2024-21682
[Federal Register Volume 89, Number 187 (Thursday, September 26, 2024)]
[Rules and Regulations]
[Pages 78793-78815]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-21682]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 3, 4, 30, 43, and 75
RIN 3038-AF25
Commodity Pool Operators, Commodity Trading Advisors, and
Commodity Pools Operated: Updating the `Qualified Eligible Person'
Definition; Adding Minimum Disclosure Requirements for Pools and
Trading Programs; Permitting Monthly Account Statements for Funds of
Funds; Technical Amendments
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is adopting amendments to certain provisions of its regulations (the
Final Rule) that would update the Portfolio Requirement thresholds
within the ``Qualified Eligible Person'' definition; include revisions
that are consistent with long-standing Commission exemptive letters
addressing the timing of certain pools' periodic financial reporting;
and make several technical amendments related to the structure of the
regulations that are the subject of this Final Rule.
DATES:
Effective date: This rule is effective November 25, 2024.
Compliance date: Commodity pool operators (CPOs) and commodity
trading advisors (CTAs) must comply with the increased Portfolio
Requirement thresholds in Commission regulation Sec. 4.7(a) by March
26, 2025. The optional monthly account statement reporting schedule for
certain Sec. 4.7 pools in Commission regulation Sec. 4.7(b)(3)(iv) is
available to CPOs as of the effective date, and compliance is required
upon election of that schedule by the CPO.
FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283 or [email protected]; Pamela M. Geraghty, Acting Deputy Director,
202-418-5634 or [email protected]; Elizabeth Groover, Acting Associate
Director, 202-418-5985 or [email protected]; or Andrew Ruggiero,
Special Counsel, 202-418-5712 or [email protected]; each in the Market
Participants Division at the Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction and Background
II. The Final Rule
A. General Overview of Comments Received
B. Minimum QEP Disclosure Requirements Under Commission
Regulation Sec. 4.7
C. Updating Financial Thresholds in the Portfolio Requirement of
the ``Qualified Eligible Person'' Definition
D. Permitting Monthly Account Statements for Certain 4.7 Pools
Consistent With Commission Exemptive Letters
E. Other Technical Amendments
F. Effective and Compliance Dates for the Final Rule
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Introduction and Background
As amended by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),\1\ section 1a(11) of the Commodity
Exchange Act (CEA or Act) defines the term ``commodity pool operator''
as any person 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.\2\ CEA section 1a(10) defines a ``commodity pool''
as any investment trust, syndicate, or similar form of enterprise
operated for the purpose of
[[Page 78794]]
trading in commodity interests.\3\ CEA section 1a(12) defines the term
``commodity trading advisor'' as any person who, for compensation or
profit, engages in the business of advising others, either directly or
through publications, writing, or electronic media, as to the value of
or the advisability of trading in commodity interests.\4\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 7 U.S.C. 1a(11).
\3\ 7 U.S.C. 1a(10).
\4\ 7 U.S.C. 1a(12).
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Generally, CEA section 4m(1) requires each person whose activities
satisfy either the CPO or CTA definition to register as such with the
CFTC.\5\ With respect to both CPOs and CTAs, the CEA also authorizes
the Commission to include persons within, or exclude them from, such
definitions, by rule, regulation, or order, if the Commission
determines that such action will effectuate the purposes of the CEA.\6\
In addition to the general registration authority set forth in CEA
section 4m(1), CEA section 4n specifically empowers the Commission to
impose compliance obligations related to the registration process,
recordkeeping, disclosure, and reporting.\7\ Finally, the CEA also
gives the Commission authority to make and promulgate such rules and
regulations, as in the judgment of the Commission, are reasonably
necessary to effectuate the provisions or to accomplish any purposes of
the CEA.\8\
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\5\ 7 U.S.C. 6m(1) (It shall be unlawful for any CTA or CPO,
unless registered under this chapter, to make use of the mails or
any means or instrumentality of interstate commerce with his
business as such CTA or CPO). See also 17 CFR 3.10.
\6\ 7 U.S.C. 1a(11)(B); 7 U.S.C. 1a(12)(B)-(C).
\7\ 7 U.S.C. 6n.
\8\ 7 U.S.C. 8a(5).
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Part 4 of the Commission's regulations specifically governs the
operations and activities of CPOs and CTAs.\9\ These regulations
establish registration exemptions and definitional exclusions for CPOs
and CTAs,\10\ and contain detailed regulations that establish the
ongoing compliance obligations applicable to registered CPOs and CTAs,
which implement the statutory authority granted to the Commission by
the CEA with respect to such registrants.\11\ Specifically, the
regulatory compliance requirements facilitate the Commission's
oversight of their activities in the commodity interest markets and
promote customer protection through operational requirements,\12\
disclosures,\13\ and regular reporting \14\ to a registrant's pool
participants or advisory clients. Commission regulation Sec. 4.7
provides exemptions from certain part 4 compliance requirements
regarding disclosure, periodic reporting, and recordkeeping for
registered CPOs and CTAs, whose prospective and actual pool
participants and/or advisory clients are restricted to individuals and
entities considered ``Qualified Eligible Persons,'' and who claim the
desired exemptions, pursuant to paragraph (d) of that section.\15\
Since its adoption over thirty years ago, the Commission has
occasionally amended Commission regulation Sec. 4.7 to enhance its
usability and ensure that it remains fit for purpose.\16\
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\9\ 17 CFR part 4.
\10\ See 7 U.S.C. 6n; 17 CFR 4.5, 4.6, 4.13, 4.14.
\11\ See, generally, 17 CFR 4.20 through 4.26, 4.30 through
4.36.
\12\ See, e.g., 17 CFR 4.20(c), 4.30(a) (prohibiting the
commingling of pool funds with those of any other person and
prohibiting CTAs from accepting funds from advisory clients in the
CTA's name, respectively).
\13\ 17 CFR 4.24, 4.25, 4.34, 4.35.
\14\ 17 CFR 4.22.
\15\ 17 CFR 4.7.
\16\ See, e.g., 77 FR 11252 (Feb. 24, 2012) (rescinding the
relief from the audit requirement for pool annual reports previously
provided under Commission regulation Sec. 4.7(b)(4)); 84 FR 67355
(Dec. 10, 2019).
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After a careful review of the existing language and structure of
Commission regulation Sec. 4.7, and considering the public and
regulatory interest of maintaining and modernizing older, but still
widely utilized provisions, the Commission approved and published in
the Federal Register a notice of proposed rulemaking (NPRM or Proposal)
comprised of targeted amendments to update the regulation in several
ways.\17\ The Commission noted in the NPRM that, as of the end of FY
2022, 837 registered CPOs operated approximately 4,304 commodity pools
pursuant to claimed Commission regulation Sec. 4.7 exemptions (Sec.
4.7 pools, and together with CTA programs operated under Commission
regulation Sec. 4.7, the Sec. 4.7 pools and trading programs).\18\
Relatedly, approximately 865 CTAs claim an exemption under Commission
regulation Sec. 4.7 for their trading programs, which the Commission
also estimates to number in the tens of thousands. The Commission
further stated that, during discussions with CFTC staff, the National
Futures Association (NFA), the registered futures association to whom
the Commission has delegated many of its regulatory oversight functions
with respect to CPOs and CTAs, predicted that this population of CPOs,
CTAs, commodity pools, and trading programs operating pursuant to
Commission regulation Sec. 4.7 will only continue to grow in the
future.\19\ More recent data on the usage of Commission regulation
Sec. 4.7 shows this to be the case. As of June 2024, approximately 824
CPOs claim exemptions under Commission regulation Sec. 4.7, with
respect to 4,763 Sec. 4.7 pools, and 822 CTAs claim exemptions under
Commission regulation Sec. 4.7 with respect to at least 10,000 Sec.
4.7 trading programs.\20\
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\17\ Commodity Pool Operators, Commodity Trading Advisors, and
Commodity Pools: Updating the `Qualified Eligible Person'
Definition; Adding Minimum Disclosure Requirements for Pools and
Trading Programs; Permitting Monthly Account Statements for Funds of
Funds; Technical Amendments, 88 FR 70852 (Oct 12. 2023) (NPRM or
Proposal).
\18\ These numbers were drawn from data in National Futures
Association Form PQR filings for Q4 2022.
\19\ In fact, as of March 31, 2023, there were approximately
1,128 CPOs registered with the Commission, and on average,
approximately 5,257 pools were reported via CFTC Form CPO-PQR on a
quarterly basis in FY 2022. Assuming there is no material difference
in the number of registered CPOs and pools reported between the
closings of Q4 2022 and of Q1 2023, NFA and CFTC data show that
approximately 69% of registered CPOs operate Sec. 4.7 pools, and
approximately 81% of all pools reported on CFTC Form CPO-PQR are
Sec. 4.7 pools. After amendments to Form CPO-PQR and Commission
regulation Sec. 4.27 adopted in 2020, the Commission accepts NFA
Form PQR as substituted compliance for the required completion of
its own Form CPO-PQR. See 17 CFR 4.27. Therefore, the data sources
for both NFA and CFTC are fundamentally the same, if not identical.
\20\ With these updated figures, Sec. 4.7 CPOs continue to
comprise approximately 69% of all CPOs registered with the
Commission, and 4.7 CTAs 66% of all CTAs registered with the
Commission, while approximately 86% of all commodity pools operated
by a registered CPO are Sec. 4.7 pools.
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In particular, the Commission proposed amendments that sought: (1)
to increase the financial thresholds in the Portfolio Requirement of
the ``Qualified Eligible Person'' (QEP) definition in Commission
regulation Sec. 4.7(a) to reflect inflation; (2) to require certain
minimum disclosures for Sec. 4.7 pools and trading programs operated
and offered by CPOs and CTAs; (3) to add a process under Commission
regulation Sec. 4.7(b)(3) permitting CPOs to elect an alternative
account statement schedule for certain Sec. 4.7 pools consistent with
long-standing exemptive letters issued by the Commission; \21\ and (4)
to improve the structure and utility of Commission regulation Sec. 4.7
through several technical adjustments (for example, reorganizing the
QEP definition, updating cross-references, etc.). After consideration
of the public comments received in response to the NPRM, as well as
several meetings with
[[Page 78795]]
interested members of the public,\22\ the Commission has determined to
finalize portions of the Proposal, while continuing to consider the
remaining proposed amendments and alternative approaches offered by
commenters.
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\21\ Such exemptive letters are routinely drafted by Commission
staff in the Market Participants Division (MPD) and constitute an
exercise of the authority in Commission regulation Sec. Sec.
4.12(a) and 140.93. See 17 CFR 4.12(a) and 140.93.
\22\ All comments on the NPRM, including notices of ex parte
meetings discussing this rulemaking, are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7443.
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II. The Final Rule
A. General Overview of Comments Received
The Commission requested comment on all aspects of the NPRM and
also solicited comment through specific, targeted questions about each
of the individual proposed amendments.\23\ The Commission received
eight comment letters in response to the Proposal, including six from
industry associations, one from NFA, and one from a law firm that
frequently represents CPOs and CTAs utilizing Commission regulation
Sec. 4.7 exemptions.\24\ Overall, comments on the Proposal were mixed,
depending on which amendment was being discussed. With respect to the
Portfolio Requirement updates, commenters largely agreed with the
necessity of the proposed increases to account for inflation and were,
for the most part, supportive of that proposed amendment. With respect
to adding minimum disclosure requirements to Commission regulation
Sec. 4.7 for all QEP pool participants and advisory clients,
commenters disagreed with the amendments as proposed and made several
suggestions seeking to narrow or eliminate the proposed disclosures.
The proposed amendment designed to align Commission regulation Sec.
4.7 with Commission exemptive letters that permit the distribution of
monthly, rather than quarterly, account statements for certain Sec.
4.7 pools received unanimous support and will consequently be adopted
as proposed by the Final Rule amendments. The following sections
discuss the proposed amendments in more detail, the comments the
Commission received from the public, as well as the terms of the Final
Rule being adopted herein.
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\23\ See, e.g., Proposal, 88 FR 70855 (requesting comment on the
proposed Portfolio Requirement increases, as well as posing specific
questions for commenters to address).
\24\ Comment Letter from the Securities Industry and Financial
Markets Association Asset Management Group (Dec. 11, 2023),
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=73190&SearchText= (SIFMA AMG Letter); Comment
Letter from the Investment Advisers Association (Dec. 11, 2023),
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=73192&SearchText= (IAA Letter); Comment Letter
from the Alternative Investment Management Association Limited (Dec.
11, 2023), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=73193&SearchText= (AIMA Letter); Comment Letter
from the Managed Funds Association (Dec. 11, 2023), available at
https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=73194&SearchText= (MFA Letter); Comment Letter
from the Investment Company Institute (Dec. 11, 2023), available at
https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=73195&SearchText= (ICI Letter); Comment Letter
from the National Futures Association (Dec. 11, 2023), available at
https://comments.cftc.gov/PublicComments/ViewComment.aspx?73191&SearchText= (NFA Letter); and Comment Letter
from Dechert, LLP (Dec. 11, 2023), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?73196&SearchText=
(Dechert Letter). One commenter also submitted a supplemental
comment letter after the closing of the NPRM's public comment
period. See Supplemental Comment Letter from the Managed Funds
Association (Jun. 26, 2024), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=73840&SearchText= (MFA Comment
Letter II). The NPRM's complete comment file is available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7443.
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B. Minimum QEP Disclosure Requirements Under Commission Regulation
Sec. 4.7
1. The Proposal
Currently, Commission regulation Sec. 4.7 provides exemptions from
the broader part 4 compliance requirements for CPOs with respect to
pools offered solely to QEPs, and for CTAs advising or managing the
accounts of QEPs, including those regulations requiring disclosure of
general and performance information about a pool or trading program.
Specifically, Commission regulation Sec. 4.7(b)(2) provides an
exemption for CPOs with respect to their pools offered solely to QEPs
regarding: (1) the requirement to deliver a disclosure document in
Commission regulation Sec. 4.21; (2) the general disclosures required
by Commission regulation Sec. 4.24; (3) the performance disclosures
required by Commission regulation Sec. 4.25; and (4) the use and
amendment requirements in Commission regulation Sec. 4.26; so long as
the CPO provides a form statement on the cover page of any offering
memorandum it chooses to distribute to its prospective pool
participants (or near the signature line of the pool's subscription
agreement, if its CPO chooses not to distribute an offering
memorandum).\25\ Similarly, Commission regulation Sec. 4.7(c)(1)
provides an exemption for CTAs with respect to their trading programs
offered to QEPs regarding: (1) the requirement to deliver a disclosure
document in Commission regulation Sec. 4.31; (2) the general
disclosures required by Commission regulation Sec. 4.34; (3) the
performance disclosures required by Commission regulation Sec. 4.35;
and (4) the use and amendment requirements in Commission regulation
Sec. 4.36; provided that the CTA includes a form statement on the
cover page of any brochure or disclosure statement it chooses to
distribute to its prospective advisory clients (or near the signature
line of the advisory agreement, if the CTA chooses not to distribute a
brochure or disclosure statement).\26\ CPOs and CTAs claiming these
exemptions \27\ are not required to deliver or disseminate any offering
memoranda, brochures, or disclosure statements to their prospective QEP
pool participants or advisory clients. Rather, these CPOs and CTAs are
only required to ensure that any information or disclosures they elect
to provide to QEPs (QEP Disclosures), include all disclosures necessary
to make the information contained therein, in the context in which it
is furnished, not misleading.\28\
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\25\ 17 CFR 4.7(b)(2) (providing an exemption from the specific
requirements of Commission regulation Sec. Sec. 4.21, 4.24, 4.25,
and 4.26 with respect to each Sec. 4.7 pool). The prescribed ``form
statement'' indicates that the CPO's offering memorandum has not
been, nor is it required to be, filed with the Commission, and that
the CFTC has not reviewed or approved such offerings or any related
offering memoranda for the Sec. 4.7 pool. Id.
\26\ 17 CFR 4.7(c)(1) (providing an exemption from the specific
requirements of Commission regulation Sec. Sec. 4.31, 4.34, 4.35,
and 4.36 with respect to an offered Sec. 4.7 trading program). The
prescribed ``form statement'' indicates the CTA's brochure has not
been, nor is it required to be, filed with the Commission, and that
the CFTC has not reviewed or approved such trading program or
brochure. Id.
\27\ See 17 CFR 4.7(d).
\28\ 17 CFR 4.7(b)(2); 17 CFR 4.7(c)(1).
