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2012-21606

  • Federal Register, Volume 77 Issue 172 (Wednesday, September 5, 2012)[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]

    [Rules and Regulations]

    [Pages 54355-54360]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2012-21606]

    [[Page 54355]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 4

    RIN 3038-AD49

    Amendments to Commodity Pool Operator and Commodity Trading

    Advisor Regulations Resulting From the Dodd-Frank Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rules.

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    SUMMARY: The Commodity Futures Trading Commission (Commission) is

    amending its regulations governing the operations and activities of

    commodity pool operators (CPOs) and commodity trading advisors (CTAs)

    in order to have those regulations reflect changes made to the

    Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reform and

    Consumer Protection Act (Dodd-Frank Act).

    DATES: Effective Date: November 5, 2012.

    FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,

    or Christopher W. Cummings, Special Counsel, Division of Swap Dealer

    and Intermediary Oversight, 1155 21st Street NW., Washington, DC 20581.

    Telephone number: 202-418-6700 and electronic mail: bgold@cftc.gov or

    ccummings@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a

    comprehensive new regulatory framework for swaps and security-based

    swaps. The goal of this legislation was to reduce risk, increase

    transparency, and promote market integrity within the financial system

    by, among other things: (1) Providing for the registration and

    comprehensive regulation of swap dealers (SDs) and major swap

    participants (MSPs); (2) imposing clearing and trade execution

    requirements on standardized derivative products; (3) creating robust

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    Commission's rulemaking and enforcement authorities with respect to,

    among others, all registered entities and intermediaries subject to the

    oversight of the Commission. Among the changes made by the Dodd-Frank

    Act to the CEA were to include within the CPO definition the operator

    of a collective investment vehicle that trades swaps, and to include

    within the CTA definition a person who provides advice concerning

    swaps.\4\

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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed through the Commission's Web site,

    www.cftc.gov.

    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \3\ 7 U.S.C. 1 et seq. (2006). The Commission's regulations are

    found at 17 CFR part 1 et seq. (2012). Both the CEA and the

    Commission's regulations also may be accessed through the

    Commission's Web site.

    \4\ See Section 721(a) of the Dodd-Frank Act, which re-organized

    (and in some cases amended) existing definitions in, and added new

    definitions to, Section 1a of the CEA. The CPO and CTA definitions,

    as amended, are codified at CEA sections 1a(11) and 1a(12),

    respectively.

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    B. The Proposed Amendments to Part 4

    Part 4 of the Commission's regulations sets forth a comprehensive

    regulatory framework for the operations and activities of CPOs and

    CTAs. It includes disclosure, reporting and recordkeeping requirements

    for registered CPOs and CTAs, registration and compliance exemptions

    for CPOs and CTAs, and other provisions, including anti-fraud

    provisions, applicable to CPOs and CTAs, regardless of registration

    status. To ensure that the Part 4 regulations applied to CPOs and CTAs

    in the context of these intermediaries' involvement with swap

    transactions, on March 3, 2011, the Commission proposed certain

    amendments to Part 4 (Proposal).\5\

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    \5\ 76 FR 11701.

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    As the Commission explained in the Proposal, because many of the

    existing Part 4 regulations generally applied to CPOs and CTAs, they

    would continue to be applicable to CPOs and CTAs with respect to their

    swap activities without the need for amendment thereto. The Commission

    noted that in other instances, however, the text of certain existing

    Part 4 regulations was specific to activities involving futures

    contracts, commodity options, and off-exchange retail foreign currency

    (``commodity interests''), and it did not include, refer to or

    otherwise take account of swap activities. As the Commission stated:

    ``The Proposal [was] intended to clarify and ensure that the

    requirements governing the operations and activities of CPOs and CTAs

    continue to apply for these intermediaries in the context of their

    involvement with swap transactions.'' \6\ Accordingly, the Commission

    proposed to amend Regulations 4.7, 4.10, 4.22, 4.23, 4.24 4.30, 4.33

    and 4.34 to include in each of these regulations a reference to swaps

    or swap activities.

