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e9-26789

  • FR Doc E9-26789[Federal Register: November 9, 2009 (Volume 74, Number 215)]

    [Rules and Regulations]

    [Page 57585-57593]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr09no09-10]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 4

    [RIN 3038-AC38]

    Commodity Pool Operator Periodic Account Statements and Annual

    Financial Reports

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is amending its regulations governing the periodic account

    statements that commodity pool operators (``CPOs'') are required to

    provide to commodity pool participants and the annual financial reports

    that CPOs are required to provide to commodity pool participants and

    file with the National Futures Association (``NFA''). The amendments:

    specify detailed information that must be included in the periodic

    account statements and annual reports for commodity pools with more

    than one series or class of ownership interest; clarify that the

    periodic account statements must disclose either the net asset value

    per outstanding participation unit in the pool, or the total value of a

    participant's interest or share in the pool; extend the time period for

    filing and distributing annual reports of commodity pools that invest

    in other funds; codify existing Commission staff interpretations

    regarding the proper accounting treatment and financial statement

    presentation of certain income and expense items in the periodic

    account statements and annual reports; streamline annual reporting

    requirements for pools ceasing operation; establish conditions for use

    of International Financial Reporting Standards (``IFRS'') in lieu of

    U.S. Generally Accepted Accounting Principles (``U.S. GAAP'') and a

    notice procedure for CPOs to claim such relief; and clarify and update

    several other requirements for periodic and annual reports prepared and

    distributed by CPOs.

    DATES: Effective date: This rule is effective December 9, 2009.

    Applicability dates: Amendments to Sec. Sec. 4.7(b)(3) and 4.22(c)

    (other than 4.22(c)(7)) are applicable to commodity pool annual reports

    for fiscal years ending December 31, 2009 and later.

    FOR FURTHER INFORMATION CONTACT: Eileen R. Chotiner, Senior Compliance

    Analyst, at (202) 418-5467, Division of Clearing and Intermediary

    Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail:

    (echotiner@cftc.gov).

    SUPPLEMENTARY INFORMATION:

    I. Background

    On February 24, 2009, the Commission published \1\ for public

    comment proposed amendments to the reporting provisions applicable to

    CPOs under Part 4 of its regulations (``Proposed Part 4

    Amendments'').\2\ Pursuant to regulations contained in Part 4, a

    registered CPO must distribute an account statement to each participant

    in each commodity pool that it operates within 30 days of the end of

    the reporting period, and must file with NFA, and provide to each

    participant, an annual financial report for each commodity pool that it

    operates within 90 days of the end of the pool's fiscal year or the

    permanent cessation of the pool's trading. The Part 4 Amendments codify

    existing staff interpretations, clarify reporting for series funds,

    extend financial reporting filing deadlines for CPOs operating

    commodity pools that that in invest in other funds, and streamline

    certain filing requirements for pools ceasing operation.

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    \1\ 74 FR 8220 (February 24, 2009).

    \2\ Commission regulations referred to herein are found at 17

    CFR Ch. I (2009 edition).

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    II. Comments Received

    The Commission received four comment letters in response to the

    Proposed Part 4 Amendments. Comments were submitted by NFA; the

    Committee on Futures Regulation of the New York City Bar Association

    (``NYC Bar''); Arthur F. Bell & Associates, LLC,

    [[Page 57586]]

    an accounting firm (``Arthur Bell CPAs''); and the Managed Funds

    Association (``MFA''). All of the commenters generally supported the

    proposed amendments. Each of the commenters, however, had specific

    suggestions regarding clarification of certain aspects of the proposal.

    The commenters' suggestions are discussed below.

    III. The Final Regulations

    A. Periodic Account Statements for Regulation 4.7-Exempt Pools

    Regulation 4.7(b)(2) requires the CPO of a commodity pool for which

    the CPO has claimed an exemption under Regulation 4.7 (i.e., a

    ``Regulation 4.7-exempt commodity pool'') to provide each participant

    in the pool with periodic account statements that must indicate: (1)

    The net asset value of the exempt pool as of the end of the reporting

    period; (2) the change in net asset value of the exempt pool from the

    end of the previous reporting period; and (3) the net asset value per

    outstanding unit of participation in the exempt pool as of the end of

    the reporting period.

    The Commission proposed to amend Regulation 4.7(b)(2) to clarify

    that the periodic account statement provided to each pool participant

    must disclose either the net asset value per outstanding participation

    unit, or the total value of the participant's interest or share, in the

    commodity pool as of the end of the reporting period. The proposal was

    intended to ensure that pool participants receive sufficient

    information to determine the value of their investments in the

    commodity pool from the periodic account statement, particularly for

    non-unitized pools. The proposed amendments also would conform the

    account statement requirements for Regulation 4.7-exempt pools to those

    for non-exempt pools under Regulation 4.22(a).

    The Commission did not receive any comments regarding the proposed

    amendments to Regulation 4.7(b)(2). For the reasons set forth above and

    in the Proposed Part 4 Amendments, the Commission is adopting the

    amendments as proposed.

    B. Series Pools and Pools With Multiple Classes of Ownership Interests

    The ownership structure of a commodity pool may be organized to

    include more than one series or class of ownership interest. The

    commodity pool may have more than one ownership series or class due to

    differences in fees and expenses charged to the series or classes,

    currency denomination of the series or classes, trading strategies,

    cash management strategies, or other aspects of the operation of the

    pool.

    Pool financial statements prepared pursuant to both Regulation

    4.22(c) and Regulation 4.7(b)(3) must be presented and computed in

    accordance with Generally Accepted Accounting Principles (``GAAP'').

    GAAP provides guidance regarding the presentation of financial

    statements for series funds \3\ and for investment funds with multiple

    ownership classes.\4\ As noted in the Proposed Part 4 Amendments,

    Commission staff has received several inquiries from CPOs, their

    attorneys and accountants, and NFA regarding the proper presentation of

    periodic account statements and annual financial reports for series

    funds and multi-class pools.