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Under the Proposal, the Commission proposed to amend the disclosure
relief provided by current Commission regulation Sec. 4.7(b)(2)(i) and
(ii) to require CPOs to deliver a set of disclosures to their Sec. 4.7
pools' prospective QEP participants.\29\ The proposed disclosure
requirements included descriptions of the Sec. 4.7 pool's: (i)
principal risk factors; (ii) investment program; (iii) use of proceeds;
(iv) custodians; (v) fees and expenses; (vi) conflicts of interest; and
(vii) targeted past performance information. Generally, the Commission
proposed to establish these minimum disclosure requirements by
rescinding or narrowing certain of the existing exemptions in
Commission regulation Sec. 4.7, including those from Commission
regulation Sec. Sec. 4.21, 4.24, and 4.25.\30\ Proposed Commission
regulation Sec. 4.7(b)(2)(i)(F) included the requirement that QEP
Disclosures provide all disclosures necessary to make the information
contained therein,
[[Page 78796]]
in the context in which it is furnished, not misleading, and Proposed
Commission regulation Sec. 4.7(b)(2)(i)(G) continued to require a form
disclaimer like that currently required by Commission regulation Sec.
4.7(b)(2)(i).
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\29\ Proposal, 88 FR 70859.
\30\ Id.
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As a consequence of requiring these minimum disclosures for Sec.
4.7 pools, the Commission also proposed to update corresponding
recordkeeping, and use and amendment requirements. Specifically, the
Commission proposed to amend Commission regulation Sec. 4.7(b)(5) to
require that CPOs maintain such QEP Disclosures among the other books
and records of their Sec. 4.7 pools, and make them available, upon
request, to the Commission, NFA, and the U.S. Department of Justice, in
accordance with Commission regulation Sec. 1.31.\31\ Additionally, the
Commission proposed to narrow the exemption from Commission regulation
Sec. 4.26 in its entirety to only Commission regulation Sec. 4.26(d),
such that compliance with Commission regulation Sec. 4.26(a) through
(c), provisions that generally govern the use and amendment of this
information, would be required, but filing with NFA prior to first use
would not.
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\31\ 17 CFR 1.31.
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Consistent with the proposed amendments regarding QEP Disclosures
for Sec. 4.7 pools, the Commission also proposed disclosure
requirements for Sec. 4.7 trading programs under Commission regulation
Sec. 4.7(c)(1). Specifically, the Commission proposed to amend
Commission regulation Sec. 4.7(c)(1) to require CTAs to deliver
certain disclosures to their Sec. 4.7 advisory clients. The proposed
disclosure requirements included a description of: (i) the trading
program; (ii) certain persons to be identified; (iii) principal risk
factors for the CTA's trading program; (iv) fees; (v) conflicts of
interest; and (vi) targeted past performance information. Similar to
the proposed amendments to Commission regulation Sec. 4.7(b)(2)(i),
the Commission proposed to establish these minimum disclosure
requirements by rescinding or narrowing existing exemptions in
Commission regulation Sec. 4.7(c)(1) from Commission regulation
Sec. Sec. 4.31, 4.34, and 4.35.\32\ Proposed Commission regulation
Sec. 4.7(c)(2)(i)(G) continued to require that QEP Disclosures provide
all additional disclosures necessary to make the information contained
therein, in the context in which it is furnished, not misleading, and
Proposed Commission regulation Sec. 4.7(c)(2)(i)(H) continued to
require a form statement like that currently required by Commission
regulation Sec. 4.7(c)(1)(i).
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\32\ Proposal, 88 FR 70861.
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Further, the Commission proposed to update corresponding
recordkeeping, and use and amendment requirements for CTAs offering
Sec. 4.7 trading programs. Specifically, the Commission proposed to
amend Commission regulation Sec. 4.7(c)(2) to require CTAs to maintain
QEP Disclosures among the other books and records for their Sec. 4.7
trading programs, and make them available to the Commission, NFA, and
the U.S. Department of Justice, in accordance with Commission
regulation Sec. 1.31. Additionally, the Commission proposed to narrow
the exemption from Commission regulation Sec. 4.36 in its entirety to
only Commission regulation Sec. 4.36(d), such that compliance with
Commission regulation Sec. 4.36(a) through (c), provisions that
generally govern the use and amendment of this information, would be
required, but filing with NFA prior to first use would not.
In the Proposal, the Commission explained that ``[t]he definition
of QEP in Regulation 4.7 encompasses a broad spectrum of market
participants from large fund complexes and other institutional
investors with significant assets under management to individuals with
varying backgrounds and experience, each of which has vastly different
resources available to insist upon the disclosure of information
regarding the offered 4.7 pool or trading program and then to analyze
whatever information is provided.'' \33\ Moreover, the Commission
stated its concern that ``individual natural persons, who meet the QEP
definition through the Portfolio Requirement, but nonetheless do not
command the assets of large financial institutions, likely lack the
ability to demand the same level of transparency afforded through the
prospect of additional significant asset allocations,'' which, the
Commission preliminarily expected, would result in their being more
likely to rely upon whatever information the CPO or CTA chose to
provide.\34\ The Commission stated its preliminary belief that,
``[t]his perceived disparity may increase the likelihood of CPOs and
CTAs with less rigorous risk management and controls to seek capital
from such individuals who are generally less able to engage in the same
rigorous monitoring,'' \35\ as institutional investors. As further
support for the imposition of minimum disclosure requirements, the
Commission also noted the ``rapid and unrelenting pace'' \36\ of
product innovation, for example in the digital asset space, increasing
the possibility that ``certain QEP participants and clients may not
have the level of information necessary to fully appreciate the nature
of the risk associated with their trading.'' \37\ The Commission
preliminarily concluded in the Proposal, based upon its analysis of the
regulatory history behind this regulation, the prevalence of Sec. 4.7
offerings, and the myriad market and product developments since 1992,
that ``requiring the provision of specific minimum disclosures for CPOs
and CTAs operating 4.7 pools and trading programs will assist in
mitigating the customer protection gaps that have developed since 1992
by ensuring that QEPs receive the information necessary to make
informed investment decisions, and that such disclosures are subject to
Commission and NFA oversight.'' \38\ Further, in explaining the
benefits of the proposed QEP Disclosure amendments, the Commission
stated its belief that, these proposed amendments would mandate a
minimum amount of transparency into Sec. 4.7 pools and trading
programs, which could help such QEPs protect themselves against
excessive fees and self-dealing, and generally help insure that the
products offered by such CPOs and CTAs are performing and being
operated, as anticipated.\39\ Additionally, the Commission explained
its expectation that ``mandating QEP Disclosures and requiring that
they be materially accurate and complete, rather than just optional and
not materially misleading, [would] benefit market participants and the
public by ensuring that prospective investors would receive QEP
Disclosures containing, at a minimum, certain important general and
performance information that they can reliably assume is kept current
and materially complete with respect to the items proposed to be
required . . . [and that the proposed amendments] would allow for
improved oversight of the regulated activities of CPOs and CTAs'' by
the Commission.\40\ For these reasons, among others articulated in the
Proposal, the Commission proposed specific minimum disclosures to
bridge the customer protection gap that has, in
[[Page 78797]]
its view, developed since the adoption of Commission regulation Sec.
4.7 in 1992.
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\33\ Proposal, 88 FR 70856.
\34\ Id.
\35\ Id. (citing Susan Taylor Martin, How Tampa's James Cordier
went from high roller to YouTube apology after losing $150 million,
Tampa Bay Times, Feb. 11, 2019, available at https://www.tampabay.com/business/how-tampas-james-cordier-went-from-high-roller-to-youtube-apology-after-losing-150-million-2019206/).
\36\ Proposal, 88 FR 70857.
\37\ Id.
\38\ Id. at 70857-58.
\39\ Proposal, 88 FR 70872.
\40\ Id.
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2. Feedback From Commenters
Generally, commenters were opposed to the proposed QEP Disclosures
for Sec. 4.7 CPOs and CTAs, citing a number of concerns relating to
cost, purpose, practicality in certain common structuring scenarios,
and redundancy. All seven commenters provided feedback on the proposed
minimum disclosure requirements, including several that offered
alternative approaches to the proposed method of adding minimum QEP
Disclosures to Commission regulation Sec. 4.7 for the Commission to
consider.
A majority of the commenters opposed or disagreed with the proposed
minimum disclosure requirements because they believed the additional
requirements were unnecessary.\41\ One commenter opposed the proposed
QEP Disclosures generally because they believe ``imposing mandatory
minimum disclosures would be premature,'' ``would not provide any
protections above and beyond current regulations,'' ``could lead to the
presentation of potentially misleading investor disclosures,'' and
because ``the costs to 4.7 CPOs and CTAs would be unduly burdensome.''
\42\ This commenter disagreed that QEPs currently lack sufficient
information to make informed decisions and stated that raising the
Portfolio Requirement may mitigate the concerns the Commission
expressed in the Proposal.\43\ The commenter asserted further that the
current standard in Commission regulation Sec. 4.7 that requires
disclosures, if any are provided, to not be misleading is sufficient
because disclosures provided in the Sec. 4.7 pool context have become
market practice and are made to satisfy the preferences and demands of
sophisticated investors.\44\ Other commenters echoed this sentiment,
with one suggesting that ``private fund managers commonly include a
description of the fund's investment objectives and strategy in
marketing materials and offering documents,'' \45\ and another stating
that it would ``essentially render the entire 4.7 regime, and the
exemptions provided thereunder, moot.'' \46\ Another commenter
described the minimum QEP disclosure requirements as ``unnecessary to
achieve the Commission's policy goals and . . . unduly costly and even
counterproductive,'' \47\ and further stated that they are ``not aware
that prospective or current QEP investors or clients in pools and
trading accounts operated by these members, virtually all of which are
qualified purchasers not subject to the Portfolio Requirement, have
requested or otherwise indicated a need for such additional
disclosure.'' \48\ Finally, NFA cautioned against the proposed
disclosure requirements, and stated that ``over the years NFA has
received few complaints from 4.7 exempt pool participants and managed
account program clients that CPOs and CTAs have not provided them with
information upon request.'' \49\ Several of these commenters
specifically recommended that the Commission adopt the proposed
amendments to the Portfolio Requirement, and then evaluate the 4.7
population to determine whether the separately proposed minimum
disclosure requirements are necessary.\50\
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\41\ See generally MFA Letter, at 6; SIFMA AMG Letter at 4; AIMA
Letter at 2; IAA Comment Letter at 5.
\42\ MFA Letter, at 2.
\43\ MFA Letter, at 6
\44\ MFA Letter, at 11.
\45\ SIFMA AMG Letter, at 5.
\46\ AIMA Letter, at 2.
\47\ IAA Letter, at 5.
\48\ Id.
\49\ NFA Letter, at 3.
\50\ See Dechert Letter, at 14 (``If the alternative approaches
we articulate in this comment letter in response to the Proposal do
not persuade the Commission, we would strongly counsel the
Commission to limit the first stage of rulemaking in this area to
the amendment of CFTC Rule 4.7 to increase the Portfolio Requirement
to reflect inflation, as proposed, and then to study the effect that
this change has on the types of QEPs the Commission seems most
concerned about protecting.''); see also AIMA Letter, at 4-5 (``If
the Portfolio Requirement thresholds are adjusted appropriately,
then there is no reason why the Commission should also eliminate the
disclosure exemptions under Regulation 4.7. The Commission should
first evaluate whether the changes to the Portfolio Requirement
thresholds address and/or mitigate the Commission's perceived
concerns about unequal bargaining or negotiating power among those
QEPs that satisfy the new, higher standard.'').
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Among the general opposition to the minimum disclosure
requirements, multiple commenters disputed the Commission's stated
concern that some QEPs may lack the ability to demand the same level of
transparency as those QEPs with significantly higher asset allocations,
resulting in their being more likely to rely upon whatever information
the CPO or CTA chose to provide. One commenter acknowledged that there
could be a disparity in QEPs' ability to obtain information, by
suggesting that the minimum disclosure requirements should be limited
to natural person QEPs, and stating that, ``if the CFTC's policy behind
the Proposal is to ensure that investors who do not have leverage are
provided minimum disclosures, then the focus should be on investors who
have direct privity with the CTA and do not have a large enough
investment mandate to be able to negotiate disclosure.'' \51\ A second
commenter pointed to language within current Commission regulation
Sec. 4.7, in which ``[p]rospective QEP clients of CTAs already have
the right, under existing regulations, to decline to have their
accounts treated as exempt accounts under Regulation 4.7.'' \52\ Other
commenters challenged the Commission's concerns more generally.\53\
---------------------------------------------------------------------------
\51\ ICI Letter, at 9.
\52\ IAA Letter, at 5.
\53\ See MFA Letter, at 6 (``There is no evidence cited in the
[NPRM] or elsewhere, however, that QEPs currently lack sufficient
information to make informed decisions.''); AIMA Letter, at 7
(``Second, the Commission concludes that the current exemption
framework is insufficient because [it] fails to ensure that all QEPs
(natural persons, specifically) can demand and receive the
information necessary to make informed investment decisions and/or
effectively monitor their investments. The Proposal, however, lacks
a concrete example of any instance where this may be the case.'').
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Aside from this general opposition, some commenters provided
specific feedback on the potential negative impacts the proposed
minimum disclosure requirements may have on dually-registered
investment advisers and complex fund structures that rely on Sec. 4.7
exemptions.\54\ One commenter stated that, ``the proposed disclosure
requirements create conflicts and duplicative burdens for CPOs and CTAs
dually-registered as investment advisers with the SEC [Securities and
Exchange Commission] when operating exempt pools or advising exempt
accounts.'' \55\ Another commenter provided background, from the
perspective of CTAs, on the ``critical'' regulatory relief provided by
Commission regulation Sec. 4.7 for registered and offshore funds
requiring a registered CTA, explaining that CTAs registered as
investment advisers are already subject to ``extensive disclosure on
Form ADV,'' and that ``both registered and offshore funds are currently
required to provide robust disclosure documents that describe the
fund's investment objective, policies, and risks, and such disclosures
necessarily describe the CTA's trading strategy and associated
[[Page 78798]]
risks.'' \56\ Multiple commenters also argued that the minimum
disclosure requirements are either unnecessary or inappropriate when
applied to common usage scenarios involving complex fund structures or
scenarios in which the CPO or CTA relies upon Commission regulation
Sec. 4.7 solely because no other appropriate exemption for their
activity exists.\57\ One commenter argued that ``layering'' the current
performance and disclosure rules on complex multi-strategy mandates
``would not provide clearer or more accurate disclosures to
investors,'' and instead, ``would potentially require any disclosures
to attempt to compensate for the flexibility inherent in these products
and potentially result in disclosures that are so generic as to be
meaningless to investors.'' \58\ Another commenter stated that, ``many
of [their] CTA members are also CPOs and offer separate accounts only
to QEPs who seek to invest a substantial amount of capital through a
separate account structure rather than pool participation,'' describing
these account arrangements as ``often heavily negotiated.'' \59\
Another commenter provided background on the relief Commission
regulation Sec. 4.7 provides to registered and offshore funds
requiring a registered CTA, describing four common scenarios where
investment advisers rely on Commission regulation Sec. 4.7 for CTA
compliance relief with respect to a registered or offshore fund
requiring a registered CPO and CTA.\60\ With respect to these CTA-
specific scenarios, the commenter argued that if the proposed
disclosure requirements were implemented in these contexts, commonly
controlled entities would likely be required to provide disclosures to
entities or persons that either already receive them, or already have
access to such information, or would result in the Commission
implementing regulatory authority over certain entities that the CFTC
has traditionally sought not to oversee directly.\61\
---------------------------------------------------------------------------
\54\ MFA Letter, at 8; Dechert Letter, at 10; IAA Letter at 5;
ICI Letter, at 3-7.
\55\ Dechert Letter, at 10 (stating further that ``CTAs that are
SEC-registered investment advisers, like CPOs that are SEC-
registered investment advisers, already distribute regulatory
disclosures to investors, such as Form ADV, making it unnecessary
for these CTAs to create new disclosure documents''). This commenter
further asserted that the Commission's concerns with respect ``to
natural person QEPs should also be sufficiently addressed by
adjusting [the Portfolio Requirement].'' Id.
\56\ ICI Letter, at 8.
\57\ SIFMA AMG Letter, at 5; IAA Letter, at 5, n.5; and, ICI
Letter, at 4-7.
\58\ MFA Letter, at 8.
\59\ SIFMA AMG Letter, at 4 (arguing that ``[t]hese investors
have the power to request the information they require to make
informed investment decisions and have little need for exhaustive
mandated disclosures that were designed originally with retail
clients in mind'').
\60\ ICI Letter, at 4-7. These scenarios included: (1) CPOs and
CTAs in a master-feeder relationship; (2) advisers and sub-advisers
to a registered fund requiring CPO and CTA registration; (3) U.S.
investment advisers to offshore funds; and (4) offshore advisers to
offshore funds that also advise U.S. funds. Id.
\61\ See generally ICI Letter, at 4-7.
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Last, and perhaps most significantly, four commenters provided the
Commission with potential alternatives to the minimum disclosure
requirement framework proposed in the NPRM. One commenter suggested
that the Commission instead amend Commission regulation Sec. 4.7 to
require CPOs and CTAs to provide disclosures to QEP investors, the
scope and substance of which, however, would be ``determined at the
discretion of the 4.7 CPO or CTA.'' \62\ Another commenter suggested
that the Commission instead consider limiting the required QEP
Disclosures to ``risk factors, the CTA's trading programs, fees and
conflicts of interest to be provided to clients who are (a) natural
persons and (b) legal organizations who are not eligible contract
participants.'' \63\ This commenter also requested that, ``where such
information is disclosed to clients or prospective clients through
compliance with an existing regulatory regime (e.g., via disclosure in
the CTA's Form ADV Part 2 brochure), the Commission should permit
satisfaction of the disclosure requirement by substituted compliance.''