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    \6\ 76 FR 11701. Part 4 applies to CPOs with respect to their

    activities affecting pool participants and to CTAs with respect to

    their activities affecting clients. Depending on the nature of its

    activities, a CPO or CTA may also come within the definition of the

    term ``swap dealer'' or ``major swap participant'' in new CEA

    Section 1a(49) or 1a(33), respectively. As directed by the Dodd-

    Frank Act, the Commission has adopted new regulations that establish

    business conduct standards for SDs and MSPs. See 77 FR 9734 (Feb.

    17, 2012). These new regulations apply to SDs and MSPs with respect

    to the counterparties with whom they transact swap business, and

    govern different activity than that to which the Part 4 regulations

    apply.

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    II. Comments on the Proposal

    The Commission received two comment letters on the Proposal,\7\

    each of which supported the Proposal. One of these letters stated that

    the Proposal ``should act to reduce risk and increase its transparency,

    and promote market integrity by ensuring that all entities are

    consistently regulated to the extent that their trading and other

    activities pertain to swaps.'' \8\ The other letter urged the

    Commission ``to work quickly and diligently on writing these rules and

    putting them in place as soon as possible.'' \9\

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    \7\ These comment letters currently are available on the

    Commission's Web site.

    \8\ Comment letter from Chris Barnard (Mar. 29, 2011).

    \9\ Comment letter from Kyle Vandergrift (Apr. 20, 2011).

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    III. The Final Regulations

    In light of the supportive comments it received, with one exception

    the Commission is adopting the amendments to the Part 4 regulations it

    proposed. That exception concerns the proposed amendment to Regulation

    4.10(a) that, for the purposes of Part 4, would have expanded the

    definition of the term ``commodity interest'' to include ``swaps.''

    This proposal was superseded by a proposed amendment to Regulation

    1.3(yy) that, for the purposes of all of the Commission's regulations,

    would define the term ``commodity interest'' to include ``swaps.'' \10\

    Accordingly, the Commission is considering the proposed definition of

    the term ``commodity interest'' in connection with its consideration of

    the comment letters it received on its proposed amendment to Regulation

    1.3(yy).

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    \10\ See 76 FR 33066, 33069-70 (June 7, 2011).

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    A. Adding ``Swap'' Terms to Part 4

    As proposed, the Commission is inserting ``swap,'' ``swap

    transaction'' or a similar term at various regulations throughout Part

    4. See the amendments to Regulations 4.23(a)(1), 4.24(g), (h)(1), and

    (i)(2) for CPOs and Regulations 4.34(g) and 4.34(i)(2) for CTAs. For

    [[Page 54356]]

    example, Regulation 4.23(a)(1) is being amended to include ``swap type

    and counterparty'' in the itemized daily record that a CPO must make

    and keep with respect to a pool's commodity interest transactions.

    At other Part 4 regulations, the Commission has included as

    proposed the term ``swap dealer'' among the persons for whom a CPO or

    CTA must provide information in its Disclosure Document and for whom a

    CPO must provide information in a pool's periodic Account Statement.

    See the amendments to Regulations 4.22(a)(3), 4.24(j)(1), (j)(3),

    (l)(1), and (l)(2) for CPOs and Regulations 4.34(j)(1), (j)(3), (k)(1)

    and (k)(2) for CTAs. For example, Regulations 4.24(j) and 4.34(j) are

    being amended to include SDs in the group of persons as to which

    conflicts of interest must be disclosed by CPOs and CTAs.

    Similarly, the Commission has included as proposed ``a registered

    swap dealer'' among the persons listed in Regulation 4.7(a)(2) that do

    not have to satisfy a portfolio requirement in order to be a qualified

    eligible person (QEP), such that a CPO or CTA that has claimed relief

    under Regulation 4.7 may accept the SD as a pool participant or

    advisory client without regard to the size of its investment portfolio.

    As the Commission explained, ``this would be consistent with the

    current treatment of other financial intermediaries registered with the

    Commission (such as futures commission merchants [FCMs] and retail

    foreign exchange dealers [RFEDs]) as QEPs under Regulation 4.7(a)(2).''

