 54464 (Sept. 5, 2012) and 78 FR 44771 (Jul. 24,
2013) (``JOBS Act Adopting Release'') (amending Regulation D, 17 CFR
230.500-230.508, and Rule 144A, 17 CFR 230.144A).
\52\ 17 CFR 230.506(c)(1)-(2). In adopting this alternative to
traditional Regulation D offerings, the SEC stated that, ``because
the issuer has the burden of demonstrating that its offering is
entitled to an exemption from the registration requirements of the
[33 Act], it will be important for issuers and their verification
service providers to retain adequate records regarding the steps
taken to verify that a purchaser was an accredited investor.'' JOBS
Act Adopting Release, 78 FR 44779.
\53\ See Rule 144A, 17 CFR 230.144A.
\54\ The SEC stated, ``[a]s amended, Rule 144A(d)(1) will
require only that the securities be sold to a QIB or to a purchaser
the seller and any person acting on behalf of the seller reasonably
believes is a QIB.'' JOBS Act Adopting Release, 78 FR 44786
(emphasis added).
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Prior to these amendments, commodity pools offered and sold
pursuant to Sec. 506 of Regulation D, or resold pursuant to Rule 144A,
were able to be operated pursuant to exemptive relief provided under
Regulations 4.7(b) and 4.13(a)(3). After these regulatory amendments
prompted by the JOBS Act, persons marketing, selling, or reselling
securities pursuant to Sec. 230.506(c) of Regulation D and/or Rule
144A could not necessarily qualify for an exemption from CPO
registration provided by Regulation 4.13(a)(3), or for exemptive relief
from certain CPO compliance obligations, as provided by Regulation 4.7,
each of which has historically been subject to offering and marketing
restrictions. Specifically, with respect to Regulation 4.7(b), such
pools may not be able to satisfy the requirement that participation
units are offered solely to qualified eligible persons (QEPs), if their
CPOs and resellers wish to engage in the general solicitation and
advertising now permitted under Sec. Sec. 230.506(c) and 230.144A,
respectively.\55\ With respect to Regulation 4.13(a)(3), those exempt
pools may not be able to meet the exemption's condition that its
interests be ``offered and sold without marketing to the public in the
United States.'' \56\ In response to the concerns of market
participants, DSIO issued CFTC Letter No. 14-116,\57\ which provided
relief so that CPOs of commodity pools, the securities of which are
either offered and sold pursuant to Sec. 230.506(c) of
[[Page 67361]]
Regulation D, or resold to QIBs under Rule 144A, were able to operate
them pursuant to Regulations 4.7 and 4.13, even if they or their
resellers engage in general solicitation and marketing, as contemplated
by the JOBS Act.
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\55\ Additionally, certain market participants questioned
whether CPOs of commodity pools relying on Sec. 230.506(c) would be
able to meet the condition in Regulation 4.7(b) that requires that
the offering ``qualifies for exemption from the registration
requirements of the [33] Act pursuant to section 4[(a)](2) of that
Act.'' Although Sec. 230.506, including Sec. 230.506(c),
``continue[s] to be treated as a regulation issued under section
4[(a)](2) of the [33 Act],'' 78 FR 44774, there was nonetheless
uncertainty expressed by certain market participants about whether
Sec. 230.506(c) constituted an ``exemption from the registration
requirements of the [33] Act pursuant to section 4[(a)](2) of that
Act,'' in accordance with Regulation 4.7(b).
\56\ 17 CFR 4.13(a)(3)(i).
\57\ CFTC Letter No. 14-116 (Sept. 9, 2014) (``JOBS Act Relief
Letter''), available at: https://www.cftc.gov/sites/default/files/csl/pdfs/14/14-116.pdf (last retrieved Oct. 3, 2019).
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In the Proposal, the Commission proposed amending Regulations
4.7(b) and 4.13(a)(3) in a manner consistent with the JOBS Act, and
informed in large part by the exemptive relief provided by the JOBS Act
Relief Letter. The Commission also proposed making several technical
amendments to Regulation 4.7(b) to improve the readability and clarity
of that provision. With respect to Regulation 4.7(b), the Proposal: (1)
Allowed the offerings to be exempt from registration under section
4(a)(2) of the 33 Act, and/or offered and sold pursuant to Regulation
D, including Sec. 230.506(c); (2) allowed the offerings to be resold
pursuant to Rule 144A; (3) deleted the restrictive text, ``without
marketing to the public;'' and (4) removed the reference to the act of
``offering'' by the registered CPO of a pool exempt under Regulation
4.7. As a result of the Proposal, the operative requirements of ``non-
bank'' CPOs \58\ claiming relief under Regulation 4.7(b) would become:
(1) The CPO must be registered with respect to the exempt pool; (2) the
participation units must be exempt from registration under section
4(a)(2) of the 33 Act and/or offered and sold pursuant to Regulation D,
or resold pursuant to Rule 144A, or offered and sold pursuant to
Regulation S; \59\ (3) the participation units must be sold solely to
QEPs, with no marketing or solicitation restriction on the offering;
and (4) the registered CPO must file the notice required by Regulation
4.7(b), and otherwise comply with the requirements in Regulation 4.7(d)
in operating the exempt pool.
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\58\ The Proposal's technical amendments also sought to break
out the eligible claimants of the relief in Regulation 4.7(b) into
two separate subparagraphs: Regulation 4.7(b)(1)(i) for ``non-bank''
CPOs whose offerings are subject to Regulation D or Regulation S,
and Regulation 4.7(b)(1)(ii) for banks registered as CPOs offering
pools in the form of a collective trust fund exempt under section
3(a)(2) of the 33 Act. See Proposal, 83 FR 52926.
\59\ 17 CFR 230.901-230.905.
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With respect to the exemption in Regulation 4.13(a)(3), the
Commission proposed to amend the regulation by deleting the language,
``such interests are offered and sold without marketing to the public
in the United States,'' and replacing it with a conditional statement
requiring that ``the interests [be] marketed and advertised to the
public in the United States solely, if at all, in compliance with
Regulation D, Sec. Sec. 230.500 through 230.508 of this title, or with
Rule 144A, Sec. 230.144A of this title.'' \60\ Consequently,
Regulation 4.13(a)(3) would require, in relevant part, that: (1) Such
commodity pool interests be exempt from registration under the 33 Act;
and (2) if such interests are marketed and advertised in the U.S., they
can only be marketed or advertised in compliance with the provisions of
Regulation D or of Rule 144A, as amended by the JOBS Act.
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\60\ Proposal, 83 FR 52926.
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ii. Comments Received and Final Amendments
The Commission received two comments specifically addressing the
JOBS Act aspect of the Proposal. Fried Frank stated that it supported
all of the proposed amendments related to the JOBS Act in Regulations
4.7 and 4.13(a)(3), including the Commission's decision not to require
an additional notice beyond that which is already required to claim
relief under Regulations 4.7 or 4.13(a)(3).\61\ MFA similarly offered
its strong support and commended the Commission's efforts to harmonize
its 17 CFR part 4 regulations with securities regulations impacted by
the JOBS Act, stating its appreciation for the Commission's desire to
``provide legal certainty with respect to transactions engaged in by
dually-regulated CFTC and SEC entities.'' \62\
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\61\ Fried Frank Letter, at 2.
\62\ MFA Letter, at 8.
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For the reasons described in the Proposal,\63\ the Commission is
adopting the amendments to Regulations 4.7(b) and 4.13(a)(3) relating
to the JOBS Act. Specifically, the Commission continues to believe that
harmonizing the impact of the JOBS Act on dually-regulated entities
eliminates incompatibilities between comparable SEC and CFTC regulatory
regimes, and generally provides legal certainty regarding these
transactions in a manner that allows these entities to benefit from the
new offering process under the JOBS Act. The Commission further
believes that the amendments achieve the goal of permitting commodity
pools operated by CPOs claiming relief under Regulations 4.7(b) or
4.13(a)(3) to avail themselves of the JOBS Act relief adopted by
Congress, while still retaining the other requirements currently set
forth in those regulations.
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\63\ Proposal, 83 FR 52911 and 52915.