\64\ A third commenter asked the Commission to consider adopting the
disclosure requirements such that they would ``not apply where exempt
pool participants and exempt account clients qualify as QEPs under CFTC
Rule 4.7(a)(2),'' referring to those QEPs that are not subject to the
Portfolio Requirement discussed in further detail below.\65\ Finally, a
fourth commenter opined that the minimum disclosure requirements
``should only apply to Regulation 4.7 CTA clients that are natural
persons who are residents of the United States.'' \66\
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\62\ MFA Letter, at 12.
\63\ SIFMA AMG Letter, at 5. The Commission notes that SIFMA AMG
provided this specific recommendation only with respect to CTAs'
Sec. 4.7 trading programs. SIFMA AMG did not provide a similar
recommendation for CPOs and their Sec. 4.7 pools.
\64\ Id.
\65\ Dechert Letter, at 5. This approach was also acknowledged
by other commenters in both comment letters and during ex parte
meetings with Commission staff as a possible, acceptable alternative
to the Proposal. See, e.g., MFA Comment Letter II, at 2 (stating
``if the CFTC decides to move forward with any proposed disclosure
requirements, it is critical that the Commission exempt CPOs and
CTAs with respect to 4.7(a)(2) investors from the disclosure
requirements'').
\66\ ICI Letter, at 9.
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3. Further Consideration of Proposed Minimum QEP Disclosures
After considering the feedback received, the Commission has
determined it appropriate to take additional time to consider the
concerns articulated as well as the alternatives to the proposed QEP
disclosure amendments put forward by commenters. Therefore, the Final
Rule does not adopt minimum disclosure requirements to Commission
regulation Sec. 4.7. Rather, the Commission is prioritizing in this
Final Rule the adoption of amendments to Commission regulation Sec.
4.7 that incorporate the proposed Portfolio Requirement increases in
the QEP definition and add the monthly account statement schedule for
certain Sec. 4.7 pools, while it continues to evaluate regulatory
alternatives and may adopt further changes in the future.
C. Updating Financial Thresholds in the Portfolio Requirement of the
``Qualified Eligible Person'' Definition
As explained briefly above, the Commission proposed to amend the
definition of the ``Portfolio Requirement,'' in Commission regulation
Sec. 4.7 by updating its financial thresholds in a manner that
accounts for the effects of inflation over the thirty-two years since
their initial adoption with the intention of continuing to align the
Portfolio Requirement with the Commission's original regulatory
intent.\67\ Commission regulation Sec. 4.7 bifurcates the definition
of QEP into two different groups of persons that may qualify: (1) those
persons \68\ who do not need to satisfy an additional Portfolio
Requirement to be considered a QEP; and (2) those persons who must
satisfy the Portfolio Requirement to be considered a QEP.\69\ The
Commission further explained that the current Portfolio Requirement
contains two thresholds whereby a person can be deemed a QEP: (1)
owning securities (including pool participations) of issuers not
affiliated with such person and other investments with an aggregate
market value of at least $2,000,000 \70\ (Securities Portfolio Test);
or (2) having on deposit with a futures commission merchant (FCM), for
its own account at any time during the six months preceding either the
date of sale to that person of a pool participation in the Sec. 4.7
pool or the date the person opens an account with the CTA for a Sec.
4.7
[[Page 78799]]
trading program, at least $200,000 in exchange-specified initial margin
and option premiums, together with required minimum security deposits
for retail forex transactions, for commodity interest transactions \71\
(Initial Margin and Premium Test). Commission regulation Sec. 4.7 also
provides that persons may satisfy the Portfolio Requirement by owning a
portfolio comprised of a combination of the funds or property specified
in the Securities Portfolio Test and the Initial Margin and Premium
Test, which, when expressed as percentages of the required amounts,
meet or exceed 100%.\72\ Therefore, if a person required to satisfy the
Portfolio Requirement meets one of the tests (or some combination of
the two), as described above, the CPO or CTA may consider such person
qualified as a QEP and accept them as a Sec. 4.7 pool participant or
advisory client, respectively.
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\67\ Proposal, 88 FR 70853-55.
\68\ See 17 CFR 1.3 (defining ``person'' as including
individuals, associations, partnerships, corporations, and trusts).
\69\ Proposal, 88 FR 70853, n. 17-18 (describing these two
different types of QEPs in further detail).
\70\ 17 CFR 4.7(a)(1)(v)(A), or as amended by the Final Rule, 17
CFR 4.7(a)(5)(i). The Commission explains further below that the
Final Rule adopts several technical amendments reorganizing and
renumbering portions of Commission regulation Sec. 4.7, including
the paragraph containing definitions. As a result of the Final Rule,
the new citations for the Portfolio Requirement thresholds will be
17 CFR 4.7(a)(5)(i) through (iii).
\71\ 17 CFR 4.7(a)(1)(v)(B), or as amended by the Final Rule, 17
CFR 4.7(a)(5)(ii).
\72\ 17 CFR 4.7(a)(1)(v)(C), or as amended by the Final Rule, 17
CFR 4.7(a)(5)(iii).
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In the Proposal, the Commission explained its preliminary
conclusions that updating the dollar thresholds within the Securities
Portfolio Test and the Initial Margin and Premium Test would be
appropriate because the thresholds had not been updated since their
adoption in 1992.\73\ The Commission further explained its belief that
the Consumer Price Index for All Urban Consumers (CPI-U) and the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-
W) would be suitable benchmarks for determining the general impact of
inflationary pressures on the existing Portfolio Requirement
thresholds; employing those indexes, the Commission ultimately proposed
doubling the Securities Portfolio Test to $4,000,000, and the Initial
Margin and Premium Test to $400,000, while also retaining the existing
option to meet the Portfolio Requirement through a combination of the
two tests adding up to 100%.\74\ Although the Commission acknowledged
that the proposed update to the dollar thresholds were not an exact
reflection of the impact of inflation,\75\ the Commission reasoned that
approximating these thresholds to the nearest million and hundred
thousand provided clear and fair thresholds that would better
facilitate compliance.\76\ After careful consideration of the comments
received, as well as additional analysis of the benchmarks the
Commission initially used to determine the impact of inflation on the
existing Portfolio Requirement thresholds, the Commission is adopting
the amendments to the Portfolio Requirement as proposed.
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\73\ Proposal, 88 FR 70854.
\74\ Id.
\75\ Using the indexes, as of February 2023, the Commission
explained in the NPRM that $2,000,000 had the same buying power as
$4,270,000, and $200,000 had the same buying power as approximately
$427,000. Id.
\76\ Id.
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Commenters generally supported the Commission's proposed amendments
to the Portfolio Requirement. Of the eight responses the Commission
received on the Proposal as a whole, five commenters responded directly
to the Commission's proposal to update the Portfolio Requirement.\77\
MFA, SIFMA AMG, AIMA, IAA, and Dechert supported the Commission's
proposal to update the Portfolio Requirement,\78\ although some
commenters further stated that the adoption of these threshold
increases should not be coupled with the addition of minimum disclosure
requirements in Commission regulation Sec. 4.7. In particular, several
commenters expressed their view that appropriately updating the
Portfolio Requirement thresholds should alleviate the concerns raised
by the Commission in the NPRM by providing additional customer
protection for natural persons (and other QEPs subject to the Portfolio
Requirement) and modernizing Commission regulation Sec. 4.7, which
would thereby render any additional disclosure requirements
unnecessary.\79\ The Commission agrees that increasing the thresholds
brings Commission regulation Sec. 4.7 back into alignment with the
Commission's original intention in 1992 for the purpose of
differentiating between retail investors and more sophisticated market
participants. The increases to the Portfolio Requirement thresholds
ensure that persons unable to meet those metrics receive the full
panoply of disclosures and other customer protections required for non-
QEP pool participants and advisory clients.
---------------------------------------------------------------------------
\77\ See SIFMA AMG Letter, at 11; AIMA Letter, at 4; IAA Letter,
at 2; Dechert Letter, at 14.
\78\ See MFA Letter, at 3 (explaining that ``an increase in the
investor qualification thresholds for QEPs could modernize CFTC
Regulation 4.7 to meet contemporary expectations regarding
sophisticated investors,'' and that the proposed increases ``would
bring the Portfolio Requirement monetary threshold into closer
alignment with the qualified purchaser . . . standard, consistent
with the investor base for many 4.7 pools''); SIFMA AMG Letter, at
11 (``[W]e think it makes sense to update the Portfolio Requirement
to ensure that QEPs remain limited to those investors who are truly
sophisticated.''); AIMA Letter, at 4 (``We broadly support the
proposed changes to the Portfolio Requirement Thresholds.''); IAA
Letter, at 2 (``We do not object to the Commission's proposal to
update the Portfolio Requirement thresholds for QEPs to adjust for
inflation.''); Dechert Letter, at 14 (``[W]e do not have an issue
with CFTC's proposal to increase the two thresholds in the Portfolio
Requirement.'').
\79\ See, e.g., MFA Letter, at 5 (``Doubling the QEP dollar
thresholds is sufficient to address the Commission's current
investor protection and modernization goals, without conditioning
the increase on the adoption of a prescriptive, retail orientated
disclosure regime contained in the Disclosure and Performance
Rules.''); SIFMA AMG Letter, at 11 (``In our view, this update
should address the Commission's concerns articulated in the Proposal
at large regarding investor sophistication and access to
information, thus obviating the need to impose mandatory disclosure
requirements in addition.''); AIMA Letter, at 4 (``If the Portfolio
Requirement thresholds are adjusted appropriately, then there is no
reason why the Commission should also eliminate the disclosure
exemptions under Regulation 4.7.''); IAA Letter, at 2 (``We believe
that raising [the Portfolio Requirement thresholds] should be
sufficient to address the Commission's concerns, and that the
additional proposed disclosures are not necessary.'').
---------------------------------------------------------------------------
Although the Commission is not finalizing the proposed amendments
that would add minimum disclosure requirements to Commission regulation
Sec. 4.7 in this Final Rule, the Commission notes that commenters
asserted that raising the Portfolio Requirement thresholds would also
address the Commission's concerns regarding the informational
discrepancy between CPOs' and CTAs' prospective and actual pool
participants and advisory clients. The Commission proposed the
increases to the thresholds in the Portfolio Requirement to ensure that
it continued to serve as ``objective criteria'' to distinguish between
retail participants in the commodity interest markets and those persons
``with a high degree of sophistication with regard to investments as
well as financial resources to withstand the risk of their
investments.'' \80\ Essentially, increasing the Portfolio Requirement
thresholds in the manner proposed in the NPRM effectively bridges the
financial gap that has developed between the amounts the Commission
adopted in 1992 and the actual buying power of those amounts in 2024,
due to inflationary effects experienced in that time period.
---------------------------------------------------------------------------
\80\ Proposal, 88 FR 70854 (citing the 1992 Proposed Rule, 57 FR
3152).
---------------------------------------------------------------------------
In addition to general support from commenters, the Commission
believes that updated information from the indexes used to benchmark
the proposed thresholds within the Portfolio Requirement continues to
support the proposed increases. In developing this Final Rule, the
Commission revisited the two inflation indexes published by the United
States Bureau of Labor Statistics (BLS) used to devise the proposed
amendments to the Portfolio Requirement. As explained in the Proposal,
the Commission consulted
[[Page 78800]]
the CPI-U and CPI-W to understand the approximate effect of inflation
on the dollar value thresholds within the Portfolio Requirement and the
current buying power of those thresholds.\81\ The purpose of consulting
these benchmarks was to determine whether the dollar thresholds within
the Portfolio Requirement still reflect the heightened standard of
investor activity and sophistication that the Commission considered
sufficient for certain persons to qualify as a QEP in adopting the
Portfolio Requirement in 1992. At the time of the Proposal, the
Commission preliminarily concluded that the thresholds within the
Portfolio Requirement were significantly devalued by over three decades
of inflationary effects, such that the thresholds no longer served as
the investor protection guardrails that the Commission originally
intended.\82\ If left unaddressed, the Commission believes that the gap
between the actual buying power of the original Portfolio Requirement
thresholds and the Commission's original intent of limiting QEPs to
financially sophisticated persons with significant commodity interest
trading experience will only widen. In the Proposal, the Commission
specifically requested feedback from commenters on whether the CPI-U
and CPI-W indexes were ``the most appropriate for considering inflation
on the thresholds within the Portfolio Requirement,'' and if not, the
Commission also requested feedback on any other indexes or methods it
should use in assessing the effect of inflation.\83\ The Commission did
not receive any feedback in response to this question, and therefore,
will continue to use the CPI-U and CPI-W indexes as benchmarks for its
analysis. Using the same example, the Commission used in the Proposal,
based on analysis using CPI-U data, as of July 2024, the $2,000,000
threshold in the Securities Portfolio Test has the same buying power as
approximately $4,464,726, and the $200,000 threshold in the Initial
Margin and Premiums Test has the same buying power as approximately
$446,472.\84\ As shown by the example, the disparity in buying power
will continue to be exacerbated over time.
---------------------------------------------------------------------------
\81\ See the U.S. BLS Handbook of Methods, for more information
on the CPI, CPI-U, and CPI-W, available at https://www.bls.gov/opub/hom/cpi/presentation.htm. As described by the BLS Handbook of
Methods, CPI-U represents the buying habits of the residents of
urban and metropolitan areas in the United States and covers over 90
percent of the U.S. population. Id. Comparatively, the CPI-W is
computed using the same prices as the CPI-U, but the weights of the
CPI-W are based on a subset of the CPI-U population, covering
approximately 30 percent of the U.S. population. Id. The CPI-W also
includes households where more than one-half of the household's
earners must have been employed for at least 37 weeks during the
previous 12 months. Id. Given the relevance of these indexes to the
population of natural persons that may qualify as QEPs via the
Portfolio Requirement, the Commission believes these indexes are the
most appropriate to use in determining today's buying power of the
Portfolio Requirement's monetary thresholds established in 1992.
\82\ See Proposal, 88 FR 70854 The indexes show that inflation
has had an appreciable effect on the monetary thresholds promulgated
in the 1992 Final Rule. The CPI-U and CPI-W data expose that the
current thresholds may no longer be indicative of a high level of
investor sophistication, acumen, and resources that the Commission
anticipated when the Portfolio Requirement was promulgated. Based on
analysis using CPI-U data, for example, as of February 2023, the
Securities Portfolio Test's $2,000,000 threshold has equal
purchasing power as approximately $4,270,000, and the $200,000
specification in the Initial Margin and Premiums Test has equal
purchasing power as approximately $427,000. See also id. at 70854,
n. 30.
\83\ Id. at 70855.
\84\ The actual calculator for CPI-U can be found at https://www.bls.gov/data/inflation_calculator.htm. Similar to the Proposal,
the Commission is choosing to include the July 2024 CPI-U data above
because it provides a clear example of today's buying power of the
Portfolio Requirement, as it was established in August 1992, and
because the data can be easily accessed and verified via the BLS
inflation calculator link provided herein. In comparing the results
of each index, as applied to the Portfolio Requirement thresholds,
the Commission found no material difference between the CPI-W and
CPI-U. Analysis using the CPI-W provided similar buying power
figures to those produced by the CPI-U analysis. Given that the
Commission is proposing updated thresholds rounded down to the
nearest million and hundred thousand, the Commission believes that
providing the CPI-U analysis is sufficient for purposes of this
Final Rule.
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Although the Commission believes the updated information from the
inflation indexes justifies updating the Portfolio Requirement
thresholds, some commenters raised concerns that an increased Portfolio
Requirement would have wider consequences. One commenter raised a
concern that, if the Commission significantly raised the Portfolio
Requirement's financial standards, it ``may move certain persons that
may desire to participate in a 4.7 pool or managed account program
further away from the SEC's current accredited investor qualification
standards for private offerings,'' and recommended that the Commission
work with the SEC to review the accredited investor definition and
determine if any changes are appropriate, rather than update the
Portfolio Requirement thresholds on its own.\85\ The Commission agrees
with the commenter that it is desirable to harmonize overlapping
regulatory regimes where possible and appropriate, and recognizes that
it is perhaps particularly relevant to Commission regulation Sec. 4.7,
where the Commission specifically identified and utilized the SEC's
accredited investor definition as a ``foundation'' for developing the
exemption.\86\ Despite that acknowledgement, the Commission is not
persuaded that increasing the financial thresholds within the Portfolio
Requirement would create a large enough gap between the two frameworks,
so as to render them unworkable in tandem. The Portfolio Requirement is
a unique feature of Commission regulation Sec. 4.7 that has never
appeared as a qualification in the SEC's accredited investor
definition. In 1992, as part of the Commission's discussion of the
SEC's accredited investor definition serving as a ``foundation'' for
Commission regulation Sec. 4.7, the Commission stated that it
``[proposed] a definition of QEP that is designed generally to include
persons who qualify as accredited investors under Regulation D [17 CFR
230.500 through 230.508] and who meet certain additional
qualifications.'' \87\ The Commission was clear in 1992 that the
Portfolio Requirement was intended to be an ``additional
qualification'' on top of meeting the accredited investor definition,
and that its consideration of aspects of the accredited investor
definition in developing Commission regulation Sec. 4.7 were with
respect to the categories of QEPs and not the Portfolio Requirement.