    \11\

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    \11\ 76 FR at 11702.

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    B. Including Books and Records Relating to Swap Transactions within

    Part 4

    The Commission has adopted as proposed amendments to Part 4 that

    require a CPO or CTA to make and keep certain books and records

    generated by the swap transactions in which it engages on behalf of not

    only its pool participants and clients, but also itself. See the

    amendments to Regulations 4.23(a)(7) and (b)(1) for CPOs and

    Regulations 4.33(a)(6) and (b)(1) for CTAs. The amendments to

    Regulations 4.23(a)(7) and 4.33(a)(6) require CPOs and CTAs to retain

    each acknowledgment of a swap transaction received from an SD. The

    amendments to Regulations 4.23(b)(1) and 4.33(b)(1) make clear that if

    a CPO or CTA was a counterparty to a swap transaction, then it would be

    subject to the swap data recordkeeping and reporting requirements of

    Part 45 of the Commission's regulations, as applicable.\12\

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    \12\ See Regulation 45.2, which requires SDs and MSPs to keep

    full, complete and systematic records, together with all pertinent

    data and memoranda, of all activities relating to their business

    with respect to swaps, as prescribed by the Commission. (Non-SD and

    non-MSP counterparties subject to the Commission's jurisdiction have

    a similar requirement, but only with respect to each swap to which

    they are a counterparty.)

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    C. Regulation 4.30

    Subject to certain exceptions, Regulation 4.30 provides that no CTA

    may solicit, accept or receive from an existing or prospective client

    funds, securities or other property in the trading advisor's name (or

    extend credit in lieu thereof) to purchase, margin, guarantee or secure

    any commodity interest of the client.

    The Commission proposed to amend Regulation 4.30 by adding to the

    list of intermediaries then excepted from the foregoing prohibition--

    i.e., registered FCMs, leverage transaction merchants and RFEDs--a

    registered SD in connection with a swap that was not cleared through a

    derivatives clearing organization. The Commission explained that this

    amendment to Regulation 4.30 was necessary ``[b]ecause swap dealers

    will generally fall within the statutory definition of CTA, and because

    a swap dealer engaging in uncleared swap transactions may be accepting

    funds or other property from its counterparties as variation and

    initial margin payments.'' \13\

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    \13\ 76 FR at 11702. In this regard, the Commission has proposed

    regulations addressing the circumstances in which non-bank SDs may

    be required or permitted to accept margin payments in uncleared swap

    transactions. See 76 FR 23732 (Apr. 28, 2011). Accordingly, this

    amendment to Regulation 4.30 should not be interpreted to impose or

    authorize any such margin requirements.

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    Subsequently, the Commission amended Regulation 4.6 to provide

    therein for an exclusion from the definition of the term ``commodity

    trading advisor'' for an SD, provided the commodity interest and swap

    advisory activities of the SD are solely incidental to the conduct of

    its business as an SD.\14\ Because not all SDs may always meet the

    ``solely incidental'' proviso, the Commission has determined to amend

    Regulation 4.30 as proposed, such that any registered SD who is a CTA

    is not subject to the regulation's operational prohibition.

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    \14\ See 77 FR 9734, 9739-40 (Feb. 17, 2012).

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    D. Deleting Regulation 4.32

    The Commission has deleted as proposed Regulation 4.32, which

    concerned trading by a registered CTA on or subject to the rules of a

    derivatives transaction execution facility (DTEF) for non-institutional

    customers. As the Commission explained:

    Section 734(a) of the Dodd-Frank Act repeals Section 5a of the

    CEA, which is the section establishing and providing for the

    regulation of DTEFs. Accordingly, because subsequent to the

    effective date of the Dodd-Frank Act Regulation 4.32 will no longer

    have a statutory basis or purpose, the Proposal would remove and

    reserve Regulation 4.32.\15\

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    \15\ 76 FR at 11702.