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However, the Commission is further reorganizing and revising
Regulation 4.7(b)(1) and adopting a minor amendment to Regulation
4.13(a)(3)(i) to clarify which exempt CPOs are eligible for relief from
the offering restrictions in those regulations pursuant to the JOBS Act
amendments, and to further improve readability and clarity. First,
Regulation 4.7(b)(1), as amended, will separate the three different
types of commodity pools for which a registered CPO may claim relief
under that regulation: (1) A commodity pool that is exempt from
registration under section 4(a)(2) of the 33 Act, which includes
certain Regulation D offerings; (2) a commodity pool that is offered
and sold pursuant to Regulation S; and (3) a commodity pool that is a
collective trust fund, the securities of which are exempt under section
3(a)(2) of the 33 Act.\64\ Second, consistent with the JOBS Act Relief
Letter, Regulation 4.7(b)(1)(i)(A) clarifies that the general
solicitation ban currently in Regulation 4.7(b) remains in effect for
all offerings of the three types of commodity pools listed in
Regulations 4.7(b)(1)(i)(A)-(C), except for those that are offered
pursuant to Sec. 230.506(c). Third, also consistent with the JOBS Act
Relief Letter, the Commission is creating Regulation 4.7(b)(1)(ii) to
clarify that the relief in Regulation 4.7(b) is available with respect
to the three types of commodity pools listed in Regulations
4.7(b)(1)(i)(A)-(C), even if participations in such pools are resold
pursuant Rule 144A. Finally, with respect to Regulation 4.13(a)(3), the
Commission is amending that subparagraph's reference to ``Regulation D,
Sec. Sec. 230.500 through 230.508'' to say ``Sec. 230.506(c).''
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\64\ See infra new Regulations 4.7(b)(1)(i) and (ii).
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iii. The Effect of the Final Amendments on CFTC Letter 14-116: The JOBS
Act Relief Letter
The Commission intends the adoption of the amendments to
Regulations 4.7 and 4.13(a)(3) detailed above, which are effective 30
days after publication in this Federal Register release, to supersede
the staff exemptive relief previously provided by the JOBS Act Relief
Letter. Because CPOs currently relying on that exemptive letter are
already required to file notices claiming an exemption under Regulation
4.7 or 4.13(a)(3) to fully utilize that relief, the Commission expects
that such exempt CPOs wishing to use general solicitation in their
existing qualifying exempt pools may do so without further action. CPOs
interested in using general solicitation with respect to qualifying
exempt pools formed in the future may do so in accordance with the
amendments adopted herein, following their effective date, by filing a
notice of exemption for such pools, as required by Regulations 4.7(d)
and 4.13(b)(1).
[[Page 67362]]
c. Permitting Non-U.S. Person Investors in De Minimis Exempt Pools
In the context of proposing other amendments to Regulation 4.13,
the Commission also proposed to amend Regulation 4.13(a)(3), which, as
noted above, provides a CPO registration exemption to persons who
operate pools trading a de minimis amount of commodity interests,
subject to the conditions enumerated in that regulation.\65\
Specifically, the Commission proposed to amend Regulation
4.13(a)(3)(iii), the condition which governs the permissible investors
in those exempt pools, by deleting, at Regulation 4.13(a)(3)(iii)(E), a
provision referencing persons eligible to participate in pools relying
upon Regulation 4.13(a)(4),\66\ and replacing it with ``[a] non-U.S.
person,'' as a new category of permissible investors.\67\
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\65\ 17 CFR 4.13(a)(3).
\66\ The Commission noted in the Proposal its understanding that
``relying on CFTC Staff Letter 04-13, for purposes of determining
whether a person qualifies for exemption from CPO registration under
Sec. 4.13(a)(3), market participants are generally not considering
whether non-U.S. person participants meet one of the investor
sophistication criteria listed in Sec. 4.13(a)(3).'' Proposal, 83
FR 52907 (internal footnotes omitted). In 2012, the Commission
rescinded the exemption originally provided in Regulation
4.13(a)(4), the features of which comprised the legal underpinnings
for the analysis in CFTC Staff Letter 04-13. See Commodity Pool
Operators and Commodity Trading Advisors: Compliance Obligations, 77
FR 11252 (Feb. 24, 2012); correction notice published at 77 FR 17328
(Mar. 26, 2012).
\67\ Proposal, 83 FR 52907, 52914, 52926. The Commission also
expressed its view that de minimis pools ``do not trigger the same
level of regulatory interest . . . as commodity pools requiring CPO
registration and compliance with all or part of the requirements in
17 CFR part 4,'' and that such an amendment would be consistent with
other part 4 regulations: ``Additionally, Sec. 4.7 already permits
non-U.S. persons, regardless of their [QEP] status, to participate
in commodity pools thereunder, which are not subject to de minimis
commodity interest trading thresholds.'' Id.
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Generally, the Commission received comments in favor of its efforts
to amend Regulation 4.13(a)(3), such that non-U.S. person participants,
regardless of financial sophistication, would be explicitly permitted
in de minimis commodity pools, although several commenters offered
suggested edits and raised questions.\68\ For instance, several
commenters inquired whether the Commission intended this proposed
amendment to mean, ``non-U.S. persons,'' as that term is defined in
Regulation 4.7(a)(1)(iv),\69\ and others requested the Commission
consider expanding its definition of ``non-U.S. person,'' to include
the definition of that term in Regulation S.\70\ Commenters also
provided helpful background information to the Commission. Two
commenters requested that the Commission confirm the ongoing validity
of staff guidance regarding the categories of participants eligible to
invest in de minimis commodity pools, i.e., DSIO's CPO-CTA Frequently
Asked Questions (CPO-CTA FAQs).\71\
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\68\ See, e.g., Dechert Letter, at 12; Fried Frank Letter, at 2;
Freddie Mac Letter, at 2; IAA Letter, at 12.
\69\ Dechert Letter, at 12; IAA Letter, at 12; AIMA Letter, at
8; Fried Frank Letter, at 2.
\70\ AIMA Letter, at 8; Freddie Mac Letter, at 2.
\71\ Dechert Letter, at 12, and Willkie Letter, at 8, citing
``[DSIO] Responds to Frequently Asked Questions--CPO/CTA: Amendments
to Compliance Obligations,'' at 3, available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/faq_cpocta.pdf (last retrieved Oct. 7, 2019) (CPO CTA
FAQs).
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In the CPO-CTA FAQs, DSIO stated its intent to continue permitting
non-U.S. persons to participate in de minimis commodity pools,
notwithstanding the rescission of Regulation 4.13(a)(4), as well as its
plan to specifically amend Regulation 4.13(a)(3) in the future to
permit such participants, as a typographical or technical amendment, as
opposed to one that is designed to affect the substance of the de
minimis exemption.\72\ One commenter also offered an alternative change
to the proposed amendment: Willkie suggested instead that the
Commission delete the outdated provision and simultaneously amend the
immediately preceding paragraph to state, ``A `qualified eligible
person,' as that term is defined in Sec. 4.7 of this chapter,'' which
this commenter thought would effectively add non-U.S. persons as
permitted participants in this type of pool.\73\
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\72\ CPO CTA FAQs, at 3.
\73\ Willkie Letter, at 8.
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The Commission agrees with the approach of deleting the outdated
provision in Regulation 4.13(a)(3)(iii)(E) and also amending Regulation
4.13(a)(3)(iii)(D) to permit as participants in de minimis pools, ``[a]
`qualified eligible person,' as that term is defined in Sec. 4.7 of
this chapter.'' The Commission believes that this amendment provides an
important update to this exemption, which reflects the general market
understanding and practice of permitting non-U.S. persons to invest in
de minimis pools in a manner consistent with prior Commission
statements and staff guidance. This amendment also responds to the
question raised by several commenters of which ``non-U.S. person''
definition the Commission intended to use--the final amendment
incorporates by reference the definition of that term in Regulation
4.7(a)(1)(iv). In particular, this amendment is consistent with CFTC
Letter 04-13,\74\ which, as discussed above, relied heavily on the
rescinded Regulation 4.13(a)(4), and with the guidance provided by DSIO
staff in the CPO CTA FAQs.\75\ Moreover, because the legal analysis of
CFTC Letter 04-13 is primarily based on a CPO registration exemption
repealed in 2012, the Commission believes it appropriate, and in fact,
the Commission intends, for this amendment to supersede that staff
letter. Finally, through the use of a cross-reference, this amendment
ensures that any future amendments to the QEP definition are also
consistently reflected in the de minimis exemption, simplifying future
Commission rulemaking endeavors.
