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2012-3390

  • Federal Register, Volume 77 Issue 37 (Friday, February 24, 2012)[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]

    [Rules and Regulations]

    [Pages 11252-11344]

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

    [FR Doc No: 2012-3390]

    [[Page 11251]]

    Vol. 77

    Friday,

    No. 37

    February 24, 2012

    Part III

    Commodity Futures Trading Commission

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    17 CFR Parts 4, 145, and 147

    Commodity Pool Operators and Commodity Trading Advisors: Compliance

    Obligations; Harmonization of Compliance Obligations for Registered

    Investment Companies Required To Register as Commodity Pool Operators;

    Final Rule and Proposed Rule

    Federal Register / Vol. 77 , No. 37 / Friday, February 24, 2012 /

    Rules and Regulations

    [[Page 11252]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 4, 145, and 147

    RIN 3038-AD30

    Commodity Pool Operators and Commodity Trading Advisors:

    Compliance Obligations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission is adopting

    amendments to its existing part 4 regulations and promulgating one new

    regulation regarding Commodity Pool Operators and Commodity Trading

    Advisors. The Commission is also adopting new data collections for CPOs

    and CTAs that are consistent with a data collection required under the

    Dodd-Frank Act for entities registered with both the Commission and the

    Securities and Exchange Commission. The adopted amendments rescind the

    exemption from registration; rescind relief from the certification

    requirement for annual reports provided to operators of certain pools

    offered only to qualified eligible persons (QEPs; modify the criteria

    for claiming relief); and require the annual filing of notices claiming

    exemptive relief under several sections of the Commission's

    regulations. Finally, the adopted amendments include new risk

    disclosure requirements for CPOs and CTAs regarding swap transactions.

    DATES: Effective dates: This final rule is effective on April 24, 2012,

    except for the amendments to Sec. 4.27, which shall become effective

    on July 2, 2012.

    Compliance dates: Compliance with Sec. 4.27 shall be required by

    not later than September 15, 2012, for a CPO having at least $5 billion

    in assets under management, and by not later than December 14, 2012,

    for all other registered CPOs and all CTAs. Compliance with Sec. 4.5

    for registration purposes only shall be required not later than the

    later of December 31, 2012, or 60 days after the effective date of the

    final rulemaking further defining the term ``swap,'' which the

    Commission will publish in the Federal Register at a future date.

    Entities required to register due to the amendments to Sec. 4.5 shall

    be subject to the Commission's recordkeeping, reporting, and disclosure

    requirements pursuant to part 4 of the Commission's regulations within

    60 days following the effectiveness of a final rule implementing the

    Commission's proposed harmonization effort pursuant to the concurrent

    proposed rulemaking. CPOs claiming exemption under Sec. 4.13(a)(4)

    shall be required to comply with the rescission of Sec. 4.13(a)(4) by

    December 31, 2012; however, compliance shall be required for all other

    CPOs on April 24, 2012. Compliance with all other amendments, not

    otherwise specified above, shall be required by December 31, 2012.

    FOR FURTHER INFORMATION CONTACT: Kevin P. Walek, Assistant Director,

    Telephone: (202) 418-5463, Email: kwalek@cftc.gov, or Amanda Lesher

    Olear, Special Counsel, Telephone: (202) 418-5283, Email:

    aolear@cftc.gov, Michael Ehrstein, Attorney-Advisor, Telephone: 202-

    418-5957, Email: mehrstein@cftc.gov, Division of Swap Dealer and

    Intermediary Oversight, Commodity Futures Trading Commission, Three

    Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background on the Proposal To Amend the Registration and Compliance

    Obligations for CPOs and CTAs

    A. Statutory and Regulatory Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ The

    legislation was enacted to reduce risk, increase transparency, and

    promote market integrity within the financial system by, inter alia,

    enhancing the Commodity Futures Trading Commission's (the

    ``Commission'' or ``CFTC'') rulemaking and enforcement authorities with

    respect to all registered entities and intermediaries subject to the

    Commission's oversight.

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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 at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

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    The preamble of the Dodd-Frank Act explicitly states that the

    purpose of the legislation is:

    To promote the financial stability of the United States by

    improving accountability and transparency in the financial system,

    to end `too big to fail', to protect the American taxpayer by ending

    bailouts, to protect consumers from abusive financial services

    practices, and for other purposes.\2\

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    \2\ Id.

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    Pursuant to this stated objective, the Dodd-Frank Act has expanded

    the scope of federal financial regulation to include instruments such

    as swaps, enhanced the rulemaking authorities of existing federal

    financial regulatory agencies including the Commission and the

    Securities and Exchange Commission (``SEC''), and created new financial

    regulatory entities.

    In addition to the expansion of the Commission's jurisdiction to

    include swaps under Title VII of the Dodd-Frank Act, Title I of the

    Dodd-Frank Act created the Financial Stability Oversight Council

    (``FSOC'').\3\ The FSOC is composed of the leaders of various state and

    federal financial regulators and is charged with identifying risks to

    the financial stability of the United States, promoting market

    discipline, and responding to emerging threats to the stability of the

    country's financial system.\4\ The Dodd-Frank Act anticipates that the

    FSOC will be supported in these responsibilities by the federal

    financial regulatory agencies.\5\ The Commission is among those

    agencies that could be asked to provide information necessary for the

    FSOC to perform its statutorily mandated duties.\6\

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    \3\ See section 111 of the Dodd-Frank Act.

    \4\ See section 112(a)(1)(A) of the Dodd-Frank Act.

    \5\ See sections 112(a)(2)(A) and 112(d)(1) of the Dodd-Frank

    Act.

    \6\ See section 112(d)(1) of the Dodd-Frank Act.

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    Title IV of the Dodd-Frank Act requires advisers to large private

    funds \7\ to register with the SEC.\8\ Through this registration

    requirement, Congress

    [[Page 11253]]

    sought to make available to the SEC ``information regarding [the] size,

    strategies and positions'' of large private funds, which Congress

    believed ``could be crucial to regulatory attempts to deal with a

    future crisis.'' \9\ In section 404 of the Dodd-Frank Act, Congress

    amended section 204(b) of the Investment Advisers Act to direct the SEC

    to require private fund advisers registered solely with the SEC \10\ to

    file reports containing such information as is deemed necessary and

    appropriate in the public interest and for investor protection or for

    the assessment of systemic risk. These reports and records must include

    a description of certain prescribed information, such as the amount of

    assets under management, use of leverage, counterparty credit risk

    exposure, and trading and investment positions for each private fund

    advised by the adviser.\11\ Section 406 of the Dodd-Frank Act also

    requires that the rules establishing the form and content of reports

    filed by private fund advisers that are dually registered with the SEC

    and the CFTC be issued jointly by both agencies after consultation with

    the FSOC.\12\

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    \7\ Section 202(a)(29) of the Investment Advisers Act of 1940

    (``Investment Advisers Act'') defines the term ``private fund'' as

    ``an issuer that would be an investment company, as defined in

    section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3),

    but for section 3(c)(1) or 3(c)(7) of that Act.'' 15 U.S.C. 80a-

    3(c)(1), 80a-3(c)(7). Section 3(c)(1) of the Investment Company Act

    provides an exclusion from the definition of ``investment company''

    for any ``issuer whose outstanding securities (other than short term

    paper) are beneficially owned by not more than one hundred persons

    and which is not making and does not presently propose to make a

    public offering of its securities.'' 15 U.S.C. 80a-3(c)(1). Section

    3(c)(7) of the Investment Company Act provides an exclusion from the

    definition of ``investment company'' for any ``issuer, the

    outstanding securities of which are owned exclusively by persons

    who, at the time of acquisition of such securities, are qualified

    purchasers, and which is not making and does not at that time

    propose to make a public offering of such securities.'' 15 U.S.C.

    80a-3(c)(7). The term ``qualified purchaser'' is defined in section

    2(a)(51) of the Investment Company Act. See 15 U.S.C. 80a-2(a)(51).

    \8\ The Dodd-Frank Act requires private fund adviser

    registration by amending section 203(b)(3) of the Advisers Act to

    repeal the exemption from registration for any adviser that during

    the course of the preceding 12 months had fewer than 15 clients and

    neither held itself out to the public as an investment adviser nor

    advised any registered investment company or business development

    company. See section 403 of the Dodd-Frank Act. There are exemptions

    from this registration requirement for advisers to venture capital

    funds and advisers to private funds with less than $150 million in

    assets under management in the United States. There also is an

    exemption for foreign advisers with less than $25 million in assets

    under management from the United States and fewer than 15 U.S.

    clients and private fund investors. See sections 402, 407 and 408 of

    the Dodd-Frank Act.

    \9\ See S. Conf. Rep. No. 111-176, at 38 (2010).

    \10\ In this release, the term ``private fund adviser'' means

    any investment adviser that is (i) registered or required to be

    registered with the SEC (including any investment adviser that is

    also registered or required to be registered with the CFTC as a CPO

    or CTA) and (ii) advises one or more private funds (including any

    commodity pools that satisfy the definition of ``private fund'').

    \11\ See section 404 of the Dodd-Frank Act.

    \12\ See section 406 of the Dodd-Frank Act.

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    The Commodity Exchange Act (``CEA'') \13\ authorizes the Commission

    to register Commodity Pool Operators (``CPOs'') and Commodity Trading

    Advisors (``CTAs''),\14\ exclude any entity from registration as a CPO

    or CTA,\15\ and require ``[e]very commodity trading advisor and

    commodity pool operator registered under [the CEA to] maintain books

    and records and file such reports in such form and manner as may be

    prescribed by the Commission.'' \16\ The Commission also has the

    authority to include within or exclude from the definitions of

    ``commodity pool,'' ``commodity pool operator,'' and ``commodity

    trading advisor'' any entity ``if the Commission determines that the

    rule or regulation will effectuate the purposes of the CEA.'' \17\ In

    addition, the Commission has the authority to ``make and promulgate

    such rules and regulations as, in the judgment of the Commission, are

    reasonably necessary to effectuate the provisions or to accomplish any

    of the purposes of [the CEA].'' \18\ The Commission's discretionary

    authority to exclude or exempt persons from registration was intended

    to be exercised ``to exempt from registration those persons who

    otherwise meet the criteria for registration * * * if, in the opinion

    of the Commission, there is no substantial public interest to be served

    by the registration.'' \19\ It is pursuant to this authority that the

    Commission has promulgated the various exemptions from registration as

    a CPO that are enumerated in Sec. 4.13 of its regulations as well as

    the exclusions from the definition of CPO that are delineated in Sec.

    4.5.\20\

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    \13\ 7 U.S.C. 1, et seq.

    \14\ 7 U.S.C. 6m.

    \15\ 7 U.S.C. 1a(11) and 1a(12).

    \16\ 7 U.S.C. 6n(3)(A). Under part 4 of the Commission's

    regulations, entities registered as CPOs have reporting obligations

    with respect to their operated pools. See 17 CFR. 4.22. Although

    CTAs have recordkeeping obligations under part 4, the Commission has

    not required reporting by CTAs, See generally, 17 CFR. part 4.

    \17\ 7 U.S.C. 1a(10), 1a(11), 1a(12).

    \18\ 7 U.S.C. 12a(5).

    \19\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p.

    20.

    \20\ See 68 FR 47231 (Aug. 8, 2003).

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    As stated previously in this release, and in the Proposal, Congress

    enacted the Dodd-Frank Act in response to the financial crisis of 2007

    and 2008.\21\ That Act requires the reporting of certain information by

    investment advisers to private funds related to potential systemic risk

    including, but not limited to, the amount of assets under management,

    use of leverage, counterparty credit risk exposure, and trading and

    investment positions for each private fund under the reporting entity's

    advisement.\22\ This information facilitates oversight of the

    investment activities of funds within the context of the rest of a

    discrete market or the economy as a whole.

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    \21\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    \22\ See section 404 of the Dodd-Frank Act.

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    The sources of risk delineated in the Dodd-Frank Act with respect

    to private funds are also presented by commodity pools. To provide the

    Commission with similar information to address these risks, the

    Commission has determined to require registration of certain previously

    exempt CPOs and to further require reporting of information comparable

    to that required in Form PF, which the Commission has previously

    adopted jointly with the SEC. To implement this enhanced oversight, the

    Commission proposed, and has now determined to adopt, the revision and

    rescission of certain discretionary exemptions that it previously

    granted.

    B. The Proposal

    Following the recent economic turmoil, and consistent with the

    tenor of the provisions of the Dodd-Frank Act, the Commission

    reconsidered the level of regulation that it believes is appropriate

    with respect to entities participating in the commodity futures and

    derivatives markets. Therefore, on January 26, 2011, the Commission

    proposed amendments and additions to its existing regulatory regime for

    CPOs and CTAs and the creation of two new data collection instruments,

    Forms CPO-PQR and CTA-PR (``Proposal'').\23\ In a concurrent joint

    proposal with the SEC, the Commission also proposed Sec. 4.27(d) and

    sections 1 and 2 of Form PF.\24\

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    \23\ See 76 FR 7976 (Feb. 11, 2011).

    \24\ See 76 FR 8068 (Feb. 11, 2011). Because the Commission did

    not adopt the remainder of proposed Sec. 4.27 at the same time as

    it adopted the subsection of Sec. 4.27 implementing Form PF, the

    Commission modified the designation of Sec. 4.27(d) to be the sole

    text of that section. Additionally, the Commission made some

    revisions to the text of Sec. 4.27 to: (1) clarify that the filing

    of Form PF with the SEC will be considered substitute compliance

    with certain Commission reporting obligations and (2) allow CPOs and

    CTAs who are otherwise required to file Form PF the option of

    submitting on Form PF data regarding commodity pools that are not

    private funds as substitute compliance with certain CFTC reporting

    obligations.

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    In the Proposal, the Commission specifically proposed the following

    amendments: (A) to require the periodic reporting of data by CPOs and

    CTAs regarding their direction of commodity pool assets; (B) to

    identify certain proposed filings with the Commission as being afforded

    confidential treatment; (C) to revise the requirements for determining

    which persons should be required to register as a CPO under Sec. 4.5;

    (D) to require the filing of certified annual reports by all registered

    CPOs; (E) to rescind the exemptions from registration under Sec. Sec.

    4.13(a)(3) and (a)(4); (F) to require annual affirmation of claimed

    exemptive relief for both CPOs and CTAs; (G) to require an additional

    risk disclosure statement from CPOs and CTAs that engage in swaps

    transactions; and (H) to make certain conforming amendments to the

    Commission's regulations in light of the proposed amendments.

    In describing the rationale for the Proposal, the Commission

    stated:

    [T]o ensure that necessary data is collected from CPOs and CTAs

    that are not operators or advisors of private funds, the Commission

    is proposing a new Sec. 4.27, which would require quarterly reports

    from all CPOs and CTAs to be electronically filed with NFA. The

    Commission is promulgating proposed Sec. 4.27 pursuant to the

    Commission's authority to require the filing of reports by

    registered CPOs and CTAs under section 4n

    [[Page 11254]]

    of the CEA. In an effort to eliminate duplicative filings, proposed

    Sec. 4.27(d) would allow certain CPOs and/or CTAs that are also

    registered as private fund advisers with the SEC pursuant to the

    securities laws to satisfy certain of the Commission's systemic

    reporting requirements by completing and filing the appropriate

    sections of Form PF with the SEC with respect to advised private

    funds.

    In order to ensure that the Commission can adequately oversee

    the commodities and derivatives markets and assess market risk

    associated with pooled investment vehicles under its jurisdiction,

    the Commission is re-evaluating its regulation of CPOs and CTAs.

    Additionally, the Commission does not want its registration and

    reporting regime for pooled investment vehicles and their operators

    and/or advisors to be incongruent with the registration and

    reporting regimes of other regulators, such as that of the SEC for

    investment advisers under the Dodd-Frank Act. (Footnotes

    omitted).\25\

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    \25\ 76 FR 7976, 7977-78 (Feb. 11, 2011).

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    C. Comments on the Proposal

    The Commission received 61 comment letters in response to the

    Proposal. The commenters represented a diversity of market

    participants. Seven commenters were registered investment companies or

    registered investment advisers; five commenters were registered or

    exempt CPOs; and three commenters were registered investment companies

    or registered investment advisers that also claimed exemption from

    registration as a CPO under Sec. 4.13. The Commission also received 20

    comments from law firms; 14 comments from trade organizations; two

    comments from individual interested parties; a comment from a

    compliance service provider; and a comment from a registered futures

    association.\26\ The majority of the comments received opposed the

    adoption of the proposed amendments to Sec. 4.5 and the rescission of

    Sec. Sec. 4.13(a)(3) and (a)(4).

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    \26\ Additionally, the Commission received six comments that

    were not pertinent to the substance of the Proposal. Three concerned

    position limits in silver, one consisted of a web address; one was

    an advertisement; and one simply said ``nice.''

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    Having considered these comments, the Commission has decided to

    adopt most of the amendments to part 4 that it proposed, with some

    modifications. In addition, the Commission has decided not to rescind

    the exemption in Sec. 4.13(a)(3) for entities engaged in a de minimis

    amount of derivatives trading. The Commission's amendments to part 4,

    and the modifications to its Proposal are discussed below.

    The scope of this Federal Register release generally is restricted

    to the comments received in response to the Proposal and to the changes

    to, and the clarifications of, the Proposal that the Commission is

    making in response thereto. The Commission encourages interested

    persons to read the Proposal for a fuller discussion of the purpose of

    each of the amendments contained in the Proposal.

    D. Significant Changes From the Proposal

    The significant changes from the Proposal that the Commission is

    making in the rules it is adopting today are as follows: (1) The

    marketing restriction in Sec. 4.5 no longer contains the clause ``(or

    otherwise seeking investment exposure to)''; (2) Sec. 4.5 will be

    amended to include an alternative trading threshold test based on the

    net notional value of a registered investment company's derivatives

    positions; (3) annual notices for exemptions and exclusions will be

    filed on an annual calendar year end basis rather than on the

    anniversary of the filing date; and (4) changes have been made to the

    substance of Forms CPO-PQR and CTA-PR and the filing timelines for both

    forms.