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    IV. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \16\ requires federal

    agencies to consider the impact of those rules on small businesses.\17\

    A regulatory flexibility analysis or certification typically is

    required for ``any rule for which the agency publishes a general notice

    of proposed rulemaking pursuant to'' the notice-and-comment provisions

    of the Administrative Procedure Act, 5 U.S.C. 553(b).\18\ The

    amendments to the Part 4 regulations contained herein will affect CPOs

    and CTAs. The Commission stated in the Proposal that:

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    \16\ 5 U.S.C. 601 et seq.

    \17\ By its terms, the RFA does not apply to ``individuals.''

    See 48 FR 14933, n. 115 (Apr. 6, 1983).

    \18\ 5 U.S.C. 601(2), 603, 604 and 605.

    With respect to CPOs, the Commission previously has determined

    that a CPO is a small entity for the purpose of the RFA if it meets

    the criteria for an exemption from registration under Regulation

    4.13(a)(2). Thus, because the Proposal applies to registered CPOs,

    the RFA is not applicable to it. As for CTAs, the Commission

    previously has stated that it would evaluate within the context of a

    particular rule proposal whether all or some affected CTAs would be

    considered to be small entities and, if so, the economic impact on

    them of the particular rule. In this regard, the Commission notes

    that the Proposal applies to registered CTAs. Moreover, the Proposal

    would not have a significant economic impact on any CPO or CTA who

    would be affected thereby, because it would merely bring within the

    current Part 4 regulatory structure of disclosure, reporting and

    recordkeeping information with respect to swap activities. It would

    not impose any additional operative requirements or otherwise direct

    or confine the activities of CPOs and CTAs.\19\

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    \19\ 76 FR at 11703.

    The Commission did not receive any comments regarding its RFA

    analysis in the Proposal. Accordingly, pursuant to 5 U.S.C. 605(b), the

    Chairman, on behalf of the Commission, certifies that the amendments to

    the Part 4 regulations being published today by this Federal Register

    release will not have a significant economic impact on a substantial

    number of small entities.

    [[Page 54357]]

    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \20\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. The amendments to the Part 4

    regulations will not require any new collection of information from any

    entity that is subject to them. Additionally, the Commission did not

    receive any comments regarding its PRA analysis in the Proposal.

    Accordingly, for purposes of the PRA, the Chairman, on behalf of the

    Commission, certifies that the amendments to the Part 4 regulations

    being published today by this Federal Register release will not impose

    any new reporting or recordkeeping requirements.

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    \20\ 44 U.S.C. 3501 et seq.

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    C. Cost-Benefit Analysis

    Prior to the passage of the Dodd-Frank Act, the Part 4 regulations

    did not apply to swap-related activities. This pre-Dodd-Frank Act

    construct provides a useful reference point from which to compare the

    costs and benefits of the proposed regulations to the alternative where

    the Commission would not be taking any action to incorporate swap-

    related information into Part 4.

    As a result of the Dodd-Frank Act including swap-related activities

    among the activities on which the CPO and CTA definitions are based,

    CPOs and CTAs who engage in swap-related activities are now subject to

    Part 4. In various places, however, the wording of particular

    provisions of Part 4 was incomplete or inconsistent in the context of

    CPOs and CTAs involved with swap transactions; there is no regulatory

    need for the prohibition in Regulation 4.30 against directly accepting

    margin payments to apply to an SD; and the subject matter of Regulation

    4.32 (trading on DTEFs) was rendered moot by the Dodd-Frank Act. Under

    such a scenario, the costs to the public of inaction would be, in

    qualitative terms, failure to receive Part 4 disclosure, reporting and

    recordkeeping protections from their CPOs and CTAs with regard to their

    swap activities, an unnecessary burden on SDs, and regulatory text that

    is obsolete. The costs of these amendments, if any, will be minimal--

    limited to the costs associated with including information related to

    swaps in the Disclosure Documents, Account Statements and books and

    records already required of CPOs and CTAs under existing Part 4

    regulations. Moreover, this information should be readily available to

    CPOs and CTAs. The costs cannot be feasibly quantified or estimated,

    because they will vary according to each registrant's internal

    processes and registration category. In contrast, the amendments will

    yield significant if unquantifiable benefit to the public, relative to

    inaction, by clarifying the application of Part 4 and the obligations

    of CPOs and CTAs to their participants and clients, respectively.