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\74\ CFTC Staff Letter 04-13 (Apr. 14, 2004), available at:
https://www.cftc.gov/sites/default/files/tm/letters/04letters/tm04-13.htm (last retrieved Oct. 10, 2019).
\75\ CPO CTA FAQs, at 3.
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III. Related Matters
a. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that Federal
agencies, in promulgating regulations, consider whether the regulations
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.\76\ Each Federal agency is required to conduct an initial and
final regulatory flexibility analysis for each rule of general
applicability for which the agency issues a general notice of proposed
rulemaking. As noted in the Proposal, the regulations adopted herein
affect only persons registered or required to be registered as CPOs or
CTAs and persons claiming exemptions from registration as such. With
respect to CPOs, the Commission previously has determined that a CPO is
a small entity for purposes of the RFA, if it meets the criteria for an
exemption from registration under Regulation 4.13(a)(2).\77\ Because
the regulations adopted herein generally apply to persons registered or
required to be registered as CPOs with the Commission, and/or provide
relief to
[[Page 67363]]
qualifying persons from registration as such, as well as from related
compliance burdens, the RFA is not applicable with respect to CPOs
impacted by this release's regulatory amendments.
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\76\ 5 U.S.C. 601, et seq.
\77\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619-20. Regulation 4.13(a)(2) exempts a person from
registration as a CPO when: (1) None of the pools operated by that
person has more than 15 participants at any time, and (2) when
excluding certain sources of funding, the total gross capital
contributions the person receives for units of participation in all
of the pools it operates or intends to operate do not, in the
aggregate, exceed $400,000. See 17 CFR 4.13(a)(2).
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Regarding CTAs, the Commission has previously considered whether
such registrants should be deemed small entities for purposes of the
RFA on a case-by-case basis, in the context of the particular
Commission regulation at issue.\78\ As certain of these registrants may
be small entities for purposes of the RFA, the Commission considered
whether this rulemaking would have a significant economic impact on
such registrants.\79\ The only portion of the Final Rules directly
impacting CTAs adds a self-executing registration exemption consistent
with the CTA Family Office No-Action Letter, which provides no-action
relief from CTA registration to Family Offices providing CTA services
to their family clients. This new exemption will not impose any new
burdens on market participants or Commission registrants. Rather,
because the Commission is adopting an exemption from the requirement to
register as a CTA for qualifying Family Offices, the Commission finds
that such exemption would be less burdensome to those persons than the
full costs of CTA registration and compliance. Affected Family Office
CTAs will be transitioning from the CTA registration relief provided
through the CTA Family Office No-Action Letter to a self-executing CTA
exemption for Family Offices in Regulation 4.14, and there is
consequently no significant economic impact on these entities by virtue
of this particular regulatory amendment. The Commission's decision not
to require an associated notice or filing further supports the
Commission's preliminary and final RFA findings. Additionally, the
Commission received no comments on the Proposal's RFA discussion.
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\78\ See 47 FR 18620.
\79\ Proposal, 83 FR 52917.
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Therefore, the Commission concludes that, to the extent the
regulations adopted herein affect CTAs, it will not create a
significant economic impact on a substantial number of small entities.
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the regulations adopted by
the Commission will not have a significant economic impact on a
substantial number of small entities.
b. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) imposes certain requirements on
Federal agencies in connection with their conducting or sponsoring any
collection of information as defined by the PRA.\80\ Under the PRA, an
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number from the Office of Management and Budget (OMB).
The regulations adopted in this release would result in a collection of
information within the meaning of the PRA, as discussed below. The
Commission is therefore submitting the Final Rules to OMB for approval.
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\80\ See 44 U.S.C. 3501, et seq.
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As discussed in the Proposal, the Commission's proposed regulations
would have impacted or amended two collections of information for which
the Commission has previously received control numbers from OMB. The
first collection of information the Commission believed could be
impacted by the Proposal is, ``Rules Relating to the Operations and
Activities of Commodity Pool Operators and Commodity Trading Advisors
and to Monthly Reporting by Futures Commission Merchants, OMB control
number 3038-0005'' (Collection 3038-0005). Collection 3038-0005
primarily accounts for the burden associated with part 4 of the
Commission's regulations that concern compliance obligations generally
applicable to CPOs and CTAs, as well as certain enumerated exemptions
from registration as such, exclusions from those definitions, and
available relief from compliance with certain regulatory requirements.
The Commission had proposed to amend this collection to reflect (1) the
notices proposed to be required to claim certain of the CPO
registration exemptions and the CPO exclusion proposed therein; and (2)
an expected reduction in the number of registered CPOs and CTAs filing
Forms CPO-PQR and CTA-PR, pursuant to proposed revisions to Regulation
4.27.\81\
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\81\ Proposal, 83 FR 52918-19.
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The Commission also proposed to amend a second collection of
information entitled, ``Part 3--Registration, OMB control number 3038-
0023'' (Collection 3038-0023), which pertains to the registration of
intermediaries generally, to reduce the number of persons registering
as CPOs and CTAs as a result of the regulatory amendments in the
Proposal. The responses to these collections of information are
mandatory.
The collections of information in the Proposal would have made
available to eligible persons: (1) An exemption from CPO registration
based upon Commission Staff Advisory 18-96; (2) recordkeeping location
relief for qualifying, registered CPOs, also based upon Commission
Staff Advisory 18-96; (3) exemptions from CPO and CTA registration for
qualifying Family Offices; (4) an expanded exclusion under Regulation
4.5 for investment advisers of BDCs; and (5) exemptive relief made
available through amendments to the definition of ``Reporting Person''
in Regulation 4.27(b), such that qualifying CPOs and CTAs no longer
have to file Forms CPO-PQR or CTA-PR.\82\ In the instant Federal
Register release, the Commission is adopting final amendments,
effectively adding exemptions from CPO and CTA registration for
qualifying Family Offices at Regulations 4.13(a)(6) and 4.14(a)(11),
respectively, and finalizing other amendments consistent with the JOBS
Act Relief Letter issued by Commission staff.
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\82\ The Proposal also included proposed amendments to
Regulations 4.7(b) and 4.13(a)(3), expanding the availability of
relief under those provisions to include registered and exempt CPOs
issuing, offering, selling, or reselling securities with general
solicitation, pursuant to the JOBS Act. Those amendments do not
impact or change the number of CPOs registered or exempt from such
registration, but rather affect their ability to broadly solicit the
public for investment. See infra section II.b. for discussion of
that aspect of the Final Rules.
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As noted in the Proposal, eligible persons have the option to elect
the registration exemptions adopted and/or amended, if they are so
qualified, but have no obligation to do so. For this reason, the
Commission proposed to amend Collection 3038-0005 for PRA purposes to
reflect these alternatives, and Collection 3038-0023 to reduce the
number of persons registering as CPOs or CTAs; the Commission further
stated its expectation that the Proposal would not impose any
significant new burdens on CPOs or CTAs.\83\ The Commission emphasized
then, ``to the extent that the proposed amendments provide registration
exemptions or definitional exclusions, and/or alternatives to
comprehensive compliance with Commission regulations, through the
adoption of amendments consistent with existing exemptive and no-action
letter relief, it is reasonable . . . to infer that the proposed
amendments will generally prove to be less burdensome
[[Page 67364]]
for persons eligible to claim the proposed alternative relief.'' \84\
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\83\ The Commission also considered in the Proposal the impact
that the proposed 18-96 Exemption, as well as related proposed
amendments to Regulation 4.23, might have on these collections and
the number of persons responding thereunder. Proposal, 83 FR 52918.
Because the Commission is not pursuing or finalizing those proposed
amendments at this time, the Commission no longer believes any
modifications to these collections on those bases are necessary.
\84\ Proposal, 83 FR 52918.