    II. Responses to Comments on the Proposal

    A. Comments Regarding Proposed Amendments to Sec. 4.5

    As part of the Proposal, the Commission proposed amendments to

    Sec. 4.5(c)(2)(iii), reinstating a trading threshold and marketing

    restriction for registered investment companies claiming exclusion from

    the definition of CPO under that section. In support of the Proposal,

    the Commission stated that it became aware that certain registered

    investment companies were offering interests in de facto commodity

    pools while claiming exclusion under Sec. 4.5.\27\ The Commission

    further stated that it believed that registered investment companies

    should not engage in such activities without Commission oversight and

    that such oversight was necessary to ensure consistent treatment of

    CPOs regardless of their status with respect to other regulators.\28\

    The Commission also recognized that operational issues may exist

    regarding the ability of registered investment companies to comply with

    the Commission's compliance regime.\29\

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    \27\ 76 FR 7976, 7983 (Feb. 12, 2011). The Commission determined

    to propose amendments to Sec. 4.5 following the submission of a

    petition for rulemaking by the National Futures Association, to

    which the Commission has delegated much of its direct oversight

    activities relating to CPOs, CTAs, and commodity pools. See, 75 FR

    56997 (Sept. 17, 2010).

    \28\ Id. at 7984.

    \29\ Id.

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    The Commission received numerous comments regarding the proposed

    amendments to Sec. 4.5. The comments can be broadly categorized into

    eight categories: (1) General comments as to the advisability of making

    such a change and the Commission's justification for doing so; (2) the

    trading threshold; (3) the inclusion of swaps within the trading

    threshold; (4) the proposed marketing restriction; (5) harmonization of

    compliance obligations with those of the SEC; (6) the appropriate

    entity to register as the registered investment company's CPO; (7) the

    use and permissibility of controlled foreign corporations by registered

    investment companies; and (8) the timeline for implementation.

    1. General Comments on Proposed Amendments to Sec. 4.5

    Certain comments argued against the adoption of any change to Sec.

    4.5 and questioned the Commission's justification for doing so.\30\

    Most commenters generally opposed the change because they claimed that

    requiring registration and compliance with the Commission's regulatory

    regime would provide no tangible benefit to the Commission or investors

    because registered investment companies are already subject to

    comprehensive regulation by the SEC.

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    \30\ Comment letter from the Investment Company Institute (April

    12, 2011) (``ICI Letter''); comment letter from the Mutual Fund

    Directors Forum (April 12, 2011) (``MFDF Letter'').

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    The Commission believes that registration with the Commission

    provides two significant benefits. First, registration allows the

    Commission to ensure that all entities operating collective investment

    vehicles participating in the derivatives markets meet minimum

    standards of fitness and competency.\31\ Second, registration provides

    the Commission and members of the public with a clear means of

    addressing wrongful conduct by individuals and entities participating

    in the derivatives markets. The Commission has clear authority to take

    punitive and/or remedial action against registered entities for

    violations of the CEA or of the Commission's regulations. Moreover, the

    Commission has the ability to deny or revoke registration, thereby

    expelling an individual or entity from serving as an intermediary in

    the industry. Members of the public also may access the Commission's

    reparations program or National Futures Association's (``NFA'')

    arbitration program to seek redress for wrongful conduct by a

    Commission registrant

    [[Page 11255]]

    and/or NFA member. Therefore, the Commission continues to believe that

    its registration requirements further critical regulatory objectives

    and serve important public policy goals.

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    \31\ See H.R. Rep. No. 565 (Part 1), 97th Cong., 2d Sess. 48

    (1982), S. Rep. No. 384, 97th Cong., 2d Sess. 111 (1982). See also,

    48 FR 14933 (Apr. 6, 1983).

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    A number of commenters who expressed general opposition also

    acknowledged that if the Commission determined to proceed with its

    proposed changes to Sec. 4.5, certain areas of harmonization with SEC

    requirements should be addressed. To that end, concurrently with the

    issuance of this rule, the Commission plans to issue a notice of

    proposed rulemaking detailing its proposed modifications to part 4 of

    its regulations to harmonize the compliance obligations that apply to

    dually registered investment companies. Commenters did not question,

    however, that the Commission has a regulatory interest in overseeing

    entities engaging in derivatives trading. Rather, they argued that the

    SEC currently provides adequate oversight of their activities.

    The Commission disagrees with the arguments presented by those

    commenters who argued against the adoption of any change to Sec. 4.5.

    The Commission continues to believe that entities operating collective

    investment vehicles that engage in more than a de minimis amount of

    derivatives trading should be required to register with the Commission.

    The Commission believes that because Congress empowered the Commission

    to oversee the derivatives market, the Commission is in the best

    position to oversee entities engaged in more than a limited amount of

    non-hedging derivatives trading.

    Several commenters also asserted that modifying Sec. 4.5 would

    result in a significant burden to entities required to register with

    the Commission without any meaningful benefit to the Commission.\32\

    The Commission believes, as discussed throughout this release, that

    entities that are offering services substantially identical to those of

    a registered CPO should be subject to substantially identical

    regulatory obligations. The Commission also recognizes that

    modification to Sec. 4.5 may result in costs for registered investment

    companies. For that reason, as stated above, in conjunction with

    finalizing the proposed amendments to Sec. 4.5, the Commission has

    proposed to adopt a harmonized compliance regime for registered

    investment companies whose activities require oversight by the

    Commission. Although the Commission believes the modifications to Sec.

    4.5 enhance the Commission's ability to effectively oversee derivatives

    markets, it is not the Commission's intention to burden registered

    investment companies beyond what is required to provide the Commission

    with adequate information it finds necessary to effectively oversee the

    registered investment company's derivatives trading activities. Through

    this harmonization, the Commission intends to minimize the burden of

    the amendments to Sec. 4.5.

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    \32\ See ICI Letter; comment letter from Vanguard (April 12,

    2011) (``Vanguard Letter''); comment letter from Reed Smith LLP

    (April 12, 2011) (``Reed Smith Letter''); comment letter from

    AllianceBernstein Mutual Funds (April 12, 2011) (``AllianceBernstein

    Letter''); comment letter from United States Automobile Association

    (April 12, 2011) (``USAA Letter''); comment letter from Principal

    Management Corporation (April 12, 2011) (``PMC Letter''); comment

    letter from Investment Adviser Association (April 12, 2011) (``IAA

    Letter''); comment letter from Dechert LLP and clients (April 12,

    2011) (``Dechert II Letter''); comment letter from Janus Capital

    Management LLC (April 12, 2011) (``Janus Letter''); comment letter

    from Security Traders Association (April 12, 2011) (``STA Letter'');

    comment letter from Invesco Advisers, Inc. (April 12, 2011)

    (``Invesco Letter''); and comment letter from Equinox Fund

    Management, LLC (July 28, 2011) (``Equinox Letter'').

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    Second, the Commission disagrees with the commenters' assertion

    that the Commission would not receive any meaningful benefit from a

    modification to Sec. 4.5. As stated above, the Commission disagrees

    that such registration and oversight is redundant, and emphasizes that

    it is in the best position to adequately oversee the derivatives

    trading activities of entities in which the Commission has a regulatory

    interest. As discussed above, the Commission is charged with

    administering the Commodity Exchange Act to protect market users and

    the public from fraud, manipulation, abusive practices and systemic

    risk related to derivatives that are subject to the Act, and to foster

    open, competitive, and financially sound markets. The Commission's

    programs are structured and its resources deployed in service of that

    mission.

    One commenter questioned the Commission's reasoning for choosing to

    impose additional requirements on registered investment companies but

    not proposing to impose such requirements on other categories of

    entities.\33\ This commenter also stated that the Commission was

    required to detail its reasoning under the Administrative Procedure

    Act.\34\ As stated in the Proposal, the Commission remains concerned

    that registered investment companies are offering managed futures

    strategies, either in whole or in part, without Commission oversight

    and without making the disclosures to both the Commission and investors

    regarding the pertinent facts associated with the investment in the

    registered investment company. The Commission is focused on registered

    investment companies because it is aware of increased trading activity

    in the derivatives area by such entities that may not be appropriately

    addressed in the existing regulatory protections, including risk

    management and recordkeeping and reporting requirements. The SEC has

    also noted this increased trading activity and is reviewing the use of

    derivatives by investment companies.\35\ In its recent concept release

    regarding the use of derivatives by registered investment companies,

    the SEC noted that although its staff had addressed issues related to

    derivatives on a case-by-case basis, it had not developed a

    ``comprehensive and systematic approach to derivatives related

    issues.'' \36\ As aptly noted by the Chairman of the SEC, ``The

    controls in place to address fund management in traditional securities

    can lose their effectiveness when applied to derivatives. This is

    particularly the case because a relatively small investment in a

    derivative instrument can expose a fund to potentially substantial gain

    or loss--or outsized exposure to an individual counterparty.'' \37\

    Despite the commenter's assertion, the Commission is unaware of other

    classes of entities that are excluded from the definition of CPO

    engaging in significant derivatives trading. Of course, if the

    Commission becomes aware of any other categories of excluded entities

    engaging in similar levels of derivatives trading, it will consider

    appropriate action to ensure that such entities and their derivatives

    [[Page 11256]]

    trading activities are brought under the Commission's regulatory

    oversight. As stated previously, the Commission continues to believe

    that entities that are offering services substantially identical to

    those of a registered CPO should be subject to substantially identical

    regulatory obligations.

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

    \33\ See ICI Letter.

    \34\ Id.

    \35\ For example, the SEC recently issued a concept release

    seeking comment on use of derivatives by investment companies,

    noting: ``The dramatic growth in the volume and complexity of

    derivatives investments over the past two decades, and funds'

    increased use of derivatives, have led the [Securities and Exchange]

    Commission and its staff to initiate a review of funds' use of

    derivatives under the Investment Company Act. (footnotes omitted)''

    76 FR 55237, 55238 (Sep. 7, 2011).

    \36\ 76 FR 55237, 55239 (Sept. 7, 2011). See, Press Release,

    Securities and Exchange Commission, SEC Seeks Public Comment on Use

    of Derivatives by Mutual Funds and Other Investment Companies (Aug.

    31, 2011), available at http://www.sec.gov/news/press/2011/2011-175.htm (`` `The derivatives markets have undergone significant

    changes in recent years, and the Commission is taking this

    opportunity to seek public comment and ensure that our regulatory

    approach and interpretations under the Investment Company Act remain

    current, relevant, and consistent with investor protection,' '' said

    SEC Chairman Mary Shapiro.'').

    \37\ Chairman Mary Shapiro, Opening Statement at SEC Open

    Meeting Item 1--Use of Derivatives by Funds (Aug. 31, 2011),

    available at http://www.sec.gov/news/speech/2011/spch083111mls-item1.htm (``The current derivatives review gives us the opportunity

    to re-think our approach to regulating funds' use of derivatives. We

    are engaging in this review with a holistic perspective, in the wake

    of the financial crisis, and in light of the new comprehensive

    regulatory regime for swaps being developed under the Dodd-Frank

    Act.'').

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

    2. Comments on the Proposed Trading Threshold

    The Commission also received numerous comments on the proposed

    addition of a trading threshold to the exclusion under Sec. 4.5.\38\

    The proposed trading threshold provided that derivatives trading could

    not exceed five percent of the liquidation value of an entity's

    portfolio, without registration with the Commission. The Proposal

    excluded activity conducted for ``bona fide hedging'' purposes.\39\

    Most commenters stated that a five percent threshold was far too low in

    light of the Commission's determination to include swaps within the

    measured activities and the limited scope of the Commission's bona fide

    hedging definition, but no data was provided to support this assertion.

    The Commission, in its adoption of the exemption under Sec.

    4.13(a)(3),\40\ previously determined that five percent is an

    appropriate threshold to determine whether an entity warrants oversight

    by the Commission.\41\

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

    \38\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith

    Letter; AllianceBernstein Letter; AII Letter; STA Letter; Janus

    Letter; PMC Letter; USAA Letter; comment letter from Fidelity

    Management and Research Co. (April 12, 2011) (``Fidelity Letter'');

    comment letter from Securities Industry and Financial Markets

    Association (April 12, 2011) (``SIFMA Letter''); comment letter from

    Dechert LLP (July 26, 2011) (``Dechert III Letter''); comment letter

    from Rydex/SGI Morgan, Lewis & Bockius LLP (April 12, 2011) (``Rydex

    Letter''); comment letter from the United States Chamber of Commerce

    (April 12, 2011) (``USCC Letter''); comment letter from Sidley

    Austin LLP (April 12, 2011) (``Sidley Letter''); comment letter from

    the National Futures Association (April 12, 2011) (``NFA Letter'');

    comment letter from Campbell & Company, Inc. (April 12, 2011)

    (``Campbell Letter''); comment letter from AQR Capital Management,

    LLC (April 12, 2011) (``AQR Letter''); comment letter from Steben &

    Company, Inc. (April 12, 2011) (``Steben Letter''); comment letter

    from the Investment Company Institute (July 28, 2011) (``ICI II

    Letter''); and comment from the Association of Institutional

    Investors (April 12, 2011) (``AII Letter'').

    \39\ 76 FR 7976, 7989 (Feb. 11, 2011).

    \40\ 17 CFR 4.13(a)(3).

    \41\ 68 FR 47221, 47225 (Aug. 8, 2003).

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

    Despite the views of some commenters, the Commission believes that

    the five percent threshold continues to be the appropriate percentage

    for exemption or exclusion based upon an entity's limited derivatives

    trading. Five percent remains the average required for futures margins,

    although the Commission acknowledges that margin levels for securities

    product futures are significantly higher and the levels for swaps

    margining may be as well. The Commission believes, however, that

    trading exceeding five percent of the liquidation value of a portfolio

    evidences a significant exposure to the derivatives markets. The

    Commission believes that such exposure should subject an entity to the

    Commission's oversight. Moreover, the Commission believes that its

    adoption of an alternative net notional test to determine eligibility

    for exclusion from the definition of CPO, as discussed infra, provides

    flexibility to registered investment companies in consideration of the

    fact that initial margin for certain commodity interest products may

    not permit compliance with the five percent threshold.

    Commenters also recommended that the Commission exclude from the

    threshold calculation various instruments including broad-based stock

    index futures, security futures generally, or financial futures

    contracts as a whole.\42\ The Commission does not believe that

    exempting any of these instruments from the threshold calculation is

    appropriate. The Commission does not believe that there is a meaningful

    distinction between those security or financial futures and other

    categories of futures. The Commission believes that its oversight of

    the use of security or financial futures is just as essential as its

    oversight of physical commodity futures. Congress granted the

    Commission authority over all futures in Sec. 2 of the CEA.\43\ The

    Commission believes that it is in the best position to assess investor

    and market risks posed by entities trading in derivatives regardless of

    type. Therefore, the Commission has decided not to modify the scope of

    the threshold from what was proposed in order to exclude security

    futures or financial futures from the trading threshold.

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

    \42\ See Rydex Letter; Invesco Letter; ICI Letter.

    \43\ 7 U.S.C. 2.

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

    Commenters requested that the Commission expand its definition of

    bona fide hedging as it appears in Sec. 1.3(z) to include risk

    management as a recognized bona fide hedging activity for purposes of

    Sec. 4.5.\44\ The Proposal excluded activity conducted for ``bona fide

    hedging'' purposes as that term was defined in Sec. 1.3 as it existed

    at the time of the proposal.\45\ Further, the Proposal noted that the

    Commission anticipated that the definition of ``bona fide hedging''

    would be modified through future rulemakings,\46\ which were open for

    comments from the public.

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

    \44\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith

    Letter; AllianceBernstein Letter; IAA Letter; Janus Letter; and STA

    Letter.

    \45\ 76 FR 7976, 7989 (Feb. 11, 2011).

    \46\ 76 FR 7976, 7984 (Feb. 11, 2011).

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

    The Commission recently adopted final rules regarding position

    limits and, through that rulemaking, implemented a new statutory

    definition of bona fide hedging transactions for exempt and excluded

    commodity transactions as part of new Sec. 151.5.\47\ This statutory

    definition limits the scope of bona fide hedging transactions for

    exempt and agricultural commodities, and does not provide for a risk

    management exemption for position limits purposes.\48\ With regard to

    position limits and bona fide hedging transactions for excluded

    commodities, the Commission amended the pre-Dodd-Frank definition of

    bona fide hedging in Sec. 1.3(z) to only apply to excluded

    commodities. Further, the Commission allowed DCMs and SEFs that are

    trading facilities to provide for a risk management exemption from

    position limits for excluded commodity transactions.

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

    \47\ 7 U.S.C. 6a(c); 76 FR 71626, 71643 (Nov. 18, 2011).

    \48\ 76 FR 71626, 71644 (Nov. 18, 2011).

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

    The Commission does not believe that it is appropriate to exclude

    risk management transactions from the trading threshold. The Commission

    believes that an important distinction between bona fide hedging

    transactions and those undertaken for risk management purposes is that

    bona fide hedging transactions are unlikely to present the same level

    of market risk as they are offset by exposure in the physical markets.

    Additionally, the Commission is concerned that in the context of

    exclusion under Sec. 4.5, a risk management exclusion would permit

    registered investment companies to engage in a greater volume of

    derivatives trading than other entities which are engaged in similar

    activities, but which are otherwise required to register as CPOs. This

    could result in disparate treatment among similarly situated entities.

    Moreover, there was no consensus among the commenters as to the

    appropriate definition of risk management transactions. Thus, the

    Commission believes that it may be difficult in this context to

    properly limit the scope of such exclusion as objective criteria are

    not universally recognized, which would make such exclusion onerous to

    enforce.\49\

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

    \49\ The Commission notes that Sec. 4.5 references the

    definition of bona fide hedging for exempt and agricultural

    commodities under Sec. 151.5 as well as the definition of bona fide

    hedging for excluded commodities under Sec. 1.3(z). Market

    participants should not construe either Sec. 151.5 or Sec. 1.3(z)

    as permitting a risk management exemption for purposes of

    determining compliance with the trading threshold in Sec. 4.5.