    In the CEA,\21\ Congress provided the Commission with the authority

    to promulgate regulations that, among other things, are reasonably

    necessary to effectuate any of the provisions or to accomplish any of

    the purposes of the CEA. In accordance with Section 15(a) of the CEA,

    it is in this post-Dodd-Frank Act environment that the Commission

    considers the costs and benefits of its actions before promulgating a

    regulation under the CEA or issuing an order.

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    \21\ See 7 U.S.C. 12(a)(5).

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    Section 15(a) specifies that the costs and benefits shall be

    evaluated in light of the following five broad areas of market and

    public concern: (1) Protection of market participants and the public;

    (2) efficiency, competitiveness, and financial integrity of futures

    markets; (3) price discovery; (4) sound risk management practices; and

    (5) other public interest considerations.

    In light of the provisions of the Dodd-Frank Act that expand the

    ``commodity pool operator'' and ``commodity trading advisor''

    definitions to include swap-related activities, these amendments

    incorporate into the existing Part 4 framework regulations to take

    account of the swap-related activities of CPOs and CTAs. Specifically,

    the amendments subject CPOs and CTAs when involved with swap

    transactions to the same Part 4 requirements that apply when they are

    involved with commodity interest transactions, to the extent

    regulations in place at the time of the enactment of the Dodd-Frank Act

    did not clearly do so.\22\ The revision to Regulation 4.30 excepts SDs

    from the prohibition on accepting margin to treat them equivalently

    with FCMs and RFEDs. In addition, these amendments delete Regulation

    4.32, pertaining to trading by registered CTAs on DTEFs, given the

    repeal by the Dodd-Frank Act of CEA Section 5a, which authorized such

    trading facilities.

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    \22\ As is explained above, when the Dodd-Frank Act extended the

    statutory definitions of the terms ``commodity pool operator'' and

    ``commodity trading advisor,'' those existing Part 4 regulations

    that applied generally to CPOs and CTAs became applicable to CPOs

    and CTAs captured by the expanded statutory definitions, without

    further amendment. Certain other existing Part 4 regulations,

    however, spoke specifically to activities involving commodity

    interests, but not to swap activities. Accordingly, this rulemaking

    amends this latter subset of Part 4 regulations by making them

    applicable to swap activities, thus closing the regulatory gap that

    would otherwise exist.

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    In the Proposal the Commission sought public comment on the costs

    and benefits of its contemplated amendments to Part 4.\23\ The

    Commission did not receive any comments in response to this request.

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    \23\ 76 FR 11701, 11703.

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    Section 15(a) Factors

    (1) Protection of market participants and the public.

    The Commission believes the amendments to the Part 4 regulations

    will provide protection to market participants and the public by

    requiring CPOs and CTAs to include information on swap intermediaries

    and activities in the disclosure, reporting and recordkeeping framework

    under Part 4. For example, Regulation 4.24(j) has provided protections

    to commodity pool participants by requiring their CPO to disclose any

    actual or potential conflict of interest with any FCM with whom their

    pool was required to maintain its account. The amendment to Regulation

    4.24(j) the Commission has adopted will provide similar protections, by

    requiring the CPO to disclose any actual or potential conflict of

    interest with any SD with whom their pool maintains its swap positions.

    (2) Efficiency, competitiveness, and financial integrity of the

    futures markets.

    The Commission does not expect the amendments to Part 4 to have an

    impact on the efficiency, competitiveness and financial integrity of

    the commodity interest markets.

    (3) Price Discovery.

    The Commission does not expect the amendments to Part 4 to have an

    impact on the market's price discovery functions.

    (4) Sound risk management practices.