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    \3\ American Institute of Certified Public Accountants

    (``AICPA'') Audit and Accounting Guide, Investment Companies

    paragraph 7.03.

    \4\ AICPA Audit and Accounting Guide, Investment Companies,

    Chapter 5, Complex Capital Structures.

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    In order to address issues raised with series funds and to address

    the proper accounting treatment under GAAP, the Commission proposed to

    amend Regulations 4.7(b)(2) and 4.22(a) to specify that, for series

    funds structured with a limitation on liability among the different

    series, the periodic account statement may include only the information

    for the series being reported, although additional information on other

    series may be provided. The Commission further proposed that for multi-

    class funds and for series funds that were not structured with a

    limitation on liability among the different series or classes, net

    asset value and other information required by the regulations must be

    presented for both the pool as a whole as well as for each series or

    class of ownership interest.

    The Commission also proposed to amend Regulations 4.7(b)(3) and

    4.22(c) to clarify that, for series funds structured with a limitation

    on liability among the different series, the annual report may include

    only the information for the series being reported. The Commission

    further noted that for both periodic account statements and annual

    financial reports, CPOs of series funds with a limitation on liability

    among the different series were not precluded by the proposed

    amendments from providing financial information to participants for

    other series or classes of a respective pool.

    The Commission did not receive any comment regarding the above

    proposals. For the reasons set forth above and in the Proposed Part 4

    Amendments, the Commission is adopting the amendments as proposed.

    C. Changes to Fund of Funds Extension Provisions Under Regulation

    4.22(f)(2)

    Regulations 4.7(b)(3) and 4.22(c) require a CPO to provide to each

    participant in each commodity pool that the CPO operates an annual

    report for the commodity pool within 90 calendar days of the end of the

    pool's fiscal year. The CPO is further required to submit a copy of the

    annual report electronically to NFA.

    Regulation 4.22(f)(2) permits a CPO of a commodity pool that

    invests in other funds (referred to as a ``fund of funds'') to claim up

    to an additional 60 days to distribute the pool's annual report to pool

    participants and to file a copy with NFA. A CPO may claim the

    Regulation 4.22(f)(2) fund of funds 60-day extension by filing with NFA

    an initial notice, containing specified representations, in advance of

    the annual report's due date for the first year the extension is

    claimed. In subsequent years, the CPO may confirm that the

    circumstances necessitating the relief continue to apply by restating

    certain representations in a statement filed at the same time as the

    pool's annual report.

    The self-certification procedures for claiming an extension of the

    filing deadline for a fund of funds under Regulation 4.22(f)(2)

    currently are applicable only to CPOs that distribute annual reports

    that are audited by independent public accountants. CPOs of funds of

    funds that distribute unaudited annual financial reports to

    participants pursuant to Regulation 4.7(b)(3) may not claim an

    extension of the filing deadline under Regulation 4.22(f)(2). Such

    CPOs, however, may request from NFA up to a 90-day extension of the

    filing deadline under Regulation 4.22(f)(1).

    As discussed in the Proposed Part 4 Amendments, in adopting

    Regulation 4.22(f)(2), the Commission anticipated that a substantial

    majority of the CPOs of funds of funds would be able to distribute to

    the participants and to file with NFA the pools' annual reports within

    150 days of the end of the respective commodity pool's fiscal year.\5\

    The number of CPOs that have requested additional extensions under

    Regulation 4.22(f)(1) after having claimed the 60-day extension under

    Regulation 4.22(f)(2), however, has increased significantly in recent

    years. To address this issue, the Commission proposed to extend from 60

    to 90 days the maximum period of additional time

    [[Page 57587]]

    that a CPO that operates a commodity pool that invests in other funds

    may claim under Regulation 4.22(f)(2).

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    \5\ 65 FR 81333 at 81334 (December 26, 2000).

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    The Commission also proposed to extend the application of

    Regulation 4.22(f)(2) to CPOs that operate Regulation 4.7-exempt

    commodity pools that do not prepare financial statements audited by

    independent public accountants. As noted in the Proposed Part 4

    Amendments, Regulation 4.22(f)(2) was adopted, in large part, to

    address difficulties that CPOs experience in obtaining timely

    information about their pools' investments in other funds in order for

    the pools' public accountants to prepare audited financial statements.

    Annual reports that are not audited, however, are still required to be

    prepared in accordance with GAAP. CPOs need information establishing

    the value of the pools' material investments from the investee funds.

    These investments may be in a number of investee funds, such as other

    commodity pools, securities funds, or hedge funds, both domestic and

    offshore. The information that the CPOs require frequently is

    unavailable until the investee funds complete their own audited

    financial statements. Thus, in many cases, the CPOs cannot obtain the

    information they require about the investee funds in time for the

    annual financial reports of the pools to be prepared and distributed by

    the due date. To address this issue, the Commission proposed to permit

    CPOs of funds of funds for which unaudited annual reports are prepared

    to be able to claim the extension under Regulation 4.22(f)(2).

    In addition, the Commission proposed to eliminate the requirement

    that a CPO that filed a claim of extension under Regulation 4.22(f)(2)

    for a particular pool restate certain representations in a statement

    filed with the pool's annual reports in subsequent years. Instead,

    under the proposal, the CPO would be presumed to operate the pool as a

    fund of funds and otherwise continue to qualify for the automatic

    extension. The CPO, however, must provide NFA with notice if the pool

    no longer operates as a fund of funds and must distribute the pool's

    annual report to pool participants and file a copy with NFA within 90

    days of the pool's fiscal year-end, as required by Regulation 4.22(c).

    The Commission received several comments generally supporting the

    proposed amendments, and no commenter opposed the proposed amendments.