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

    [[Page 11257]]

    During numerous meetings with commenters, the commenters noted that

    most registered investment companies use derivatives for risk

    management purposes, namely to offset the risk inherent in positions

    taken in the securities or bond markets, or to equitize cash

    efficiently. Although the Commission recognizes the importance of the

    use of derivatives for risk management purposes, it does not believe

    that transactions that are not within the bona fide hedging definition

    should be excluded from the determination of whether an entity meets

    the trading threshold for registration and oversight. Therefore, the

    Commission has decided not to exclude risk management activities by

    registered investment companies from the trading threshold for purposes

    of Sec. 4.5.

    Several panelists at the Commission's staff roundtable held on July

    6, 2011\50\ (``Roundtable'') suggested that, instead of a trading

    threshold that is based on a percentage of margin, the Commission

    should focus solely on entities that offer ``actively managed futures''

    strategies.\51\ The panelist defined ``actively managed futures''

    strategies as those in which the entity or its investment adviser made

    its own decisions as to which derivatives to take positions in, as

    compared to the ``passive'' use of an index, wherein the entity's

    investments simply track those held by an index.\52\

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

    \50\ See Notice of CFTC Staff Roundtable Discussion on Proposed

    Changes to Registration and Compliance Regime for Commodity Pool

    Operators and Commodity Trading Advisors, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.

    \51\ See Transcript of CFTC Staff Roundtable Discussion on

    Proposed Changes to Registration and Compliance Regime for Commodity

    Pool Operators and Commodity Trading Advisors (``Roundtable

    Transcript''), at 19, 25, 30, 76-77, 87-90, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.

    \52\ Id.

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

    The Commission does not believe that it is proper to exclude from

    the Commission's oversight those entities that are using an index or

    other so-called ``passive'' means to track the value of other

    derivatives. Establishing ``active'' versus ``passive'' use of

    derivatives as a criterion for entitlement to the exclusion would

    introduce an element of subjectivity to an otherwise objective standard

    and make the threshold more difficult to interpret, apply, and enforce.

    It also could have the undesirable effect of encouraging funds to

    structure their investment activities to avoid regulation. Moreover,

    the use of an index or other passive investment vehicle by a large

    number of investment companies can amplify the market assumptions built

    into an index or other vehicle. Thus, the Commission has decided not to

    adopt the panelist's suggestion that the Commission focus on whether an

    entity offers an actively managed futures strategy.

    One commenter suggested that the Commission should consider the

    adoption of an alternative test that would be identical to the

    aggregate net notional value test that is currently available under

    Sec. 4.13(a)(3)(ii)(B).\53\ Section 4.13(a)(3)(ii)(B) provides that an

    entity can claim exemption from registration if the net notional value

    of its fund's derivatives trading does not exceed one hundred percent

    of the liquidation value of the fund's portfolio.\54\

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

    \53\ Dechert III Letter.

    \54\ 17 CFR 4.13(a)(3)(ii)(B).

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

    Conversely, several panelists at the Roundtable opposed such a

    test, stating that it was not a reliable means to measure an entity's

    exposure in the market.\55\ Specifically, certain panelists asserted

    that the net notional value of positions may not provide a reliable

    measure of the risk posed by certain entities in the market.\56\

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

    \55\ See Roundtable Transcript at 69-71.

    \56\ See Roundtable Transcript at 70.

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

    The Commission first considered the addition of an alternative net

    notional trading threshold when it proposed to amend Sec. 4.5 in

    2002.\57\ In support of its proposal, the Commission stated that the

    alternative test provided otherwise regulated entities that use certain

    classes of futures with higher initial margin requirements with an

    opportunity to also receive exclusionary relief from the definition of

    CPO.\58\ The Commission further stated that the inclusion of an

    alternative test enabled entities seeking exclusion to rely on

    whichever test was less restrictive based on their futures

    positions.\59\ In 2003, the Commission proposed and adopted final rules

    amending Sec. 4.5, which eliminated the five percent trading threshold

    and did not adopt the alternative net notional test.\60\ In stating its

    rationale for rescinding the five percent threshold test and declining

    to adopt the alternative net notional test, the Commission stated that

    because it was simultaneously proposing, and ultimately adopting, an

    exemption from registration in Sec. 4.13(a)(4), which did not impose

    any trading restriction, the Commission would remove the trading

    restrictions from Sec. 4.5 as well to provide consistent

    treatment.\61\

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

    \57\ 67 FR 65743 (Oct. 28, 2002).

    \58\ 67 FR 65743, 65744-45.

    \59\ 67 FR 65743, 65745.

    \60\ 68 FR 12622 (Mar. 17, 2003); 68 FR 47221 (Aug. 8, 2003).

    \61\ 68 FR 12622, 12625-26 (noting that although entities

    excluded under Sec. 4.5 could solicit retail participants, as

    compared to those entities exempt under Sec. 4.13(a)(4), which may

    only offer to certain high net worth entities and individuals, the

    Commission stated that the fact that the Sec. 4.5 entities were

    otherwise regulated supported consistent criteria for relief).

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

    The Commission no longer believes that its prior justification for

    abandoning the alternative net notional test is persuasive. By the

    adoption of this final rule, the Commission will reinstate the five

    percent trading threshold in Sec. 4.5 for registered investment

    companies and rescind the exemption in Sec. 4.13(a)(4), which reverses

    the regulatory conditions in existence in 2003. The Commission believes

    that the appropriate criteria for exclusion through the use of a net

    notional test is delineated in Sec. 4.13(a)(3)(ii)(B),\62\ commonly

    known as the ``de minimis exemption,'' albeit with the addition of

    allowing unlimited use of futures, options, or swaps for bona fide

    hedging purposes, which is not permitted under Sec. 4.13(a)(3).

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

    \62\ The net notional test as it appears in Sec. 4.13(a)(3)

    will be amended by this rulemaking to provide guidance regarding the

    ability to net cleared swaps.

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

    As stated previously, the net notional test, as set forth under

    Sec. 4.13(a)(3)(ii)(B), permits entities to claim relief if the

    aggregate net notional value of the entity's commodity interest

    positions does not exceed 100 percent of the liquidation value of the

    pool's portfolio.\63\ Notional value is defined by asset class. For

    example, the notional value of futures contracts is derived by

    multiplying the number of contracts by the size of the contract, in

    contract units, and then multiplying by the current market price for

    the contract.\64\ The notional value of a cleared swap, however, will

    be determined consistent with the provisions of part 45 of the

    Commission's regulations. The ability to net positions is also

    determined by asset class, with entities being able to net futures

    contracts across designated contract markets or foreign boards of

    trade, whereas swaps may only be netted if cleared by the same

    designated clearing organization (``DCO'') and it is otherwise

    appropriate.\65\

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

    \63\ 17 CFR 4.13(a)(3)(ii)(B).

    \64\ Id.

    \65\ See discussion of amendments to Sec. 4.13(a)(3)(ii)(B)

    infra.

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

    The Commission believes that the adoption of an alternative net

    notional test will provide consistent standards for relief from

    registration as a CPO for entities whose portfolios only contain a

    [[Page 11258]]

    limited amount of derivatives positions and will afford registered

    investment companies with additional flexibility in determining

    eligibility for exclusion. Therefore, the Commission will adopt an

    alternative net notional test, consistent with that set forth in Sec.

    4.13(a)(3)(ii)(B) as amended herein, for registered investment

    companies claiming exclusion from the definition of CPO under Sec.

    4.5.

    The Commission also received several comments supporting both the

    imposition of a trading threshold in general and the five percent

    threshold specifically.\66\ At least one commenter suggested, however,

    that the Commission consider requiring registered investment companies

    that exceed the threshold to register, but not subjecting them to the

    Commission's compliance regime beyond requiring them to be subject to

    the examination of their books and records, and examination by the

    National Futures Association.\67\ In effect, this commenter requested

    that the Commission subject such registrant to ``notice registration.''

    The Commission believes that adopting the commenter's approach would

    not materially change the information that the Commission would receive

    regarding the activities of registered investment companies in the

    derivatives markets, which is one of the Commission's purposes in

    amending Sec. 4.5. Moreover, a type of notice registration would not

    provide the Commission with any real means for engaging in consistent

    ongoing oversight. Notwithstanding such notice registration, the

    Commission would still be deemed to have regulatory responsibility for

    the activities of these registrants. In the Commission's view, notice

    registration does not equate to an appropriate level of oversight. For

    that reason, the Commission has determined not to adopt the notice

    registration system proposed by the commenter. The Commission is

    adopting the amendment to Sec. 4.5 regarding the trading threshold

    with the addition of an alternative net notional test for the reasons

    stated herein and those previously discussed in the Proposal.

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

    \66\ See NFA Letter, Campbell Letter, AQR Letter, Steben Letter.

    \67\ See AQR Letter.

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

    3. Comments on the Inclusion of Swaps in the Trading Threshold

    The Commission also received numerous comments opposing its

    decision to include swaps within the threshold test discussed

    above.\68\ Several commenters expressed concern that the Commission

    would require inclusion of swaps within the threshold prior to its

    adoption of final rules further defining the term ``swap'' and

    explaining the margining requirements for such instruments. The

    Commission agrees that it should not implement the inclusion of swaps

    within the threshold test prior to the effective date of such final

    rules. Therefore, it is the Commission's intention to establish the

    compliance date of the inclusion of swaps within the threshold

    calculation as 60 days after the final rules regarding the definition

    of ``swap'' and the delineation of the margin requirement for such

    instruments are effective.\69\ The Commission believes that such

    compliance date will provide entities with sufficient time to assess

    the impact of such rules on their portfolios and to make the

    determination as to whether registration with the Commission is

    required.

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

    \68\ See Janus Letter; Reed Smith Letter; AllianceBernstein

    Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA

    Letter; Dechert II Letter; AII Letter; and SIFMA Letter.

    \69\ Effective Date for Swap Regulation, 76 FR 42508 (issued and

    made effective by the Commission on July 14, 2011; published in

    Federal Register on July 19, 2011).

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

    The Commission also received a comment asking for additional

    clarification regarding its decision to include swaps within the

    threshold.\70\ The Dodd-Frank Act amended the statutory definition of

    the terms ``commodity pool operator'' and ``commodity pool'' to include

    those entities that trade swaps.\71\ If the Commission were to adopt

    the trading threshold and only include futures and options as the basis

    for calculating compliance with the threshold, the swaps activities of

    the registered investment companies would still trigger the

    registration requirement notwithstanding the exclusion of swaps from

    the calculus. That is, the purpose of the threshold test is to define a

    de minimis amount of trading activity that would not trigger the

    registration requirement. If swaps were excluded, any swaps activities

    undertaken by a registered investment company would result in that

    entity being required to register because there would be no de minimis

    exclusion. As a result, one swap contract would be enough to trigger

    the registration requirement. For that reason, if the Commission wants

    to permit some de minimis level of swaps activity by registered

    investment companies without registration with the Commission, it must

    do so explicitly in the exclusion.\72\ Because the Commission has

    determined that de minimis activity by registered investment companies

    does not implicate the Commission's regulatory concerns, the Commission

    has decided to include swaps as a component of the trading threshold.

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

    \70\ See Janus Letter; Reed Smith Letter; AllianceBernstein

    Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA

    Letter; Dechert II Letter; AII Letter; and SIFMA Letter.

    \71\ 7 U.S.C. 1a(10); 1a(11).

    \72\ Any reference to a de minimis level of swaps activities by

    registered investment companies only applies in the context of CPO

    registration by registered investment companies.

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

    4. Comments on the Proposed Marketing Restriction

    The marketing restriction, as proposed by the Commission, prohibits

    the marketing of interests in the registered investment company ``as a

    vehicle for trading in (or otherwise seeking investment exposure to)

    the commodity futures, commodity options, or swaps markets.'' \73\

    Again, as with the other aspects of the proposed amendments to Sec.

    4.5, the Commission received numerous comments on this prohibition.\74\

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

    \73\ 76 FR 7976, 7989 (Feb. 12, 2011).

    \74\ See Rydex Letter; Fidelity Letter; SIFMA Letter; AII

    Letter; ICI Letter; Vanguard Letter; Reed Smith Letter;

    AllianceBernstein Letter; USAA Letter; PMC Letter; Invesco Letter;

    Janus Letter; STA Letter; comment letter from the Managed Futures

    Association regarding proposed amendments to Sec. 4.5 (April 12,

    2011) (``MFA II Letter''); Dechert II Letter; NFA Letter; comment

    letter from Alston & Bird, LLP (April 12, 2011) (``Alston Letter'');

    Campbell Letter; AQR Letter; Steben Letter; and Dechert III Letter.

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

    The vast majority of comments urged the Commission to remove the

    clause ``or otherwise seeking investment exposure to'' as introducing

    an unacceptable level of ambiguity into the marketing restriction.\75\

    The Commission agrees with these comments and believes that the removal

    of this clause is appropriate as the clause does not meaningfully add

    to the marketing restriction and only creates uncertainty. Thus, the

    Commission will adopt the marketing restriction without the clause ``or

    otherwise seeking investment exposure to * * *''

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

    \75\ See, e.g., ICI Letter; Alston Letter; Rydex Letter; and

    Vanguard Letter.

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

    The Commission also received many comments asking that the

    Commission provide some clarification regarding the factors that it

    would consider in making the determination whether an entity violated

    the marketing restriction.\76\ The Commission agrees that providing

    factors to further explain the plain language of the marketing

    restriction would be helpful to those who plan to market registered

    investment companies

    [[Page 11259]]

    to investors. The Commission has determined, however, that such factors

    should be instructive and that no single factor is dispositive. The

    Commission will determine whether a violation of the marketing

    restriction exists on a case by case basis through an examination of

    the relevant facts. The Commission seeks to discourage entities from

    designing creative marketing with the intent to avoid the marketing

    restriction.

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

    \76\ See ICI Letter; MFA II Letter; Dechert II Letter; Invesco

    Letter; NFA Letter; Campbell Letter; Steben Letter; and AQR Letter.

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

    To address commenters' requests for guidance, the Commission

    believes that the following factors are indicative of marketing a

    registered investment company as a vehicle for investing in commodity

    futures, commodity options, or swaps:

    The name of the fund;

    Whether the fund's primary investment objective is tied to

    a commodity index;

    Whether the fund makes use of a controlled foreign

    corporation for its derivatives trading;

    Whether the fund's marketing materials, including its

    prospectus or disclosure document, refer to the benefits of the use of

    derivatives in a portfolio or make comparisons to a derivatives index;

    Whether, during the course of its normal trading

    activities, the fund or entity on its behalf has a net short

    speculative exposure to any commodity through a direct or indirect

    investment in other derivatives;

    Whether the futures/options/swaps transactions engaged in

    by the fund or on behalf of the fund will directly or indirectly be its

    primary source of potential gains and losses; and

    Whether the fund is explicitly offering a managed futures

    strategy.\77\

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

    \77\ These factors are derived in substantial part from the

    Steben Letter and AQR Letter.

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

    The Commission will give more weight to the final factor in the

    list when determining whether a registered investment company is

    operating as a de facto commodity pool. In contrast, a registered

    investment company that does not explicitly offer a managed futures

    strategy could still be found to have violated the marketing

    restriction based on whether its conduct satisfied any number of the

    other factors enumerated above. Put differently, if a registered

    investment company offers a strategy with several indicia of a managed

    futures strategy, yet avoids explicitly describing the strategy as such

    in its offering materials, that registered investment company may still

    be found to have violated the marketing restriction.

    The Commission also notes that whether the name of the fund

    includes the terms ``futures'' or ``derivatives,'' or otherwise

    indicates a possible focus on futures or derivatives, will not be

    considered a dispositive factor, but rather one of many that the

    Commission will consider in making its determination. Moreover, the

    Commission will not consider the mere disclosure to investors or

    potential investors that the registered investment company may engage

    in derivatives trading incidental to its main investment strategy and

    the risks associated therewith as being violative of the marketing

    restriction.

    At the Roundtable, several panelists questioned the Commission's

    reasoning for deeming the use of a controlled foreign corporation

    (``CFC'') to be an appropriate factor in determining whether the

    registered investment company violates the marketing restriction. Based

    on comments received at the Roundtable and during the comment period,

    the Commission believes that registered investment companies use

    controlled foreign corporations as a mechanism to invest up to 25

    percent of the registered investment company's portfolio in

    derivatives.\78\ The Commission, therefore, believes that a registered

    investment company's use of a CFC may indicate that the company is

    engaging in derivatives trading in excess of the trading threshold.

    Again, the Commission will consider this factor in the context of the

    registered investment company's other conduct and will not view this

    factor as being dispositive of a violation of the marketing

    restriction.

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

    \78\ See Roundtable Transcript at 152-53.

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

    For these reasons, and those stated in the Proposal, the Commission

    adopts the marketing restriction in Sec. 4.5 with the modifications

    discussed herein.

    5. Comments on the Harmonization of Compliance Obligations

    Many commenters raised concerns about the potential conflicts

    between the Commission's regulatory regime and that imposed by the SEC

    if the Commission were to adopt the proposed amendments as final

    rules.\79\ As noted above, in an effort to obtain further information

    from interested parties, Commission staff held the Roundtable, and

    invited staff from the SEC, the IRS, and members of various trade

    organizations. The roundtable focused predominantly on harmonization of

    the Commission's compliance regime with that of the SEC. Upon

    consideration of the comments and the discussions held as a result of

    the Roundtable relating to registered investment companies that will be

    required to register under amended Sec. 4.5, the Commission agrees

    that it is necessary to harmonize the Commission's compliance

    obligations under part 4 of the Commission's regulations with the

    requirements of the SEC for registered investment companies. To that

    end, concurrently with the issuance of this rule, the Commission is

    issuing a notice of proposed rulemaking detailing its proposed

    modifications to part 4 of its regulations to harmonize the compliance

    obligations that apply to dually registered investment companies. The

    Commission will not require entities that must register due to the

    amendments to Sec. 4.5 to comply with the Commission's compliance

    regime until the adoption of final rules governing the compliance

    framework for registered investment companies subject to the

    Commission's jurisdiction.