    The Commission does not expect the amendments to Part 4 to have an

    impact on risk management practices by CPOs, CTAs and other Commission

    registrants. However, the requirement that CPOs and CTAs account for

    SD, MSP and swap activities when complying with their disclosure,

    reporting and recordkeeping requirements under Part 4 will benefit

    prospective and actual pool participants and clients by ensuring that

    these participants and clients are afforded the same customer

    protections as participants and clients

    [[Page 54358]]

    in all other commodity pools and managed account programs.

    (5) Other public interest considerations.

    The Commission has not identified any other public interest

    considerations regarding the costs and benefits of the amendments to

    Part 4.

    List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Customer protection, Reporting and

    recordkeeping requirements, Swaps.

    For the reasons presented above, the Commission hereby amends

    Chapter I of Title 17 of the Code of Federal Regulations as follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    0

    1. The authority citation for Part 4 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 23,

    as amended by Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (July 21,

    2010).

    0

    2. Section 4.7 is amended by adding paragraph (a)(2)(i)(C) to read as

    follows:

    Sec. 4.7 Exemption from certain part 4 requirements for commodity

    pool operators with respect to offerings to qualified eligible persons

    and for commodity trading advisors with respect to advising qualified

    eligible persons.

    * * * * *

    (a) * * *

    (2) * * *

    (i) * * *

    (C) A swap dealer registered pursuant to section 4s(a)(1) of the

    Act, or a principal thereof;

    * * * * *

    0

    3. Section 4.22 is amended by revising paragraph (a)(3) to read as

    follows:

    Sec. 4.22 Reporting to pool participants.

    (a) * * *

    (3) The Account Statement must also disclose any material business

    dealings between the pool, the pool's operator, commodity trading

    advisor, futures commission merchant, retail foreign exchange dealer,

    swap dealer, or the principals thereof that previously have not been

    disclosed in the pool's Disclosure Document or any amendment thereto,

    other Account Statements or Annual Reports.

    * * * * *

    0

    4. Section 4.23 is amended by:

    0

    a. Revising paragraphs (a)(1) and (a)(7); and

    0

    b. Revising paragraph (b)(1), to read as follows:

    Sec. 4.23 Recordkeeping.

    * * * * *

    (a) * * *

    (1) An itemized daily record of each commodity interest transaction

    of the pool, showing the transaction date, quantity, commodity

    interest, and, as applicable, price or premium, delivery month or

    expiration date, whether a put or a call, strike price, underlying

    contract for future delivery or underlying physical, swap type and

    counterparty, the futures commission merchant and/or retail foreign

    exchange dealer carrying the account and the introducing broker, if

    any, whether the commodity interest was purchased, sold (including, in

    the case of a retail forex transaction, offset), exercised, expired

    (including, in the case of a retail forex transaction, whether it was

    rolled forward), and the gain or loss realized.

    * * * * *

    (7) Copies of each confirmation or acknowledgment of a commodity

    interest transaction of the pool, and each purchase and sale statement

    and each monthly statement for the pool received from a futures

    commission merchant, retail foreign exchange dealer or swap dealer.

    * * * * *

    (b) * * *

    (1) An itemized daily record of each commodity interest transaction

    of the commodity pool operator and each principal thereof, showing the

    transaction date, quantity, commodity interest, and, as applicable,

    price or premium, delivery month or expiration date, whether a put or a

    call, strike price, underlying contract for future delivery or

    underlying physical, swap type and counterparty, the futures commission

    merchant or retail foreign exchange dealer carrying the account and the

    introducing broker, if any, whether the commodity interest was

    purchased, sold, exercised, or expired, and the gain or loss realized;

    Provided, however, that if the pool operator is a counterparty to a

    swap, it must comply with the swap data recordkeeping and reporting

    requirements of Part 45 of this chapter, as applicable.

    * * * * *

    0

    5. Section 4.24 is amended by:

    0

    a. Revising paragraph (g);

    0

    b. Revising paragraph (h)(1)(i);

    0

    c. Revising paragraph (i)(2)(xii);

    0

    d. Revising paragraphs (j)(1)(vi) and (j)(3); and

    0

    e. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and

    (l)(2)(i), to read as follows:

    Sec. 4.24 General disclosures required.