    NFA and Arthur Bell CPAs supported the proposed amendments to

    Regulation 4.22(f)(2) extending the amount of time within which funds

    of funds must file their reports from 150 to 180 days after fiscal year

    end. NFA, however, commented that multi-tiered funds of funds could

    still have difficulty obtaining necessary information if their investee

    funds are commodity pools and the CPOs of the investee funds had

    claimed an extension under Regulation 4.22(f)(2) of up to 180 days. In

    such situations, the CPO of the fund of funds may not receive annual

    reports for investee funds until 180 days after the end of the investee

    fund's year-end, which would coincide with the due date for the CPO of

    the fund of funds to distribute an annual report to participants in the

    fund of funds. In its comment letter, NFA suggested that the Commission

    amend Regulation 4.22(f)(1) to provide for an additional extension of

    up to 210 days after the pool's year end to provide CPOs of funds of

    funds with additional time to prepare and to distribute annual reports

    for the commodity pool. The Commission did not receive any comments

    regarding the proposal to eliminate, after the initial year, the

    requirement in Regulation 4.22(f)(2) that a CPO claiming an extension

    of time provide a statement containing representations regarding

    operating a fund of funds each year after the initial year.

    Arthur Bell CPAs further supported the proposal to extend the

    availability of the fund of funds extension to Regulation 4.7-exempt

    pools for which audited reports are not prepared, noting that even for

    an unaudited report, the additional time is necessary due to the

    requirement under GAAP to provide a condensed schedule of investments,

    which necessitates obtaining information from investee funds.

    The Commission has considered the comments received and is adopting

    the amendments to Regulations 4.22(f)(1) and (2) as proposed. The

    Commission acknowledges that a CPO of a multi-tiered fund of funds may

    face challenges in obtaining the appropriate detailed financial

    information from each investee fund. The Commission, however, must

    balance the challenges faced by the CPO of a fund of funds with the

    need of pool participants to receive financial information regarding

    the performance of a fund in as timely a manner as possible. Based upon

    its review of annual report filings of commodity pools over the last

    several years, the Commission does not believe that there is a

    sufficient basis to propose additional extension provisions under

    Regulation 4.22(f)(1) that would extend the filing deadline to 210 days

    after the end of a pool's fiscal year end. Commission staff will

    monitor filings under the revised fund of funds timeframe closely to

    ascertain whether any further changes may be warranted.

    In addition, under the regulations as amended, CPOs that previously

    have claimed the fund of funds extension will not need to file new or

    revised notices with NFA in order to claim the additional 30 days to

    file and to distribute their qualifying pools' annual reports. However,

    the Commission continues to expect CPOs to file and to distribute their

    pools' annual reports as soon as possible after the pools' fiscal year-

    ends to ensure that participants obtain information that is as current

    as possible.

    D. Procedures for Preparation and Filing of Reports for Liquidating

    Pools

    The Commission proposed to clarify and to streamline procedures for

    CPOs filing final reports for pools that had ceased operation.

    Currently, Regulation 4.22(c) requires a CPO of a commodity pool that

    has ceased operation to distribute a final annual report to commodity

    pool participants and to file a copy with NFA within 90 days of the

    pool's permanent cessation of trading, but in no event longer than 90

    days after funds are returned to pool participants. The Commission

    proposed to eliminate the confusion created by the reference in

    Regulation 4.22(c) to two possible timeframes for filing a final annual

    report by amending the regulation to specify that the final annual

    report must be filed no later than 90 days after the pool ceases

    trading. Under the proposed amendment, if a CPO has not distributed all

    funds to participants by the date that the report is issued, the CPO

    must provide information about the return of funds to pool

    participants, including an estimate of the value of funds remaining to

    be distributed and the anticipated timeframe of when those funds are

    expected to be returned. When the remaining funds are returned to

    participants, the CPO should send a notice to all participants and to

    NFA. The proposed amendment also would permit CPOs to prepare unaudited

    final reports as long as the CPO obtains from all participants, and

    files with NFA, written waivers of their right to receive an audited

    report.

    NFA supported the Commission's proposal to clarify the timeframe

    within which the final report must be filed; however, MFA noted that

    requiring reports to be filed within 90 days of the cessation of

    trading would create reporting inefficiencies for CPOs and participants

    of pools that hold assets that are difficult to liquidate. MFA's

    comment letter described scenarios in which inefficiencies would be

    created, such as when the pool holds assets that

    [[Page 57588]]

    cannot be liquidated for an extended period of time, or the pool is

    involved in bankruptcy. The MFA comment letter also noted that a CPO

    may have difficulty in obtaining an audit opinion on financial

    statements for a pool that has significant assets that have not been

    liquidated.

    MFA suggested as an alternative to the proposal that CPOs that have

    determined to liquidate a pool provide notice to NFA and pool

    participants shortly after the pool ceases trading, and file the pool's

    final annual report within 90 days of returning funds to the

    participants. NFA suggested an alternative to the proposed requirement

    that CPOs that have not distributed all funds by the time the final

    report is filed provide notice to NFA when the final distribution is

    completed. NFA proposed that only those CPOs that have not returned

    funds within the time frame specified in the final annual report would

    provide notice to NFA, along with an explanation of why the

    distribution has not been completed. NFA would then monitor these pools

    until all funds are returned.