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

    \79\ See Vanguard Letter; ICI Letter; Dechert III Letter; Reed

    Smith Letter; AllianceBernstein Letter; USAA Letter; PMC Letter;

    Invesco Letter; IAA Letter; Dechert II Letter; Fidelity Letter;

    Janus Letter; SIFMA Letter; STA Letter; AQR Letter; NFA Letter; MFA

    II Letter; Alston Letter; Rydex Letter; and ICI II Letter.

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

    6. Comments Regarding the Entity Required to Register as the CPO

    The Commission received a number of comments requesting

    clarification as to which entity would be required to register as a CPO

    if a registered investment company would not qualify for exclusion

    under Sec. 4.5, as amended.\80\ The commenters consistently proposed

    that the registered investment company's investment adviser is the

    appropriate entity to register in the capacity of the investment

    company's CPO. The Commission agrees that the investment adviser is the

    most logical entity to serve as the registered investment company's

    CPO. To require a member or members of the registered investment

    company's board of directors to register would raise operational

    concerns for the registered investment company as it would result in

    piercing the limitation on liability for actions undertaken in the

    capacity of director.\81\ Thus, the Commission concludes that the

    investment adviser for the registered investment company is the entity

    required to register as the CPO.

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

    \80\ See ICI Letter; Reed Smith Letter; AllianceBernstein

    Letter; Rydex Letter; Fidelity Letter; USAA Letter; PMC Letter; IAA

    Letter; Janus Letter; SIFMA Letter; STA Letter; comment letter from

    AlphaSimplex Group (April 12, 2011) (``ASG Letter''); NFA Letter;

    MFDF Letter; and Campbell Letter.

    \81\ See MFDF Letter.

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

    [[Page 11260]]

    7. Comments Regarding the Use of Controlled Foreign Corporations

    The Commission received many comments regarding the use of CFCs by

    registered investment companies for purposes of engaging in commodities

    trading. As stated previously, it is the Commission's understanding

    that registered investment companies invest up to 25 percent of their

    assets in the CFC, which then engages in actively managed derivatives

    strategies, either on its own or under the direction of one or more

    CTAs. Operators of CFCs have been exempt from Commission registration

    by claiming relief under Sec. 4.13(a)(4) of the Commission's

    regulations because the sole participant in the CFC is the registered

    investment company. Additionally, at the Roundtable, panelists informed

    Commission staff that several registered investment companies that

    operated CFCs did not claim relief under Sec. 4.13(a)(4) because it

    was their opinion that the CFC was merely a subdivision of the

    registered investment company and was not a separate commodity

    pool.\82\

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

    \82\ See Roundtable Transcript at 165.

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

    Commenters urged the Commission to continue to permit registered

    investment companies to use CFCs and to allow such CFCs to be exempt

    from registration with the Commission under Sec. 4.13 or exclude them

    under Sec. 4.5 by reason of their sole investor being excluded as

    well. Commenters proposed various mechanisms by which the Commission

    could obtain information regarding the activities of CFCs, including

    requiring disclosure of CFC fees and expenses at the registered

    investment company level, requiring a representation that the CFC will

    comply with key provisions of the Investment Company Act of 1940

    (``Investment Company Act''),\83\ and requiring the registered

    investment company to make its CFC's books and records available to the

    Commission and NFA for inspection.

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

    \83\ 15 U.S.C. 80a-1, et seq.

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

    The Commission does not oppose the continued use of CFCs by

    registered investment companies, but it believes that CFCs that fall

    within the statutory definition of ``commodity pool'' should be subject

    to regulation as a commodity pool.\84\ The Dodd-Frank Act amended the

    CEA to define a commodity pool as ``any investment trust, syndicate, or

    similar form of enterprise operated for the purpose of trading in

    commodity interests, including any * * * commodity for future delivery,

    security futures product, or swap.'' \85\ Based on a plain language

    reading of the statutory definition, CFCs wholly owned by registered

    investment companies and used for trading commodity interests are

    properly considered commodity pools. These entities also satisfy the

    definition of ``pool'' delineated in Sec. 4.10(d)(1) of the

    Commission's regulations, which is substantively identical to the

    statutory definition. There is no meaningful basis for concluding

    otherwise. Moreover, the Commission believes that each separate legally

    cognizable entity must be assessed on its own characteristics and that

    a CFC should not be entitled to exclusion simply because its parent

    company is a registered investment company that may be entitled to

    exclusion under Sec. 4.5. Therefore, the Commission does not oppose

    the use of CFCs for trading in commodity interests by registered

    investment companies, but such CFCs will be required to have their CPOs

    register with the Commission unless they may claim exemption or

    exclusion therefrom on their own merits.

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

    \84\ 7 U.S.C. 1a(10).

    \85\ 7 U.S.C. 1a(10).

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

    8. Comments Regarding Implementation of Amendments

    The Commission received several comments with suggestions regarding

    implementation of the proposed amendments to Sec. 4.5, if the

    Commission decided to adopt the proposed provisions as final rules.\86\

    Several commenters recommended that the Commission provide for an

    undefined ``substantial transition period for compliance.'' \87\

    Conversely, one commenter suggested that the Commission should only

    provide a short period of time for compliance.\88\ Another commenter

    suggested that at least 12-months would be required for registered

    investment companies to come into registration and compliance with

    Commission requirements.\89\ Finally, a commenter suggested that the

    Commission delay implementation until all mandatory Dodd-Frank Act

    rules are implemented.\90\

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

    \86\ See Steben Letter; ICI Letter; NFA Letter; Reed Smith

    Letter; AllianceBernstein Letter; USAA Letter; PMC Letter; IAA

    Letter; Janus Letter; STA Letter; Rydex Letter; Alston Letter; and

    comment letter from the Association of Institutional Investors (July

    1, 2011) (``AII II Letter'').

    \87\ See ICI Letter; NFA Letter; Reed Smith Letter;

    AllianceBernstein Letter; USAA Letter; PMC Letter; IAA Letter; Janus

    Letter; and STA Letter.

    \88\ See Steben Letter.

    \89\ See Rydex Letter.

    \90\ See AII II Letter.

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

    In light of the Commission's proposed harmonization effort with

    respect to the compliance obligations for dually registered investment

    companies and the ongoing efforts to further define the term ``swap''

    and the margin requirements for swaps positions, the Commission

    recognizes that a short implementation period is not practicable. The

    Commission believes that 11 months is an adequate amount of time to

    enable compliance by existing registered investment companies.

    Recognizing that the definition of swap is not yet finalized, the

    Commission has decided that compliance with the amendments to Sec. 4.5

    for purposes of registration only will occur on the later of either

    December 31, 2012 or within 60-days following the adoption of final

    rules defining the term ``swap,'' and establishing margin requirements

    for such instruments.\91\ Entities required to register due to the

    amendments to Sec. 4.5 shall be subject to the Commission's

    recordkeeping, reporting, and disclosure requirements set forth in part

    4 of the Commission's regulations within 60 days following the

    effectiveness of a final rule implementing the Commission's proposed

    harmonization effort pursuant to the concurrent proposed rulemaking.

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

    \91\ Effective Date for Swap Regulation, 76 FR 42508.

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

    Several commenters also suggested that the Commission exempt from

    compliance those registered investment companies that have already

    claimed relief under Sec. 4.5.\92\ The Commission does not believe

    that ``grandfathering'' is appropriate in this context. As the

    Commission stated in its Proposal, and reaffirms in this preamble, part

    of the purpose of amending Sec. 4.5 is to ensure that entities that

    are engaged in a certain level of derivatives trading are subject to

    the registration and compliance obligations and oversight by the

    Commission.\93\ Grandfathering is inconsistent with the goals of the

    Commission's amendments. The Commission, however, believes that

    harmonization of the Commission's compliance regime with that of the

    SEC will minimize the regulatory burden of existing registered

    investment companies. In addition, the Commission is permitting a

    sufficient amount of time for existing entities to come into compliance

    before the compliance dates set forth above. Therefore, the Commission

    believes that it is addressing the commenters' concerns through

    harmonization while still ensuring that the Commission has the

    [[Page 11261]]

    information necessary to oversee all participants in the derivatives

    markets.

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

    \92\ See ICI Letter; Reed Smith Letter; AllianceBernstein

    Letter; Invesco Letter; IAA Letter; Janus Letter; AII Letter; SIFMA

    Letter; and STA Letter.

    \93\ 76 FR 7976, 7983-84 (Feb. 12, 2011).

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

    B. Comments Regarding Proposed Amendment to Sec. 4.7

    The Commission proposed two amendments to Sec. 4.7. The first

    proposed to amend Sec. Sec. 4.7(a)(3)(ix) and (a)(3)(x) to incorporate

    by reference the accredited investor standard from the SEC's Regulation

    D \94\ under the Securities Act of 1933,\95\ rather than by direct

    inclusion of its specific terms. The Commission stated that this

    amendment would ``permit the Commission's definition of QEP to continue

    to include the specific terms of the accredited investor standard in

    the event that it is later modified by the SEC without requiring the

    Commission to amend Sec. 4.7 each time to maintain parity.'' \96\

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

    \94\ 17 CFR 230.501(a)(5), (a)(6) (2011).

    \95\ 15 U.S.C. 77a, et seq.

    \96\ 76 FR 7976, 7985 (Feb. 12, 2011).

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

    The Commission received one comment supporting this proposed

    amendment. Specifically, the commenter stated its belief that this

    amendment would ``facilitate consistency amongst federal standards for

    financial sophistication and reduce investor confusion.'' \97\ The

    Commission agrees and, accordingly, is adopting the amendments to

    Sec. Sec. 4.7(a)(3)(ix) and (a)(3)(x) as proposed.

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

    \97\ See MFA II Letter.

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

    The second proposed amendment to Sec. 4.7 would rescind the relief

    provided in Sec. 4.7(b)(3) \98\ from the certification requirement of

    Sec. 4.22(c) \99\ for financial statements contained in commodity pool

    annual reports. In support of the Proposal, the Commission noted that

    approximately 85 percent of all pools operated under Sec. 4.7 in

    fiscal year 2009 filed financial statements that were certified by

    certified public accountants, ``despite being eligible to claim relief

    from certification under Sec. 4.7(b)(3).'' \100\ The number of

    uncertified financial statements has continued to decline and, for

    fiscal year 2010, approximately 91 percent of all reports filed for

    pools operated under Sec. 4.7 included financial statements that were

    certified by certified public accountants.\101\ In the Proposal, the

    Commission stated its belief that ``requiring certification of

    financial information by an independent accountant in accordance with

    established accounting standards will ensure the accuracy of the

    financial information submitted by its registrants,'' and will further

    the stated purposes of the Dodd-Frank Act.\102\

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

    \98\ 17 CFR 4.7(b)(3) (2011).

    \99\ Id. 4.22(c).

    \100\ 76 FR 7967, 7984-85 (Feb. 12, 2011).

    \101\ In 2010, 951 pools were operated pursuant to Sec. 4.7 and

    84 of those pools filed uncertified financial statements for fiscal

    year 2010.

    \102\ Id. at 7985.

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

    The Commission received two comments regarding this proposed

    amendment. One commenter supported the proposed rescission and the

    Commission's stated justification for doing so.\103\ The other

    commenter recommended that the Commission retain an exemption from

    certification of financial statements for entities where the pool's

    participants are limited to the principals of its CPO(s) and CTA(s) and

    other categories of employees listed in Sec. 4.7(a)(2)(viii).\104\ It

    is unclear how many of the pools operated under Sec. 4.7 would qualify

    for such relief if adopted. The Commission believes that rather than

    adopt an exemption for such entities without data regarding the scope

    of the exemption's applicability, it is more appropriate to rescind the

    exemption from certification for all pools operated under Sec.

    4.7(b)(3) generally and permit entities to write to the Division of

    Swap Dealer and Intermediary Oversight to request exemptive relief from

    the certification requirement on a case by case basis under Sec.

    140.99.\105\ By requiring entities to request relief from the

    Commission, the Commission can better determine whether such an

    exemption should be adopted in the future. Therefore, the Commission is

    adopting the amendments to Sec. 4.7 as proposed.

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

    \103\ See NFA Letter.

    \104\ See MFA II Letter.

    \105\ 17 CFR Sec. 140.99.

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

    C. Comments Regarding the Proposed Rescission of Sec. Sec. 4.13(a)(3)

    and (a)(4)

    As stated previously, the Commission proposed to rescind Sec. Sec.

    4.13(a)(3) and (a)(4). After considering the comments received, which

    are detailed herein, the Commission has determined to retain the de

    minimis exemption in Sec. 4.13(a)(3). The Commission concluded that

    overseeing entities with less than five percent exposure to commodity

    interests is not the best use of the Commission's limited resources.

    Moreover, the Commission believes that the retention of the de minimis

    exemption in Sec. 4.13(a)(3) provides for consistent treatment of

    entities engaging in de minimis levels of trading due to the addition

    of a five percent trading threshold in Sec. 4.5 as well. The

    Commission received several comments requesting that the Commission

    modify Sec. 4.13(a)(3) in various respects. The Commission has

    determined, however, that it is appropriate to retain Sec. 4.13(a)(3)

    in its current form, for the reasons detailed below.

    1. General Comments

    In addition to the comments that the Commission received regarding

    the specific parts of the Proposal rescinding Sec. Sec. 4.13(a)(3) and

    (a)(4), the Commission received numerous comments regarding the

    proposed rescissions generally.\106\ Broadly, the comments opposed the

    rescission of both provisions.

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

    \106\ See comment letter from the New York State Bar Association

    (April 12, 2011) (``NYSBA Letter''); comment letter from Skadden,

    Arps, Slate, Meagher & Flom LLP (April 12, 2011) (``Skadden

    Letter''); MFA Letter; comment letter from Katten, Muchin Rosenman

    LLP (April 12, 2011) (``Katten Letter''); Fidelity Letter; Dechert

    Letter; comment letter from the Alternative Investment Management

    Association, Ltd. (April 12, 2011) (``AIMA Letter''); comment letter

    from the Alternative Investment Management Association, Ltd. (July

    1, 2011) (``AIMA II Letter''); IAA Letter; SIFMA Letter; comment

    letter from HedgeOp Compliance, LLC (July 28, 2011) (``HedgeOp

    Letter''); comment letter from the Private Investor Coalition; Inc.

    (April 12, 2011) (``PIC Letter''); and comment letter Seward &

    Kissel, LLP (April 12, 2011) (``Seward Letter'').

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

    Several commenters asserted that rescission was not necessary

    because the Commission has the means to obtain any needed information

    from exempt CPOs through its large trader reporting requirements and

    its special call authority.\107\ Although the Commission has the means

    to obtain certain information through the mechanisms delineated by the

    commenters, neither of those mechanisms provide the type of data

    requested on Forms CPO-PQR or CTA-PR with the kind of regularity

    proposed under Sec. 4.27. For example, large trader reporting may

    provide detailed trading information for a particular market

    participant, but it does not provide the Commission with information

    regarding trends across funds that are not large enough to trigger the

    reporting obligation, but that may nevertheless impact the market.

    Also, with respect to the Commission's special call authority under

    Sec. 21.03, the collection of data under that section is generally

    reactive in nature. That is, the Commission would be in a position to

    collect data under Sec. 21.03 after it became aware of an issue.

    Conversely, it is anticipated that collecting data using Forms CPO-PQR

    and CTA-PR will enable the Commission to be more proactive in assessing

    possible threats to market stability and in carrying out its duties in

    overseeing market participants generally.

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

    \107\ See Skadden Letter; Katten Letter; and MFA Letter.

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

    Some commenters suggested that the Commission adopt a limited

    exemption for SEC-registered entities that are not ``primarily

    engaged'' in trading commodity interests.\108\ Pursuant to the

    [[Page 11262]]

    terms of Sec. 4m(3) of the CEA, as amended by the Dodd-Frank Act, CTAs

    that are registered with the SEC and whose business does not consist

    primarily of acting as a CTA, and that do not act as a CTA to any pool

    engaged primarily in the trading of commodity interests, are exempt

    from registration with the Commission.\109\ The Commission believes

    that that statutory exemption for CTAs is explicit as to Congress's

    limited intentions regarding exempting entities from registration with

    the Commission. By the plain language of Sec. 4m(3), this section

    creates an exemption from the CTA registration requirements of the CEA;

    commodity pools are discussed in that provision only to the extent that

    the characteristics of the pool enable the CTA to claim relief. The

    registration category of CPO is not implicated. Therefore, the

    Commission concludes that the provisions of Sec. 4m(3) do not mandate

    any exemption from the registration requirements for CPOs. Moreover,

    the Commission disagrees with the commenter who asserted that

    rescission is inconsistent with Congress's asserted intention to avoid

    dual registration. The Commission does not believe it is accurate to

    state that Congress intended to avoid oversight by both agencies, and

    indeed Congress clearly anticipated some overlap when, in the Dodd-

    Frank Act, it required the Commission to work with the SEC to adopt a

    data collection instrument for dual registrants. Section 406 of the

    Dodd-Frank Act explicitly mandated that the Commission and the SEC

    jointly promulgate a reporting form for dually registered

    entities.\110\ The Commission does not believe that this requirement

    could be consistent with any asserted Congressional intention to

    absolutely avoid dual registration with the commissions. Therefore, the

    Commission concludes that dual registration of certain entities is not

    irreconcilable with the Congressional intent underlying the Dodd-Frank

    Act.

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

    \108\ See Dechert Letter; and Katten Letter.

    \109\ 7 U.S.C. 6m(3).

    \110\ See Section 406 of the Dodd-Frank Act.

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

    Other commenters asserted that the compliance and regulatory

    obligations under the Commission's rules are burdensome and costly for

    private businesses and would unnecessarily distract entities from their

    primary focus of managing client assets.\111\ The Commission disagrees

    with this assertion, which in any event was not fully detailed by any

    commenter. The Commission believes that regulation is necessary to

    ensure a well functioning market and to provide investor protection.

    The Commission further believes that the compliance regime that the

    Commission has adopted strikes the appropriate balance between limiting

    the burden placed on registrants and enabling the Commission to carry

    out its duties under the CEA. Moreover, the compliance and regulatory

    obligations imposed on these CPO registrants will be no different from

    those imposed on other registered CPOs. Such compliance and regulatory

    obligations have not been unduly burdensome for these other

    registrants.