The Portfolio Requirement is a CFTC-only component of Commission
regulation Sec. 4.7 that was developed intentionally to impose a
heightened standard for QEPs as opposed to simply relying on the
provisions of the securities laws. It is entirely plausible that, under
the existing frameworks, a person may qualify as an accredited
investor, but also not be a QEP. For example, Sec. 230.501(a)(6) of
Regulation D defines an accredited investor as any natural person who
had an individual income in excess of $200,000 in each of the two most
recent years, or joint income with that person's spouse in excess of
$300,000 in each of those years.\88\ If a natural person narrowly meets
that accredited investor income test, it is entirely possible that they
do not have sufficient assets to meet the Securities Portfolio Test, or
sufficient commodity interest trading to meet the Initial Margin and
Premiums Test under the current Portfolio Requirement in
[[Page 78801]]
Commission regulation Sec. 4.7. To put it simply, in the context of
natural persons, the accredited investor definition attempts to measure
financial sophistication by annual income or net worth, whereas the
Portfolio Requirement is focused on a person's experience trading and
managing a portfolio of sufficient size to demonstrate an understanding
of the risks in the securities and commodity interest markets; the
latter being arguably more relevant to assessing a person's
sophistication and investment acumen given the complexity and unique
risks associated with the commodity interest markets.\89\
---------------------------------------------------------------------------
\85\ NFA Letter, at 3. NFA also stated that the Commission, in
its 1992 Proposal, acknowledged that the SEC's accredited investor
definition under SEC Regulation D was used as the ``foundation'' to
define categories of QEPs. See also 57 FR 3148, 3151-3152 (Jan. 28,
1992) (1992 Proposal).
\86\ 1992 Proposal, 57 FR 3151.
\87\ Id. (emphasis added).
\88\ 17 CFR 230.501(a)(6).
\89\ See 1992 Final Rule, 57 FR 34854, quoting 1992 Proposal, 57
FR 3151 (explaining that the Commission intended to define QEP
status by means of objective criteria that such persons possess
either the investment expertise and experience necessary to
understand the risks involved, as evidenced by the registered status
of certain investment professionals, or have an investment portfolio
of sufficient size to indicate that the participant has substantial
investment experience and thus a high degree of sophistication with
regard to investments as well as financial resources to withstand
the risk of their investments).
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Moreover, not all persons are required to meet the Portfolio
Requirement to be QEPs. The Portfolio Requirement only applies to
persons listed under current Commission regulation Sec. 4.7(a)(3),\90\
whereas those categories of persons listed under current Commission
regulation Sec. 4.7(a)(2) do not have to meet its terms to be
QEPs.\91\ In creating and adopting the QEP definition and Commission
regulation Sec. 4.7, the Commission viewed these two categories as
separate ``classes'' and intentionally provided an additional
eligibility condition, in the form of the Portfolio Requirement, for
those persons listed in current Commission regulation Sec.
4.7(a)(3).\92\ The amendments to the financial thresholds being adopted
today do not expand the Portfolio Requirement to the other persons
enumerated under current Commission regulation Sec. 4.7(a)(2) or
otherwise alter these two original categories of QEPs. The
establishment of the Portfolio Requirement was an intentional,
alternative mechanism for qualification as a QEP, functioning
independent of the SEC's accredited investor definition, and has been
part of the terms of Commission regulation Sec. 4.7 since its
inception in 1992. As such, the Commission is not persuaded that
updating the Portfolio Requirement by adjusting its thresholds would
meaningfully disrupt existing harmonization between CFTC and SEC
regulatory regimes, as the two standards were never identical and were
not intended to be. Nor does the Commission believe that it should
delay increasing the Portfolio Requirement until the accredited
investor definition is otherwise amended.
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\90\ This list includes, but is not limited to: (1) certain
investment companies registered under the Investment Company Act of
1940 (ICA) or business development companies as defined in section
2(a)(48) of the ICA: (2) banks as defined in section 3(a)(2) of the
Securities Act of 1933 (Securities Act); or any savings and loan
association or other institution defined in section 3(a)(5)(A) of
the Securities Act acting for its own account or for the account of
a QEP; (3) certain insurance companies acting for their own account
or that of a QEP; (4) certain state employee benefit plans; (5)
certain employee benefit plans within the meaning of the Employee
Retirement Income Security Act of 1974 (ERISA); (6) private business
development companies; (7) certain organizations described in
section 501(c)(3) of the Internal Revenue Code (IRC) with total
assets in excess of $5,000,000; (8) certain corporations,
Massachusetts or similar business trusts, or partnerships, limited
liability companies or similar business ventures; (9) natural
persons meeting the individual net worth or joint net worth tests
within the ``accredited investor'' definition; (10) natural persons
who would otherwise be considered accredited investors; (11) certain
pools, trusts, insurance company separate accounts, or bank
collective trusts; and (12) certain government entities.
\91\ This list includes, but is not limited to: (1) registered
FCMs, registered retail foreign exchange dealers (RFEDs), registered
swap dealers, and principals thereof; (2) a registered broker or
dealer, or principal thereof; (3) certain registered CPOs, and
principals thereof (active for two or more years, and $5,000,000 in
total aggregate commodity pool assets); (4) certain registered CTAs,
and principals thereof (active for two or more years, and advising
commodity accounts, in the aggregate, of $5,000,000 or more); (5)
certain investment advisers registered under the Investment Advisers
Act of 1940 (IAA), and principals thereof; (6) ``qualified
purchasers'' as defined in section 2(a)(51)(A) of the ICA; (7)
``knowledgeable employees'' as defined in 17 CFR 270.3c-5 pursuant
to the ICA; (8) certain persons associated with an exempt pool or
account; (9) certain trusts; (10) organizations described in section
501(c)(3) of the IRC, where the trustee, founder, or person making
investment decisions is also a QEP; (11) non-United States persons;
and (12) exempt pools.
\92\ 1992 Proposal, 57 FR 3152.
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Another commenter expressed concern that the increases to the
financial thresholds within the Portfolio Requirement could have
negative effects on persons who currently qualify as QEPs, but would no
longer be considered QEPs under the updated Portfolio Requirement.\93\
Specifically, the commenter advocated for the grandfathering of
investors who are currently QEPs, but would no longer qualify as such
under the increased Portfolio Requirement, and encouraged the
Commission to ``clarify and explain its expectations with respect to
4.7 offerings with pool participants that are both QEPs, and former
QEPs that no longer satisfy the [increased] Portfolio Requirement.''
\94\ In the Proposal, the Commission specifically requested any data or
information from CPOs or CTAs that utilize Commission regulation Sec.
4.7 on the number of advisory clients and pool participants that would
be directly affected by the increase.\95\ Despite raising this concern
and the Commission's specific request, neither this commenter nor any
other provided information or data on the number of advisory clients or
pool participants that currently qualify as QEPs via the existing
Portfolio Requirement, but would not so qualify if the increased
thresholds are adopted. Notwithstanding the lack of specific
information to assess the magnitude of the class of persons affected,
the Commission acknowledges that some persons will fall within this
``gap'' population that would no longer be considered QEPs under the
updated Portfolio Requirement.\96\ Because of that reality, the
Commission preliminarily addressed its position with respect to such
former QEPs within the Proposal.\97\ For the sake of clarity, however,
the Commission today restates its position below on how it expects CPOs
and CTAs to comply with the updated Portfolio Requirement for its
advisory clients or pool participants that previously qualified as
QEPs, but would not so qualify under the updated Portfolio Requirement.
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\93\ MFA Letter, at 4.
\94\ Id.
\95\ See Proposal, 88 FR 70855, Request #2 (``The Commission is
also seeking any data or information, from CPOs and CTAs that
utilize Regulation 4.7, on the estimated number of advisory clients
and pool participants that currently qualify as QEPs via the
existing Portfolio Requirement, but would not so qualify if the
increased monetary thresholds in the Portfolio Requirement described
above are adopted.'').
\96\ The only mechanism available for the Commission to confirm
the existence of this population would be to review all documents
required to be kept by Sec. 4.7 CPOs and CTAs that validate their
advisory clients' or pool participants' status as QEPs and assess
how many would fall within the ``gap'' population.
\97\ Proposal, 88 FR 70854-55 (``Acknowledging that the
Portfolio Requirement will likely result in a certain portion of
currently-qualifying QEPs no longer meeting the thresholds, the
Commission noted that current Regulation 4.7(a)(3) provides that
CPOs must assess a person's QEP status at the time of sale of any
pool participation units including satisfying the Portfolio
Requirement. Likewise, CTAs must make a similar assessment at the
time that a person opens an exempt account. As opposed to requiring
mandatory redemptions or terminations of advisory relationships for
those current QEPs who may not meet the proposed heightened
thresholds, the Commission expects that continuing this requirement
minimizes the potential for disruption to the 4.7 pool or trading
program, as well as possible negative consequences for the current
QEPs. Therefore, the proposal was for the retaining the requirements
of Regulation 4.7(a)(3) in Proposed Regulation 4.7(a)(6)(ii).
Additionally the Commission sought comment on this issue in the
proposal.).
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The Commission intends to retain, and will apply, the provision
which requires that, for persons that must
[[Page 78802]]
satisfy the Portfolio Requirement, a CPO or CTA must have the
reasonable belief, at the time of sale of a pool participation in an
exempt pool, or at the time that a person opens an exempt account, that
such person satisfies the Portfolio Requirement. In effect, if a CPO or
CTA has previously sold a pool participation or opened an exempt
account for a person that qualified as a QEP under the previous
Portfolio Requirement, but who does not meet the updated Portfolio
Requirement, the CPO or CTA would not be required to redeem such
person's pool participations, or to terminate the advisory relationship
with that person. However, a CPO or CTA would not be permitted to sell
any additional pool participations or open any additional exempt
accounts for any person that does not meet the updated Portfolio
Requirement. The avoidance of required redemption or account closure
should limit any potential disruptions or negative consequences either
to the Sec. 4.7 pool or trading program, or the pool participant or
advisory client.
The Commission believes, however, that it would run counter to the
intent of the updated Portfolio Requirement to permit a wholesale
grandfathering of any persons who had previously been considered QEPs
prior to the update. Additionally, the Commission is concerned that
doing so may lead to an influx of persons into Sec. 4.7 pools and
trading programs prior to the implementation date of the updated
Portfolio Requirement, solely to evade the increased financial
thresholds. The Commission notes that, pursuant to current Commission
regulation Sec. 4.7 requirements, CPOs and CTAs are responsible for
determining the QEP status of their prospective pool participants or
advisory clients, regardless of how such QEP meets that definition, and
must retain evidence of such determinations as part of their books and
records.\98\
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\98\ See 17 CFR 4.7(b)(5) and (c)(2) (requiring CPOs and CTAs to
maintain books and records including, without limitation, records
relating to the qualifications of qualified eligible persons).
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D. Permitting Monthly Account Statements for Certain Sec. 4.7 Pools
Consistent With Commission Exemptive Letters
As the Commission explained in the Proposal, Commission regulation
Sec. 4.7(b)(3) provides an exemption from the requirement in
Commission regulation Sec. 4.22(a) and (b) that CPOs provide monthly
account statements containing specific information to participants in
their commodity pools.\99\ With respect to Sec. 4.7 pools, CPOs are
permitted to distribute account statements no less frequently than
quarterly within 30 days after the end of the reporting period.\100\
The Commission noted, however, that CPOs of Sec. 4.7 pools that are
``Funds of Funds'' \101\ have reported to Commission staff that they
often have difficulty complying with the quarterly account statement
schedule required by Commission regulation Sec. 4.7(b)(3). The
Commission stated further that such CPOs regularly request exemptive
letters from the Commission to permit them to follow an alternate
account statement schedule, explaining that because they cannot control
the timing of when they receive financial information from underlying
investee collective investment vehicles, investor Fund of Funds CPOs
often do not receive the requisite information for their own Sec. 4.7
pool periodic reporting until the 30-day period for distribution is
nearly expired. The Commission explained that, over the years, it has
routinely granted these exemptive letter requests, permitting
requesting CPOs to distribute monthly, rather than quarterly, account
statements for their Sec. 4.7 Fund of Funds pools within 45 days of
the month-end,\102\ and that this approach allowed the requesting CPOs
additional time to receive and gather the information required for
their account statements, while also ensuring that QEP pool
participants receive both more accurate and more frequent reporting.
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\99\ Proposal, 88 FR 70863 (citing 17 CFR 4.7(b)(3), 4.22(a) and
(b)).
\100\ 17 CFR 4.7(b)(3)(i).
\101\ In the Proposal, the Commission defined ``Funds of Funds''
as pools that invest in unrelated funds, pools, or other collective
investment vehicles. Proposal, 88 FR 70856, n. 42.
\102\ Proposal, 88 FR 70863 (citing CFTC Letters 18-29, 19-01,
19-03, 20-11, 21-16, and 23-04).
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Consistent with its past efforts to memorialize routinely granted
Commission letter relief via regulatory amendments, the Commission
proposed to add paragraph (b)(3)(iv) to Commission regulation Sec.
4.7, noting that the amendment was intended to streamline availability,
provide consistency, and eliminate the need for Commission staff to
process and respond to requests individually.\103\ Proposed Commission
regulation Sec. 4.7(b)(3)(iv) stated, where the exempt pool is
invested in one or more other pools or funds operated by third parties,
the commodity pool operator may choose instead to prepare and
distribute to its pool participants statements on a monthly basis
within 45 days of the month-end, provided that such account statements
otherwise meet the requirements of Commission regulation Sec.
4.7(b)(3), and that the CPO notifies its Sec. 4.7 pool participants of
this alternate distribution schedule either in the pool's offering
memorandum, or upon adoption of this reporting schedule.\104\ The
Commission requested comment on the proposed amendment, in particular
whether it effectively creates a mechanism in Regulation Sec.
4.7(b)(3) that is equivalent to the exemptive letters currently issued
by the Commission, and whether the alternate account statement
distribution schedule and notice requirements are clear.\105\
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\103\ Id.
\104\ Proposal, 88 FR 70878.
\105\ Id. at 70863.
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In response to this aspect of the NPRM, the Commission received
positive feedback from multiple commenters, with one commenter noting
specifically that ``seeking and receiving the exemptive relief has come
with a time and cost burden for CPOs'' operating Sec. 4.7 Fund of Fund
pools and indicating that the proposed amendment would be a welcome
alternative to that process.\106\ Given the positive public comments,
the lack of any suggested changes to this amendment, as well as its
continued belief that considering and adopting regulatory amendments
consistent with staff letter relief provides clarity, consistency, and
streamlines availability, the Commission is adopting Proposed
Commission regulation Sec. 4.7(b)(3)(iv) as proposed.
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\106\ SIFMA AMG Letter, at 11; IAA Letter, at 7; NFA Letter, at
5; Dechert Letter, at 11.
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E. Other Technical Amendments
The Proposal also included a number of technical amendments to
Commission regulation Sec. 4.7 designed to improve its efficiency and
usefulness for intermediaries and their prospective and actual QEP pool
participants and advisory clients, as well as the general public.\107\
For example, the Commission proposed to delete the introductory
paragraph to Commission regulation Sec. 4.7 and to generally
restructure the definitions section in Commission regulation Sec.
4.7(a), eliminating what it viewed as unnecessary subparagraph levels
in the QEP definition and alphabetizing the definitions for ease of
reference. The Commission also proposed additional amendments to ensure
that cross-references within Commission regulation Sec. 4.7 and in
other part 4 regulations were accurate.
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\107\ Proposal, 88 FR 70863.
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The Commission sought comment on those technical amendments and
requested commenters detail any other technical amendments it should
consider for ease of use, as well as
[[Page 78803]]
whether there were any other cross-references within Commission
regulation Sec. 4.7 not addressed by the Proposal that should be
corrected. The Commission received no comments on these technical
amendments, and no commenters identified additional technical
amendments or corrections that it should consider. Nevertheless, as a
result of the reorganization of the definitions in Commission
regulation Sec. 4.7 accomplished by this Final Rule, the Commission
has identified several regulations outside of 17 CFR part 4 that now
require technical corrections because they refer to certain definitions
in Commission regulation Sec. 4.7. Specifically, the Commission is
correcting references to defined terms in Commission regulation Sec.
4.7 found in Commission regulation Sec. Sec. 1.35, 3.10, 30.6, 43.6,
and 75.10. Therefore, the Commission is adopting the technical
amendments in the NPRM largely as proposed, along with technical
corrections to the regulatory cross-references outside of part 4 that
are listed herein.