    The Commission has considered carefully the comments regarding the

    timeframe within which a CPO must provide a final report for a pool

    that has ceased operation and has determined to modify the proposed

    changes to address concerns raised by the commenters, including the

    addition of an option for CPOs that are unable to complete the

    liquidation of a pool in sufficient time to prepare, distribute and

    file the pool's final report within 90 days of the permanent cessation

    of trading. Under the amended regulation, a CPO generally would be

    required to provide a liquidating pool's final report within 90 days of

    the cessation of trading. The final report may contain only the

    Statements of Operations and Changes in Net Assets; an explanation of

    the winding down of the pool's operations; written disclosure that all

    interests in, and assets of, the pool have been redeemed, distributed

    or transferred on behalf of the participants; and, if all funds have

    not been distributed at the time the report is issued, disclosure of

    the value of the assets remaining to be distributed and the expected

    timeframe for their distribution. If the CPO has not completed the

    distribution of funds within the timeframe specified in the final

    report, the CPO will be required to provide notice to NFA and the

    pool's participants containing information about the value of the

    pool's remaining assets, the expected timeframe for liquidation, any

    fees and expenses that will continue to be charged to the pool, and the

    extent to which reports will continue to be provided to participants

    pursuant to the pool's operative documents. The Commission notes that

    the latter requirement is for the purpose of disclosure, and is not

    intended to relieve CPOs of their obligation to continue to comply with

    the periodic and annual reporting requirements. In this connection, the

    Commission notes that MFA requested in its comment letter that CPOs

    that are unable to provide a final annual report within 90 days be

    permitted to provide quarterly rather than monthly periodic account

    statements to participants. Pools operating pursuant to Regulation 4.7

    currently are permitted to provide quarterly statements; CPOs that are

    required to provide monthly account statements may request relief under

    Regulation 4.12(a).

    Both NFA and MFA commented on the waiver provisions of the proposed

    requirement that CPOs be permitted to prepare unaudited final reports

    as long as the CPO obtains from all participants, and files with NFA,

    written waivers of their right to receive an audited report. NFA

    recommended that rather than filing all waivers with NFA, the CPO file

    a certification with NFA that a waiver has been received from each

    participant. The CPO would be required to make the waivers available to

    NFA on request. MFA noted that for pools with many participants,

    obtaining the waivers would be difficult and suggested that the

    Commission instead adopt a negative consent procedure. The Commission

    has determined that it is not in the public interest to permit CPOs to

    provide unaudited reports to participants who are entitled to receive

    audited reports without the affirmative consent of the participants.

    However, it will be sufficient for the CPO to certify to NFA that it

    has obtained waivers from all of the pool's participants, provided that

    the CPO maintain all the waivers and make them available to NFA or the

    Commission upon request.

    Finally, in order to accommodate the appropriate numbering of

    changes to Regulation 4.22(c), the Commission is redesignating existing

    paragraph 4.22(c)(6) as 4.22(c)(8).

    E. Codifying Existing Policies Regarding Special Allocations of

    Ownership Equity, Unrealized Gains and Losses, and Investee Funds'

    Income and Expenses

    The Commission proposed to codify staff interpretations regarding

    reporting in a pool's annual financial report special allocations of

    partnership equity from limited partners to the general partner or any

    other special class of partner; combining gains and losses on regulated

    futures transactions with gains and losses on non-CFTC regulated

    transactions that are part of the same trading strategy in the

    Statement of Operations; and disclosing in the notes to the financial

    statements the amounts of management and incentive fees and expenses

    indirectly incurred as a result of investing in any fund where the

    investment in the fund exceeded five percent of the pool's net asset

    value. One commenter specifically addressed the proposed requirement to

    disclose information on the amounts of income and expenses associated

    with a pool's investments in investee funds. Arthur Bell CPAs noted

    that in some cases, it may not be possible for CPOs to obtain the

    information about investee funds' fees and expenses that would be

    required under proposed Regulation 4.22(c)(5)(i), stating that some

    investee funds are not obligated to report this information, and other

    funds may not maintain records of allocations of management and

    incentive fees or indirect expenses relative to the fund of fund's

    investment. The comment letter from Arthur Bell CPAs suggested that the

    proposed regulation be revised to state that in such cases, a CPO would

    be permitted to disclose that certain information required under this

    section is not available, if the CPO has made a good faith effort to

    obtain the information.

    As noted in the proposing release, Division of Clearing and

    Intermediary Oversight (``DCIO'') staff has encouraged CPOs to disclose

    income and fee information for investee pools for many years, on the

    basis that such information is material for pool participants to

    comprehend fully the investment strategy and fee structure of a

    commodity pool. However, the illustration of investee fund disclosure

    that has been included as an attachment to DCIO's annual guidance

    letter to CPOs allows that in unusual circumstances, a CPO may state

    that it does not have information on specific fees and expenses. In

    order to address the issue noted in the comment, the Commission is

    adopting this regulation generally as proposed, with the addition of an

    option for a CPO that does not have the specific amounts of fees and

    expenses to disclose instead the percentage amounts and computational

    basis for each such fee and include a statement that the CPO is not

    able to obtain the specific fee amounts for this fund.

    [[Page 57589]]

    F. Use of International Financial Reporting Standards in the

    Preparation of Commodity Pool Annual Financial Reports

    Regulation 4.22(d) requires that audited and unaudited financial

    statements of commodity pools, as well as periodic account statements,

    be presented and computed in accordance with GAAP. This provision

    consistently has been interpreted by Commission staff to mean GAAP as

    established in the United States (``U.S. GAAP'').

    The Commission proposed to amend Regulation 4.22(d) to permit CPOs

    that operate commodity pools organized under the laws of a foreign

    jurisdiction to prepare financial statements for such pools using

    International Financial Reporting Standards (``IFRS'') as issued by the

    International Accounting Standards Board in lieu of U.S. GAAP. The

    proposal specified that the IFRS financial statements contain a

    condensed Schedule of Investments as set forth in Statement of

    Accounting Positions 95-2, 01-1, and 03-04 issued by the AICPA; report

    special allocations of partnership equity in accordance with Commission

    Interpretative Letter 94-3; and, in the event that IFRS would require

    that the pool consolidate its financial statements with another entity,

    such as a feeder fund consolidating with its master fund, all

    applicable disclosures required by U.S. GAAP for the feeder must be

    presented with the reporting pool's consolidated financial statements.

    In addition, the use of accounting standards other than U.S. GAAP must

    not conflict with any representations made in offering memoranda or

    similar documents provided to participants or potential participants in

    the pool. The proposal further required that a CPO may claim the above

    relief by filing a notice with NFA within 90 days of the end of the

    commodity pool's fiscal year.

    The NYC Bar commented on two technical aspects of the proposal.