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

    \111\ See MFA Letter; Seward Letter; and Katten Letter.

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

    2. Comments Regarding the Proposed Rescission of Sec. 4.13(a)(3)

    In the Proposal, the Commission proposed rescinding the ``de

    minimis'' exemption in Sec. 4.13(a)(3). The Commission stated its

    belief that ``it is possible for a commodity pool to have a portfolio

    that is sizeable enough that even if just five percent of the pool's

    portfolio were committed to margin for futures, the pool's portfolio

    could be so significant that the commodity pool would constitute a

    major participant in the futures market.'' \112\ Moreover, the

    Commission stated that it believed that this rescission was consistent

    with the purposes of the Dodd-Frank Act, with specific regard to

    increased transparency and accountability of participants in the

    financial markets. The Commission did, however, solicit comment as to

    whether some form of de minimis exemption should be maintained.

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

    \112\ 76 FR 7976, 7985 (Feb. 12, 2011).

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

    The Commission received ten comments specifically on its proposed

    rescission of the ``de minimis'' exemption in Sec. 4.13(a)(3).\113\

    The commenters consistently urged the Commission to retain a de minimis

    exemption. Some commenters cited to the amendment to Sec. 4m(3) of the

    CEA by the Dodd Frank Act, which provides an exemption from

    registration for CTAs that are registered with the SEC and whose

    business does not consist primarily of acting as a CTA and that does

    not act as a CTA to any pool engaged primarily in the trading of

    commodity interests.\114\ One commenter stated that the effect of Sec.

    4m(3) was to exempt such CTAs from registration as a CPO or CTA; \115\

    whereas another commenter asserted that the amendment of Sec. 4m(3) is

    evidence that Congress did not intend to have the operator of a

    commodity pool register as a CPO if its pool is not primarily engaged

    in trading commodity interests.\116\ The Commission notes that under

    the tenets of statutory interpretation, where Congress explicitly

    enumerates certain exceptions to a general prohibition, additional

    exceptions are not to be implied in the absence of evidence of a

    contrary legislative intent.\117\ By the plain language of Sec. 4m(3),

    this section creates an exemption from the CTA registration

    requirements of the CEA; commodity pools are discussed only to the

    extent that the characteristics of the pool enable the CTA to claim

    relief. The registration category of CPO is not referenced. Therefore,

    the Commission concludes that the provisions of Sec. 4m(3) do not

    mandate any exemptions from registration for CPOs. The Commission

    notes, however, that it has determined to retain the de minimis

    exemption set forth in Sec. 4.13(a)(3).

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

    \113\ See MFA Letter; NYSBA Letter; comment letter from Schulte

    Roth & Zabel LLP (April 12, 2011) (``Schulte Letter''); Dechert III

    Letter; Skadden Letter; Seward Letter; IAA Letter; NFA Letter; SIFMA

    Letter; and comment letter from McGuireWoods LLC (April 12, 2011)

    (``McGuireWoods Letter'').

    \114\ 7 U.S.C. 6m(3).

    \115\ See Skadden Letter.

    \116\ See MFA Letter.

    \117\ See Andrus v. Glover Construction Co., 446 U.S. 608

    (1980).

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

    Several commenters suggested adding as a prerequisite for exemptive

    relief under Sec. 4.13(a)(3), registration with the SEC as an

    investment adviser.\118\ The Commission is declining to add SEC

    registration as part of the criteria for relief under Sec. 4.13(a)(3)

    because the basis for providing relief is the limited nature of the

    pool's trading activity rather than its operator's registration status

    with the SEC. To require the CPO of an exempt pool to be regulated by

    the SEC would limit the applicability of Sec. 4.13(a)(3), which is not

    the Commission's intention at this time.

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

    \118\ See MFA Letter; NFA Letter; Skadden Letter; Schulte

    Letter; NYSBA Letter; Dechert III Letter; IAA Letter; and Seward

    Letter.

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

    Most commenters suggesting the additional requirement of SEC

    registration also proposed an increase in the trading threshold,

    ranging from 20 percent to 50 percent of the pool's liquidation value

    due to the inclusion of the pool's swaps activity within the trading

    threshold.\119\ As discussed earlier in this release in the context of

    Sec. 4.5, the Commission believes that a five percent threshold

    continues to be the appropriate level for exemption or exclusion due to

    limited derivatives trading. Moreover, the Commission would again note

    that the inclusion of an alternative net notional test provides CPOs

    with another, perhaps less restrictive means, of qualifying for the

    exemption. The Commission believes

    [[Page 11263]]

    that trading exceeding five percent of the liquidation value of a

    portfolio, or a net notional value of commodity interest positions

    exceeding 100 percent of the liquidation value of a portfolio,

    evidences a significant exposure to the derivatives markets, and that

    such exposure should subject an entity to the Commission's oversight.

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

    \119\ See MFA Letter; Skadden Letter; NYSBA Letter; Dechert III

    Letter.

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

    With respect to the issue of the inclusion of swaps making it more

    difficult to satisfy the trading threshold, the Commission believes

    that it would be premature to increase the threshold at this time.

    Additionally, as stated previously, the inclusion of an alternative net

    notional test may provides entities with another mechanism for

    qualifying for the exemption in Sec. 4.13(a)(3). The Commission

    believes that it may be more appropriate to reassess the trading

    threshold after collecting data from registered CPOs through Form CPO-

    PQR. Therefore, the Commission has decided not to increase the trading

    threshold under Sec. 4.13(a)(3).

    Additionally, the Commission believes that it must include swaps

    within the threshold to enable the most entities to claim relief under

    Sec. 4.13(a)(3). As stated previously with respect to the amendments

    to Sec. 4.5, the Dodd-Frank Act amended the statutory definition of

    the terms ``commodity pool operator'' and ``commodity pool'' to include

    those entities that trade swaps.\120\ If the Commission were to keep

    the de minimis test in Sec. 4.13(a)(3) and only include futures and

    options as the basis for calculating compliance with the threshold, the

    swaps activities of the CPOs would still trigger the registration

    requirement notwithstanding the exclusion of swaps from the calculus.

    That is, the purpose of the threshold test is to define a de minimis

    amount of trading activity that would not trigger the registration

    requirement. If swaps were excluded, any swaps activities undertaken by

    a CPO would result in that entity being required to register because

    there would be no de minimis exclusion for such activity. As a result,

    one swap contract would be enough to trigger the registration

    requirement. For that reason, if the Commission wants to permit some de

    minimis level of swaps activity by CPOs without registration with the

    Commission, it must do so explicitly in the exemption.\121\ Because the

    Commission has determined that de minimis activity by CPOs does not

    implicate the Commission's regulatory concerns, the Commission has

    decided that it is appropriate to include swaps within the trading

    threshold under Sec. 4.13(a)(3).\122\

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

    \120\ 7 U.S.C. 1a(10); 1a(11).

    \121\ Any reference to a de minimis level of swaps activities by

    registered investment companies only applies in the context of CPO

    registration by registered investment companies.

    \122\ The Commission has proposed to amend the definition of

    ``commodity interest'' as it appears in Sec. 1.3 to include swaps,

    consistent with the Dodd-Frank Act. See, 76 FR 33066 (June 7, 2011).

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

    Additionally, to enable CPOs to fully exercise the alternative net

    notional test, the Commission is amending Sec. 4.13(a)(3)(ii)(B) to

    provide guidance as to the notional value of cleared swaps positions

    and the ability to net swaps cleared by the same DCO. The Commission

    believes that this amendment will serve to provide equal ability to

    claim relief under Sec. 4.13(a)(3) to all CPOs regardless of the types

    of commodity interests held by their operated pools. Therefore, the

    Commission is amending Sec. 4.13(a)(3)(ii)(B)(1) to provide that the

    notional value of a cleared swap is determined consistent with the

    provisions of part 45 of the Commission's regulations and Sec.

    4.13(a)(3)(ii)(B)(2) to provide that swaps cleared by the same DCO may

    be netted where appropriate.

    After consideration of the comments and the Commission's stated

    rationale for proposing to rescind the exemption in Sec. 4.13(a)(3),

    the Commission has determined to retain the de minimis exemption

    currently set forth in that section without modification.\123\

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

    \123\ The Commission does not need to amend the language of

    Sec. 4.13(a)(3) to include swaps within the trading threshold as

    this section determines eligibility based on the amount of

    ``commodity interests'' traded. In a separate rulemaking, the

    Commission has proposed to amend the definition of the term

    ``commodity interest'' to include swaps. See 76 FR 11701 (March 3,

    2011).

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

    3. Comments Regarding a Family Offices Exemption

    In response to the Commission's proposed rescission of Sec. Sec.

    4.13(a)(3) and (a)(4), the Commission received numerous comments asking

    that the Commission adopt an exemption from registration for family

    offices that is akin to the exemption adopted by the SEC.\124\ The

    commenters noted that prior to the adoption of Sec. Sec. 4.13(a)(3)

    and (a)(4), the Commission staff granted relief to family offices on an

    ad hoc basis, but that when Sec. Sec. 4.13(a)(3) and (a)(4) were

    adopted, most family offices availed themselves of those exemptions

    from registration. The commenters argued that the Commission should

    have less regulatory concern about family offices because their

    clientele is necessarily limited to family members and the family

    offices do not solicit outside of the family unit.

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

    \124\ See 17 CFR 250.202(a)(11)(G)-1.

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

    Due to the exemptions previously granted by Commission staff, and

    the resulting lack of information regarding the activities of CPOs

    claiming relief thereunder, the Commission does not yet have a

    comprehensive view of the positions taken and interests held by

    currently exempt entities. The Commission, therefore, believes that it

    is prudent to withhold consideration of a family offices exemption

    until the Commission has developed a comprehensive view regarding such

    firms to enable the Commission to better assess the universe of firms

    that may be appropriate to include within the exemption, should the

    Commission decide to adopt one. Therefore, the Commission is directing

    staff to look into the possibility of adopting a family offices

    exemption in the future.

    The Commission notes that family offices previously relying on the

    exemption under Regulation Sec. 4.13(a)(3) will not be affected by the

    rules adopted herein, as the Commission is not rescinding the Sec.

    4.13(a)(3) exemption and it will remain available to entities meeting

    its criteria. The Commission further notes that family offices continue

    to be permitted to write in on a firm by firm basis to request

    interpretative relief from the registration and compliance obligations

    under the Commission's rules and to rely on those interpretative

    letters already issued to the extent permissible under the Commission's

    regulations.\125\ Therefore, the Commission does not believe an

    exemption for family offices is necessary at this time.

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

    \125\ See 17 CFR 140.99(a)(3) (``An interpretative letter may be

    relied upon by persons in addition to the Beneficiary.''). The most

    recent letter (CFTC letter 10-25) issued affirming the Division's

    interpretation that a ``family office'' is not a pool under Sec.

    4.10(d) is available at the Commission's Web site at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/10-25.pdf. See, CFTC Interpretative Letter 00-100 [2000-2002 Transfer

    Binder] Comm. Fut. L. Rep. (CCH) ] 28,420 (Nov. 1, 2000); CFTC

    Interpretative Letter No. 96-24, [1994-1996 Transfer Binder] Comm.

    Fut. L. Rep. (CCH) ] 26,653 (March 4, 1996); CFTC Interpretative

    Letter No. 97-29, [1996-1998 Transfer Binder] Comm. Fut. L. Rep.

    (CCH) ] 27,039 (March 21, 1997); CFTC Interpretative Letter No. 95-

    35, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 26,376

    (Nov. 23, 1994).

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

    4. Comments Regarding a Foreign Advisor Exemption

    Several commenters suggested that if the Commission determines to

    adopt the proposed rescissions, it should adopt a foreign advisor

    exemption similar to that set forth in the Dodd-Frank Act under the

    Investment Adviser Act of

    [[Page 11264]]

    1940.\126\ The commenters expressed concern that the rescission of the

    exemptions under Sec. Sec. 4.13(a)(3) and (a)(4) would result in

    nearly all non-US based CPOs operating a pool with at least one U.S.

    investor being required to register with the Commission. Commenters

    also expressed concern that foreign CPOs would have to report the

    entirety of their derivatives activities to the Commission even if

    foreign regulators also oversee such activities.

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

    \126\ See Section 403 of the Dodd-Frank Act.

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

    Due to the exemptions previously adopted by the Commission, and the

    resulting lack of information regarding the activities of CPOs claiming

    relief thereunder, the Commission does not yet have a comprehensive

    view of the positions taken and interests held by currently exempt

    entities. The Commission, therefore, believes that it is prudent to

    withhold consideration of a foreign advisor exemption until the

    Commission has received data regarding such firms on Forms CPO-PQR and/

    or CTA-PR, as applicable, to enable the Commission to better assess the

    universe of firms that may be appropriate to include within the

    exemption, should the Commission decide to adopt one. Foreign advisors

    to pools that meet the criteria of Sec. 4.13(a)(3) will be able to

    continue to operate pursuant to that exemption, if previously claimed,

    or file notice of claim of exemption under Sec. 4.13(a)(3). Therefore,

    the Commission is not providing an exemption for foreign advisors at

    this time.

    5. Comments Regarding the Proposed Rescission of Sec. 4.13(a)(4)

    In the Proposal, the Commission proposed to rescind the exemption

    in Sec. 4.13(a)(4) for operators of pools that are offered only to

    individuals and entities that satisfy the qualified eligible person

    standard in Sec. 4.7 or the accredited investor standard under the

    SEC's Regulation D.\127\ In the Proposal, the Commission stated that it

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

    \127\ See 17 CFR 4.13(a)(4).

    [S]eeks to eliminate the exemptions under Sec. Sec. 4.13(a)(3)

    and (4) for operators of pools that are similarly situated to

    private funds that previously relied on the exemptions under

    Sec. Sec. 3(c)(1) and (7) of the Investment Company Act and Sec.

    203(b)(3) of the Investment Advisers Act. It is the Commission's

    view that the operators of these pools should be subject to similar

    regulatory obligations, including proposed form CPO-PQR, in order to

    provide improved transparency and increased accountability with

    respect to these pools. The Commission has determined that it is

    appropriate to limit regulatory arbitrage through harmonization of

    the scope of its data collection with respect to pools that are

    similarly situated to private funds so that operators of such pools

    will not be able to avoid oversight by either the Commission or the

    SEC through claims of exemption under the Commission's

    regulations.\128\

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

    \128\ 76 FR 7976, 7986 (Feb 12, 2011).

    The Commission received several comments regarding its proposed

    rescission.\129\ Several commenters argued that the Commission should

    consider retaining the exemption in Sec. 4.13(a)(4) for funds that do

    not directly invest in commodity interests, but do so through a fund of

    funds structure, and who are advised by an SEC registered investment

    adviser. Due to the exemptions previously adopted by the Commission,

    and the resulting lack of information regarding the activities of CPOs

    claiming relief thereunder, the Commission does not yet have a

    comprehensive view of the positions taken and interests held by

    currently exempt entities. The Commission, therefore, believes that it

    is prudent to withhold consideration of a fund of fund exemption until

    the Commission has received data regarding such firms on Forms CPO-PQR

    and/or CTA-PR, as applicable, to enable the Commission to better assess

    the universe of firms that may be appropriate to include within the

    exemption, should the Commission decide to adopt one. Therefore, the

    Commission is not providing an exemption for funds of funds at this

    time. The Commission notes, however, that staff will consider requests

    for exemptive relief for funds of funds on a case by case basis.

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

    \129\ See comment letter from Sidley Austin LLP (April 12, 2011)

    (``Sidley Letter''); MFA Letter; NYSBA Letter; comment letter from

    Cranwood Capital Management (April 12, 20110 (``Cranwood Letter'');

    Dechert III Letter; and comment letter from Nantucket Multi

    Managers, LLC (April 12, 2011) (``Nantucket Letter'').

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

    The Commission received two comments that argued that the

    rescission of Sec. 4.13(a)(4) is inconsistent with the private

    offering framework under the SEC's Regulation D and that the rescission

    would result in the end of private offerings.\130\ The Commission

    believes that this analysis is flawed and is the result of a mistaken

    conflation of the private fund structure under the Commission's rules

    and privately-offered ownership interests under the SEC's rules. The

    Commission notes that the rescission of Sec. 4.13(a)(4) does not

    preclude CPOs from utilizing Regulation D with respect to the offering

    of pool interests because the availability of relief from the

    registration of an offering under Regulation D does not require that

    the entity involved be exempt from regulation. Therefore, the

    Commission continues to believe that rescission of Sec. 4.13(a)(4) is

    appropriate for the reasons stated in the Proposing Release and that it

    is consistent with the registration of investment advisers of such

    exempt funds with the SEC.

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

    \130\ See MFA Letter; and NYSBA Letter.

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

    One commenter expressed concerns about the fact that the class of

    eligible participants in a pool operated pursuant to Sec. 4.13(a)(4)

    is broader than that for a pool qualifying under Sec. 4.7.\131\

    Specifically, this commenter noted that under Sec. 4.13(a)(4),

    participants may include non-natural participants that are QEPs under

    Sec. 4.7 or accredited investors under Sec. 230.501(a)(1)-(3), (a)(7)

    or (a)(8),\132\ whereas Sec. 4.7 does not include such participants as

    QEPs.\133\ The Commission recognizes that this discrepancy may result

    in certain entities being unable to claim relief under Sec. 4.7;

    however, due to the exemptions previously adopted by the Commission,

    and the resulting lack of information regarding the activities of CPOs

    claiming relief thereunder, the Commission does not yet have a

    comprehensive view of the positions taken and interests held by

    currently exempt entities and until the Commission has more information

    regarding the universe of entities affected, the Commission does not

    believe that it is appropriate to amend Sec. 4.7 to reflect the nature

    of participants in funds previously entitled to relief under Sec.

    4.13(a)(4). After the Commission has collected data from such entities

    through Form CPO-PQR, the Commission may reconsider this issue. The

    Commission also notes that staff will consider requests for exemptive

    relief from the limitations of Sec. 4.7 on a case-by-case basis.