F. Effective and Compliance Dates for the Final Rule
In the Proposal, the Commission requested feedback from commenters
on the time needed to comply with the proposed Portfolio Requirement
update and the proposed minimum disclosure requirements.\108\ The
Commission only received one comment in response, requesting an 18-
month implementation timeline for the proposed minimum disclosure
requirements.\109\ As discussed above, the Final Rule is not adopting
minimum disclosure requirements in Commission regulation Sec. 4.7 at
this time. Nonetheless, the Commission is adopting distinct compliance
dates for each remaining component of the Final Rule.
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\108\ Proposal, 88 FR 70855 (``3. How much time would CPOs and
CTAs need to determine that their existing QEP pool participants and
clients would continue to satisfy the increased Securities Portfolio
or Initial Margin and Premium Tests, if adopted as proposed?''); see
also Proposal, 88 FR 70859 (``Should the Commission consider an
implementation period for the proposed amendments, and if so, how
much time should the Commission allow for CPOs and CTAs to develop
and prepare QEP Disclosures that would comply with the proposed
amendments?'').
\109\ SIFMA Letter, at 11 (``If, however, the Commission
declines to do so, we ask that the Commission allow for at least an
18-month compliance period to allow CPOs and CTAs adequate time to
develop the necessary compliance programs.'').
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The compliance date for the increased Portfolio Requirement
thresholds shall be six months from publication of the Final Rule in
the Federal Register. As discussed in section II.C above, the updated
Portfolio Requirement will require Sec. 4.7 CPOs and CTAs to adjust
their processes for assessing the QEP status for both new and existing
pool participants and advisory clients. However, given that the
Portfolio Requirement update would not require Sec. 4.7 CPOs and CTAs
to redeem pool participations or otherwise end advisory relationships
with those QEPs who no longer meet the Portfolio Requirement, as
amended by the Final Rule, and that Sec. 4.7 CPOs and CTAs only need
to update their QEP evaluation processes with the new thresholds on a
forward-looking basis, the Commission believes a 6-month implementation
period is appropriate.\110\
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\110\ See discussion in section II.C above for more detail on
the implementation and applicability of the amended Portfolio
Requirement to existing QEP pool participants and advisory clients.
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Finally, the component of the Final Rule permitting alternative
monthly account statement schedule for certain Sec. 4.7 pools that are
Funds of Funds, i.e., new Commission regulation Sec. 4.7(b)(3)(iv),
shall be effective as of the Final Rule's effective date, as described
above, and following the effective date, compliance will be required
when a CPO elects to utilize this schedule for a qualifying Sec. 4.7
pool.
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.\111\ If the rules are determined to have a significant
economic impact, such agencies must provide a regulatory flexibility
analysis regarding such economic impact. 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. The Final Rule
amendments adopted by the Commission today would affect only persons
registered or required to be registered as CPOs and CTAs and those
commodity pools and trading programs operated under Commission
regulation Sec. 4.7 and offered solely to QEPs.
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\111\ 5 U.S.C. 601, et seq.
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1. CPOs
The Commission has previously established certain definitions of
``small entities'' to be used by the Commission in evaluating the
impact of its rules on such entities in accordance with the
requirements of the RFA.\112\ With respect to CPOs, the Commission
previously has determined that a CPO is a small entity for purposes of
the RFA, only if it meets the criteria for an exemption from
registration under Commission regulation Sec. 4.13(a)(2).\113\ The
regulations adopted in this Final Rule apply to persons registered or
required to be registered as CPOs with the Commission (specifically,
those registered CPOs whose prospective and actual pool participants
are restricted to QEPs) and/or provide relief to qualifying registrants
from certain periodic reporting burdens. Accordingly, the Chairman, on
behalf of the Commission, certifies pursuant to 5 U.S.C. 605(b) that
this Final Rule will not have a significant economic impact on a
substantial number of small entities, with respect to CPOs.
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\112\ See, e.g., Policy Statement and Establishment of
Definitions of ``Small Entities'' for Purposes of the Regulatory
Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982).
\113\ Id. at 18619-20. Commission regulation Sec. 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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2. CTAs
Regarding CTAs, the Commission has previously considered whether
such registrants would 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.\114\ Because certain of these registered CTAs may
be small entities for the purposes of the RFA, the Commission
considered in the NPRM whether the proposed amendments would have a
significant economic impact on such registrants.\115\ The Commission
received no comments on the initial regulatory flexibility analysis
conducted in the Proposal.
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\114\ Id. at 18620.
\115\ Proposal, 88 FR 70863-66.
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The portions of the Final Rule directly impacting CTAs would affect
only CTAs registered or required to register with the Commission that
offer and operate trading programs designed for QEPs. Given that the
Commission has determined to finalize only the Portfolio Requirement
increases in this Final Rule, the Commission believes that the Final
Rule amendments will have almost no economic impact on registered CTAs
offering Sec. 4.7 trading programs because, beyond increasing
[[Page 78804]]
the thresholds in the Portfolio Requirement, the Final Rule does not
add any other compliance burdens for CTAs.
As stated above, the amendments adopted today primarily impact
registered CTAs offering Sec. 4.7 trading programs to QEP advisory
clients and claiming the compliance exemptions currently offered by
Commission regulation Sec. 4.7. As explained in the NPRM, data on the
specific size of registered CTAs offering Sec. 4.7 trading programs is
limited, but it has been the Commission's experience that such CTAs
claiming compliance exemptions in Commission regulation Sec. 4.7 for
the purposes of soliciting and serving QEP advisory clients are often
large financial institutions with substantial financial assets and
advisory experience, or affiliates thereof. Although the Chairman, on
behalf of the Commission, certifies under the RFA that the Final Rule
will not have a significant impact on a substantial number of small
entities, and hereby provides notice of that certification to the Small
Business Administration, the Commission nonetheless has determined that
publishing a final regulatory flexibility analysis is appropriate to
ensure that the impact of the Final Rule is fully addressed. Therefore,
the Commission has prepared the following final regulatory flexibility
analysis:
i. A Statement of the Need for, and Objectives of, the Rule
As the Commission stated in the Proposal, and as reiterated above
in this Final Rule, since the 1992 Final Rule adopting Commission
regulation Sec. 4.7, the Commission has witnessed substantial
increases in the intermediary population utilizing those exemptions for
Sec. 4.7 pools and trading programs offered and available to QEPs.
This development also coincides with current commodity interest market
conditions, in which the Commission has seen significant expansion and
growth in the complexity and diversity of commodity interest products
offered via Sec. 4.7 pools and trading programs, which may be more
challenging to fully understand. As stated above, the CEA grants the
Commission the authority to regulate and register CTAs, as well as to
require the maintenance of books and records and filing of reports that
the Commission believes is necessary to accomplish its regulatory
mission and the goals of the CEA.\116\ The Commission has determined to
adopt the proposed increases to the Portfolio Requirement in the QEP
definition, which will require CTAs to adjust their methods of
evaluating prospective advisory clients' QEP status.
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\116\ 7 U.S.C. 6m, 6n.
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ii. A Statement of the Significant Issues Raised by the Public Comments
in Response to the Initial Regulatory Flexibility Analysis, a Statement
of the Assessment of the Agency of Such Issues, and a Statement of Any
Changes Made in the Proposed Rule as a Result of Such Comments
The Commission received no comments specifically addressing the
initial regulatory flexibility analysis published in the Proposal.\117\
However, the Commission did receive several comments, discussed above,
stating that the proposed amendments, if adopted, would prove costly to
intermediaries, with such costs being passed down to QEP pool
participants and advisory clients, without necessarily resulting in the
customer protection benefits the Commission intended. Commenters
asserted that the proposed amendments, as applied to common usage
scenarios in complex fund structures, may require CTAs to provide QEP
Disclosures to entities or persons under common control who likely
already receive or have access to such information; that, in other
contexts, CTAs have relationships with highly sophisticated and well-
resourced QEPs, whose disclosures and access to information are
carefully negotiated; and finally, that the proposed amendments would
be duplicative of requirements in the securities laws dictating the
content and disclosures in Form ADV, which is commonly filed by
investment advisers dually registered as CTAs, or of disclosures
already being made as a matter of common market practice.
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\117\ Proposal, 88 FR 70863-66.
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After considering these comments, as well as potential alternatives
raised by commenters, the Final Rule does not adopt any minimum
disclosure requirements in Commission regulation Sec. 4.7. The
Commission will continue evaluating the regulatory alternatives and may
adopt further changes in the future. The Commission has determined to
adopt the proposed increases to the Portfolio Requirement in the QEP
definition as part of this Final Rule, which will require CTAs to
adjust their methods of evaluating prospective advisory clients' QEP
status. Therefore, the only impact this Final Rule will have on CTAs is
with respect to the adoption of the Portfolio Requirement increases
that may have a small effect on how CTAs evaluate prospective advisory
clients' QEP status.
iii. A Description of and, Where Feasible, an Estimate of the Number of
Small Entities to Which the Rule Will Apply
CTAs are generally not subject to any minimum capital requirements,
nor does the Commission collect data on the ``size'' of registered CTAs
via Commission registration applications or other required Commission
filings or reports. Therefore, the Commission has no data to analyze
that would enable it to estimate how many registered CTAs may be
considered small entities for RFA purposes. The Commission sought
comment on this issue in its initial regulatory flexibility analysis,
but received no comments addressing this issue or providing relevant
data. It is the Commission's experience that registered CTAs \118\
claiming Commission regulation Sec. 4.7 exemptions and offering Sec.
4.7 trading programs to QEP advisory clients are frequently large
financial institutions offering a variety of trading programs and
strategies. Nonetheless, the Commission acknowledges that some
percentage or portion of the population of CTAs affected by this Final
Rule, i.e., those registered or required to register with the
Commission and utilizing the exemptions in Commission regulation Sec.
4.7, may be considered small entities as defined by the RFA, though the
Commission lacks the information or data necessary to determine or
estimate how many.
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\118\ As of June 2024, there were approximately 1,241 CTAs
registered with the Commission.
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iv. A Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Rule, Including an Estimate of the
Classes of Small Entities Which Will Be Subject to the Requirement and
the Type of Professional Skills Necessary for Preparation of the Report
or Record
The Commission is not adopting the minimum disclosure requirements,
or the corresponding proposed recordkeeping, use and amendment
requirements, in Commission regulation Sec. 4.7, but is adopting
adjustments to the Portfolio Requirement in the QEP definition of that
provision. The Commission anticipates that the Final Rule will affect
CTAs claiming Commission regulation Sec. 4.7 and offering Sec. 4.7
trading programs, which, as stated above, may include some small
entities for RFA purposes. Nonetheless, regardless of whether a CTA is
considered a small entity, the Commission believes that all registered
CTAs offering and managing Sec. 4.7 trading programs generally possess
the
[[Page 78805]]
professional skills necessary to accurately evaluate the QEP status of
prospective advisory clients, which is a baseline requirement for CTAs
operating under claimed exemptions in Commission regulation Sec. 4.7,
and that the Final Rule will require only minor adjustments to CTAs'
existing processes.
v. A Description of the Steps the Agency Has Taken To Minimize the
Significant Economic Impact on Small Entities Consistent With the
Stated Objectives of Applicable Statutes, Including a Statement of the
Factual, Policy, and Legal Reasons for Selecting the Alternative
Adopted in the Final Rule and Why Each One of the Other Significant
Alternatives to the Rule Considered by the Agency Which Affect the
Impact on Small Entities Was Rejected
The Commission did not propose any specific small entity exemption,
but in the initial regulatory flexibility analysis, the Commission
identified potential alternatives to the proposed amendments: (1) to
not amend Commission regulation Sec. 4.7 to add disclosure
requirements for Sec. 4.7 trading programs; (2) to amend Commission
regulation Sec. 4.7(c)(1) to require compliance with the entirety of
the disclosure regulations generally applicable to registered CTAs
offering trading programs to non-QEP advisory clients; or (3) limiting
the application of the proposed amendments to registered CTAs claiming
Commission regulation Sec. 4.7 and offering Sec. 4.7 trading programs
to those CTAs who are not small entities for RFA purposes.
Although the Commission did not receive any comments directly on
the initial regulatory flexibility analysis, multiple commenters made
suggestions regarding how the Commission might limit the scope of the
proposed disclosure requirements, while still accomplishing its
customer protection goals with respect to QEPs most in need of
regulatory support. In this Final Rule, the Commission has determined
to adopt the proposed increases to the Portfolio Requirement in the QEP
definition as part of this Final Rule, but is not adopting the proposed
minimum disclosure requirements. Nonetheless, the Commission will
continue to evaluate regulatory alternatives relating to minimum
disclosure requirements and may adopt further changes, in the future,
as appropriate.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) imposes certain
requirements on Federal agencies, including the Commission, in
connection with conducting or sponsoring any ``collection of
information'' as defined by the PRA.\119\ 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 PRA is
intended, in part, to minimize the paperwork burden created for
individuals, businesses, and other persons as a result of the
collection of information by Federal agencies, and to ensure the
greatest possible benefit and utility of information created,
collected, maintained, used, shared, and disseminated by or for the
Federal Government. The PRA applies to all information, regardless of
form or format, whenever the Federal Government is obtaining, causing
to be obtained, or soliciting information, and includes required
disclosure to third parties or the public, of facts or opinions, when
the information collection calls for answers to identical questions
posed to, or identical reporting or recordkeeping requirements imposed
on, ten or more persons.
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\119\ 44 U.S.C. 3501, et seq.
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The Final Rule modifies an existing collection of information
previously approved by OMB and for which the Commission has received an
OMB control number. The title for this collection is ``Rules Relating
to the Operations and Activities of Commodity Pool Operators and
Commodity Trading Advisors and to Monthly Reporting by Futures
Commission Merchants'' (Collection 3038-0005). Collection 3038-0005
primarily accounts for the burden associated with the Commission's part
4 regulations that concern compliance generally applicable to CPOs and
CTAs, as well as certain exemptions from registration as such and
exclusions from those definitions, and available relief from compliance
with certain regulatory requirements, e.g., Commission regulation Sec.
4.7. In the Proposal, the Commission performed a PRA burden analysis of
the proposed amendments and invited the public and other interested
parties to comment on any aspect of the information collection
requirements discussed therein. The Commission did not receive any such
comments. The Commission is revising Collection 3038-0005 to reflect
the adoption of the Final Rule amendments to Commission regulation
Sec. 4.7, as discussed in further detail below.
Collection 3038-0005 governs responses made pursuant to part 4 of
the Commission's regulations, pertaining to the operations of CPOs and
CTAs, including the itemization of compliance burdens remaining after
CPOs and CTAs elect certain exemptions from broader compliance
obligations in the part 4 regulations. In the NPRM, the Commission
proposed new information collection obligations including minimum
disclosure requirements and an alternative reporting schedule for
required account statements. As discussed above, the Commission is not
adopting the minimum disclosure requirements proposed in the NPRM in
this Final Rule. The Commission is, however, adopting the amendment
addressing the reporting schedule for distribution of account
statements by CPOs of Sec. 4.7 pools that are Funds of Funds.
As discussed above, the Commission is adopting an amendment to
Commission regulation Sec. 4.7(b)(3) that, consistent with routinely
issued Commission exemptive letters, permits CPOs of Sec. 4.7 pools
that are Funds of Funds to distribute monthly account statements within
45 days of the month-end, provided that such account statements
otherwise meet the requirements of Commission regulation Sec.
4.7(b)(3), and that the CPO notifies its Sec. 4.7 pool participants of
this alternate distribution schedule either in the pool's offering
memorandum, or upon adoption of this reporting schedule. Collection
3038-0005 currently includes a reporting burden associated with
Commission regulation Sec. 4.7(b)(3) that accounts for the quarterly
account statements currently required to be distributed by such CPOs to
their Sec. 4.7 pools' QEP participants. The Commission is revising the
collection to include an additional reporting burden associated with
Commission regulation Sec. 4.7(b)(3)(iv), adopted as part of this
Final Rule, to account for the burden associated with monthly reporting
as an option for Sec. 4.7 pools that are Funds of Funds. As it stated
in the NPRM, the Commission believes that ``a smaller subset of CPOs
and 4.7 pools [will] rely on this reporting schedule, and therefore,
burden estimates below are based on 100 CPOs utilizing this alternative
monthly account statement schedule for up to three 4.7 pools each.''
\120\
---------------------------------------------------------------------------
\120\ Id.
---------------------------------------------------------------------------
Accordingly, the aggregate annual estimate for the reporting burden
associated with Commission regulation Sec. 4.7(b)(3)(iv), as added by
this Final Rule, is as follows:
Estimated number of respondents: 100.
[[Page 78806]]
Estimated frequency/timing of responses: Monthly.
Estimated number of annual responses per respondent: 36.
Estimated number of annual responses for all respondents: 3,600.
Estimated annual burden hours per response: 1.
Estimated total annual burden hours per respondent: 36.
Estimated total annual burden hours for all respondents: 3,600.