    First, with respect to the timeframe within which a CPO that is seeking

    relief from the U.S. GAAP requirement under proposed Regulation

    4.22(d)(2)(ii), the NYC Bar stated that the proposed regulation and

    accompanying explanatory text were confusing as to when the notice must

    be filed. The NYC Bar suggested that the adopting release clarify that

    a notice claiming relief must be filed within 90 days after the end of

    the pool's fiscal year in order to be effective. The Commission has

    considered the NYC Bar's comments and has amended Regulation

    4.22(d)(2)(ii) to provide that the notice must be filed with NFA within

    90 days after the end of the pool's fiscal year.

    Second, the NYC Bar suggested that the provision in proposed

    Regulation 4.22(d)(2)(i)(C) requiring that the CPO represent that the

    use of IFRS for the preparation of the commodity pool's financial

    statements was not inconsistent with the pool's ``offering memorandum

    or similar document'' be replaced with ``offering memorandum or other

    operative document.'' This suggestion was intended to provide for a

    broader range of operating documents in which such information may be

    provided. The Commission has considered the comment and agrees that

    including the information on the accounting standards to be followed by

    the pool in any operative document that is provided or available to

    participants is consistent with the objectives of the proposed

    regulation, and therefore is adopting a final regulation that requires

    such disclosure in the pool's offering memorandum or any other

    operative document that is made available to participants or

    prospective participants.

    In addition, in developing these final regulations, the Commission

    has noted that the use of IFRS for preparing pool financial statements

    generally would extend to the computations that form the basis for the

    information reported in periodic account statements required by

    Regulations 4.22(a) and 4.7(b)(2). Therefore, the Commission is

    adopting changes to Regulations 4.22(a) and 4.7(b)(2) to permit CPOs

    that have claimed the relief available in Regulation 4.22(d), as

    amended, to present the pool's periodic account statements on the same

    basis as they are computing and presenting the pool's financial

    statements.

    G. GAAP Requirements in Regulation 4.13

    Regulation 4.13 provides an exemption from registration for CPOs

    that operate only one pool at a time, for which no advertising is done

    and no compensation is received; or that operate pools that include no

    more than 15 participants each, and the aggregate subscriptions to all

    pools do not exceed $400,000. Regulation 4.13 further provides an

    exemption from registration for CPOs of pools whose participants are

    SEC ``accredited investors'' \6\ and that limit the pool's trading of

    commodity interests to a de minimis amount, or that limit participation

    in the pool to certain highly sophisticated investors. Regulation

    4.13(c) specifies that, if a CPO that has claimed an exemption from

    registration under Regulation 4.13 distributes an annual report to pool

    participants, the annual report must be presented and computed in

    accordance with GAAP and, if audited by an independent public

    accountant, certified in accordance with Regulation 1.16.

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    \6\ 17 CFR 230.501(a) (2009).

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    The Commission proposed to amend Regulation 4.13(c) to delete the

    requirement that the annual reports for pools for which the CPO has

    claimed exemption from registration under Regulation 4.13 must be

    presented and computed in accordance with GAAP and, if audited by an

    independent public accountant, certified in accordance with Regulation

    1.16. As noted in the Proposed Part 4 Amendments, the annual reports

    are not required by Commission regulations to be prepared, distributed,

    or filed, and therefore the Commission does not need to prescribe the

    form of such reports.

    The Commission did not receive any comments regarding the proposed

    amendments to Regulation 4.13(c). The Commission has determined to

    adopt the amendments as proposed.

    H. Updating References to Financial Schedules

    The Commission proposed to update both the periodic and annual

    reporting provisions of Part 4 to conform with current accounting

    practices with respect to the references to various financial

    schedules. No comments were received on this proposal. Therefore, the

    Commission is adopting amendments to delete references to the Statement

    of Changes in Financial Position, which no longer exists; rename the

    Statement of Income (Loss) as the Statement of Operations; and rename

    the Statement of Changes in Net Asset Value as the Statement of Changes

    in Net Assets.

    IV. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,

    requires that agencies, in proposing rules, consider the impact of

    those rules on small businesses. The Commission has determined

    previously that registered CPOs are not small entities for the purpose

    of the RFA.\7\ The proposed amendments to Regulation 4.7 and Regulation

    4.22 would apply only to registered CPOs. With respect to CPOs exempt

    from registration, the Commission has previously determined that a CPO

    is a small entity if it meets the criteria for exemption from

    registration under current Regulation 4.13(a)(2). The proposed

    amendment to

    [[Page 57590]]

    Regulation 4.13 would remove an existing requirement and does not

    impose any significant burdens. The Commission's proposal solicited

    public comment on this analysis.\8\ No comments were received.

    Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies, pursuant to 5 U.S.C. 605(b), that the action it is taking

    herein will not have a significant economic impact on a substantial

    number of small entities.

    ---------------------------------------------------------------------------

    \7\ 47 FR 18618, 18619 (April 30, 1982).

    \8\ 74 FR 8225 (February 24, 2009).

    ---------------------------------------------------------------------------

    B. Paperwork Reduction Act

    This rulemaking modifies existing regulatory requirements by

    clarifying information that must be included in required periodic and

    annual reports, increasing slightly the burden for this collection of

    information due to including specific fee and expense information in

    annual reports for funds of funds. The proposing release included an

    estimate of the impact of these changes on the paperwork burden under

    existing information collection 3038-0005, and also corrected a

    previous calculation error with respect to the total number of

    respondents. As required by the Paperwork Reduction Act of 1995 (44

    U.S.C. 3507(d)), the Commission submitted a copy of this section to the

    Office of Management and Budget (``OMB'') for its review. No comments

    were received in response to the Commission's invitation in the notice

    of proposed rulemaking \9\ to comment on any change in the potential

    paperwork burden associated with these rule amendments. The information

    collection burdens created by the Commission's proposed rules, which

    were discussed in detail in the proposing release, are identical to the

    information collection burdens of the final rules.