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

    \131\ MFA raised this concern during several meetings with

    Commission staff, although it did not provide any detail regarding

    the scope of its concerns and the topic was not discussed in the

    written comments submitted regarding this rulemaking.

    \132\ 17 CFR Sec. 4.13(a)(4)(ii)(B).

    \133\ 17 CFR Sec. 4.7(a).

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

    One commenter argued that rescission is not necessary because any

    fund that seeks to attract qualified eligible purchasers is already

    required to maintain oversight and controls that exceed those mandated

    by part 4 of the Commission's regulations such that any regulation

    imposed would be duplicative and unnecessarily burdensome.\134\ That

    commenter further stated that:

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

    \134\ See Cranwood Letter.

    We are accustomed to intense scrutiny from potential investors

    that frequently includes independent background checks of our key

    employees, onsite visits that include

    [[Page 11265]]

    interviews with our traders and other key personnel, interviews of

    our third-party administrator and our auditors, interviews of

    officials of our clearing broker, interviews of officers at our

    custodial bank, and bulk delivery of transactional data for

    independent analysis. To say that such information-gathering goes

    far beyond the contents of a mandated disclosure document is a gross

    understatement.\135\

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

    \135\ See Cranwood Letter.

    The commenter primarily focused on the significant level of

    controls that the fund operator implements independent of regulation.

    The Commission believes that, contrary to the commenter's arguments as

    to the import of that fact, such controls and internal oversight should

    facilitate compliance with the Commission's regulatory regime.

    Moreover, the Commission continues to believe that registration serves

    important regulatory purposes as stated previously in this release in

    the context of the amendments to Sec. 4.5.

    The Commission has determined to eliminate the exemption in Sec.

    4.13(a)(4) because, as stated in the proposal, there are no limits on

    the amount of commodity interest trading in which pools operating under

    this regulation can engage. That is, it is possible that a commodity

    pool that is exempted from registration under Sec. 4.13(a)(4) could be

    invested solely in commodities, which, in the Commission's view,

    necessitates Commission oversight to ensure adequate customer

    protection and market oversight. Therefore, the Commission adopts the

    rescission of Sec. 4.13(a)(4) as proposed.

    The Commission received several comments regarding the timing of

    the implementation of the rescission of Sec. 4.13(a)(4).\136\ Two

    commenters suggested that 18 months is the appropriate time period to

    permit entities to prepare for compliance with the Commission's

    registration and compliance regime.\137\ One commenter suggested that

    the Commission provide ``sufficient time,'' but provided no proposed

    specific period of time.\138\ Several commenters asserted that

    currently exempt entities should be grandfathered.\139\

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

    \136\ See NYSBA Letter; AIMA Letter; Schulte Letter; comment

    letter from Fulbright & Jaworski L.L.P. (April 12, 2011)

    (``Fulbright Letter''); SIFMA Letter; Seward Letter; Katten Letter;

    and comment letter from TIF Fund Management LLC (May 19, 2011)

    (``TIF Letter''); NFA Letter; IAA Letter; and Dechert Letter.

    \137\ See Schulte Letter; and Fulbright Letter.

    \138\ See NFA Letter. See also, IAA Letter.

    \139\ See NYSBA Letter; AIMA Letter; Schulte Letter; Fulbright

    Letter; SIFMA Letter; Seward Letter; and Katten Letter.

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

    The Commission recognizes that entities will need time to come into

    compliance with the Commission's regulations. The Commission does not,

    however, believe that the process of preparing for Commission oversight

    necessitates an 18 month time period. Based on the comments received

    indicating that a certain portion of entities currently claiming relief

    under Sec. 4.13(a)(4) already have robust controls in place

    independent of Commission oversight, the Commission believes that

    entities currently claiming relief under Sec. 4.13(a)(4) should be

    capable of becoming registered and complying with the Commission's

    regulations within 12 months following the issuance of the final rule.

    For entities that are formed after the effective date of the

    rescission, the Commission expects the CPOs of such entities to comply

    with the Commission's regulations upon formation and commencement of

    operations.

    The Commission does not believe that ``grandfathering'' is

    appropriate in this context. As the Commission stated in its Proposal,

    part of the purpose of rescinding Sec. 4.13(a)(4) is to ensure that

    entities that are engaged in derivatives trading are subject to

    substantively identical registration and compliance obligations and

    oversight by the Commission.\140\ Grandfathering is not consistent with

    the stated goals of the Commission's rescission and would result in

    disparate treatment of similarly situated entities.

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

    \140\ 76 FR 7976, 7986 (Feb. 12, 2011).

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

    Therefore, the Commission will implement the rescission of Sec.

    4.13(a)(4) for all entities currently claiming exemptive relief

    thereunder on December 31, 2012, but the rescission will be implemented

    for all other CPOs upon the effective date of this final rulemaking.

    D. Comments Regarding the Proposed Annual Notices for Continued

    Exemptive or Exclusionary Relief

    In the Proposal, the Commission proposed to require annual

    reaffirmance of a claim of exemption or exclusion from registration as

    a CPO or CTA. In the Proposal, the Commission stated its position that

    an annual notice requirement would promote improved transparency

    regarding the number of entities either exempt or excluded from the

    Commission's registration and compliance programs, which is consistent

    with one of the primary purposes of the Dodd-Frank Act. Moreover, the

    Commission stated its belief that an annual notice requirement would

    enable the Commission to determine whether exemptions and exclusions

    should be modified, repealed, or maintained as part of the Commission's

    ongoing assessment of its regulatory scheme.

    The Commission received three comments on this provision in the

    Proposal.\141\ One commenter supported the adoption of an annual notice

    requirement, but suggested that the due date of the notice be changed

    from the exemption's original filing date to a calendar-year end for

    all filers.\142\ The Commission agrees that moving the due date for the

    annual notice requirement to the calendar-year end for all filers may

    be more operationally efficient. Therefore, the Commission will adopt

    the annual notice requirement mandating that the notice be filed at the

    calendar year-end rather than the anniversary of the original filing.

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

    \141\ See NFA Letter; AII Letter; and SIFMA Letter.

    \142\ See NFA Letter.

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

    Two commenters suggested that the 30-day time period for filing was

    not adequate to enable firms to comply.\143\ One commenter proposed a

    60-day time period,\144\ whereas the other commenter proposed 90 days

    as the necessary amount of time.\145\ The Commission recognizes that

    the proposed 30-day filing period may not be adequate due to the

    ramifications of an entity's failure to file its annual notice in a

    timely manner, which would result in the exemption or exclusion being

    deemed withdrawn. This issue is particularly important because of the

    NFA's Bylaw 1101, which prohibits NFA members from conducting business

    with non-members. Should an entity fail to file its annual notice

    within the requisite time frame, its NFA membership could be deemed

    withdrawn, which could potentially impact numerous other NFA members.

    The Commission believes that extending the filing period from 30 days

    to 60 days will provide NFA with adequate time to follow up with filing

    entities to ensure that a filing is not omitted inadvertently and to

    limit the adverse consequences for other NFA members. The Commission

    does not, however, believe that 90 days is necessary as it intends for

    such notice to be filed electronically with NFA and for NFA's filing

    system to pre-populate the notice with the names and NFA IDs of all

    exempt pools operated by the CPO with an option to choose to reaffirm

    the exemptions for all exempt pools. The Commission believes that this

    minimizes both the time and expense burdens on the CPO and should

    enable

    [[Page 11266]]

    all entities to comply with the requirement within 60 days.

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

    \143\ See NFA Letter; and SIFMA Letter.

    \144\ See NFA Letter.

    \145\ See SIFMA Letter.

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

    E. Comments Regarding the Proposed Risk Disclosure Statement for Swaps

    in Sec. 4.24 and Sec. 4.34

    The Commission also proposed adding standard risk disclosure

    statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.

    4.24(b) and 4.34(b), respectively.\146\

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

    \146\ 76 FR 7976, 7986 (Feb. 12, 2011).

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

    The Commission received three comments with respect to the proposed

    standard risk disclosure statement for swaps.\147\ Two argued that a

    standard risk disclosure statement is not the appropriate way to

    disclose the risks inherent in swaps activity to participants or

    clients.\148\ Specifically, those commenters argued that the use of

    swaps by CPOs and CTAs varies and depending on the reason for using

    swaps, different risks may be implicated. Furthermore, those commenters

    also noted that the proposed risk disclosure statement is inconsistent

    with recent SEC guidance to registered investment companies to avoid

    generic disclosures. The Commission respectfully disagrees with the

    assertions of those commenters who believe that a standard risk

    disclosure statement is not appropriate. The Commission believes that a

    standardized risk disclosure statement addressing certain risks

    associated with the use of swaps is necessary due to the revisions to

    the statutory definitions of CPO, CTA, and commodity pool enacted by

    the Dodd-Frank Act.\149\ Moreover, it is the Commission's position that

    concerns about ``one-size-fits-all'' disclosure of risks are addressed

    through additional disclosures required under Sec. Sec. 4.24(g) and

    4.34(g), which govern disclosures regarding the risks associated with

    participating in the offered commodity pool or program.

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

    \147\ See SIFMA Letter; Fidelity Letter; and comment letter from

    Chris Barnard (Feb. 26, 2011) (``Barnard Letter'').

    \148\ See SIFMA Letter; and Fidelity Letter.

    \149\ See 7 U.S.C. 1a(10), 1a(11), and 1a(12).

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

    With respect to the comments submitted regarding the conflicting

    requirements imposed on registered investment companies whose advisers

    are required to register as CPOs pursuant to amended Sec. 4.5,\150\

    such concerns will be addressed through the proposed modifications to

    the Commission's compliance regime that will be applicable to

    registered investment companies overseen by both the SEC and the

    Commission.

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

    \150\ See SIFMA Letter; and Fidelity Letter.

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

    Additionally, the Commission received one comment that supported

    the adoption of the standard risk disclosure statement for swaps, but

    suggested that the Commission consider whether the wording needed to be

    modified depending on whether the swaps were cleared or uncleared.\151\

    Based on the language proposed, the Commission does not believe that

    different language must be adopted to account for the differences

    between cleared and uncleared swaps. In particular, the Commission

    notes that the proposed risk disclosure statement is not intended to

    address all risks that may be associated with the use of swaps, but

    that the CPO or CTA is required to make additional disclosures of any

    other risks in its disclosure document pursuant to Sec. Sec. 4.24(g)

    and 4.34(g) of the Commission's regulations. Moreover, the language of

    the proposed risk disclosure statement is conditional and does not

    purport to assert that all of the risks discussed are applicable in all

    circumstances. For the reasons discussed above and those stated in the

    Proposal, the Commission adopts the proposed risk disclosure statements

    for CPOs and CTAs regarding swaps.\152\ These additional risk

    disclosure statements will be required for all new disclosure documents

    and all updates filed after the effective date of this final

    rulemaking.

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

    \151\ See Barnard Letter.

    \152\ These risk disclosure statements do not affect the swap

    disclosure requirements mandated in CEA Section 4s(h)(3)(B) and

    rules relating to that statutory provision. See proposed Sec.

    23.431 Disclosure of Material Information, Business Conduct

    Standards for Swap Dealers and Major Swap Participants with

    Counterparties, 75 FR 80638 (Dec. 22, 2010). In addition, managed

    accounts that do not convey discretionary authority to the CTA will

    require the pass through of the swap disclosures in any final rule

    promulgated pursuant to 4s(h)(3)(B).

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

    F. Section 4.27 and Forms CPO-PQR and CTA-PR

    1. General Comments

    The Commission received numerous comments in response to proposed

    Sec. 4.27, which requires CPOs and CTAs to report certain information

    to the Commission on Forms CPO-PQR and CTA-PR, respectively. Several

    commenters questioned whether the data collection was necessary for the

    Commission's oversight of its registrants.\153\ Others asserted that

    certain groups, such as registered investment companies or family

    offices, should be exempted from completing the data collection.\154\

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

    \153\ See Fidelity Letter; and AIMA Letter.

    \154\ See ICI Letter; AIMA Letter; and comment letter from K&L

    Gates LLP (Feb. 12, 2011) (``K&L Letter'').

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

    The Commission's new reporting requirements supplement SEC

    reporting requirements for dual registrants that must file Form PF with

    the SEC by virtue of their dual registration status. Information about

    CTAs and CPOs that are non-dual registrants is necessary for the

    Commission to identify significant risk to the stability of the

    derivatives market and the financial market as a whole. Following the

    recent economic turmoil, the Commission has reconsidered the level of

    regulation that it believes is appropriate for entities participating

    in the commodity futures and derivatives markets. With respect to the

    assertion that registered investment companies should not be required

    to file Form CPO-PQR, the Commission believes that it is important to

    collect the data in Form CPO-PQR from registered investment companies

    whose activities require CPO registration to assess the risk posed by

    such investment vehicles to derivatives markets and the broader

    financial system. Consequently, the Commission intends to require from

    registered investment companies that are also registered as CPOs the

    same information that it is requiring from entities solely registered

    as CPOs. Additionally, the Commission notes that to the extent that the

    entity registered as the CPO for the registered investment company is

    registered as an investment adviser and is required to file Form PF

    with the SEC, the activities of the registered investment company may

    be reported on Form PF as well.

    The Commission further believes that the same reasoning applies

    with respect to the collection of data from family offices. To enable

    the Commission to evaluate a potential family offices exemption

    following the collection and analysis of data regarding their

    activities, the Commission believes that it is essential that family

    offices remain subject to the data collection requirements to the

    extent that such entities are not entitled to claim relief pursuant to

    the Commission's interpretative guidance regarding family offices.

    One commenter recommended that the Commission clarify the filing

    obligations for CPOs and CTAs that are required to file Form PF with

    the SEC and to streamline the reporting obligations.\155\ Another

    commenter argued that a very large private fund that has a limited

    amount of derivatives trading should not be subject to Schedule C of

    Form CPO-PQR.\156\ As

    [[Page 11267]]

    stated in the Proposal, CPOs that are dually registered with the SEC

    and that file Form PF must still file Schedule A with the Commission,

    and CTAs must still file Form CTA-PR. The Commission intends to adopt

    Sec. 4.27 as proposed and permit dual registrants to file Form PF with

    the SEC in lieu of completing Schedules B and/or C of Form CPO-PQR. The

    Commission never intended to require very large dual registrants to

    file anything more than the general identifying information required on

    Schedule A with the Commission, and neither Sec. 4.27 nor the forms

    require dual registrants to file Schedules B or C if they are filing

    Form PF.

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

    \155\ See Fidelity Letter.

    \156\ See AIMA Letter; SIFMA Letter; and Fidelity Letter.

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

    The Commission has modified both Schedule A of Form CPO-PQR and

    Form CTA-PR so that both documents are only soliciting general

    demographic data. The Commission has moved Question 12, which asked for

    information regarding position information, from proposed Schedule A to

    Schedule B of Form CPO-PQR in an effort to avoid collecting redundant

    information from dual registrants. Additionally, the Commission is not

    adopting Schedule B from Form CTA-PR, and therefore, will be limiting

    the information collected from registered CTAs to demographic data and

    the names of the pools advised by the CTA.

    One commenter questioned whether the information collected on Forms

    CTA-PR and CPO-PQR will provide the Commission with real-time data that

    will enable it to have an accurate and timely picture of a CTA's

    activities and operating status.\157\ The Commission recognizes the

    limitations of the data collection instruments with respect to the

    timeliness of the information requested. The Commission believes,

    however, that the forms strike the appropriate balance between the time

    needed to compile complex data and the Commission's need for timely

    information. Moreover, the Commission believes that the information

    required on Form CPO-PQR and CTA-PR will be useful because it will

    allow the Commission to better deploy its enforcement and examination

    resources.

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

    \157\ See Barnard Letter.

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

    Another commenter questioned whether the Commission possessed the

    staffing and financial resources necessary to meaningfully use such

    data as part of its oversight.\158\ The Commission recognizes that the

    resources available to it are limited. To that end, the Commission, as

    stated in the Proposal, intends to coordinate with the NFA to

    accomplish the analysis necessary to make full use of the data

    collected from Commission registrants.

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

    \158\ See Dechert Letter.

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

    In addition, the Commission intends for the data to be collected

    from registrants in an electronic format, which will enable the

    Commission to leverage its technology and to require less intensive

    staff time to achieve the desired results. The use of an electronic

    format will enable the FSOC to conduct additional analysis of the data

    collected in the event that the FSOC requests such information from the

    Commission, without significant consumption of Commission resources.

    For these reasons, the Commission believes that it has the tools

    necessary to make full use of the data that it intends to collect on

    Forms CPO-PQR and CTA-PR, notwithstanding the Commission's current

    staffing and financial resources.

    2. Comments Regarding the Reporting Thresholds

    The Commission received several comments regarding the appropriate

    reporting thresholds for the various schedules of Form CPO-PQR.\159\

    The commenters stated that $150 million in assets under management was

    too low of a threshold for entities to be categorized as mid-sized and

    required to file Schedule B. Rather, the commenters urged the

    Commission to increase the threshold to $500 million in assets under

    management.\160\ The Commission believes that $150 million in assets

    under management is still the appropriate threshold for mid-sized CPOs.

    The Commission will retain this threshold because it is consistent with

    the threshold for advisers filing Section 1 of Form PF, which is

    substantively similar to Schedule B of Form CPO-PQR, and it will ensure

    comparable treatment of entities of similar magnitude.

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

    \159\ See AIMA Letter; MFA II Letter; Seward Letter. See also,

    AIMA II Letter.

    \160\ See AIMA Letter.

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

    These commenters also suggested that the Commission increase the

    threshold for large CPOs from $1 billion to $5 billion in assets under

    management.\161\ The Commission has decided not to increase the large

    CPO threshold to $5 billion. The Commission has decided, however, to

    increase the threshold from $1 billion to $1.5 billion. The Commission

    believes that increasing the threshold to $1.5 billion will reduce the

    number of CPOs required to file Schedule C of Form CPO-PQR, but will

    still represent a substantial portion of the assets under management by

    registered CPOs. Moreover, the Commission notes that this modification

    is consistent with the revised threshold for large hedge fund advisers

    that it recently adopted with respect to Form PF.\162\ The Commission

    believes that increasing the threshold beyond $1.5 billion could limit

    the Commission's access to information necessary to oversee entities

    that could pose a risk to the derivatives markets or the financial

    system as a whole.