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i. Revisions to the Collections of Information
(a) OMB Control Number 3038-0005
Collection 3038-0005 is currently in force with its control number
having been provided by OMB, and it was renewed recently on March 14,
2017.\85\ As stated above, Collection 3038-0005 governs responses made
pursuant to part 4 of the Commission's regulations, governing the
operations of CPOs and CTAs. Generally, under Collection 3038-0005, the
estimated average time spent per response will not be significantly
altered; however, the Commission is making minor adjustments, discussed
further below, to Collection 3038-0005 to account for new and/or
lessened burdens expected from the regulatory amendments adopted in
this release.
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\85\ See Notice of Office of Management and Budget Action, OMB
Control No. 3038-0005, available at: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201701-3038-005 (last retrieved Oct. 3, 2019).
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In this release, the Commission is adopting new CPO and CTA
exemptions for qualifying Family Offices, as well as finalizing
amendments to Regulations 4.7(b) and 4.13(a)(3), consistent with to the
JOBS Act. In the Proposal, the Commission estimated an increase in the
number of persons responding to the portion of Collection 3038-0005
associated with Regulation 4.13(b)(1) (the requirement to file a claim
for an exemption under that section) by at least the number of persons
claiming the CPO Family Office No-Action Letter, which has provided no-
action relief from CPO registration for Family Offices, i.e., 200 CPOs.
This estimate was based on the Commission's decision in the Proposal to
require a notice filing from Family Offices wishing to claim the
proposed CPO exemption.
Given the Commission's adoption today of the CPO exemption for
Family Offices with no notice filing requirement, the Commission no
longer believes such an increase in the number of persons filing
notices under Regulation 4.13(b)(1) is necessary. Regarding the JOBS
Act amendments also adopted in this release, the Commission stated in
the Proposal that ``no adjustments need to be made to Collection 3038-
0005 to account for [those] amendments because persons relying on the
exemptive relief therein are, as a condition of relief, currently
required to claim an exemption under Regulations 4.7(b) or 4.13(a)(3),
as applicable to them, and therefore, are already counted in this
collection;'' \86\ the Commission continues to believe this aspect of
its PRA analysis to be accurate.
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\86\ Proposal, 83 FR 52918. The Proposal further discussed
modifications to Collection 3038-0005 based on the proposed
amendments to Regulation 4.5 and 4.27. Id. Each of those amendments
is being finalized and adopted by the Commission in a concurrently
published Federal Register release containing the pertinent Preamble
and administrative law discussions as well as those final rule
amendments.
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The currently approved total burden associated with Collection
3038-0005, in the aggregate, is as follows:
Estimated number of respondents: 45,270.
Annual responses for all respondents: 129,042.
Estimated average hours per response: 2.83.\87\
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\87\ The Commission has rounded the average hours per response
to the second decimal place for ease of presentation.
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Annual burden: 365,764.
Additionally, the currently approved total recordkeeping burden
associated with Collection 3038-0005 is as follows:
Estimated number of respondents: 9,838.
Annual responses for respondents: 13,672.
Estimated average hours per response: 5.01.
Annual recordkeeping burden: 68,497.
In the Proposal, the Commission estimated that the proposed CPO
registration exemptions, based on Commission Staff Advisory 18-96 and
to provide relief for Family Offices, would result in an additional 250
notice filings under Regulation 4.13(b)(1). Because these notice
filings will not be required by the final amendments, the Commission no
longer believes that such an increase is necessary. As a result of
these Final Rules, the Commission believes that the reporting burden
associated with Regulation 4.13(b)(1) under Collection 3038-0005 should
remain unchanged, as follows:
Estimated number of respondents: 3,622.
Annual responses by each respondent: 3.
Estimated average hours per response: 0.5.
Total annual reporting burden hours: 1,811.
The Commission has taken the position in this release that Family
Offices, though eligible for exemption from registration as CPOs under
Regulation 4.13 by virtue of the Final Rules, will still be subject to
the same recordkeeping requirements in Regulations 4.13(c)(1)(i)-(ii)
as all other exempt CPOs. Therefore, the Commission believes an
adjustment to account for the recordkeeping burden of approximately 200
newly exempt Family Offices is necessary. As a result, the Commission
is amending the recordkeeping burden associated with Regulations
4.13(c)(1)(i)-(ii) as follows:
Estimated number of respondents: 3,812.
Annual responses by each respondent: 1.
Estimated average hours per response: 11.4.
Total annual recordkeeping burden hours: 43,457.
As a result, the total new recordkeeping burden associated with
Collection 3038-0005 will be as follows:
Estimated number of respondents: 10,038.
Annual responses for all respondents: 13,872.
Estimated average hours per response: 5.10.
Annual recordkeeping burden: 70,777.
The total new burden associated with Collection 3038-0005, in the
aggregate, reflecting the regulatory amendments adopted herein,\88\ is
as follows:
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\88\ These burden totals include adjustments made to Collection
3038-0005 to reflect the Final Rule amendments contained in this
Federal Register release, as well as Final Rule amendments
concurrently adopted and published through a second release by the
Commission. See also Registration and Compliance Requirements for
Commodity Pool Operators and Commodity Trading Advisors: Registered
Investment Companies, Business Development Companies, and Definition
of Reporting Person, published elsewhere in this issue of the
Federal Register.
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Estimated number of respondents: 43,397.
Annual responses for all respondents: 112,024.
Estimated average hours per response: 3.16.
Annual reporting burden: 354,367.
(b) OMB Control Number 3038-0023
Based on the contents of the Proposal, the Commission expected that
``persons that are currently counted among the estimates for Collection
3038-0023 with respect to CPO and CTA registration with the Commission
will deregister as such, due to the availability of the additional
registration exemptions and exclusion proposed herein.'' \89\ On that
basis, the Commission proposed, ``to deduct the expected claimants of
that relief from the total number of persons required to register with
the Commission as CPOs and CTAs.'' \90\ As discussed above, the
Commission is
[[Page 67365]]
adopting herein CPO and CTA exemptions for Family Offices, with no
notice filing requirement, and finalizing amendments to Regulations
4.7(b) and 4.13(a)(3) based upon the JOBS Act. As noted above, the
conditions of relief related to the JOBS Act provisions already require
that the person be registered as a CPO or exempt from such
registration, meaning those amendments will have no impact on the
number of respondents in this collection.
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\89\ Proposal, 83 FR 52919.
\90\ Id.
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The currently approved total burden associated with Collection
3038-0023, in the aggregate, excluding the burden associated with
Regulation 3.21(e), is as follows:
Estimated number of respondents: 77,857.
Estimated number of responses: 78,109.
Estimated average hours per response: 0.09.
Estimated total annual burden on respondents: 7,029.8.
Frequency of collection: Periodically.
The currently approved total burden associated with Regulation
3.21(e) under Collection 3038-0023, which remains unchanged under the
Final Rules, is as follows:
Estimated number of respondents: 396.
Estimated number of responses: 396.
Estimated average hours per response: 1.25.
Estimated total annual burden on respondents: 495.
Frequency of collection: Annually.
The Commission proposed to reduce the number of registrants by the
estimated number of claimants with respect to each of the registration
exemptions and exclusion in the Proposal. Given the amendments being
adopted herein,\91\ the Commission continues to estimate that 200
persons will claim relief from registration as the CPO of a qualifying
Family Office and that 100 persons will claim relief from registration
as the CTA of a qualifying Family Office or of family clients.\92\
Therefore, the Commission believes that the burden associated with
Collection 3038-0023 should be reduced, such that the total burden
associated with the collection, excluding the burden associated with
Regulation 3.21(e), will be as follows:
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\91\ As discussed above, these burden totals include adjustments
made to Collection 3038-0023 to reflect the Final Rule amendments
contained in this Federal Register release, as well as Final Rule
amendments concurrently adopted and published through a second
release by the Commission. See also Registration and Compliance
Requirements for Commodity Pool Operators and Commodity Trading
Advisors: Registered Investment Companies, Business Development
Companies, and Definition of Reporting Person, published elsewhere
in this issue of the Federal Register.
\92\ As noted above, any modifications necessary to the
collections of information related to the proposed amendments to
Regulation 4.5 or 4.27 are discussed in a separate Federal Register
release.