    ---------------------------------------------------------------------------

    \9\ Id.

    ---------------------------------------------------------------------------

    List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Consumer protection, Reporting and

    recordkeeping requirements.

    0

    Accordingly, 17 CFR Chapter I is amended as follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    0

    1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o,

    12a, and 23.

    0

    2. In Sec. 4.7:

    0

    a. Add paragraphs (b)(2)(iii)(A) and (B) and (b)(2)(iv) and (v);

    0

    b. Revise paragraphs (b)(3)(i) introductory text and (b)(3)(i)(B) and

    (C);

    0

    c. Add paragraph (b)(3)(i)(D); and

    0

    d. Revise paragraph (b)(3)(ii).

    The additions and revisions read as follows:

    Sec. 4.7 Exemption from certain part 4 requirements for commodity

    pool operators with respect to offerings to qualified eligible persons

    and for commodity trading advisors with respect to advising qualified

    eligible persons.

    * * * * *

    (b) * * *

    (2) * * *

    (iii)(A) Either the net asset value per outstanding participation

    unit in the exempt pool as of the end of the reporting period, or

    (B) The total value of the participant's interest or share in the

    exempt pool as of the end of the reporting period.

    (iv) Where the pool is comprised of more than one ownership class

    or series, the net asset value of the series or class on which the

    account statement is reporting, and the net asset value per unit or

    value of the participant's share, also must be included in the

    statement required by this paragraph (b)(2); except that, for a pool

    that is a series fund structured with a limitation on liability among

    the different series, the account statement required by this paragraph

    (b)(2) is not required to include the consolidated net asset value of

    all series of the pool.

    (v) A commodity pool operator of a pool that meets the conditions

    specified in Sec. 4.22(d)(2)(i) of this part to present and compute

    the commodity pool's financial statements contained in the Annual

    Report in accordance with International Financial Reporting Standards

    issued by the International Accounting Standards Board and has filed

    notice pursuant to Sec. 4.22(d)(2)(ii) of this part also may use such

    International Financial Reporting Standards in the computation and

    presentation of the account statement.

    (3) Annual report relief. (i) Exemption from the specific

    requirements of Sec. 4.22(c) and (d) of this part; Provided, That

    within 90 calendar days after the end of the exempt pool's fiscal year

    or the permanent cessation of trading, whichever is earlier, the

    commodity pool operator electronically files with the National Futures

    Association and distributes to each participant in lieu of the

    financial information and statements specified by those sections, an

    annual report for the exempt pool, affirmed in accordance with Sec.

    4.22(h) which contains, at a minimum:

    * * * * *

    (B) A Statement of Operations for that year;

    (C) Appropriate footnote disclosure and such further material

    information as may be necessary to make the required statements not

    misleading. For a pool that invests in other funds, this information

    must include, but is not limited to, separately disclosing the amounts

    of income, management and incentive fees associated with each

    investment in an investee fund that exceeds five percent of the pool's

    net assets. The income, management and incentive fees associated with

    an investment in an investee fund that is less than five percent of the

    pool's net assets may be combined and reported in the aggregate with

    the income, management and incentive fees of other investee funds that,

    individually, represent an investment of less than five percent of the

    pool's net assets. If the commodity pool operator is not able to obtain

    the specific amounts of management and incentive fees charged by an

    investee fund, the commodity pool operator must disclose the percentage

    amounts and computational basis for each such fee and include a

    statement that the CPO is not able to obtain the specific fee amounts

    for this fund;

    (D) Where the pool is comprised of more than one ownership class or

    series, information for the series or class on which the financial

    statements are reporting should be presented in addition to the

    information presented for the pool as a whole; except that, for a pool

    that is a series fund structured with a limitation on liability among

    the different series, the financial statements are not required to

    include consolidated information for all series.

    (ii) Except as provided in Sec. 4.22(d)(2) of this part, such

    annual report must be presented and computed in accordance with

    generally accepted accounting principles consistently applied and, if

    certified by an independent public accountant, so certified in

    accordance with Sec. 1.16 of this chapter as applicable.

    * * * * *

    Sec. 4.13 [Amended]

    0

    3. Amend Sec. 4.13 by removing paragraph (c)(2) and redesignating

    paragraph (c)(3) as (c)(2).

    0

    4. In Sec. 4.22:

    0

    a. Revise paragraphs (a) introductory text, (a)(1) introductory text,

    and (a)(2) introductory text;

    0

    b. Add paragraphs (a)(5) and (6);

    [[Page 57591]]

    0

    c. Revise paragraphs (c) introductory text, (c)(4), and (c)(5);

    0

    d. Redesignate paragraph (c)(6) as paragraph (c)(8), and add new

    paragraphs (c)(6) and (7); and

    0

    e. Revise paragraphs (d), (e) and (f)(2).

    The revisons and additions read as follows:

    Sec. 4.22 Reporting to pool participants.

    (a) Except as provided in paragraph (a)(4) or (a)(6) of this

    section, each commodity pool operator registered or required to be

    registered under the Act must periodically distribute to each

    participant in each pool that it operates, within 30 calendar days

    after the last date of the reporting period prescribed in paragraph (b)

    of this section, an Account Statement, which shall be presented in the

    form of a Statement of Operations and a Statement of Changes in Net

    Assets, for the prescribed period. These financial statements must be

    presented and computed in accordance with generally accepted accounting

    principles consistently applied. The Account Statement must be signed

    in accordance with paragraph (h) of this section.

    (1) The portion of the Account Statement which must be presented in

    the form of a Statement of Operations must separately itemize the

    following information:

    * * * * *

    (2) The portion of the Account Statement that must be presented in

    the form of a Statement of Changes in Net Assets must separately

    itemize the following information:

    * * * * *

    (5) Where the pool is comprised of more than one ownership class or

    series, information for the series or class on which the account

    statement is reporting should be presented in addition to the

    information presented for the pool as a whole; except that, for a pool

    that is a series fund structured with a limitation on liability among

    the different series, the account statement is not required to include

    consolidated information for all series.