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

    \161\ See AIMA Letter; MFA II Letter; Seward Letter.

    \162\ 76 FR 71128, 71135 (Nov. 16, 2011).

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

    3. Comments Regarding Harmonization With the SEC's Compliance Regime

    The Commission received numerous comments on harmonizing Forms CPO-

    PQR and CTA-PR with Form PF.\163\ The Commission has considered

    comments received on the Form PF proposed jointly with the SEC that

    address harmonization of the CFTC and SEC forms in addition to the

    comments received specifically on the Proposal. Two commenters argued

    that the Commission and the SEC should use the same metrics for

    measuring assets under management for purposes of determining filing

    obligations.\164\ As noted several times in this preamble, the

    Commission has sought to harmonize Forms CPO-PQR and CTA-PR to the

    extent possible; however, it is not appropriate in all circumstances.

    For example, the SEC and the CFTC use different methods for determining

    the threshold for reporting assets under management. In order to

    determine whether a CPO meets the asset threshold for classification as

    a mid-sized or large CPO, Form CPO-PQR requires the use of the

    aggregated gross pool assets under management. Conversely, Form PF

    defines ``regulatory assets under management'' as the gross value of

    the securities portfolio as reported on the SEC's Form ADV.\165\

    Additionally, Form CPO-PQR uses net assets under management as the

    method for determining whether a commodity pool is a large commodity

    pool for filing purposes, whereas Form PF uses net regulatory assets.

    In the Commission's view, gross assets under management and net asset

    value are more appropriate means for determining filing obligations for

    CPOs and large commodity pools because entities registered with the

    Commission are familiar with the use of net asset value for other

    purposes including

    [[Page 11268]]

    determining the required frequency of reporting to participants.\166\

    Moreover, the Commission believes that it is inappropriate for it to

    incorporate the SEC definitions of regulatory assets under management

    and net regulatory assets under management into Form CPO-PQR as those

    terms are not consistent with the existing CFTC regulatory

    framework.\167\ The use of net asset value is consistent with the

    longstanding utilization of net asset value in U.S. GAAP and in the

    Commission's regulations.\168\ Therefore, the Commission does not

    believe that its use of net asset value requires any additional

    calculation by dual registrants beyond that required to complete Form

    PF.

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

    \163\ See AIMA Letter; MFA II Letter; Dechert Letter; Seward

    Letter; IAA Letter; Fidelity Letter; AIMA II Letter; K&L Letter; MFA

    Letter; and SIFMA Letter.

    \164\ See AIMA Letter; and MFA II Letter.

    \165\ Form PF defines net assets under management as regulatory

    assets under management less liabilities 76 FR 71128, 71136 (Nov.

    16, 2011).

    \166\ Id.

    \167\ Id. Additionally, the Commission notes that Form PF also

    asks for net assets under management in question 3 of Section 1.

    \168\ See, e.g., 17 CFR 4.22.

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

    Several commenters argued that the Commission does not need to

    collect information through Forms CPO-PQR and CTA-PR because it already

    receives information through the Large Trader Reporting System and Form

    40.\169\ Large Trader Reporting and Form 40 do not provide the

    information regarding the relationship between a large position held by

    a pool and the rest of the pool's other derivatives positions and

    securities investments. The Commission believes that the scope of

    information sought through Forms CPO-PQR and CTA-PR will provide it

    with substantially more detail regarding the activities of entities

    engaged in derivatives trading and will better enable it to assess the

    risk posed by a pool or CPO as a whole.

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

    \169\ See Fidelity Letter; and K&L Letter.

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

    Several commenters also urged the Commission to consider

    coordinating with the SEC to promulgate a single form.\170\ The

    Commission believes that it is most efficient for Commission-only

    registrants to use a form that is based upon the format of NFA's Form

    PQR, with which current registrants are already familiar. Currently

    registered CPOs have been filing NFA's Form PQR on a quarterly basis

    for more than one year and have experience using NFA's interface for

    the collection of data. The Commission recognizes that new registrants

    will not have any experience with NFA's Form PQR or NFA's filing

    system; however, the same would be true if the Commission were to

    implement an altogether new system. Therefore, the Commission believes

    that by continuing to use the system developed by NFA for collecting

    data from CPOs and CTAs, it is minimizing the burden on current

    registrants because they will not be required to learn a new system,

    without adding any additional burden to new registrants.

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

    \170\ See AIMA II Letter; Seward Letter; MFA Letter; AIMA

    Letter; and SIFMA Letter.

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

    Several commenters raised concerns about how affiliated entities

    will be treated on the forms.\171\ The Commission believes that

    affiliated entities should be permitted, but should not be required, to

    report on a single form with respect to all affiliates and the pools

    that they advise. This position is consistent with the treatment of

    affiliated entities on Form PF. Furthermore, the Commission believes

    that where a pool is operated by one or more co-CPOs, only one CPO

    should report on the activities of the jointly operated pool, but that

    CPO must disclose the identities of the other co-CPOs. The Commission

    believes that this will eliminate the potential for double counting of

    pool assets if all co-CPOs were required to report on the jointly

    operated pool.

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

    \171\ See MFA II Letter; MFA Letter; AIMA Letter; SIFMA Letter;

    and Seward Letter.

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

    4. Comments Regarding Funds of Funds

    The Commission also received one comment regarding issues unique to

    fund of funds and feeder funds.\172\ Specifically, this commenter

    asserted that funds of funds that invest in unaffiliated commodity

    pools are ``not in the business of trading commodity interests,'' and

    therefore, should not be subject to reporting obligations on Form CPO-

    PQR.\173\ This commenter further argues that funds of funds reporting

    is not necessary because either the Commission or the SEC will oversee

    the investee fund and that funds of funds likely do not have access to

    information with sufficient detail to respond to the questions in Form

    CPO-PQR regarding size, strategy, or positions held by the investee

    fund.\174\

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

    \172\ See MFA II Letter.

    \173\ Id.

    \174\ Id.

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

    The Commission disagrees with the commenter's assertion that funds

    investing in unaffiliated commodity pools are not in the business of

    trading commodity interests. Although it is true that the fund does not

    directly engage in such trading, it is the position of the Commission

    that a fund investing in an unaffiliated commodity pool is itself a

    commodity pool. This interpretation is consistent with the statutory

    definition of commodity pool, which draws no distinctions between

    direct and indirect investments in commodity interests.\175\ Moreover,

    the Commission believes that permitting indirect investment in

    commodity interests to occur without Commission oversight would create

    an incentive for entities to avoid direct investment in commodity

    interests and possibly increase the opacity of the market. Therefore,

    the Commission concludes that a fund that invests in an unaffiliated

    commodity pool is a commodity pool for purposes of the CEA and the

    Commission's regulations promulgated thereunder.

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

    \175\ See 7 U.S.C. 1a(11).

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

    With respect to the commenter's assertion that the funds of funds

    need not report because the investee fund will be subject to the

    jurisdiction of either the Commission or the SEC, the Commission must

    again disagree. As the commenter itself noted in its comment, the funds

    of funds could be invested in a fund whose adviser or operator is not

    required to report due to exemptive relief granted by either the

    Commission or the SEC. The Commission acknowledges that a fund of funds

    may not have access to the kind of information necessary to respond to

    all of the data elements in Schedules B and C with respect to the

    investment activities of its investee funds. Nevertheless, the

    Commission believes that requiring basic information about the

    investment in the investee funds without requiring that funds of funds

    complete the additional detail strikes an appropriate balance between

    recognizing the limitations of the information available to funds of

    funds and enabling the Commission to analyze and monitor the levels of

    interconnectedness among a CPO's funds. The Commission believes that a

    fund of funds should still be required to provide at a minimum the name

    of the investee fund(s) and the size of its investment(s) in such

    funds.

    Accordingly, the Commission is adding a question to Schedule A of

    Form CPO-PQR requesting the names of the investee funds and the size of

    the fund of funds' investment in the investee funds. The Commission is

    also adding an instruction to Form CPO-PQR permitting the CPO of a fund

    of funds to exclude any assets invested in the equity of commodity

    pools or private funds for purposes of determining the CPO's reporting

    obligations. The CPO must, however, treat these assets consistently for

    purposes of Form CPO-PQR. For example, an adviser may not include these

    assets for purposes of certain questions such as those regarding

    borrowing, but disregard such assets for purposes of determining the

    reporting thresholds. This new instruction will permit a CPO to

    disregard investments in commodity pools or private funds,

    [[Page 11269]]

    but would not allow a CPO to disregard the liabilities of the fund,

    even if incurred due to the investment in the underlying fund.

    Moreover, if any of the CPO's commodity pools invests substantially all

    of its assets in the equity of other commodity pools or private funds

    and, aside from those investments, holds only cash, cash equivalents,

    and instruments intended to hedge currency risk, the CPO may complete

    only Schedules A and B with respect to that fund and otherwise

    disregard such assets for reporting purposes. These instructions are

    consistent with those instructions adopted as part of the joint Form

    PF, and the Commission believes that this treatment of funds of funds

    reduces the burden of reporting for CPOs and improves the quality of

    the data obtained by the Commission. Therefore, the Commission is

    adding a general question regarding funds of funds, but is otherwise

    permitting CPOs to disregard the assets of such funds that are invested

    in other commodity pools or private funds for reporting purposes.

    5. Adopted Modifications to Form CPO-PQR

    The Commission has decided to make several additional revisions to

    Form CPO-PQR in addition to those discussed previously. The Commission

    believes that these revisions are necessary to provide clarification,

    decrease the burden imposed on registrants, and further harmonize Form

    CPO-PQR with Form PF.

    a. Instructions

    As discussed previously, the Commission has decided to revise

    certain instructions governing the completion of Form CPO-PQR.

    Specifically, the Commission has determined that it is appropriate to

    raise the threshold for large CPOs from $1 billion to $1.5 billion in

    an effort to reduce the number of CPOs required to report on a

    quarterly basis and respond to commenters' concerns, but still provide

    the Commission with the information necessary to effectively oversee

    such large market participants. The Commission has also determined to

    modify the frequency of reporting for filers of Form CPO-PQR. As

    adopted, all CPOs, other than large CPOs, will be required to file

    Schedule A on an annual basis; mid-size CPOs will be required to file

    Schedule B on an annual basis; and large CPOs will be required to file

    Schedules A, B, and C on a quarterly basis.

    The Commission received several comments asserting that the 15-day

    period for reporting was not sufficient to permit reporting CPOs to

    complete and file the form and all suggested extending the period to 30

    or 45 days.\176\ The Commission agrees that reporting CPOs will need

    additional time in which to submit the various schedules of Form CPO-

    PQR.

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

    \176\ See NFA Letter; Seward Letter; and AIMA Letter.

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

    Upon further consideration, the Commission believes that it is

    appropriate to require all CPOs, other than large CPOs, to file

    Schedule A within 90 days of the end of the calendar year. This time

    period coincides with the annual questionnaire required by NFA of its

    entire population of member CPOs and with the vast majority of annual

    report filings for commodity pools. The revised deadline will enable

    CPOs, other than large CPOs, to benefit from the availability of the

    NFA annual questionnaire and the availability of the information in CPO

    annual report filings. Moreover, because the Commission has transferred

    the pool position information from Schedule A to Schedule B, the

    Commission believes that non-large CPOs should be able to comply with

    filing basic demographic data within 90 days.

    With respect to mid-sized CPOs filing Schedule B, the Commission

    believes that 90 days is an adequate time period for compiling data and

    completing that schedule. The Commission notes that CPOs are generally

    required to file annual reports for their pools within 90 days of their

    fiscal year end, most of which coincide with the calendar year end. The

    Commission believes that the alignment of pools' fiscal years with the

    calendar year end should facilitate the preparation of Schedule B and

    reduce the burden imposed on mid-size CPOs because some of the

    information required will be similar to that included in a pool's

    annual financial statements.

    With respect to the quarterly reporting by large CPOs on Schedules

    A, B, and C, the Commission believes that 60 days is a sufficient

    amount of time to complete those schedules for large CPOs. The

    Commission notes that the entities required to file on a quarterly

    basis have a significant amount of assets under management, and as

    such, the Commission anticipates that such entities routinely generate

    the type of information requested on Schedules B and C as part of their

    internal governance. Accordingly, the Commission will require large

    CPOs to file Schedules B and C within 60 days following the end of the

    reporting period as defined in Form CPO-PQR.

    In October 2011, the Commission adopted Form PF as a joint

    reporting form with the SEC. The terms of Form PF permit dually

    registered entities that are filing the form for their private funds

    under advisement to report on the activities of their other commodity

    pools as well. Entities that choose to file Form PF for all of their

    funds under advisement will still be required to file Schedule A on an

    annual basis, which is consistent with the terms of the Proposal. The

    instructions of Form CPO-PQR have been modified to reflect this change.

    The Commission has also determined to omit the statement that the

    failure to answer all required questions completely and accurately may

    severely impact your ability to operate. The Commission does not

    believe that such language is necessary to inform registered CPOs of

    their obligations under the CEA and the Commission's regulations to

    comply with such obligations in good faith.

    Additionally, the Commission has concluded that it should clarify

    the obligations of co-CPOs of a pool with respect to the submission of

    Form CPO-PQR. The Commission has amended the instructions to the form

    to clarify that for co-CPOs, the CPO with the greater assets under

    management overall is required to report for the co-operated pool.

    Furthermore, if a pool is operated by co-CPOs and one of the CPOs is

    also a registered investment adviser, the non-investment adviser CPO

    will still be obligated to file the applicable sections of Form CPO-PQR

    regardless of whether the investment adviser CPO filed a Form PF. The

    Commission believes that this will prevent the possibility of double

    counting and unnecessary duplicative filings regarding co-operated

    pools.

    b. Schedule A

    Schedule A seeks basic identifying information about the CPO, each

    of its pools, and any services providers used. The Commission has

    decided to adopt Schedule A as proposed with the following revisions.

    In question 3 of part 2, the Commission has added a question asking

    whether the pool is operated by co-CPOs and for the name of the other

    CPO(s). This question will enable the Commission to ensure that only

    one CPO is filing with respect to each co-operated commodity pool. In

    addition, question 12 of part 2, which asked for information regarding

    the pool's trading strategies, has been moved to Schedule B, both in

    response to a commenter's suggestion \177\ and in an effort to ensure

    that dual registrants are not required to file extensive duplicative

    information

    [[Page 11270]]

    on Schedule A that they are already providing on Form PF.

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

    \177\ See AIMA Letter.

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

    The Commission added a question asking for the telephone number and

    email for the contact person for the reporting CPO as this was

    inadvertently omitted in the Proposal. Also, the Commission added a

    subpart h. to question 10 regarding the base currency used by the CPO

    for the particular pool for which it is reporting. This question was

    inadvertently omitted but is necessary for the Commission to fully

    utilize the information reported regarding the changes in the pool's

    assets under management.

    The Commission added subparts to question 12 regarding prospective

    risks for the imposition of ``gates'' and restrictions on redemption of

    participant withdrawals. The terms of question 12, as proposed, only

    seek information on a retrospective basis, which, although useful to

    the Commission in assessing overall issues regarding the imposition of

    restrictions on redemption, does not assist the Commission in assessing

    possible sources of prospective risk to the market and pool

    participants. Moreover, question 12, as proposed, did not capture

    information about pools that have procedures in place governing the

    imposition of restrictions on redemptions, but whose restrictions have

    not been triggered. The Commission believes that the modifications to

    this question solicits such information and will provide the Commission

    with a more complete understanding of the role of restrictions on

    redemptions in the operation of commodity pools. Moreover, the

    Commission believes that the request for additional information

    regarding the potential imposition of restrictions on redemptions is

    consistent with the tenor and intent of question 12 as proposed.

    The Commission also has made numerous non-substantive technical

    amendments in Schedule A, including formatting corrections, the

    deletion of the term ``carrying'' from question 5 in part 2, and the

    addition of two months that were inadvertently omitted from the monthly

    rate of return table in part 2, question 11.

    c. Schedule B

    Mid-sized and large CPOs will be required to complete Schedule B,

    which will solicit data about each pool operated by these CPOs. The

    Commission has decided to adopt Schedule B with the following

    revisions.

    In question 1, subpart d, the Commission has decided to change the

    format of the question from a pull-down list of options to a chart,

    consistent with the format used for substantively identical question

    20, section 1c in Form PF. The Commission believes that the chart

    format change will add clarity to the question and will facilitate the

    completion by registrants. The Commission also has added a column

    requesting the percentage of the pool's capital invested in each

    strategy. This additional information aligns Form CPO-PQR with the

    information requested in Form PF and also provides the Commission with

    the means to assess the risk that a pool derives from its borrowing

    activities.

    The Commission has also amended question 1 to add a subpart g

    asking the reporting CPO to report the percentage of the commodity

    pool's net asset value that is traded pursuant to a high frequency

    trading strategy. This subpart previously appeared as part of the chart

    in question 1 regarding investment strategies. The Commission believes

    that denoting the issue of high frequency trading as its own subpart of

    question 1 will enhance the clarity of the question and make the data

    gained by the Commission more usable in its assessment of risks posed

    to the derivatives markets.

    The Commission is amending question 2 to include the percentage of

    a pool's borrowings from U.S. and non-U.S. creditors that are not

    ``financial institutions,'' as that term is defined in Form CPO-PQR, as

    separate line items. This revision parallels the structure of subparts

    b and c of that question.

    Finally, the Commission has made several non-substantive

    corrections/alterations, including modifying the format of question 3

    to provide a more user-friendly interface for reporting funds and

    combining several subparts into charts, correcting a typographical

    error in question 5, adding the question that was formerly question 12

    of Schedule A to Schedule B as question 6, and expanding several

    categories of investments to provide a parallel level of detail among

    the asset classes.

    d. Schedule C

    Schedule C requests information about the pools operated by large

    CPOs on an aggregated and pool by pool basis. The Commission is

    adopting Schedule C as proposed with the following revisions.