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Estimated number of respondents: 77,492.
Estimated number of responses: 77,492.
Estimated average hours per response: 0.09.
Estimated total annual burden on respondents: 6,974.
ii. 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 therein.\93\ The Commission did not receive any
such comments.
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\93\ Proposal, 83 FR 52920.
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c. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA.\94\ Section 15(a) further specifies that the costs and
benefits shall be evaluated in light of the following five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the CEA section 15(a) considerations.
---------------------------------------------------------------------------
\94\ 7 U.S.C. 19(a).
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i. General Costs and Benefits
The baseline for the Commission's consideration of the costs and
benefits of the Final Rules is the regulatory status quo, as determined
by the CEA and the Commission's existing regulations in 17 CFR part 4.
The Commission recognizes, however, that to the extent that market
participants have relied on relevant Commission staff action, the
actual costs and benefits of the Final Rules, as realized in the
market, may not be as significant. Because each amendment addresses a
discrete issue, which impacts a unique subgroup within the universe of
entities captured by the CPO and CTA statutory definitions, the
Commission has determined to analyze the costs and benefits associated
with each amendment separately, as presented below. The Commission has
endeavored to assess the costs and benefits of the amendments adopted
herein in quantitative terms wherever possible. Where estimation or
quantification is not feasible, however, the Commission has provided
its assessment in qualitative terms.
The Commission notes that the consideration of costs and benefits
below is based on the understanding that the markets function
internationally, with many transactions involving U.S. firms taking
place across international boundaries; with some Commission registrants
being organized outside of the United States; with leading industry
members typically conducting operations both within and outside the
United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
Final Rule on all activity subject to the amended regulations, whether
by virtue of the activity's physical location in the United States, or
by virtue of the activity's connection with or effect on U.S. commerce
under section 2(i) of the CEA.\95\ In particular, the Commission notes
that some entities affected by this rulemaking are located outside of
the United States.
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\95\ 7 U.S.C. 2(i).
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(a) Summary of the Final Rule
As discussed in greater detail below, and in the foregoing
preamble, the Commission believes that the amendments adopted by the
Final Rules enable the Commission to discharge its regulatory oversight
function with respect to the commodity interest markets. The Commission
also believes that the Final Rules will reduce the potential burden on
persons whose commodity interest activities are subject to the
Commission's regulations applicable to CPOs and CTAs without reducing
the overall regulatory benefits of those provisions. The Commission is
amending existing 17 CFR part 4 regulations in a manner consistent with
DSIO's CPO and CTA Family Office No-Action Letters by adopting new CPO
and CTA registration exemptions under Regulations 4.13 and 4.14.
Additionally, the Commission is adopting amendments to Regulations 4.7
and 4.13 to permit general solicitation under those provisions,
consistent with the JOBS Act.
(b) Benefits of the Final Rule Amendments
The Commission expects that the addition of CPO and CTA
registration
[[Page 67366]]
exemptions for qualifying Family Offices will result in two main
benefits. First, qualifying Family Offices will not be subject to the
costs associated with registration, NFA membership, or compliance with
part 4 of the Commission's regulations. The elimination of these costs
should result in a reduction of the costs associated with the
establishment and operation of a Family Office, which should ultimately
benefit their family clients. Second, because the exemptions harmonize
the Commission's treatment of Family Offices with that of the SEC,
Family Offices will generally only be required to comply with one
standard to determine their registration and compliance obligations
with respect to both their securities and commodity interest
transactions. Although DSIO had previously issued no-action relief
letters for both CPO and CTA registration, Family Offices wishing to
avail themselves of this relief were required to prepare a notice
making specific representations and to submit the document
electronically to a specific email inbox. Through this Federal Register
release, the Commission is finalizing the CPO exemption for Family
Offices without requiring any notice filing. Moreover, for Family
Offices claiming relief from CTA registration, the Commission is
adopting that exemption, as proposed, also without a notice filing
requirement, consistent with the majority of the existing exemptions
available to CTAs under Regulation 4.14.
The Commission believes also that the alignment of Regulations
4.7(b) and 4.13(a)(3) with the SEC's JOBS Act amendments to Regulation
D and Rule 144A will result in several benefits. By harmonizing
Commission regulations that specifically reference the statutory and
regulatory provisions governing unregistered, exempt securities
offerings, the amendments will facilitate full implementation of the
JOBS Act by making the relief from the prohibition on general
solicitation more widely available. Moreover, the amendments eliminate
the distinction between private offerings of commodity pools and other
privately offered collective investment vehicles that do not transact
in commodity interests, thereby treating similarly situated offerors in
a consistent manner. Thus, the Commission finds that there is a
substantial benefit in aligning its regulations with those of its
sister regulator, in the interest of fostering cooperation and comity,
especially where there is limited customer protection risk for the
retail public.
(c) Costs of the Final Rule Amendments
The Commission believes there are some costs associated with the
Final Rules. Generally, CPOs and CTAs are subject to comprehensive
regulation under the Commission's part 4 regulations, including
disclosure, reporting, and recordkeeping requirements. Although the
Commission continues to find that its regulatory concerns with respect
to Family Offices are fundamentally different from those respective of
CPOs and CTAs soliciting and serving the general public, the CPO and
CTA exemptions adopted for Family Offices could conceivably be
detrimental to persons who relied on CPO and CTA regulation with
respect to Family Offices for some purpose. The Commission is adopting
registration exemptions based on the requirements of the CPO and CTA
Family Office No-Action Letters, upon which many Family Offices rely in
place of CPO and CTA registration and regulation. As discussed above,
the Commission continues to believe that Family Offices and their
inherent characteristics present distinctions from the typical CPO-
participant or CTA-client relationships that 17 CFR part 4 is designed
to regulate, which justify the adoption of these exemptions. In
particular, Family Offices eligible for these exemptions will be
restricted to soliciting or providing advice to persons that are
``family clients,'' thereby limiting their contact or interaction with
the public. The Commission further believes that these characteristics
and limitations are a reasonable substitute for the benefits and
protections afforded by the Commission's regulatory regime for CPOs and
CTAs. Therefore, any detriment resulting from the CPO and CTA
exemptions for Family Offices is expected to be minimal at most.
The Commission has determined to alter certain of its cost
estimates from the Proposal, based on specific changes incorporated in
the Final Rules. Regarding the CPO and CTA exemptions for Family
Offices, the Commission no longer believes that CPOs claiming this
relief will incur any expense related to a notice filing because it is
adopting that exemption without such a requirement. Family Offices
will, however, still be required to incur expenses associated with the
initial determination as to their eligibility for the new exemptions.
With respect to the CTA exemption for Family Offices, the Commission
continues to believe that the costs associated with it will be limited
to the expenses associated with making the determination as to the
person's initial and ongoing eligibility for the exemption. The
Commission does not have the necessary data to estimate the amount of
these expenses, and though it requested comment as to the amount of
these costs and how they compare to the costs of registration under 17
CFR part 4, no comments addressed this issue or provided any data.
Additionally, the Commission believes there may be some costs
associated with the amendments to Regulations 4.7 and 4.13 based on the
JOBS Act. By removing the restrictions on solicitation and marketing
from those regulations, the Commission will be permitting general
solicitation by those exempt operators in vehicles considered to be
commodity pools. In considering the costs of similar regulatory
amendments, the SEC noted that eliminating the prohibition on general
solicitation could result in heightened fraudulent activity in
offerings made pursuant to Sec. 506(c) of Regulation D (17 CFR
230.506(c)) because promoters of fraudulent schemes could more easily
reach potential investors through general solicitation; this, the SEC
emphasized, could negatively impact capital formation and raising by
legitimate issuers, which the JOBS Act was designed to promote.\96\
After discussing historical data indicating that ``hedge funds'' are
not disproportionately involved in fraudulent activity, when compared
to other types of funds and advisers, the SEC stated further that such
costs of general solicitation could be mitigated by the fact that such
issuers would continue to be subject to antifraud provisions under the
federal securities laws, and importantly, to restrictions on the sale
of these securities to accredited investors, as well as verification
requirements.\97\
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\96\ JOBS Act Adopting Release, 78 FR 44798-44800.
