When the Commission considered the proposal to amend the registration exemption for foreign commodity pool operators (CPOs),[1] I noted that, in his second inaugural address in 1893, President Grover Cleveland remarked “[u]nder our scheme of government the waste of public money is a crime against the citizen.”[2]  The CFTC is a taxpayer-funded agency, and Congress expects us to deploy our resources to serve the needs of American taxpayers.  That is why as Chairman and Chief Executive, I have sought to revisit our agency’s regulations where there does not appear to be a clear connection to furthering the interests of the United States or our citizens.[3]

The CFTC’s framework for regulating foreign commodity CPOs protects U.S. investors who put their money in commodity investment funds run from outside the United States.  But, in some instances, the only benefit of CFTC regulation of offshore CPOs is to foreign investors.  There is no statutory mandate for the CFTC to regulate pools never offered or sold to U.S. investors.  To do so absent a compelling reason would be—in President Cleveland’s words—a waste of public money.

Consequently, I am pleased to support today’s final rule to amend the exemption for CPOs in regulation 3.10(c) (3.10 Exemption).  The final rule eliminates the potential need for the CFTC to require the registration and oversight of non-U.S. CPOs whose pools have no U.S. investors.  The final rule additionally exempts U.S.-based affiliates of pool sponsors who put seed money into offshore funds that have only foreign investors.  In so doing, the final rule provides much-needed regulatory flexibility for non-U.S. CPOs operating offshore commodity pools, without compromising the CFTC’s mission to protect U.S. investors.

Exemption for Foreign CPOs Sponsoring Funds without U.S. Investors

The final rule amends the conditions under which a foreign CPO, in connection with commodity interest transactions on behalf of persons located outside the United States, will qualify for an exemption from CPO registration and regulation with respect to an offshore pool.  Specifically, through amendments to our regulation 3.10(c), a non-U.S. CPO will be able to operate pools offered to U.S. persons as either a registered or exempt CPO, while simultaneously claiming the 3.10 Exemption with respect to its qualifying offshore commodity pools.[4]

Absent a compelling reason, the CFTC should be focused on U.S. markets and U.S. investors, and refrain from extending our reach outside the United States.[5]  The protection of non-U.S. customers of non-U.S. firms is best left to foreign regulators with the relevant jurisdiction and mandate.[6]  Therefore, I believe it is appropriate for the final rule to allow foreign CPOs to rely on the 3.10 Exemption for their foreign commodity pools when they have no U.S. investors.  Where a foreign CPO does have U.S. investors, other exemptions or exclusions from registration might be available.

Unfortunately, under a strict construction of the current rule, if a foreign CPO has one fund with U.S. investors, then the foreign CPO must register all its funds or rely on some other exemption besides the 3.10 Exemption.  This “all or nothing” reading of the rule has produced two competing consequences—neither of which makes for good regulatory policy.  First, if the CPO chooses to register with respect to all its funds, the CFTC ends up regulating some foreign-based funds without any U.S. investors. Second, if the CPO refuses to register for any of its funds, then U.S. investors are effectively denied the liquidity and investment opportunities offered by foreign commodity pools.

In the last decade, statutory and regulatory developments have produced a growing mismatch between the Commission’s stated policy purposes underlying the 3.10 Exemption (that focus the CFTC’s resources on the protection of U.S. persons) and the strict construction of the 3.10 Exemption (that leads to its “all or nothing” application).  To address this mismatch, the final rule amends the 3.10 Exemption to align the plain text of the exemption with our longstanding policy goal of regulating foreign CPOs only when they offer their funds to U.S. investors.  In effect, the Commission’s walk finally conforms to our talk.[7]

Affiliate Investment Exemption

The final rule also permits U.S. affiliates of a non-U.S. CPO to contribute capital to that CPO’s offshore pools as part of the initial capitalization without rendering the non-U.S. CPO ineligible for the 3.10 Exemption.  In other words, the final rule allows a U.S. affiliate of a foreign CPO to invest in the offshore fund without triggering registration requirements because of the nature of the relationship between the affiliate and the non-U.S. CPO.

It is hard to imagine how an entity that controls, is controlled by, or is under common control with, a given foreign CPO could lack a sufficient degree of transparency with respect to its own contribution of initial capital to an offshore commodity pool run by that very same foreign CPO.  In short, a U.S. affiliate’s initial investment in its affiliated non-U.S. CPO’s offshore pool does not raise the same investor protection concerns as similar investments in the same pool by unaffiliated persons located in the United States.  In many cases, moreover, the affiliate is itself regulated by other U.S. regulators—for instance, state insurance departments in the case of insurance companies that wish to deploy their own general account assets as they best see fit, in keeping with their separate regulatory regimes.  Accordingly, I see no reason to deploy the limited, taxpayer-funded resources of the CFTC to protect U.S. affiliates of foreign CPOs who are far better positioned than us to safeguard their own interests.