C. Cost-Benefit Considerations
1. Statutory and Regulatory Background
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its discretionary actions before promulgating a
regulation under the CEA or issuing certain orders. CEA section 15(a)
further specifies that the costs and benefits shall be evaluated in
light of five broad areas of market and public concern: (1) protection
of market participants and the public; (2) efficiency, competitiveness,
and financial integrity of markets; (3) price discovery; (4) sound risk
management practices; and (5) other public interest considerations. The
Commission may, in its discretion, give greater weight to any of the
five enumerated areas of concern, and may, in its discretion, determine
that, notwithstanding its costs, a particular rule is necessary or
appropriate to protect the public interest, or to effectuate any of the
provisions, or to accomplish any of the purposes, of the CEA. The
Commission considers the costs and benefits resulting from its
discretionary determinations with respect to the section 15(a) factors.
The Commission invited public comment on the cost-benefit
consideration in the Proposal. There were several general comments that
it was ``inadequate.'' \121\ One commenter stated that they believed
the Commission failed to engage in an adequate cost-benefit analysis
sufficient to justify a burdensome and costly disclosure regime.\122\
Similarly, another commenter stated that they believed the cost-benefit
analysis in the Proposal was insufficient.\123\ This commenter further
encouraged the Commission to ``carefully evaluate the increased
operational costs associated with requiring CPOs and CTAs offering 4.7
pools and managed account programs to provide the proposed additional
disclosures,'' as they ``will almost certainly be passed on to the
pools' participants and managed account programs' clients.'' \124\
Despite these general objections to the Commission's Proposal,
commenters provided no additional detail regarding how or why the
Commission's preliminary cost-benefit analysis was ``inadequate,'' nor
did commenters respond to the Commission's specific requests for
comment associated with the Proposal's cost-benefit considerations
discussion,\125\ both of which impede the Commission's ability to
remediate the deficiencies commenters perceived in the Proposal's cost-
benefit analysis. Regardless, as detailed below, the Commission has
considered the broad criticism asserted by commenters, as well as the
adjustments made from the proposed amendments to those in this Final
Rule.
---------------------------------------------------------------------------
\121\ MFA Letter, at 12; SIFMA AMG Letter, at 10; and AIMA
Letter, at 8.
\122\ MFA Letter, at 12. However, in their comment letter, MFA
did not provide any specific cost considerations or analysis for the
Commission to consider.
\123\ SIFMA AMG Letter, at 10.
\124\ Id.
\125\ See, e.g., Proposal, 88 FR 70872 (inquiring as to ``the
costs of gathering and disseminating the other types of information
required to be included in the QEP Disclosures,'' and ``how . . .
fees and expenses charged by CPOs and CTAs . . . [would] be affected
by the proposed disclosure requirements'').
---------------------------------------------------------------------------
As discussed above, the Commission is adopting amendments to
Commission regulation Sec. 4.7 that will result in additional costs
for CPOs and CTAs operating Sec. 4.7 pools and trading programs. In
response to certain comments, however, the Commission is declining to
finalize the proposed minimum disclosure requirements and believes it
appropriate to spend additional time considering the alternative
proposals put forward by commenters. The Commission believes this
approach will significantly reduce the costs and burdens to Sec. 4.7
CPOs and CTAs arising from this Final Rule, as compared to those
outlined in the NPRM. The Final Rule will, however, finalize the
proposed amendments that will (1) increase the Portfolio Requirement in
Commission regulation Sec. 4.7 such that persons required to meet it
to be a QEP may satisfy it by either: (a) owning securities and other
assets worth at least $4,000,000; (b) having on deposit with an FCM for
their own account at least $400,000 in initial margin, option premiums,
or minimum security deposits; or (c) owning a portfolio of funds and
assets that, when expressed as percentages of the prior two thresholds,
have a combined value of at least 100%; and (2) add a provision to
Commission regulation Sec. 4.7(b)(3) codifying routinely issued
exemptive letters allowing CPOs of Sec. 4.7 pools that are Funds of
Funds to distribute account statements on a monthly basis, within 45
days of the end of the month-end. These regulatory amendments adopted
by the Final Rule will likely generate minimal costs to Sec. 4.7 CPOs
and CTAs, but are expected to result in several benefits to
intermediaries and pool participants and advisory clients. The baseline
against which these costs and benefits are compared is the regulatory
status quo set forth in current Commission regulation Sec. 4.7. The
Commission has endeavored to enumerate material costs and benefits and,
when reasonably feasible, assign a quantitative value to them. Where it
is not reasonably feasible to quantify costs and benefits of the
proposed amendments, those costs and benefits are discussed
qualitatively.
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 some 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 discussion of costs and benefits
below refers to the effects of this 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 CEA section 2(i). Some
CPOs and CTAs are located outside of the United States.
2. Increasing Financial Thresholds in the Portfolio Requirement of the
``Qualified Eligible Person'' Definition
The Final Rule increases the Portfolio Requirement in Commission
regulation Sec. 4.7 such that persons required to meet the Portfolio
Requirement to be considered QEPs can do so by either: (1) owning
securities and other assets worth at least $4,000,000; (2) having on
deposit with an FCM for their own account at least $400,000 in initial
margin, option premiums, or minimum security deposits; or (3) owning a
portfolio of funds and assets that, when expressed as percentages of
the prior two thresholds, have a combined value of at least 100%. The
Commission did not receive any specific comments regarding whether any
costs associated with the Portfolio Requirement financial thresholds
would change as a result of the proposed increases. As stated in the
[[Page 78807]]
Proposal and herein, the Portfolio Requirement was adopted to identify
prospective pool participants and advisory clients that possess
sufficient financial experience and sophistication to withstand the
risks associated with their participation in the commodity interest
markets without the full panoply of protections afforded under part 4
of the Commission's regulations. As stated previously in this release
and in the Proposal, the Commission believes that increasing such
thresholds appropriately restores the alignment of Commission
regulation Sec. 4.7 with the Commission's original intention when it
was adopted in 1992 to differentiate between retail investors and more
sophisticated market participants, i.e., QEPs.
The Commission recognizes, as it did in the Proposal, that
increasing the thresholds in the Portfolio Requirement will result in
some subset of QEPs no longer qualifying as such, which, should such
newly designated non-QEPs still desire to participate in the commodity
interest markets, could result in market forces supporting the
development and offering of additional non-Sec. 4.7 pools and trading
strategies. This would result in more diverse offerings to retail
commodity interest market participants, thereby enhancing the variety
and vibrancy of the non-QEP marketplace. As stated in the Proposal, the
Commission believes that this development would result in more non-QEPs
having the opportunity to participate in the commodity interest markets
through commodity pools and trading programs better aligned with their
particular risk tolerances and investment goals.
As noted in the Proposal, due to the increases in the Portfolio
Requirement thresholds, Sec. 4.7 CPOs will likely no longer be able to
offer pool participation units to certain QEPs who will no longer
qualify under the new thresholds adopted herein. Such CPOs, as well as
some Sec. 4.7 CTAs, may decide to offer commodity pools and trading
programs that are subject to the full suite of requirements under part
4 of the Commission's regulations, which necessarily would result in
increased costs associated with compliance. Conversely, it is possible
that some CPOs and CTAs may continue to find the compliance relief
provided by Commission regulation Sec. 4.7 to outweigh possible gains
to be had by accessing the non-QEP market, which would mitigate the
potential benefit to non-QEPs. Additionally, the Commission expects
there to be certain ministerial costs associated with system updates
required for Sec. 4.7 CPOs and CTAs to implement the increased
thresholds, but given that the general requirements associated with the
Portfolio Requirement are not changing in a substantive way beyond the
actual numerical value of the thresholds, the Commission does not
expect such costs to be significant.
Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of the amendments to Commission regulation Sec. 4.7
with respect to the following factors: protection of market
participants and the public; efficiency, competitiveness, and financial
integrity of markets; price discovery; sound risk management practices;
and other public interest considerations. As discussed above, the Final
Rule's amendments increasing the financial thresholds in the Portfolio
Requirement will, in the Commission's opinion, more closely align the
QEP definition with the original intent of the regulation, which is to
assure that offerings operated pursuant to Commission regulation Sec.
4.7 compliance exemptions are only made to persons with ``substantial
investment experience and thus a high degree of sophistication with
regard to investments as well as financial resources to withstand the
risk of their investments.'' \126\
---------------------------------------------------------------------------
\126\ 1992 Final Rule, 57 FR 34854 (citing and quoting 1992
Proposal, 57 FR 3151).
---------------------------------------------------------------------------
a. Protection of Market Participants and the Public
As stated above, the Commission believes that this amendment will
benefit the commodity interest markets and the general public by
realigning financial thresholds in its most commonly used regulations
in a manner that accounts for the impacts of inflation since their
original adoption and more accurately reflects current economic
circumstances; the Commission expects that this will result in persons
investing in commodity interest products offered by registered CPOs and
CTAs being more accurately categorized as QEPs, and thus, more
appropriately limited in their investment choices. Moreover, raising
the Portfolio Requirement thresholds, as a practical matter, will
likely limit the prospective investor population for Sec. 4.7 pools
and trading programs to a smaller number of persons. To the extent
persons who meet the higher Portfolio Requirement thresholds are more
financially sophisticated or resilient than those who no longer
qualify, this amendment should result in individuals and entities, both
QEPs and non-QEPs, being offered pools and trading programs that are
regulated in a manner commensurate with their respective needs for
customer protection. If the increased thresholds further lead to the
creation of more commodity pools and trading programs subject to the
full part 4 compliance requirements by registered CPOs and CTAs, this
too will potentially lead to greater transparency in their activities,
which also protects persons investing in commodity interest products.
Additionally, greater variety in the commodity pools and trading
programs available to non-QEPs will provide more options for this
population to consider, which may further enable them to make more
appropriate investment decisions by choosing the offerings best suited
to their individual risk appetite or other portfolio needs.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Final Rule's amendments to the Portfolio Requirement may also
affect the size, composition, or number of commodity pools and trading
programs in the commodity interest markets, especially those offered
solely to QEPs. This may, in turn, affect the flow of investing in
commodity interests. The financial economics literature suggests that,
to the extent changing the QEP definition reduces the flow of non-
commercial funds into commodity interest markets, the cost to
commercial traders using futures markets to hedge their risks may
increase.\127\ Via this mechanism, the Final Rule's amendment may have
an indirect effect on efficiency of the futures markets with respect to
the hedging costs of operating companies, commodity producers, or other
commercial traders.
---------------------------------------------------------------------------
\127\ Goldstein and Yang, ``Commodity Financialization and
Information Transmission,'' 2022, Journal of Finance, 77, 2613-2668.
---------------------------------------------------------------------------
c. Price Discovery
The increased Portfolio Requirement thresholds are likely to result
in fewer persons being considered QEPs, which may further result in
fewer participants and clients in offered pools and trading programs
operated under Commission regulation Sec. 4.7. An additional indirect
effect of the Final Rule's amendments could be a change in the flow of
investment in commodity interests by non-commercial traders. The
financial economics literature has found ambiguous results regarding
the relationship between increased investment by non-commercial traders
in commodity interest markets and price
[[Page 78808]]
discovery.\128\ As such, it is difficult to ex ante predict how changes
in the Portfolio Requirement thresholds would impact price discovery.
---------------------------------------------------------------------------
\128\ Id.
---------------------------------------------------------------------------
d. Sound Risk Management Practices
Increasing the Portfolio Requirement thresholds may result in
registered CPOs and CTAs that previously only offered pools and trading
programs to QEPs creating and offering pools and trading programs
designed for persons that are not QEPs. Consequently, these non-QEP
pools and trading programs operated by registered CPOs and CTAs would
then be subject to the full complement of part 4 compliance
requirements, which could result in more diligent risk management
practices by the CPOs and CTAs.
e. Other Public Interest Considerations
The original Portfolio Requirement thresholds in the QEP definition
were intended to ensure that only persons possessing an appropriate and
high level of trading experience, acumen, and financial resources would
be eligible to invest in complex commodity interest investments offered
and operated under Commission regulation Sec. 4.7. The Commission
determined it appropriate to lessen the compliance burdens for
registered CPOs and CTAs limiting their prospective participants and
clients to financially sophisticated QEPs through the exemptions
provided by Commission regulation Sec. 4.7 for their Sec. 4.7 pools
and trading programs. The 1992 Portfolio Requirement thresholds were
adopted to provide a metric by which CPOs and CTAs could approximately
assess the experience and financial wherewithal of potential pool
participants or advisory clients, ensuring that they truly possess the
sophistication and resilience of other QEPs not subject to such
thresholds. Updating these thresholds to account for inflation realigns
the Portfolio Requirement with the original intent of the QEP
definition and modernizes its provisions consistent with today's
economic circumstances.
3. Permitting Monthly Account Statements Consistent With Commission
Exemptive Letters for Certain Sec. 4.7 Pools
Consistent with longstanding exemptive letter relief described
herein, the Final Rule adds a provision to Commission regulation Sec.
4.7(b)(3) allowing CPOs of Sec. 4.7 pools that are Funds of Funds to
distribute account statements on a monthly basis, within 45 days of the
month-end, provided that such CPOs notify their pool participants. The
Commission received no comments addressing any costs that Sec. 4.7
CPOs or CTAs may incur as a result of adopting this amendment.
As discussed in the Proposal, the primary benefit of this amendment
is to facilitate Sec. 4.7 pools' investment in other pools or
collective investment vehicles without potentially violating the
periodic reporting requirements in Commission regulation Sec. 4.7. The
Commission expects that this would allow CPOs of Sec. 4.7 pools to
seek higher returns and/or better diversification for their
participants by investing in other pools or other collective investment
vehicles, without requiring an exemptive letter to ensure they can meet
their periodic reporting requirements, or otherwise risking chronic
compliance violations. The Commission also continues to believe there
is significant benefit to be gained by adopting this amendment because
CPOs of Sec. 4.7 Fund of Funds pools will be able to adopt an
alternative account statement schedule at their convenience or
immediately when necessary, rather than being required to seek an
exemptive letter individually from the Commission and to potentially
delay operational decisions or changes until such letter is received.
Moreover, the Final Rule also ensures that similarly situated
registrants are treated in a consistent manner by making the
alternative schedule available to all qualifying CPOs and Sec. 4.7
pools without the need for individual requests.
Under the alternative schedule, as described above, qualifying CPOs
would be required to prepare and distribute periodic account statements
on a monthly basis, which is more frequent than the baseline of
quarterly. This will result in increased administrative costs to CPOs
that elect this alternative schedule associated with the monthly
account statements, which may be passed on to their pool participants.
Under the terms of the Final Rule, qualifying CPOs are also required to
disclose to their pool participants their election to use the
alternative account statement schedule, and this disclosure must be
provided to their prospective and existing pool participants. The
notification requirement will also result in costs to the CPO, and
potentially the pool participants, which will vary in amount depending
on whether the CPO chooses to incorporate the notice in an existing
communication to pool participants or to create a new standalone
disclosure. Similarly, the costs associated with dissemination will
vary depending on whether the offered pool is still accepting new
participants, or if it is closed, as the Commission does not expect
Sec. 4.7 CPOs to prepare disclosures for pool participants with
respect to pool participation units purchased prior to the effective
date of this Final Rule. The Commission notes that this alternative
reporting schedule is voluntary, and therefore, should a CPO determine
that the costs associated with more frequent statements outweighs the
benefits associated with adopting the alternative schedule, it is not
required to do so and can continue to provide quarterly account
statements within 30 days of the quarter-end, as currently required
under Commission regulation Sec. 4.7 (and which will remain unchanged
by this Final Rule).
The Commission expects that CPOs will use the services of an
accountant to prepare the monthly account statements permitted by the
Final Rule amendments. The BLS states that the mean wage for
accountants as of May 2023, the most recent information available, is
$43.65 per hour.\129\ The Commission has estimated that the time burden
associated with complying with the alternate schedule for periodic
account statements required under the Final Rule is 36 hours per CPO.
If the CPO solely uses the services of an accountant to complete these
tasks, the total cost associated with the alternative account statement
provisions adopted herein is $1,571.40 per CPO.
---------------------------------------------------------------------------
\129\ Bureau of Labor Statistics, United States Department of
Labor, Occupational Employment and Wage Statistics, Accountants and
Auditors, May 2023 (published April 2024), available at https://www.bls.gov/oes/current/oes132011.htm.
---------------------------------------------------------------------------
Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of the amendment to Commission regulation Sec.
4.7(b)(3) with respect to the following factors: protection of market
participants and the public; efficiency, competitiveness, and financial
integrity of markets; price discovery; sound risk management practices;
and other public interest considerations. As discussed above, the
addition to Commission regulation Sec. 4.7(b)(3) of a permissible
monthly account statement schedule will facilitate compliance with
periodic reporting deadlines for CPOs of Sec. 4.7 Fund of Funds pools.
Absent this change (and assuming such Sec. 4.7 pool has received no
exemptive letter from the Commission), it may otherwise be impractical
for such Sec. 4.7 pools to operate as Funds of Funds, due to the
baseline applicable quarterly reporting requirements in Commission
regulation Sec. 4.7.