    * * * * *

    (g) Principal risk factors. A discussion of the principal risk

    factors of participation in the offered pool. This discussion must

    include, without limitation, risks relating to volatility, leverage,

    liquidity, counterparty creditworthiness, as applicable to the types of

    trading programs to be followed, trading structures to be employed and

    investment activity (including retail forex and swap transactions)

    expected to be engaged in by the offered pool.

    (h) * * *

    (1) * * *

    (i) The approximate percentage of the pool's assets that will be

    used to trade commodity interests, securities and other types of

    interests, categorized by type of commodity or market sector, type of

    swap, type of security (debt, equity, preferred equity), whether traded

    or listed on a regulated exchange market, maturity ranges and

    investment rating, as applicable;

    * * * * *

    (i) * * *

    (2) * * *

    (xii) Any costs or fees included in the spread between bid and

    asked prices for retail forex or, if known, swap transactions; and

    * * * * *

    (j) * * *

    (1) * * *

    (vi) Any other person providing services to the pool, soliciting

    participants for the pool, acting as a counterparty to the pool's

    retail forex or swap transactions, or acting as a swap dealer with

    respect to the pool.

    * * * * *

    (3) Included in the description of such conflicts must be any

    arrangement whereby a person may benefit, directly or indirectly, from

    the maintenance of the pool's account with the futures commission

    merchant and/or retail foreign exchange dealer and/or from the

    maintenance of the pool's swap positions with a swap dealer, or from

    the introduction of the pool's account to a futures commission merchant

    and/or retail foreign exchange dealer and/or swap dealer by an

    introducing broker (such as payment for order flow or soft dollar

    arrangements) or from an investment of pool assets in investee pools or

    funds or other investments.

    * * * * *

    (l) * * *

    (1) * * *

    (iii) The pool's futures commission merchants and/or retail foreign

    exchange dealers and/or swap dealers and its introducing brokers, if

    any.

    (2) With respect to a futures commission merchant and/or retail

    [[Page 54359]]

    foreign exchange dealer and/or swap dealer or an introducing broker, an

    action will be considered material if:

    (i) The action would be required to be disclosed in the notes to

    the futures commission merchant's, retail foreign exchange dealer's,

    swap dealer's or introducing broker's financial statements prepared

    pursuant to generally accepted accounting principles;

    * * * * *

    0

    6. Section 4.30 is revised to read as follows:

    Sec. 4.30 Prohibited activities.

    (a) Except as provided in paragraph (b) of this section, no

    commodity trading advisor may solicit, accept or receive from an

    existing or prospective client funds, securities or other property in

    the trading advisor's name (or extend credit in lieu thereof) to

    purchase, margin, guarantee or secure any commodity interest of the

    client.

    (b) The prohibition in paragraph (a) of this section shall not

    apply to:

    (1) A futures commission merchant that is registered as such under

    the Act;

    (2) A leverage transaction merchant that is registered as a

    commodity trading advisor under the Act;

    (3) A retail foreign exchange dealer that is registered as such

    under the Act; or

    (4) A swap dealer that is registered as such under the Act, with

    respect to funds, securities or other property accepted to purchase,

    margin, guarantee or secure any swap that is not cleared through a

    derivatives clearing organization.

    Sec. 4.32 [Removed and Reserved]

    0

    7. Section 4.32 is removed and reserved.

    0

    8. Section 4.33 is amended by:

    0

    a. Revising paragraph (a)(6); and

    0

    b. Revising paragraph (b)(1), to read as follows:

    Sec. 4.33 Recordkeeping.

    * * * * *

    (a) * * *

    (6) Copies of each confirmation or acknowledgment of a commodity

    interest transaction, and each purchase and sale statement and each

    monthly statement received from a futures commission merchant, a retail

    foreign exchange dealer or a swap dealer.