\97\ 78 FR 44799 (noting further that ``the public nature of
these solicitations may also facilitate detection of fraudulent
activity in that the fraudulent nature of some offerings may be
inferred from particular statements in solicitation materials'').
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The Commission also believes that permitting general solicitation
in offerings subject to an exemption under Regulations 4.7(b) and
4.13(a)(3), consistent with the JOBS Act, could theoretically increase
the instance of fraudulent activity or solicitation in those markets.
The Commission notes that, consistent with the SEC amendments discussed
above, persons complying with the terms of Sec. 506(c) of Regulation D
and Rule 144A and claiming relief under Regulations 4.7 or 4.13(a)(3)
would still be required to limit participants in the offered pool to
[[Page 67367]]
the permitted investors listed in those regulations. Maintaining this
restriction on the participants in pools subject to these exemptions
meets the Commission's goal of permitting such exempt CPOs to rely on
JOBS Act relief, without sacrificing the remaining substantive
requirements of those exemptions, and while minimizing any impact on or
risk to non-permitted investors. Additionally, persons claiming
exemptive relief under Regulation 4.7(b) are required to register with
the Commission as a CPO, while persons claiming the exemption in
Regulation 4.13(a)(3) would be exempt from such registration, and both
types of CPO would still subject to antifraud provisions in the CEA.
Accordingly, the Commission believes that adopting these amendments
will neither result in an erosion of the customer protections provided
to non-sophisticated, retail pool participants under 17 CFR part 4, nor
will they cause an expansion of the relief available under Regulations
4.7 or 4.13(a)(3), beyond the discrete issue of permitted solicitation
with respect to exempt securities offerings and their resales.
ii. Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
(a) Factor 1: Protection of Market Participants and the Public
The Commission considered whether the amendments adopted in this
release would have any detrimental effect on the customer protections
of the Commission's regulatory regime. The Commission believes that the
CPO and CTA exemptions for Family Offices will have a limited impact on
the protection provided to market participants and the public. Because
Family Offices, by definition, are not offered to persons other than
family clients, the general public would generally not be negatively
affected by the failure of Family Offices to register as CPOs and CTAs
with the Commission. Moreover, as discussed above, the Commission finds
that familial relationships inherent in Family Offices would provide a
reasonable alternative mechanism to protect the interests of family
clients. The Commission believes its regulatory interest in Family
Offices is distinct from and much lower than in the case of arms-length
transactions between CPOs and pool participants, or CTAs and advisory
clients.
With respect to the JOBS Act amendments to Regulations 4.7 and
4.13, the Commission does not believe that these amendments will alter
the protections currently available to market participants and the
public. Pools offered pursuant to claims of relief under either
Regulation 4.7 or 4.13(a)(3) will still be limited in their permitted
participants to the persons listed in those regulations, and the relief
provided will otherwise remain unchanged. As such, the general American
public will not be able to purchase interests in pools that would not
be subject to the full panoply of the compliance obligations under 17
CFR part 4. Therefore, there will be no reductions to the protections
currently in place, by virtue of the JOBS Act amendments in the Final
Rules.
(b) Factor 2: Efficiency, Competitiveness, and Financial Integrity of
Markets
Section 15(a)(2)(B) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of efficiency,
competitiveness, and financial integrity considerations. Inasmuch as
the Final Rules do not directly impact how futures contracts or other
derivatives are actually traded, the Commission believes that they will
not have a significant impact on the efficiency, competitiveness, and
financial integrity of markets.
(c) Factor 3: Price Discovery
Section 15(a)(2)(C) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of price discovery
considerations. Similarly, because the Final Rules do not directly
impact how futures contracts or other derivatives are actually traded,
the Commission believes that the amendments will not have a significant
impact on price discovery.
(d) Factor 4: Sound Risk Management
Section 15(a)(2)(D) requires the Commission to evaluate the costs
and benefits of a regulation in light of sound risk management
practices. The Commission believes that the Final Rules will not have a
significant impact on the practice of sound risk management because the
manner in which various funds, operators, and advisors organize,
register, or claim exemption from such registration, has only a small
influence on how market participants manage their risks overall.
(e) Factor 5: Other Public Interest Considerations
Section 15(a)(2)(e) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of other public
interest considerations. The Final Rules reflect the Commission's
determination that such amendments harmonize Commission regulations
with other federal laws, where appropriate, to exempt and reduce the
regulatory burden on certain entities.
d. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under CEA section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the CEA.\98\ The Commission believes that the
public interest to be protected by the antitrust laws is generally to
protect competition. The Commission requested comment on whether the
Proposal implicated any other specific public interest to be protected
by the antitrust laws and received no comments addressing this issue.
---------------------------------------------------------------------------
\98\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission has considered the Final Rules to determine whether
they are anticompetitive and has identified no anticompetitive effects.
Because the Commission has determined the Final Rules are not
anticompetitive and have no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects in 17 CFR Part 4
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Reporting and
recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission 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. In Sec. 4.7:
0
a. Revise paragraph (b) introductory text;
[[Page 67368]]
0
b. Redesignate paragraphs (b)(1) through (5) as paragraphs (b)(2)
through (6);
0
c. Add a new paragraph (b)(1); and
0
d. Revise newly redesignated paragraph (b)(3).
The revisions and addition 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) Relief available to commodity pool operators--(1) Eligibility.
Relief from specific compliance obligations is available to certain
registered commodity pool operators with respect to the pool(s) they
operate, provided that the registered commodity pool operator files the
required notice under paragraph (d) of this section and otherwise
complies with the conditions of paragraph (d) of this section in
operating the exempt pool(s).
(i) Types of commodity pools. (A) Regarding an offering that is
exempt from registration under section 4(a)(2) of the Securities Act of
1933, any registered commodity pool operator who offers or sells
participations in such a pool solely to qualified eligible persons,
without marketing to the public, may claim any or all of the relief
described in this paragraph (b) with respect to such pool; Provided,
that the prohibition on marketing to the public shall not apply to a
registered commodity pool operator who offers or sells participations
in a pool offered pursuant to Sec. 230.506(c) of this title.
(B) Regarding an offering that is offered and sold pursuant to
Regulation S, Sec. Sec. 230.901 through 230.905 of this title, any
registered commodity pool operator who offers or sells participations
in such a pool solely to qualified eligible persons, without marketing
to the public, may claim any or all of the relief described in this
paragraph (b) with respect to such pool.
(C) Regarding a pool that is a collective trust fund, the
securities of which are exempt from registration pursuant to section
3(a)(2) of the Securities Act of 1933, any bank registered as a
commodity pool operator that offers or sells participations in such a
pool solely to qualified eligible persons, without marketing to the
public, may claim any or all of the relief described in this paragraph
(b) with respect to such pool.
(ii) Resales. A registered commodity pool operator may claim any or
all of the relief described in this paragraph (b) with respect to the
pools described in paragraphs (b)(1)(i)(A) through (C) of this section,
if participations in such pools are resold pursuant to Rule 144A (Sec.
230.144A of this title).
* * * * *
(3) Periodic reporting relief. (i) Exemption from the specific
requirements of 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:
(A) The net asset value of the exempt pool as of the end of the
reporting period;
(B) The change in net asset value from the end of the previous
reporting period; and
(C) Either the net asset value per outstanding participation unit
in the exempt pool as of the end of the reporting period, or the total
value of the participant's interest or share in the exempt pool as of
the end of the reporting period.
(ii) Where the pool is comprised of more than one ownership class
or series, the net asset value of the series or class on which the
account statement is reporting, and the net asset value per unit or
value of the participant's share, also must be included in the
statement required by this paragraph (b)(3); except that, for a pool
that is a series fund structured with limitation on liability among the
different series, the account statement required by this paragraph
(b)(3) is not required to include the consolidated net asset value of
all series of the pool.
(iii) A commodity pool operator that meets the conditions specified
in Sec. 4.22(d)(2)(i) to present and compute the 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 that notice with
respect to the computation and presentation of the account statement.