    (6) A commodity pool operator of a pool that meets the conditions

    specified in paragraph (d)(2)(i) of this section and has filed notice

    pursuant to paragraph (d)(2)(ii) of this section may elect to follow

    the same accounting treatment with respect to the computation and

    presentation of the account statement.

    * * * * *

    (c) Except as provided in paragraph (c)(7) or (c)(8) of this

    section, each commodity pool operator registered or required to be

    registered under the Act must distribute an Annual Report to each

    participant in each pool that it operates, and must electronically

    submit a copy of the Report and key financial balances from the Report

    to the National Futures Association pursuant to the electronic filing

    procedures of the National Futures Association, within 90 calendar days

    after the end of the pool's fiscal year or the permanent cessation of

    trading, whichever is earlier; Provided, however, that if during any

    calendar year the commodity pool operator did not operate a commodity

    pool, the pool operator must so notify the National Futures Association

    within 30 calendar days after the end of such calendar year. The Annual

    Report must be affirmed pursuant to paragraph (h) of this section and

    must contain the following:

    * * * * *

    (4) Statements of Operations, and Changes in Net Assets, for the

    period between--

    (i) The later of:

    (A) The date of the most recent Statement of Financial Condition

    delivered to the National Futures Association pursuant to this

    paragraph (c); or

    (B) The date of the formation of the pool; and

    (ii) The close of the pool's fiscal year, together with Statements

    of Operations, and Changes in Net Assets for the corresponding period

    of the previous fiscal year.

    (5) Appropriate footnote disclosure and such further material

    information as may be necessary to make the required statements not

    misleading. For a pool that invests in other funds, this information

    must include, but is not limited to, separately disclosing the amounts

    of income, management and incentive fees associated with each

    investment in an investee fund that exceeds five percent of the pool's

    net assets. The management and incentive fees associated with an

    investment in an investee fund that is less than five percent of the

    pool's net assets may be combined and reported in the aggregate with

    the income, management and incentive fees of other investee funds that,

    individually, represent an investment of less than five percent of the

    pool's net assets. If the commodity pool operator is not able to obtain

    the specific amounts of management and incentive fees charged by an

    investee fund, the commodity pool operator must disclose the percentage

    amounts and computational basis for each such fee and include a

    statement that the CPO is not able to obtain the specific fee amounts

    for this fund;

    (6) Where the pool is comprised of more than one ownership class or

    series, information for the series or class on which the financial

    statements are reporting should be presented in addition to the

    information presented for the pool as a whole; except that, for a pool

    that is a series fund structured with a limitation on liability among

    the different series, the financial statements are not required to

    include consolidated information for all series.

    (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 Sec.

    4.22(c) or Sec. 4.7(b)(3):

    (i) Statements of Operations and Changes in Net Assets for the

    period between--

    (A) The later of:

    (1) The date of the most recent Statement of Financial Condition

    filed with the National Futures Association pursuant to this paragraph

    (c); or

    (2) The date of the formation of the pool; and

    (B) The close of the pool's fiscal year or the date of the

    cessation of trading, whichever is earlier; and

    (ii)(A) An explanation of the winding down of the pool's operations

    and written disclosure that all interests in, and assets of, the pool

    have been redeemed, distributed or transferred on behalf of the

    participants;

    (B) If all funds have not been distributed or transferred to

    participants by the time that the final report is issued, disclosure of

    the value of assets remaining to be distributed and an approximate

    timeframe of when the distribution will occur. If the commodity pool

    operator does not distribute the remaining pool assets within the

    timeframe specified, the commodity pool operator must provide written

    notice to each participant and to the National Futures Association that

    the distribution of the remaining assets of the pool has not been

    completed, the value of assets remaining to be distributed, and a time

    frame of when the final distribution will occur.

    (C) If the commodity pool operator will not be able to liquidate

    the pool's assets in sufficient time to prepare, file and distribute

    the final annual report for the pool within 90 days of the permanent

    cessation of trading, the commodity pool operator must provide written

    notice to each participant and to National Futures Association

    disclosing:

    (1) The value of investments remaining to be liquidated, the

    timeframe within which liquidation is expected to occur, any

    impediments to liquidation, and the nature and amount

    [[Page 57592]]

    of any fees and expenses that will be charged to the pool prior to the

    final distribution of the pool's funds;

    (2) Which financial reports the commodity pool operator will

    continue to provide to pool participants from the time that trading

    ceased until the final annual report is distributed, and the frequency

    with which such reports will be provided, pursuant to the pool's

    operative documents; and

    (3) The timeframe within which the commodity pool operator will

    provide the final report.

    (iii) A report filed pursuant to this paragraph (c)(7) that would

    otherwise be required by this paragraph (c) is not required to be

    audited in accordance with paragraph (d) of this section if the

    commodity pool operator obtains from all participants written waivers

    of their rights to receive an audited Annual Report, and at the time of

    filing the Annual Report with National Futures Association, certifies

    that it has received waivers from all participants. The commodity pool

    operator must maintain the waivers in accordance with Sec. 1.31 of

    this chapter and must make the waivers available to the Commission or

    National Futures Association upon request.

    * * * * *

    (d)(1) The financial statements in the Annual Report must be

    presented and computed in accordance with generally accepted accounting

    principles consistently applied and must be audited by an independent

    public accountant. The requirements of Sec. 1.16(g) of this chapter

    shall apply with respect to the engagement of such independent public

    accountants, except that any related notifications to be made may be

    made solely to the National Futures Association, and the certification

    must be in accordance with Sec. 1.16 of this chapter, except that the

    following requirements of that section shall not apply:

    (i) The audit objectives of Sec. 1.16(d)(1) concerning the

    periodic computation of minimum capital and property in segregation;

    (ii) All other references in Sec. 1.16 to the segregation

    requirements; and

    (iii) Section 1.16(c)(5), (d)(2), (e)(2), and (f).