    * * * * *

    (b) * * *

    (1) An itemized daily record of each commodity interest transaction

    of the commodity trading advisor, showing the transaction date,

    quantity, commodity interest, and, as applicable, price or premium,

    delivery month or expiration date, whether a put or a call, strike

    price, underlying contract for future delivery or underlying physical,

    swap type and counterparty, the futures commission merchant and/or

    retail foreign exchange dealer carrying the account and the introducing

    broker, if any, whether the commodity interest was purchased, sold

    (including, in the case of a retail forex transaction, offset),

    exercised, expired (including, in the case of a retail forex

    transaction, whether it was rolled forward), and the gain or loss

    realized; Provided, however, that if the trading advisor is a

    counterparty to a swap, it must comply with the swap data recordkeeping

    and reporting requirements of Part 45 of this chapter, as applicable.

    * * * * *

    0

    9. Section 4.34 is amended by:

    0

    a. Revising paragraph (g);

    0

    b. Revising paragraph (i)(2);

    0

    c. Revising paragraph (j)(3); and

    0

    d. Revising paragraphs (k)(1)(iii), (k)(2) introductory text and

    (k)(2)(i), to read as follows:

    Sec. 4.34 General disclosures required.

    * * * * *

    (g) Principal risk factors. A discussion of the principal risk

    factors of this trading program. This discussion must include, without

    limitation, risks due to volatility, leverage, liquidity, and

    counterparty creditworthiness, as applicable to the trading program and

    the types of transactions and investment activity expected to be

    engaged in pursuant to such program (including retail forex and swap

    transactions, if any).

    * * * * *

    (i) * * *

    (2) Where any fee is determined by reference to a base amount

    including, but not limited to, ``net assets,'' ``gross profits,'' ``net

    profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading

    advisor must explain how such base amount will be calculated. Where any

    fee is based on the difference between bid and asked prices on retail

    forex or swap transactions, the trading advisor must explain how such

    fee will be calculated;

    * * * * *

    (j) * * *

    (3) Included in the description of any such conflict must be any

    arrangement whereby the trading advisor or any principal thereof may

    benefit, directly or indirectly, from the maintenance of the client's

    commodity interest account with a futures commission merchant and/or

    retail foreign exchange dealer, and/or from the maintenance of the

    client's swap positions with a swap dealer or from the introduction of

    such account through an introducing broker (such as payment for order

    flow or soft dollar arrangements).

    (k) * * *

    (1) * * *

    (iii) Any introducing broker through which the client will be

    required to introduce its account to the futures commission merchant

    and/or retail foreign exchange dealer and/or swap dealer.

    (2) With respect to a futures commission merchant, retail foreign

    exchange dealer, swap dealer or introducing broker, an action will be

    considered material if:

    (i) The action would be required to be disclosed in the notes to

    the futures commission merchant's, retail foreign exchange dealer's,

    swap dealer's or introducing broker's financial statements prepared

    pursuant to generally accepted accounting principles;

    * * * * *

    Dated: Issued in Washington, DC, on August 23, 2012, by the

    Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Appendices to Amendments to Commodity Pool Operator and Commodity

    Trading Advisor Regulations Resulting From the Dodd-Frank Act--

    Commission Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers,

    Chilton, O'Malia and Wetjen voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to amend certain provisions of Part 4

    of the Commission's regulations regarding the operations and

    activities of commodity pool operators (CPOs) and commodity trading

    advisors (CTAs). The amendments ensure that CFTC regulations with

    regard to CPOs and CTAs reflect changes made to the Commodity

    Exchange Act by the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (Dodd-Frank Act).

    Consistent with Dodd-Frank's expansion of the CPO and CTA

    definitions to include those involved in swaps and advising on

    swaps, the final amendments require swaps information to be included

    in the disclosure, reporting and recordkeeping obligations that

    currently exist for CPOs and CTAs under Part 4. Such information

    will enhance customer

    [[Page 54360]]

    protections by increasing the transparency of CPO and CTA swap

    activities to their pool participants and clients.

    [FR Doc. 2012-21606 Filed 9-4-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: September 5, 2012