* * * * *
0
3. Amend Sec. 4.13 as follows:
0
a. Revise paragraphs (a)(3)(i) and (a)(3)(iii)(C) and (D);
0
b. Remove paragraph (a)(3)(iii)(E);
0
c. Redesignate paragraph (a)(6) as paragraph (a)(7);
0
d. Add a new paragraph (a)(6); and
0
e. Revise paragraphs (b)(1) introductory text and (c)(1) introductory
text.
The revisions and addition read as follows:
Sec. 4.13 Exemption from registration as a commodity pool operator.
* * * * *
(a) * * *
(3) * * *
(i) Interests in the pool are exempt from registration under the
Securities Act of 1933, and the interests are marketed and advertised
to the public in the United States solely, if at all, in compliance
with Sec. 230.506(c) of this title, or with Rule 144A, Sec. 230.144A
of this title, as applicable;
* * * * *
(iii) * * *
(C) A ``knowledgeable employee,'' as that term is defined in Sec.
270.3c-5 of this title; or
(D) A ``qualified eligible person,'' as that term is defined in
Sec. 4.7; and
* * * * *
(6) For each pool for which the person claims exemption under this
paragraph (a)(6):
(i) Interests in the pool are exempt from registration under the
Securities Act of 1933, and such interests are offered and sold only to
``family clients,'' as defined in Sec. 275.202(a)(11)(G)-1 of this
title;
(ii) The person qualifies as a ``family office,'' as defined in
Sec. 275.202(a)(11)(G)-1 of this title; and
(iii) The person reasonably believes, at the time of investment, or
in the case of an existing pool, at the time of conversion to a pool
meeting the criteria of this paragraph (a)(6) of this section, that
each person who participates in the pool is a ``family client'' of the
``family office,'' as defined in Sec. 275.202(a)(11)(G)-1 of this
title.
* * * * *
(b)(1) Any person who desires to claim the relief from registration
provided by this section, except for any person claiming the exemption
for family offices in paragraph (a)(6) of this section, must file
electronically a notice of exemption from commodity pool operator
registration with the National Futures Association through its
electronic exemption filing system. The notice must:
* * * * *
(c)(1) Each person who has claimed an exemption from registration
under this section must:
* * * * *
0
4. In Sec. 4.14, add paragraph (a)(11) to read as follows:
[[Page 67369]]
Sec. 4.14 Exemption from registration as a commodity trading advisor.
* * * * *
(a) * * *
(11) The person's commodity trading advice is solely directed to,
and is for the sole use of, ``family clients,'' as defined in Sec.
275.202(a)(11)(G)-1 of this title.
* * * * *
Issued in Washington, DC, on November 27, 2019, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Registration and Compliance Requirements for Commodity
Pool Operators (CPOs) and Commodity Trading Advisors: Family Offices
and Exempt CPOs--Commission Voting Summary and Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, and Stump voted in the affirmative. Commissioner Berkovitz
voted in the negative.
Appendix 2--Dissenting Statement of Commissioner Dan M. Berkovitz
Rulemaking To Provide Exemptive Relief for Family Office CPOs: Customer
Protection Should be More Important Than Relief for Billionaires
I dissent from today's final rule to provide registration
exemptions for operators of commodity pools in large investment
management structures euphemistically called ``family offices.''
These investment management structures typically manage hundreds of
millions, sometimes billions, of dollars, in private wealth. The
regulations that we proposed last year (Proposal) balanced the
family office exemption with an annual notice filing requirement and
a prohibition on persons who were statutorily disqualified from
operating commodity pools from claiming the exemption.\1\ Today's
final rule provides a blanket exemption for the operators of
commodity pools (CPOs) in family offices without either of these
minimal checks and balances. It is absurd that the Commission is
excusing billionaires from the notice-filing requirement that
generally applies to other persons--who have a fraction of that
immense wealth--who claim exemptions from CPO registration.\2\ And
persons that are statutorily disqualified from registering should
not be permitted to operate under an exemption from registration.
Disqualified persons should be disqualified.
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\1\ Registration and Compliance Requirements for Commodity Pool
Operators and Commodity Trading Advisors, Notice of proposed
rulemaking, 83 FR 52902 (Oct. 18, 2018).
\2\ See 17 CFR 4.13(b).
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Family Office Registration Exemption
The final rule exempts CPOs and commodity trading advisors
(CTAs) from registration requirements in connection with commodity
pools that are solely for the use of entities that are called
``family offices.''
``Family Offices'' Are Very Large Enterprises
According to the Securities and Exchange Commission (``SEC''),
whose definition of ``family office'' is used in today's rulemaking,
```Family offices' are entities established by wealthy families to
manage their wealth and provide other services to family members,
such as tax and estate planning services.'' \3\ Family offices,
however, are not and have never been used by ordinary families who
may have a modest degree of wealth, but rather by the
extraordinarily wealthy--including royalty, aristocrats, and wealthy
entrepreneurs, bankers and hedge fund operators--who create these
organizations to preserve, grow, and pass on their wealth to their
descendants.\4\ Under the SEC's definition, family offices are not
limited to managing the wealth of the related members of a family,
but may also include ``family clients,'' which includes key
employees of the family office, any non-profit or charitable
organization funded exclusively by family members, certain family
client trusts, and any company wholly-owned by and operated for the
sole benefit of family clients.\5\
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\3\ SEC, SEC Adopts Rule Under Dodd-Frank Defining ``Family
Offices'' (June 22, 2011), available at: sec.gov/news/press/2011-134.htm.
\4\ According to one guide to family offices:
Family offices have their roots in the sixth century, when a
king's steward was responsible for managing royal wealth. Later on,
the aristocracy also called on this service from the steward,
creating the concept of stewardship that still exists today. But the
modern concept of the family office developed in the 19th century.
In 1838, the family of financier and art collector J.P. Morgan
founded the House of Morgan to manage the family assets. In 1882,
the Rockefellers founded their own family office, which is still in
existence and provides services to other families.
EY Family Office Guide, Pathway to successful family and wealth
management, at 4, available at: https://www.ey.com/en_us/tax/family-office-advisory-services.
\5\ 17 CFR 275.202(a)(11)(G)-1. Under the SEC's definition, the
term ``family member'' is quite broad, meaning all lineal
descendants of a common ancestor (who may be living or deceased),
and such lineal descendants' spouses or spousal equivalents;
provided that the common ancestor is no more than 10 generations
removed from the youngest generation of family members. 17 CFR
275.202(a)(11)(G)-1(d)(6).
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By any measure, family offices today manage extremely large
amounts of wealth. According to the Global Family Office Report
2019, ``[t]he average family wealth of those surveyed for this
report stands at USD 1.2 billion, while the average family office
has USD 917 million in [assets under management].'' \6\ Another
source reports that, as of 2014, ``of the 34 family offices
surveyed, the financial size of the office ranged from $42 million
to well over $1.5 billion, with a median of $275 million assets
under supervision and a mean of $516 million.'' \7\ Although there
remain family offices with tens of millions of dollars in assets
under management, over the past decade the costs of running a family
office have increased significantly. It is now estimated ``that the
operating costs to build out a fully functioning family office
typically require a minimum in the range of $500 million to $1
billion.'' \8\
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\6\ Campden Research and UBS, The Global Family Office Report
2019, at 10, available at: https://www.ey.com/en_us/tax/family-office-advisory-services.
\7\ Kirby Rosplock, The Complete Family Office Handbook, A Guide
for Affluent Families and the Advisors Who Serve Them, at 8 (Wiley,
Bloomberg Press, 2014).
\8\ Id.
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The aggregate amount of wealth managed by family offices is
staggering. By one estimate, the total assets under management by
family offices is over $4 trillion, and the number of family offices
has grown ten-fold in the last decade.\9\ A recent Forbes article
noted that ``[f]amily offices are now capable of making transactions
that were traditionally reserved for big companies or private-equity
firms and therefore are becoming a disruptive force in the market-
place.'' \10\
---------------------------------------------------------------------------
\9\ Francois Botha, The Rise of the Family Office: Where Do They
Go Beyond 2019?, Forbes (Dec. 17, 2018), available at: https://www.forbes.com/sites/francoisbotha/2018/12/17/the-rise-of-the-family-office-where-do-they-go-beyond-2019/#426044f55795.