    (2)(i) The financial statements in the Annual Report required by

    this section or by Sec. 4.7(b)(3) may be presented and computed in

    accordance with International Financial Reporting Standards issued by

    the International Accounting Standards Board if the following

    conditions are met:

    (A) The pool is organized under the laws of a foreign jurisdiction;

    (B) The Annual Report will include a condensed schedule of

    investments, or, if required by the alternate accounting standards, a

    full schedule of investments;

    (C) The preparation of the pool's financial statements under

    International Financial Reporting Standards is not inconsistent with

    representations set forth in the pool's offering memorandum or other

    operative document that is made available to participants;

    (D) Special allocations of ownership equity will be reported in

    accordance with Sec. 4.22(e)(2); and

    (E) In the event that the International Financial Reporting

    Standards require consolidated financial statements for the pool, such

    as a feeder fund consolidating with its master fund, all applicable

    disclosures required by generally accepted accounting principles for

    the feeder fund must be presented with the reporting pool's

    consolidated financial statements.

    (ii) The commodity pool operator of a pool that meets the

    conditions specified in this paragraph (d)(2) may claim relief from the

    requirement in paragraph (d)(1) of this section by filing a notice with

    the National Futures Association, within 90 calendar days after the end

    of the pool's fiscal year.

    (A) The notice must contain the name, main business address, main

    telephone number and the National Futures Association registration

    identification number of the commodity pool operator, and name and the

    identification number of the commodity pool.

    (B) The notice must include representations regarding the pool's

    compliance with each of the conditions specified in Sec. 4.22(d)(2)(A)

    through (D), and, if applicable, (E); and

    (C) The notice must be signed by the commodity pool operator in

    accordance with paragraph (h) of this section.

    (e)(1) The Statement of Operations required by this section must

    itemize brokerage commissions, management fees, advisory fees,

    incentive fees, interest income and expense, total realized net gain or

    loss from commodity interest trading, and change in unrealized net gain

    or loss on commodity interest positions during the pool's fiscal year.

    Gains and losses on commodity interests need not be itemized by

    commodity or by specific delivery or expiration date.

    (2)(i) Any share of a pool's profits or transfer of a pool's equity

    which exceeds the general partner's or any other class's share of

    profits computed on the general partner's or other class's pro rata

    capital contribution are ``special allocations.'' Special allocations

    of partnership equity or other interests must be recognized in the

    pool's Statement of Operations in the same period as the net income,

    interest income, or other basis of computation of the special

    allocation is recognized. Special allocations must be recognized and

    classified either as an expense of the pool or, if not recognized as an

    expense of the pool, presented in the Statement of Operations as a

    separate, itemized allocation of the pool's net income to arrive at net

    income available for pro rata distribution to all partners.

    (ii) Special allocations of ownership interest also must be

    reported separately in the Statement of Partners' Equity, in addition

    to the pro-rata allocations of net income, as to each class of

    ownership interest.

    (3) Realized gains or losses on regulated commodities transactions

    presented in the Statement of Operations of a commodity pool may be

    combined with realized gains or losses from trading in non-commodity

    interest transactions, provided that the gains or losses to be combined

    are part of a related trading strategy. Unrealized gains or losses on

    open regulated commodity positions presented in the Statement of

    Operations of a commodity pool may be combined with unrealized gains or

    losses from open positions in non-commodity positions, provided that

    the gains or losses to be combined are part of a related trading

    strategy.

    (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 either paragraph

    (c) of this section or Sec. 4.7(b)(3)(i), as a result of the pool

    investing in another collective investment vehicle, it may claim an

    extension of time under the following conditions:

    (i) The commodity pool operator must, within 90 calendar days of

    the end of the pool's fiscal year, file a notice with the National

    Futures Association, except as provided in paragraph (f)(2)(v) of this

    section.

    (ii) The notice must contain the name, main business address, main

    telephone number and the National Futures Association registration

    identification number of the commodity pool operator, and name and the

    identification number of the commodity pool.

    (iii) The notice must state the date by which the Annual Report

    will be distributed and filed (the ``Extended Date''), which must be no

    more than 180 calendar days after the end of the pool's fiscal year.

    The Annual Report must be distributed and filed by the Extended Date.

    [[Page 57593]]

    (iv) The notice must include representations by the commodity pool

    operator that:

    (A) The pool for which the Annual Report is being prepared has

    investments in one or more collective investment vehicles (the

    ``Investments'');

    (B) For all reports prepared under paragraph (c) of this section

    and for reports prepared under Sec. 4.7(b)(3)(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

    (C) The information specified by the accountant cannot be obtained

    in sufficient time for the Annual Report to be prepared, audited, and

    distributed before the Extended Date.

    (D) For unaudited reports prepared under Sec. 4.7(b)(3)(i), the

    commodity pool operator has been informed by the operators of the

    Investments that specified information required to complete the pool's

    annual report cannot be obtained in sufficient time for the Annual

    Report to be prepared and distributed before the Extended Date.

    (v) For each fiscal year following the filing of the notice

    described in paragraph (f)(2)(i) of this section, for a particular

    pool, it shall be presumed that the particular pool continues to invest

    in another collective investment vehicle and the commodity pool

    operator may claim the extension of time; Provided, however, that if

    the particular pool is no longer investing in another collective

    investment vehicle, then the commodity pool operator must file

    electronically with the National Futures Association an Annual Report

    within 90 days after the pool's fiscal year-end accompanied by a notice

    indicating the change in the pool's status.

    (vi) Any notice or statement filed pursuant to this paragraph

    (f)(2) must be signed by the commodity pool operator in accordance with

    paragraph (h) of this section.

    * * * * *

    Issued in Washington, DC, on November 2, 2009, by the

    Commission.

    David Stawick,

    Secretary of the Commission.

    [FR Doc. E9-26789 Filed 11-6-09; 8:45 am]

    Last Updated: November 9, 2009



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