[[Page 78809]]
a. Protection of Market Participants and the Public
As discussed above, the Final Rule will permit CPOs of Sec. 4.7
Fund of Funds pools to adopt an alternative monthly account statement
schedule, provided such statements are distributed within 45 days of
the end of each month, and provided that they notify their QEP pool
participants of such reporting schedule. To the extent this amendment
encourages QEPs to participate in Sec. 4.7 Fund of Funds pools, rather
than other Sec. 4.7 pools, it may require them to adjust to a
different account statement schedule, but the Commission believes,
based on its past observation of the implementation of staff letters
that have been issued addressing this issue, that this amendment will
likely provide such QEPs with more complete and accurate account
statements on a more frequent basis. Additionally, the Final Rule may
facilitate the formation of Sec. 4.7 Fund of Funds pools by making it
easier for their CPOs to comply with the applicable periodic reporting
requirements under Commission regulation Sec. 4.7; this trend may also
serve to benefit QEP participants, in that the CPOs of Sec. 4.7 Fund
of Funds pools may be able to operate them in a manner that achieves
exposure to a wider variety of underlying investment strategies through
their investee pools, while continuing to remain compliant with their
regulatory obligations. Finally, such CPOs will also have greater
incentive and may possess more resources to monitor the behavior of
their Sec. 4.7 Fund of Funds pools' underlying investments in other
pools or funds, than QEPs directly investing therein.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Final Rule amending Commission regulation Sec. 4.7(b)(3) may
indirectly affect the functioning of commodity interest markets. To the
extent that the Final Rule affects the behavior of CPOs or the size and
composition of their Sec. 4.7 Fund of Funds pools, it might also
affect the flow of investing in commodity interests. The financial
economics literature suggests that increased investment by non-
commercial traders in commodity interest markets will generally reduce
the difference between futures prices and expected future spot
prices.\130\ This effect means that, to the extent that offering an
alternative schedule for periodic reporting in Sec. 4.7 Fund of Funds
pools increases the flow of non-commercial funds into commodity
interest markets, it will tend to also reduce the cost to commercial
traders of using the futures market to hedge their risks. In that
sense, this Final Rule may have an indirect effect on efficiency of the
futures markets in regard to the hedging costs of operating companies,
commodity producers, or other commercial market participants.
---------------------------------------------------------------------------
\130\ Goldstein and Yang, ``Commodity Financialization and
Information Transmission,'' 2022, Journal of Finance, 77, 2613-2668.
---------------------------------------------------------------------------
c. Price Discovery
To the extent that the Final Rule amending Commission regulation
Sec. 4.7(b)(3) affects the size or composition of Sec. 4.7 pools, it
might also affect the flow of investing in commodity interests. The
financial economics literature has found ambiguous results regarding
the relationship between increased investment by non-commercial traders
in commodity interest markets and commodity price discovery.\131\ As
such, it is difficult for the Commission to ex ante predict how the
addition of an alternative account statement schedule for Sec. 4.7
Fund of Funds pools would impact price discovery.
---------------------------------------------------------------------------
\131\ Id.
---------------------------------------------------------------------------
d. Sound Risk Management Practices
Periodic reporting requirements in the form of regular account
statements provided to pool participants serve as an effective means
for participants as well as CPOs to monitor pools' risk management.
Because the amount of funds a CPO manages through its operated pools is
likely responsive to its past performance,\132\ requiring the provision
of complete financial information on pool performance through regular
account statements can serve to provide an incentive for sound risk
management by such CPOs. As discussed above, the Final Rule amending
Commission regulation Sec. 4.7(b)(3) may encourage the formation of
Sec. 4.7 Fund of Funds pools, whose CPOs may be better able to monitor
the performance of underlying commodity pools or funds in which they
invest, as compared to QEP participants investing directly therein.
This also may positively influence CPOs' risk management practices in
their pools, to the extent their participants are other Sec. 4.7
pools.
---------------------------------------------------------------------------
\132\ Sirra and Tufano, ``Costly Search and Mutual Fund Flows,''
Journal of Finance, 1998, 53, 1589-1622; Del Guercio and Reuter,
``Mutual Fund Performance and the Incentive to Generate Alpha,''
Journal of Finance, 2014, 1673-1704.
---------------------------------------------------------------------------
e. Other Public Interest Considerations
A key practical consideration is that, absent exemptive letters
issued by the Commission, the existing Commission regulation Sec.
4.7(b)(3) appears to make it very difficult for CPOs to operate their
Sec. 4.7 pools as Funds of Funds, while complying with applicable
periodic reporting requirements. To the extent that facilitating the
operation of such Sec. 4.7 pools as Funds of Funds is a legitimate
policy goal of the Commission (as suggested by its routine granting of
exemptive letters on this topic), changing the regulations to
explicitly permit this alternative account statement schedule will be a
more effective and direct means of accomplishing that objective that
further ensures more consistent treatment of similarly situated
registrants.
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.\133\ The Commission believes that the public
interest to be protected by the antitrust laws is generally to protect
competition. In the Proposal, the Commission requested comment on
whether the NPRM implicated any other specific public interest to be
protected by the antitrust laws, but received no comments.
---------------------------------------------------------------------------
\133\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission has considered the amendments in this Final Rule to
determine whether they are anticompetitive and has not identified any
anticompetitive effects. Because the Commission has not determined that
the Final Rule is anticompetitive or has anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 3
Administrative practice and procedure, Commodity futures, Consumer
protection, Definitions, Foreign futures, Foreign options, Registration
requirements.
17 CFR Part 4
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer
[[Page 78810]]
protection, Reporting and recordkeeping requirements.
17 CFR Part 30
Consumer protection, Fraud.
17 CFR Part 43
Consumer protection, Reporting and recordkeeping requirements,
Swaps.
17 CFR Part 75
Banks, Banking, Compensation, Credit, Derivatives, Federal branches
and agencies, Federal savings associations, Government securities,
Hedge funds, Insurance, Investments, National banks, Penalties,
Proprietary trading, Reporting and recordkeeping requirements, Risk,
Risk retention, Securities, Swap dealers, Trusts and trustees, Volcker
rule.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24
(2012).
0
2. In Sec. 1.35, revise paragraph (b)(5)(i)(D) to read as follows:
Sec. 1.35 Records of commodity interest and related cash or forward
transactions.
* * * * *
(b) * * *
(5) * * *
(i) * * *
(D) A foreign adviser that exercises discretionary trading
authority solely over the accounts of non-U.S. persons, as defined in
Sec. 4.7(a)(4) of this chapter;
* * * * *
PART 3--REGISTRATION
0
3. The authority citation for part 3 continues to read as follows:
Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1,
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12,
12a, 13b, 13c, 16a, 18, 19, 21, and 23.
0
4. In Sec. 3.10, revise the introductory text of paragraph (c)(5)(ii)
to read as follows:
Sec. 3.10 Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators, swap dealers, major swap
participants and leverage transaction merchants.
* * * * *
(c) * * *
(5) * * *
(ii) With respect to paragraph (c)(5)(i) of this section, initial
capital contributed to a commodity pool by an affiliate, as defined by
Sec. 4.7(a)(1) of this chapter, of the pool's commodity pool operator
shall not be considered for purposes of determining whether such
commodity pool operator is executing commodity interest transactions on
behalf of a commodity pool, the participants of which are all foreign
located persons; provided, that:
* * * * *
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
0
5. 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
6. In Sec. 4.7:
0
a. Revise paragraph (a);
0
b. Add paragraph (b)(3)(iv); and
0
c. Revise paragraph (b)(5).
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.
* * * * *
(a) Definitions. (1) Affiliate of, or a person affiliated with, a
specified person means a person that directly or indirectly through one
or more persons, controls, is controlled by, or is under common control
with the specified person.
(2) Exempt account means the account of a qualified eligible person
that is directed or guided by a commodity trading advisor pursuant to
an effective claim for exemption under this section.
(3) Exempt pool means a pool that is operated pursuant to an
effective claim for exemption under this section.
(4) Non-United States person means:
(i) A natural person who is not a resident of the United States;
(ii) A partnership, corporation or other entity, other than an
entity organized principally for passive investment, organized under
the laws of a foreign jurisdiction and which has its principal place of
business in a foreign jurisdiction;
(iii) An estate or trust, the income of which is not subject to
United States income tax regardless of source;
(iv) An entity organized principally for passive investment such as
a pool, investment company or other similar entity; Provided, That
units of participation in the entity held by persons who do not qualify
as Non-United States persons or otherwise as qualified eligible persons
represent in the aggregate less than 10% of the beneficial interest in
the entity, and that such entity was not formed principally for the
purpose of facilitating investment by persons who do not qualify as
Non-United States persons in a pool with respect to which the operator
is exempt from certain requirements of this part by virtue of its
participants being Non-United States persons; and
(v) A pension plan for the employees, officers or principals of an
entity organized and with its principal place of business outside the
United States.
(5) Portfolio Requirement means that a person:
(i) Owns securities (including pool participations) of issuers not
affiliated with such person and other investments with an aggregate
market value of at least $4,000,000;
(ii) Has had on deposit with a futures commission merchant, for its
own account at any time during the six-month period preceding either
the date of sale to that person of a pool participation in the exempt
pool or the date that the person opens an exempt account with the
commodity trading advisor, at least $400,000 in exchange-specified
initial margin and option premiums, together with any required minimum
security deposits for retail forex transactions (defined in Sec.
5.1(m) of this chapter), for commodity interest transactions; or
(iii) Owns a portfolio comprised of a combination of the funds or
property specified in paragraphs (a)(5)(i) and (ii) of this section, in
which the sum of the funds or property includable under paragraph
(a)(5)(i) of this section, expressed as a percentage of the minimum
amount required thereunder, and the amount of initial margin, option
premiums, and minimum security deposits includable under paragraph
(a)(5)(ii) of this section, expressed as a percentage of the minimum
amount required thereunder, equals at least one hundred percent. An
example of a composite portfolio acceptable under this paragraph
(a)(5)(iii) would consist of $2,000,000 in securities and other
property (50% of paragraph (a)(5)(i)) and $200,000 in initial margin,
option premiums, and minimum security deposits (50% of paragraph
(a)(5)(ii)).
(6) Qualified eligible person means any person, acting for its own
account or for the account of a qualified eligible person, who the
commodity pool
[[Page 78811]]
operator reasonably believes, at the time of the sale to that person of
a pool participation in the exempt pool, or who the commodity trading
advisor reasonably believes, at the time that person opens an exempt
account, is included in the following list of persons that is divided
into two categories: Persons who are not required to satisfy the
Portfolio Requirement defined in paragraph (a)(5) of this section to be
qualified eligible persons, and those persons who must satisfy the
Portfolio Requirement in paragraph (a)(5) to be qualified eligible
persons.
(i) Persons who need not satisfy the Portfolio Requirement to be
qualified eligible persons. (A) A futures commission merchant
registered pursuant to section 4d of the Act, or a principal thereof;
(B) A retail foreign exchange dealer registered pursuant to section
2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;
(C) A swap dealer registered pursuant to section 4s(a)(1) of the
Act, or a principal thereof;
(D) A broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934, or a principal thereof;
(E) A commodity pool operator registered pursuant to section 4m of
the Act, or a principal thereof; Provided, That the pool operator:
(1) Has been registered and active as such for two years; or
(2) Operates pools which, in the aggregate, have total assets in
excess of $5,000,000;
(F) A commodity trading advisor registered pursuant to section 4m
of the Act, or a principal thereof; Provided, That the trading advisor:
(1) Has been registered and active as such for two years; or
(2) Provides commodity interest trading advice to commodity
accounts which, in the aggregate, have total assets in excess of
$5,000,000 deposited at one or more futures commission merchants;
(G) An investment adviser registered pursuant to section 203 of the
Investment Advisers Act of 1940 (``Investment Advisers Act'') or
pursuant to the laws of any state, or a principal thereof; Provided,
That the investment adviser:
(1) Has been registered and active as such for two years; or
(2) Provides securities investment advice to securities accounts
which, in the aggregate, have total assets in excess of $5,000,000
deposited at one or more registered securities brokers;
(H) A ``qualified purchaser'' as defined in section 2(a)(51)(A) of
the Investment Company Act of 1940 (``Investment Company Act'');
(I) A ``knowledgeable employee'' as defined in Sec. 270.3c-5 of
this title;
(J) With respect to an exempt pool:
(1) The commodity pool operator, commodity trading advisor or
investment adviser of the exempt pool offered or sold, or an affiliate
of any of the foregoing;
(2) A principal of the exempt pool or the commodity pool operator,
commodity trading advisor or investment adviser of the exempt pool, or
an affiliate of any of the foregoing;
(3) An employee of the exempt pool or the commodity pool operator,
commodity trading advisor or investment adviser of the exempt pool, or
of an affiliate of any of the foregoing (other than an employee
performing solely clerical, secretarial or administrative functions
with regard to such person or its investments) who, in connection with
his or her regular functions or duties, participates in the investment
activities of the exempt pool, other commodity pools operated by the
pool operator of the exempt pool or other accounts advised by the
trading advisor or the investment adviser of the exempt pool, or by the
affiliate; Provided, That such employee has been performing such
functions and duties for or on behalf of the exempt pool, pool
operator, trading advisor, investment adviser or affiliate, or
substantially similar functions or duties for or on behalf of another
person engaged in providing commodity interest, securities or other
financial services, for at least 12 months;
(4) Any other employee of, or an agent engaged to perform legal,
accounting, auditing or other financial services for, the exempt pool
or the commodity pool operator, commodity trading advisor or investment
adviser of the exempt pool, or any other employee of, or agent so
engaged by, an affiliate of any of the foregoing (other than an
employee or agent performing solely clerical, secretarial or
administrative functions with regard to such person or its
investments); Provided, That such employee or agent:
(i) Is an accredited investor as defined in Sec. 230.501(a)(5) or
(6) of this title; and
(ii) Has been employed or engaged by the exempt pool, commodity
pool operator, commodity trading advisor, investment adviser or
affiliate, or by another person engaged in providing commodity
interest, securities or other financial services, for at least 24
months;
(5) The spouse, child, sibling or parent of a person who satisfies
the criteria of paragraph (a)(6)(i)(J)(1), (2), (3), or (4) of this
section; Provided, That:
(i) An investment in the exempt pool by any such family member is
made with the knowledge and at the direction of the person; and
(ii) The family member is not a qualified eligible person for the
purposes of paragraph (a)(6)(ii)(K) of this section;
(6) Any person who acquires a participation in the exempt pool by
gift, bequest or pursuant to an agreement relating to a legal
separation or divorce from a person listed in paragraph
(a)(6)(i)(J)(1), (2), (3), (4), or (5) of this section;
(7) The estate of any person listed in paragraph (a)(6)(i)(J)(1),
(2), (3), (4), or (5) of this section; or
(8) A company established by any person listed in paragraph
(a)(6)(i)(J)(1), (2), (3), (4), or (5) of this section exclusively for
the benefit of (or owned exclusively by) that person and any person
listed in paragraph (a)(6)(i)(J)(6) or (7) of this section;
(K) With respect to an exempt account:
(1) An affiliate of the commodity trading advisor of the exempt
account;
(2) A principal of the commodity trading advisor of the exempt
account or of an affiliate of the commodity trading advisor;
(3) An employee of the commodity trading advisor of the exempt
account or of an affiliate of the trading advisor (other than an
employee performing solely clerical, secretarial or administrative
functions with regard to such person or its investments) who, in
connection with his or her regular functions or duties, participates in
the investment activities of the trading advisor or the affiliate;
Provided, That such employee has been performing such functions and
duties for or on behalf of the trading advisor or the affiliate, or
substantially similar functions or duties for or on behalf of another
person engaged in providing commodity interest, securities or other
financial services, for at least 12 months;
(4) Any other employee of, or an agent engaged to perform legal,
accounting, auditing or other financial services for, the commodity
trading advisor of the exempt account or any other employee of, or
agent so engaged by, an affiliate of the trading advisor (other than an
employee or agent performing solely clerical, secretarial or
administrative functions with regard to such person or its
investments); Provided, That such employee or agent:
(i) Is an accredited investor as defined in Sec. 230.501(a)(5) or
(6) of this title; and
[[Page 78812]]
(ii) Has been employed or engaged by the commodity trading advisor
or the affiliate, or by another person engaged in providing commodity
interest, securities or other financial services, for at least 24
months;
(5) The spouse, child, sibling or parent of the commodity trading
advisor of the exempt account or of a person who satisfies the criteria
of paragraph (a)(6)(i)(K)(1), (2), (3), or (4) of this section;
Provided, That:
(i) The establishment of an exempt account by any such family
member is made with the knowledge and at the direction of the person;
and
(ii) The family member is not a qualified eligible person for the
purposes of paragraph (a)(6)(ii)(K) of this section;
(6) Any person who acquires an interest in an exempt account by
gift, bequest or pursuant to an agreement relating to a legal
separation or divorce from a person listed in paragraph
(a)(6)(i)(K)(1), (2), (3), (4), or (5) of this section;
(7) The estate of any person listed in paragraph (a)(6)(i)(K)(1),
(2), (3), (4), or (5) of this section; or
(8) A company established by any person listed in paragraph
(a)(6)(i)(K)(1), (2), (3), (4), or (5) of this section exclusively for
the benefit of (or owned exclusively by) that person and any person
listed in paragraph (a)(6)(i)(K)(6) or (7) of this section;
(L) A trust; Provided, That:
(1) The trust was not formed for the specific purpose of either
participating in the exempt pool or opening an exempt account; and
(2) The trustee or other person authorized to make investment
decisions with respect to the trust, and each settlor or other person
who has contributed assets to the trust, is a qualified eligible
person;
(M) An organization described in section 501(c)(3) of the Internal
Revenue Code (the ``IRC''); Provided, That the trustee or other person
authorized to make investment decisions with respect to the
organization, and the person who has established the organization, is a
qualified eligible person;
(N) A Non-United States person;
(O) An entity in which all of the unit owners or participants,
other than the commodity trading advisor claiming relief under this
section, are qualified eligible persons;
(P) An exempt pool; or
(Q) Notwithstanding paragraph (a)(6)(ii) of this section, an entity
as to which a notice of eligibility has been filed pursuant to Sec.