\10\ Id (emphasis added).
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The Family Office Exemption
As explained in both the Proposal and today's final rule, family
offices typically have been exempt from CPO registration. When the
previous regulation that family offices relied upon for an exemption
was repealed in 2012, the Commission provided no-action relief to
enable family offices to continue to be exempt from registration.
Family offices are currently operating on an exempt basis under this
no-action relief.
The rationale for providing registration relief to pools
investing the money of family members has merit. The commodity pool
regulatory regime is in significant part directed at those who
solicit funds for the pools and preventing investor fraud and misuse
of customer funds. Presumably, these concerns are less likely to
arise if a pool is an investment vehicle for investors who are
related to each other and do not solicit funds from the general
public.\11\ I voted for the Proposal to seek comments on making
permanent the no-action relief from registration currently available
to family office pool operators.
---------------------------------------------------------------------------
\11\ However, affinity fraud, including defrauding relatives, is
not unheard of. See, e.g., Consent Order, CFTC v. Carter, No. 18-cv-
242, 2018 WL 7140335 (N. D. Ill. Nov. 13, 2018) and Complaint, CFTC
v. Williams, No. 2:17-cv-01325, 2017 WL 1755463 (D. Ariz. May 3,
2017).
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Family Offices Are Currently Required To Provide Notice for a CPO
Exemption
But whereas the Proposal included sensible initial and annual
notice filing requirements for an exempt CPO that would notify the
Commission that it is electing the exemption, the final rule
eliminates that
[[Page 67370]]
requirement. To date, family office CPOs claiming an exemption from
registration has been required to provide notice to the CFTC of
their claim for exemption. The current no-action relief imposes a
notice requirement,\12\ as did the previous regulatory exemption
that was relied upon by family office CPOs prior to its repeal in
2012.\13\ Neither of these notice requirements placed any
significant burdens or costs upon family office CPOs.\14\
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\12\ CFTC Letter No. 12-37, at 2-3 (Nov. 29, 2012), available
at: https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/12-37.pdf.
\13\ 17 CFR 4.13(b) (2011).
\14\ Under the current no-action relief, a person claiming the
exemption must provide the claimant's name, business address, and
telephone number, state the capacity (i.e., CPO) and name of the
pool for which the claim is being filed, and be electronically
signed by the CPO. CFTC Letter No. 12-37, at 2-3.
---------------------------------------------------------------------------
The Proposal would have subjected persons claiming an exemption
from CPO registration to the same notice requirements that apply to
other types of CPOs claiming an exemption from registration under
Regulation 4.13. Under Regulation 4.13, a person claiming any of the
enumerated exemptions from CPO registration is required to provide
his or her name, address, telephone number, fax number, and email
address, and the name of the pool for which it is claiming the
exemption.\15\ In the Proposal the Commission estimated that the
notice filing would cost approximately $28.50 per pool annually.\16\
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\15\ 17 CFR 4.13(b)(1) (2019).
\16\ Proposal, at 52923. Based on the notices filed under the
CFTC No Action Letter 12-37, the Commission estimated that
approximately 200 CPOs would be affected, with an average of 3 pools
each that would be subject to the notice requirement. Id.
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The estimated $28.50 annual cost of filing a notice of claim of
exemption is trivial compared to the hundreds of millions of dollars
managed by the average family office CPO. All other types of CPOs
claiming an exemption under Regulation 4.13, such as operators of
single pools without compensation, or operators of small pools with
less than $400,000 in capital, are required to file the same notice
of a claim of exemption. There is no rational justification for
exempting large family office pools with hundreds of millions of
dollars, or in many cases billions of dollars, under management from
the minimal notice requirements that apply to other, less wealthy
persons claiming exemptions from CPO registration.
The CFTC's interest in commodity pool operators is not limited
to the protection of investors in the pool. The Commission has a
significant interest in how the activities of these pool operators
may affect the commodity markets. Congress has declared in section
4l of the Commodity Exchange Act (CEA) that the activities of
commodity trading advisors and commodity pool operators are affected
with a national public interest in that, among other things their
operations are directed toward and cause the purchase and sale of
commodities for future delivery and the foregoing transactions occur
in such volume as to affect substantially transactions on contract
markets.\17\ The Commission has a significant interest in knowing
the identity of the persons that operate these pools, including
those that are exempt from registration. This significant interest
is manifested in the Commission's requirement that all other exempt
CPOs provide the Commission with annual notices claiming or
affirming their exemption from registration. The Commission's
interest in the activities of large, multimillion dollar family pool
CPOs is certainly no less than the Commission's interest in the
activities of smaller CPOs, all of which are required to provide
annual notice when they claim an exemption from registration.
---------------------------------------------------------------------------
\17\ 7 U.S.C. 6l.
---------------------------------------------------------------------------
The Commission eliminates the notice requirement largely on the
basis that this will harmonize the Commission's regulations with
those of the SEC. Harmonization for harmonization's sake is not a
rational basis for agency action. The question for the CFTC is not
whether the SEC has determined whether a notice requirement is
appropriate, but rather whether the CFTC would benefit from a notice
requirement under the CFTC's system of regulations. To the extent
that the Commission believes it has no regulatory interest in the
operation of commodity pools beyond the protection of investors in
the pool, such a belief is manifestly wrong and inconsistent with
Congress's finding in CEA section 4l. The Commission has a
significant regulatory interest in knowing the identity of CPOs that
may be ``a disruptive force in the market-place.'' \18\ The
Commission's mission would be better served by harmonizing the
family pool CPO exemption process with its own regulations for
exempt CPOs rather than the SEC's regulations.
---------------------------------------------------------------------------
\18\ See supra note 10.
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Disqualification of Disqualified Persons
The Proposal would have prohibited any person who was subject to
a statutory disqualification from registration from claiming an
exemption from registration. The logic underlying this provision is
simple: a person who is disqualified from operating a commodity pool
in a registered capacity should also be disqualified from operating
a pool in an unregistered capacity. Disqualified persons should be
disqualified. In the Proposal the Commission stated:
The Commission is concerned that it poses undue risk from a
customer protection standpoint for its regulations in their current
form to permit statutorily disqualified persons or entities to
legally operate exempt commodity pools, especially when those same
persons would not be permitted to register with the Commission. The
Commission preliminarily believes that preserving the prohibition on
statutory disqualifications from Advisory 18-96 and applying it to
exemptions under Sec. 4.13 would provide a substantial customer
protection benefit by prohibiting statutorily disqualified persons
from operating and soliciting participants for investment in exempt
commodity pools.\19\
---------------------------------------------------------------------------
\19\ Proposal, 83 FR 52906.
The National Futures Association (NFA) submitted a comment
letter ``fully support[ing]'' the disqualification of disqualified
---------------------------------------------------------------------------
persons. NFA stated:
[T]he Commission aptly states in the Federal Register release that
the proposed prohibition would provide a substantial customer
protection benefit. In particular, the proposed change addresses a
significant regulatory gap in the Commission's exemption framework
and will certainly strengthen customer protection by ensuring that a
person who may be prohibited from registering as a CPO is not able
to operate an exempt fund outside of the Commission's and NFA's
regulatory oversight.\20\
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\20\ Letter from Carol Wooding, Vice President, General Counsel
and Secretary, National Futures Association, to Christopher J.
Kirkpatrick, Secretary of the Commission, Re: RIN 3038-AE76:
Registration and Compliance Requirements for Commodity Pool
Operators and Commodity Trading Advisors (Dec. 17, 2018).
In today's final rule the Commission states that commenters
raised a number of issues regarding the statutory disqualification
proposal that require further consideration. I agree that the
Commission should address these comments. But it should have done so
prior to granting today's exemptions from registration. Customer
protection should be our first priority, and not deferred
indefinitely. The Commission should have addressed these comments
and finalized the disqualification rule prior to granting today's
exemption for family offices. Customer protection should not take a
back seat to exemptions from regulations for billionaires.
The approval of this rule without any checks and balances on
exempt family office CPOs will increase risks to our markets and
market participants. I therefore dissent.
[FR Doc. 2019-26162 Filed 12-9-19; 8:45 am]
BILLING CODE 6351-01-P