4.5 which is operated in accordance with such rule and in which all
unit owners or participants, other than the commodity trading advisor
claiming relief under this section, are qualified eligible persons.
(ii) Persons who must satisfy the Portfolio Requirement to be
qualified eligible persons. With respect to the persons listed in
paragraphs (a)(6)(ii)(A) through (L) of this section, the commodity
pool operator must reasonably believe, at the time of the sale to such
person of a participation in the exempt pool, or the commodity trading
advisor must reasonably believe, at the time such person opens an
exempt account, that such person satisfies the Portfolio Requirement in
paragraph (a)(5) of this section:
(A) An investment company registered under the Investment Company
Act or a business development company as defined in section 2(a)(48) of
such Act not formed for the specific purpose of either investing in the
exempt pool or opening an exempt account;
(B) A bank as defined in section 3(a)(2) of the Securities Act of
1933 (the ``Securities Act'') or any savings and loan association or
other institution as defined in section 3(a)(5)(A) of the Securities
Act acting for its own account or for the account of a qualified
eligible person;
(C) An insurance company as defined in section 2(13) of the
Securities Act acting for its own account or for the account of a
qualified eligible person;
(D) A plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan
has total assets in excess of $5,000,000;
(E) An employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974; Provided, That the investment
decision is made by a plan fiduciary, as defined in section 3(21) of
such Act, which is a bank, savings and loan association, insurance
company, or registered investment adviser; or that the employee benefit
plan has total assets in excess of $5,000,000; or, if the plan is self-
directed, that investment decisions are made solely by persons that are
qualified eligible persons;
(F) A private business development company as defined in section
202(a)(22) of the Investment Advisers Act;
(G) An organization described in section 501(c)(3) of the IRC, with
total assets in excess of $5,000,000;
(H) A corporation, Massachusetts or similar business trust, or
partnership, limited liability company or similar business venture,
other than a pool, which has total assets in excess of $5,000,000, and
is not formed for the specific purpose of either participating in the
exempt pool or opening an exempt account;
(I) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of either his purchase in the
exempt pool or his opening of an exempt account would qualify him as an
accredited investor as defined in Sec. 230.501(a)(5) of this title;
(J) A natural person who would qualify as an accredited investor as
defined in Sec. 230.501(a)(6) of this title;
(K) A pool, trust, insurance company separate account or bank
collective trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of either participating in the exempt pool or
opening an exempt account, and whose participation in the exempt pool
or investment in the exempt account is directed by a qualified eligible
person; or
(L) Except as provided for the governmental entities referenced in
paragraph (a)(6)(ii)(D) of this section, if otherwise authorized by law
to engage in such transactions, a governmental entity (including the
United States, a state, or a foreign government) or political
subdivision thereof, or a multinational or supranational entity or an
instrumentality, agency, or department of any of the foregoing.
(7) United States means the United States, its states, territories
or possessions, or an enclave of the United States government, its
agencies or instrumentalities.
(b) * * *
(3) * * *
(iv) Where the exempt pool is invested in one or more other pools
or funds operated by third parties, the commodity pool operator may
choose instead to prepare and distribute to its pool participants
statements signed and affirmed in accordance with Sec. 4.22(h) on a
monthly basis within 45 days of the month-end; Provided, that the
statements otherwise meet the conditions of paragraphs (b)(3)(i) and
(ii) of this section, and that the commodity pool operator notifies its
pool participants of this alternate distribution schedule in the exempt
pool's offering memorandum distributed prior to the initial investment,
or upon its adoption of this reporting schedule, for then existing pool
participants.
* * * * *
(5) Recordkeeping relief. Exemption from the specific requirements
of Sec. 4.23; Provided, That the commodity pool operator must maintain
the offering memoranda and reports referred to in
[[Page 78813]]
paragraphs (b)(3) and (4) of this section, and all other books and
records prepared in connection with its activities as the pool operator
of the exempt pool (including, without limitation, records relating to
the qualifications of qualified eligible persons and substantiating any
performance representations). Books and records that are not maintained
at the pool operator's main business office shall be maintained by one
or more of the following: the pool's administrator, distributor, or
custodian, or a bank or registered broker or dealer acting in a similar
capacity with respect to the pool. Such books and records must be made
available to any representative of the Commission, the National Futures
Association and the United States Department of Justice in accordance
with the provisions of Sec. 1.31 of this chapter.
* * * * *
0
7. In Sec. 4.14, revise paragraph (a)(8)(i)(C)(2) to read as follows:
Sec. 4.14 Exemption from registration as a commodity trading advisor.
* * * * *
(a) * * *
(8) * * *
(i) * * *
(C) * * *
(2) With the exception of the pool's operator, advisor, and their
principals, solely ``Non-United States persons,'' as that term is
defined in Sec. 4.7(a)(4), will contribute funds or other capital to,
and will own beneficial interests in, the pool; Provided, That units of
participation in the pool held by persons who do not qualify as Non-
United States persons or otherwise qualified eligible persons represent
in the aggregate less than 10 percent of the beneficial interest of the
pool;
* * * * *
0
8. In Sec. 4.21, revise paragraph (a)(2) to read as follows:
Sec. 4.21 Required delivery of pool Disclosure Document.
(a) * * *
(2) For the purpose of the Disclosure Document delivery requirement
in this part, including any offering memorandum delivered pursuant to
Sec. 4.7(b)(2)(i) or Sec. 4.12(b)(2)(i), the term ``prospective pool
participant'' does not include a commodity pool operated by a pool
operator that is the same as, or that controls, is controlled by, or is
under common control with, the pool operator of the offered pool.
* * * * *
0
9. In Sec. 4.22:
0
a. Revise paragraph (a)(4), the introductory text of paragraph (c)(7),
paragraph (c)(8), the introductory text of paragraph (d)(1), the
introductory text of paragraph (d)(2)(i), the introductory text of
paragraph (f)(2), and paragraph (f)(2)(iv)(B); and
0
b. Remove paragraph (f)(2)(iv)(D).
The revisions read as follows:
Sec. 4.22 Reporting to pool participants.
(a) * * *
(4) For the purpose of the Account Statement delivery requirement
in this part, including any Account Statement distributed pursuant to
Sec. 4.7(b)(3) or Sec. 4.12(b)(2)(ii), the term ``participant'' does
not include a commodity pool operated by a pool operator that is the
same as, or that controls, is controlled by, or is under common control
with, the pool operator of a pool in which the commodity pool has
invested.
* * * * *
(c) * * *
(7) For a pool that has ceased operation prior to, or as of, the
end of the fiscal year, the commodity pool operator may provide the
following, within 90 days of the permanent cessation of trading, in
lieu of the annual report that would otherwise be required by this
paragraph (c) or Sec. 4.7(b)(4):
* * * * *
(8) For the purpose of the Annual Report distribution requirement
in this part, including any annual report distributed pursuant to Sec.
4.7(b)(4) or Sec. 4.12(b)(2)(iii), the term ``participant'' does not
include a commodity pool operated by a pool operator that is the same
as, or that controls, is controlled by, or is under common control
with, the pool operator of a pool in which the commodity pool has
invested; Provided, That the Annual Report of such investing pool
contains financial statements that include such information as the
Commission may specify concerning the operations of the pool in which
the commodity pool has invested.
(d)(1) Subject to the provisions of paragraphs (d)(2) and (g)(2) of
this section, the financial statements in the Annual Report required by
this section or by Sec. 4.7(b)(4) must be presented and computed in
accordance with United States generally accepted accounting principles
consistently applied and must be audited by an independent public
accountant; Provided, however, and subject to the exception in
paragraph (c)(7)(iii)(B) of this section, that the requirement that the
Annual Report be audited by an independent public accountant does not
apply for any fiscal year during which the only participants in the
pool are one or more of the pool operator, the pool's commodity trading
advisor, any person controlling, controlled by, or under common control
with the pool operator or trading advisor, and any principal of the
foregoing; and Provided further, that the commodity pool operator
obtains a written waiver from each such pool participant of their right
to receive an audited Annual Report for such fiscal year, maintains
such waivers in accordance with Sec. 4.23, and makes such waivers
available to the Commission or National Futures Association upon
request. The requirements of Sec. 1.16(g) of this chapter shall apply
with respect to the engagement of such independent public accountants,
except that any related notifications to be made may be made solely to
the National Futures Association, and the certification must be in
accordance with Sec. 1.16 of this chapter, except that the following
requirements of Sec. 1.16 shall not apply:
* * * * *
(2)(i) Where a pool is organized in a jurisdiction other than the
United States, the financial statements in the Annual Report required
by this section or by Sec. 4.7(b)(4) may be presented and computed in
accordance with the generally accepted accounting principles, standards
or practices followed in such other jurisdiction; Provided, That:
* * * * *
(f) * * *
(2) In the event a commodity pool operator finds that it cannot
obtain information necessary to prepare annual financial statements for
a pool that it operates within the time specified in paragraph (c) of
this section or Sec. 4.7(b)(4)(i), as a result of the pool investing
in another collective investment vehicle, it may claim an extension of
time under the following conditions:
* * * * *
(iv) * * *
(B) For all reports prepared under paragraph (c) of this section
and for reports prepared under Sec. 4.7(b)(4)(i) that are audited by
an independent public accountant, the commodity pool operator has been
informed by the independent public accountant engaged to audit the
commodity pool's financial statements that specified information
required to complete the pool's Annual Report is necessary in order for
the accountant to render an opinion on the commodity pool's financial
statements. The notice must include the name, main business address,
main telephone number, and contact person of the accountant; and
* * * * *
[[Page 78814]]
PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS
0
10. The authority citation for part 30 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6c, and 12a, unless otherwise
noted.
0
11. In Sec. 30.6, revise paragraph (b)(1)(i) to read as follows:
Sec. 30.6 Disclosure.
* * * * *
(b) * * *
(1) * * *
(i) A commodity pool operator registered or required to be
registered under this part, or exempt from registration pursuant to
Sec. 30.5, may not, directly or indirectly, engage in any of the
activities described in Sec. 30.4(c) unless the pool operator, at or
before the time it engages in such activities, first provides each
prospective qualified eligible person with the Risk Disclosure
Statement set forth in Sec. 4.24(b)(2) of this chapter and the
statement in Sec. 4.7(b)(2)(i) of this chapter;
* * * * *
PART 43--REAL-TIME PUBLIC REPORTING
0
12. The authority citation for part 43 continues to read as follows:
Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as amended by Pub. L.
111-203, 124 Stat. 1376 (2010).
0
13. In Sec. 43.6, revise paragraphs (i)(6)(i)(B) and (j)(1)(ii) to
read as follows:
Sec. 43.6 Block trades and large notional off-facility swaps.
* * * * *
(i) * * *
(6) * * *
(i) * * *
(B) Is an investment adviser who has discretionary trading
authority or directs client accounts and satisfies the criteria of
Sec. 4.7(a)(6)(i)(G) of this chapter; or
* * * * *
(j) * * *
(1) * * *
(ii) An investment adviser who has discretionary trading authority
or directs client accounts and satisfies the criteria of Sec.
4.7(a)(6)(i)(G) of this chapter, or
* * * * *
PART 75--PROPRIETARY TRADING AND CERTAIN INTEREST IN AND
RELATIONSHIPS WITH COVERED FUNDS
0
14. The authority citation for part 75 continues to read as follows:
Authority: 12 U.S.C. 1851.
0
15. In Sec. 75.10, revise paragraphs (b)(1)(ii)(B)(2) and (3) to read
as follows:
Sec. 75.10 Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.
* * * * *
(b) * * *
(1) * * *
(ii) * * *
(B) * * *
(2) Substantially all participation units of the commodity pool are
owned by qualified eligible persons defined under Sec. 4.7(a)(6)(i)
and (ii) of this chapter; and
(3) Participation units of the commodity pool have not been
publicly offered to persons who are not qualified eligible persons
defined under Sec. 4.7(a)(6)(i) and (ii) of this chapter; or
* * * * *
Issued in Washington, DC, on September 18, 2024, by the
Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Commodity Pool Operators, Commodity Trading Advisors, and
Commodity Pools Operated: Updating the `Qualified Eligible Person'
Definition; Adding Minimum Disclosure Requirements for Pools and
Trading Programs; Permitting Monthly Account Statements for Funds of
Funds; Technical Amendments--Commission Voting Summary and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam, Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Supporting Statement of Commissioner Summer K. Mersinger
Today, the Commission \1\ achieved balance in adopting the
amendments to Regulation 4.7 and for that reason I can support this
final rule. I would like to thank the staff in the Market
Participants Division for their hard work on this rulemaking effort
and for their consideration of my suggestions and comments
throughout this process.
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\1\ This statement will refer to the Commodity Futures Trading
Commission as the ``Commission'', ``CFTC'', or ``Agency.'' All web
pages cited herein were last visited on September 11, 2024.
---------------------------------------------------------------------------
But the balance achieved in this final rule was sorely missing
in the original amendment proposal, as well as in recent drafts of
this final rule presented to the Commission. As I identified in my
prior dissent, the proposed amendment to Regulation 4.7 was flawed
in applying a new minimum disclosure regime on sophisticated
investors who had always been exempt from such disclosures.\2\
---------------------------------------------------------------------------
\2\ Dissenting Statement of Commissioner Summer K. Mersinger On
Proposal to Narrow Historical Exemptions for Qualified Eligible
Persons in Rule 4.7, Oct. 2, 2023, available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement100223.
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This flawed proposal led to a unanimous comment file, without a
single commenter supporting the Commission's new minimum disclosure
regime. The proposal was a textbook example of overregulation.
Thankfully, the Commission avoided the temptation to overregulate
under this rule, dropping the minimum disclosure regime from the
final rule adopted today.
I am pleased that I can support this final rule. However, we
should always remember that we do not regulate in a vacuum. We must
work with market participants to carefully calibrate all rulemaking
efforts. Additionally, we must harmonize our regulations, not only
with the interests of our market participants, but with other
regulators, including self-regulatory organizations.
While I am relieved that the final rule reflects a balanced
approach and aims to achieve the overarching goal without
overregulation, I remain concerned about the adopting release's
mention of possible future efforts to expand Regulation 4.7 after
this amendment.\3\ I urge the Commission to avoid such future
expansions, unless the Commission finds concrete evidence
establishing a need for modifications and only after robust
discussions with industry.
---------------------------------------------------------------------------
\3\ See Final Rule, Section II. B. 3.
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Additionally, I must caution the Commission from making the same
mistake on other pending rulemaking proposals where feedback from
commenters reflects a similar imbalance in the Agency's approach. We
must seek balance and compromise in our regulations, not only
because we are legally obligated to do so, but also because it is
the right thing to do.
Appendix 3--Statement of Commissioner Caroline D. Pham
I am pleased that the Commission is taking additional time to
understand how to best protect market participants and to consider
the various disclosure proposals submitted by the public in
connection with the amendments to Regulation 4.7. As a market
regulator with material impact on the risk management of the savings
of millions of Americans, it is imperative that the Commission takes
its time when considering new requirements to ensure that we get it
right.
This is especially the case when the unintended consequences of
our rules could create new obstacles to market participation that
draw a distinction between the ``have-a-lot's'' and the ``have-not-
enough's''. Ultimately, using regulation to pick winners and losers
that increases the wealth gap not
[[Page 78815]]
only betrays the American public's expectation of Washington to
create and maintain fair markets, but it also undermines financial
inclusion. The government must keep the people's trust that we will
help every American achieve economic mobility for them and their
families--not construct artificial barriers to the American Dream.
For those reasons, I applaud the Commission taking the time for
careful consideration of the public comments and further study
including data. I thank Chairman Behnam and the Market Participants
Division for working with me on this important rulemaking.
[FR Doc. 2024-21682 Filed 9-25-24; 8:45 am]
BILLING CODE 6351-01-P