    Part 1

    The questions in part 1 of Schedule C seek information for all of

    the pools operated by the large CPO on an aggregate basis.

    Question 1 requires a CPO to report a geographical breakdown of

    investments held by the pools that it operates. The Commission has

    modified this question to require a less detailed breakdown by focusing

    on regions as opposed to individual countries and has added a separate

    disclosure regarding investment in certain countries of interest. The

    Commission expects that this revision will reduce the burden of

    responding to this question because the less granular categories should

    permit more CPOs to rely on classifications that they already use.

    The Commission has determined that question 3, which seeks

    information regarding the duration of the pools' fixed income

    investments on an aggregate basis, is redundant in light of question 9

    in part 2 of Schedule C. Question 9 in part 2 of Schedule C asks for

    the same information on a pool by pool basis. For that reason, the

    Commission has deleted question 3 from part 1 of Schedule C.

    Part 2

    Part 2 of Schedule C seeks information from large CPOs on an

    individual pool basis for each operated ``large pool'' as that term is

    defined in Form CPO-PQR. The Commission has revised subpart c of

    question 3 to be a yes/no response with respect to whether the pool

    used a central clearing counterparty (``CCP'') during the reporting

    period. The Commission believes that this is less burdensome and

    provides it with sufficient information regarding the use of CCPs

    because the CPO's relationship is with the swap dealer, futures

    commission merchant, or direct clearing member rather than directly

    with the CCP.

    In subpart b of question 4, the Commission has made several

    revisions correcting the technical terminology used with respect to

    ``value at risk'' (``VaR''). These revisions are non-substantive. The

    Commission also added a new subpart c to question 4, which asks the CPO

    whether it uses any metrics other than VaR for risk management purposes

    for the reporting fund. The Commission believes that this information

    will be useful as it continues to amend Form CPO-PQR as necessary to

    obtain relevant information from registrants. Because of the addition

    of a new subpart c to question 4, subpart c of question 4 as proposed

    has been redesignated as subpart d of question 4. The Commission also

    added a category of ``relevant/not formally tested'' to subpart d of

    question 4 in an effort to capture all possible opinions of the

    reporting CPO with respect to the listed market factors. The Commission

    believes that this modification will reduce the burden on reporting

    CPOs

    [[Page 11271]]

    because fewer CPOs will need to provide detailed responses, and because

    those CPOs without existing quantitative models will not be required to

    build or acquire them to respond to the question. The Commission

    continues to believe that this question will provide valuable risk

    information to the Commission with respect to specific large pools.

    The Commission is revising subpart a of question 5 to include the

    percentage of a pool's borrowings from U.S. and non-U.S. creditors that

    are not ``financial institutions'' as that term is defined in Form CPO-

    PQR, as separate line items. This revision parallels the structure of

    the question as proposed with respect to financial institutions.

    The Commission is also amending question 9, regarding the duration

    of each large pool's fixed income instruments. This question, as

    amended, requires the CPO to report the duration, weighted average

    tenor, or 10-year equivalents of fixed income portfolio holdings,

    including asset-backed securities. This is a difference from the

    question as proposed, which would have required all large CPOs to

    report duration. Through this revision, the Commission is giving large

    CPOs the option of instead reporting weighted average tenor or 10-year

    bond equivalents because the Commission understands that CPOs may use a

    wide range of metrics to measure interest rate sensitivity. The

    Commission expects that this revised approach will reduce the burden on

    CPOs because they will generally be able to utilize their existing

    practices when providing this information on the form.

    6. Form CTA-PR

    The Commission received several comments regarding the content of

    Form CTA-PR.\178\ Most commenters urged the Commission to eliminate the

    form in its entirety.\179\ Although the Commission does not believe

    that the complete elimination of Form CTA-PR is appropriate, it

    believes that Schedule B of the form contains redundant information

    that will already be collected through Form CPO-PQR. To reduce the

    burden on CTAs, the Commission will eliminate Schedule B. Instead, the

    Commission has decided to adopt only Schedule A of Form CTA-PR and will

    add a question asking the reporting CTA to identify the pools under its

    advisement so that the Commission can analyze the relationships among

    the various registrants to better assess sources of risk to the market

    and measure their potential reach. Because Form CTA-PR will be limited

    to demographic data, the Commission believes that it is appropriate for

    CTAs to file the form on an annual basis within 45 days of the end of

    the fiscal year. Therefore, the Commission has amended the text of

    Sec. 4.27 to reflect this modification of the reporting obligations of

    CTAs.

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

    \178\ See, e.g., IAA Letter; MFA II Letter; AIMA Letter; SIFMA

    Letter; and Fidelity Letter.

    \179\ Id.

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

    7. Implementation

    The effective date for Sec. 4.27 and Forms CPO-PQR and CTA-PR is

    July 2, 2012. The Commission is adopting a two-stage phase-in period

    for compliance with Form CPO-PQR filing requirements. The compliance

    date for Sec. 4.27 is September 15, 2012 for any CPO having at least

    $5 billion in assets under management attributable to commodity pools

    as of the last day of the fiscal quarter most recently completed prior

    to September 15, 2012. Therefore, a CPO with $5 billion in commodity

    pool assets under management as of June 30, 2012, must file its first

    Form CPO-PQR within 60 days following September 30, 2012. Reporting

    CPOs must file all schedules of Form CPO-PQR.

    For all other registered CPOs and all CTAs, the compliance date for

    Sec. 4.27 is December 15, 2012. As a result, most advisers must file

    their first Form CPO-PQR or CTA-PR based on information as of December

    31, 2012. This delay in compliance should allow sufficient time for

    CPOs and CTAs to develop systems for collecting the information

    required on the forms and prepare for filing. The Commission

    anticipates that this timeframe will also enable the NFA to have

    adequate time to program a system to accept the filings. The Commission

    has determined that the extension of the compliance dates is necessary

    because the rule and forms are being adopted later than expected.

    G. Amendments to Sec. Sec. 145.5 and 147.3: Confidential Treatment of

    Data Collected on Forms CPO-PQR and CTA-PR

    As the Commission stated in the Proposal, the collection of certain

    proprietary information through Forms CPO-PQR and CTA-PR raises

    concerns regarding the protection of such information from public

    disclosure.\180\ The Commission received two comments requesting that

    the Commission treat the disclosure of a pool's distribution channels

    as nonpublic information,\181\ and numerous other comments urging the

    Commission to be exceedingly circumspect in ensuring the

    confidentiality of the information received as a result of the data

    collections.\182\

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

    \180\ 76 FR 7976, 7982 (Feb. 12, 2011).

    \181\ See MFA II Letter and Seward & Kissel Letter.

    \182\ See Roundtable transcript. Commission staff also had

    numerous meetings with commenters that addressed this issue of

    confidentiality of information.

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

    The Commission agrees that the distribution and marketing channels

    used by a CPO for its pools may be sensitive information that

    implicates other proprietary secrets, which, if revealed to the general

    public, could put the CPO at a competitive disadvantage. Accordingly,

    the Commission is amending Sec. Sec. 145.5 and 147.3 to include

    question 9 of Schedule A of Form CPO-PQR as a nonpublic document.

    Additionally, the Commission is amending Sec. Sec. 145.5 and 147.3

    to remove reference to question 13 in Schedule A of Form CPO-PQR

    because such question no longer exists due to amendments to that

    schedule. Similarly, the Commission will be designating question

    subparts (c) and (d) of question 2 of Form CTA-PR as nonpublic because

    it identifies the pools advised by the reporting CTA.

    Therefore, as adopted, the parts of Form CPO-PQR that are

    designated nonpublic under parts 145 and 147 of the Commission

    regulations are:

    Schedule A: Question 2, subparts (b) and (d); Question 3,

    subparts (g) and (h); Question 9; Question 10, subparts (b), (c), (d),

    (e), and (g); Question 11; and Question 12.

    Schedule B: All.

    Schedule C: All; and

    Form CTA-PR: question 2, subparts c and d.

    H. Conforming Amendments to Part 4

    As a result of the amendments adopted herein, the Commission must

    amend various provisions in part 4 of the Commission's regulations for

    purposes of making conforming changes. Specifically, the Commission is

    deleting references to repealed Sec. 4.13(a)(4) in other sections of

    the Commission's regulations.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA)\183\ requires that agencies,

    in proposing rules, consider the impact of those rules on small

    businesses. The Commission has previously established certain

    definitions of ``small entities'' to be used by the Commission in

    evaluating the impact of its rules on

    [[Page 11272]]

    such entities in accordance with the RFA.\184\

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

    \183\ See 5 U.S.C. 601, et seq.

    \184\ 47 FR 18618 (April 30, 1982).

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

    CPOs: The Commission has determined previously that registered CPOs

    are not small entities for the purpose of the RFA.\185\ 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 Rule 4.13(a)(2).\186\ Such CPOs will

    continue to qualify for either exemption or exclusion from registration

    and therefore will not be required to report on proposed Form CPO-PQR;

    however, they will have an annual notice filing obligation confirming

    their eligibility for exemption or exclusion from registration and

    reporting. The Commission estimates that the time required to complete

    this new requirement will be approximately 0.25 of an hour, which the

    Commission has concluded will not be a significant time expenditure.

    The Commission has determined that the proposed regulation will not

    create a significant economic impact on a substantial number of small

    entities.

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

    \185\ See 47 FR 18618, 18619, Apr. 30, 1982.

    \186\ See 47 FR at 18619-20.

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

    CTAs: The Commission has previously decided to evaluate, within the

    context of a particular rule proposal, whether all or some CTAs should

    be considered to be small entities, and if so, to analyze the economic

    impact on them of any such rule.\187\ Form CTA-PR is proposed to be

    required of all registered CTAs, which necessarily includes entities

    that would be considered small. The majority of the information

    requested on Form CTA-PR is information that is readily available to

    the CTA or readily calculable by the CTA, regardless of size.

    Therefore, the Commission estimates that the time required to complete

    the items contained in Form CTA-PR will be approximately 0.5 hours as

    it is comprised of only two questions, which solicit information that

    is expected to be readily available. The Commission has determined that

    Form CTA-PR will not create a significant economic impact on a

    substantial number of small entities. Accordingly, the Chairman, on

    behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)

    that the proposed rules, will not have a significant impact on a

    substantial number of small entities.

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

    \187\ See 47 FR at 18620.

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

    The Commission did not receive any comments on its analysis of the

    application of the RFA to the instant part 4 amendments.

    B. Paperwork Reduction Act

    This rulemaking contains information collection requirements. The

    Paperwork Reduction Act (``PRA'') imposes certain requirements on

    Federal agencies in connection with their conducting or sponsoring any

    collection of information as defined by the PRA.\188\ An agency may not

    conduct or sponsor, and a person is not required to respond to, a

    collection of information unless it displays a currently valid control

    number from the Office of Management and Budget (``OMB'').

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

    \188\ See 44 U.S.C. 3501 et seq.

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

    The Commission is amending Collection 3038-0023 to allow for an

    increase in response hours for the rulemaking resulting from the

    rescission of Sec. Sec. 4.13(a)(4) and the modification of Sec. 4.5.

    This amendment differs from that in the Proposal due to the

    Commission's decision to retain the exemption set forth in Sec.

    4.13(a)(3). The Commission is amending Collection 3038-0005 to allow

    for an increase in response hours for the rulemaking associated with

    new and modified compliance obligations under part 4 of the

    Commission's regulations resulting from these revisions. The titles for

    these collections are ``Part 3--Registration'' (OMB Control number

    3038-0023) and ``Part 4--Commodity Pool Operators and Commodity Trading

    Advisors'' (OMB Control number 3038-0005). Responses to this collection

    of information will be mandatory.

    Both amendments differ from those set forth in the Proposal due to

    comments received asserting that, absent harmonization of the

    Commission's compliance regime for CPOs with that of the SEC for

    registered investment companies, entities operating registered

    investment companies that would be required to register with the

    Commission would not be able to comply with the Commission's

    regulations and would have to discontinue its activities involving

    commodity interests.\189\ The Commission acknowledges that there are

    certain provisions of its compliance regime that conflict with that of

    the SEC and that it would not be possible to comply with both. For this

    reason, the Commission is considering issuing a notice of proposed

    rulemaking regarding the areas of potential harmonization between the

    Commission's compliance obligations and those of the SEC. Until such

    time as the harmonized compliance regime is adopted as final rules, the

    Commission will not be requiring compliance with the provisions of

    Sec. 4.5 for registered investment companies. Therefore, the

    Commission is excluding Sec. 4.5 compliance from the PRA burden

    calculation for these final rules, and is recalculating the information

    collection requirements associated with Sec. 4.5 in the proposed

    harmonized compliance rules.

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

    \189\ See, e.g., ICI Letter, Fidelity Letter, Dechert III

    Letter.

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

    The Commission will protect proprietary information according to

    the Freedom of Information Act (``FOIA'') and 17 CFR part 145,

    ``Commission Records and Information.'' In addition, section 8(a)(1) of

    the CEA strictly prohibits the Commission, unless specifically

    authorized by the CEA, from making public ``data and information that

    would separately disclose the business transactions or market position

    of any person and trade secrets or names of customers.'' \190\ The

    Commission is also required to protect certain information contained in

    a government system of records according to the Privacy Act of

    1974.\191\

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

    \190\ See 7 U.S.C. 12.

    \191\ See 5 U.S.C. 552a.

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

    1. Additional Information Provided by CPOs and CTAs

    a. OMB Control Number 3038-0023

    Part 3 of the Commission's regulations concern registration

    requirements. The Commission is amending existing Collection 3038-0023

    to reflect the obligations associated with the registration of new

    entrants, i.e., CPOs that were previously exempt from registration

    under Sec. Sec. 4.5 and 4.13(a)(4), that had not previously been

    required to register. The Commission is omitting those CPOs continuing

    to claim relief under Sec. 4.13(a)(3), as that section will remain

    effective, and those CPOs that would be required to register under

    revised Sec. 4.5, as those entities will not be able to register and

    comply with the Commission's compliance obligations until such time as

    the harmonization of its requirements with those of SEC is finalized.

    Because the registration requirements are in all respects the same as

    for current registrants, the collection has been amended only insofar

    as it concerns the increased estimated number of respondents and the

    corresponding estimated annual burden.

    Accordingly, the Commission is amending existing Collection 3038-

    0023 to provide, in the aggregate:

    Estimated number of respondents: 75,425.

    [[Page 11273]]

    Annual responses by each respondent: 75,932.

    Estimated average hours per response: 0.09.

    Annual reporting burden: 6,833.9.

    In addition to the reporting burdens, each CPO or CTA not

    previously subject to registration will be obligated to submit a $200

    registration fee, an $85 registration fee for each associated person,

    and a $15 fee for fingerprinting services for each associated person.

    Those entities that do not already provide certified annual reports

    will now incur public accounting costs as a result of the newly adopted

    rules requiring certification. Moreover, the Commission anticipates

    that reporting entities may hire external service providers, such as

    law firms or accounting firms, to prepare and submit some of the

    documents required both in Collection 3038-0023 and in Collection 3038-

    0005, which is accounted for below.

    b. OMB Control Number 3038-0005

    Part 4 of the Commission's regulations concerns the operations of

    CTAs and CPOs, and the circumstances under which they may be exempted

    or excluded from registration. Under existing Collection 3038-0005 the

    estimated average time spent per response has not been altered;

    however, adjustments have been made to the collection to account for

    current information available from NFA concerning CPOs and CTAs

    registered or claiming exemptive relief under the part 4 regulations,

    and the new burden expected under proposed Sec. 4.27. The Commission

    estimates that a total of 300 entities annually will file the Notice of

    Exemption from CTA Registration under Sec. 4.14(a)(8), with an

    estimated burden of 0.5 hours per notice filing. An estimated 253

    entities will annually file 7,890 Notices of Exclusion from CPO

    Definition under Sec. 4.5, with an estimated burden of 0.5 hours per

    notice filing. The rules also require certain reports by each entity

    registered as a CPO or CTA. These include certain disclosure documents,

    pool account statements and pool annual reports, and requests for

    extensions of the annual report deadline. The Commission estimates that

    180 entities will prepare an average of 1.5 pool account statements as

    required under Sec. 4.22(a) an average of 9 times per year, with a

    per-response burden of 3.85 hours. The Commission estimates that these

    same 180 entities will prepare and file an average of 1.5 annual

    reports, with a burden of 9.58 hours per report. In addition, the

    Commission anticipates that 962 entities will file a request for a

    deadline extension for the annual report each year, with a burden of

    0.5 hours per request.

    These burden estimates, together with those associated with the

    increases necessary to account for the filing of forms CPO-PQR, PF, and

    CTA-PR discussed below, will result in an amendment to Collection 3038-

    0005 to provide, in the aggregate:

    Estimated number of respondents: 43,168.

    Annual responses for all respondents: 61,868.

    Estimated average hours per response: 8.77.

    Annual reporting burden: 257,635.8.

    Proposed Sec. 4.27 is expected to be the main reason for the

    increased burden under Collection 3038-0005.

    The Commission has amended its burden estimates with respect to

    Form CPO-PQR to reflect the fact that dually registered entities that

    operate pools that are not private funds may report the activities for

    such funds on Form PF.\192\ The Commission expects that any entity that

    is eligible to file form PF will file that form and not the form CPO-

    PQR, and has excluded from the estimates for form CPO-PQR those

    entities. As most of the burden associated with filing form PF for CPOs

    newly required to register with the Commission has been accounted for

    by the Commission in an information collection request associated with

    a rulemaking adopted jointly with the SEC, the amendment to Collection

    3038-0005 accounts only for the burden of filing form PF by dually

    registered CPOs for pools that are not private funds as defined in the

    joint rulemaking.

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

    \192\ Based on information that the Commission received from

    registrants on their annual financial report filings, the Commission

    determined that \1/3\ of all pools reporting to the Commission in

    2009 reported gains or losses from securities or a combination of

    securities and futures. Based on the provisions of Form PF, which

    permits filers of the form to file with respect to commodity pools

    that are not private funds, the Commission anticipates that all

    entities entitled to file Form PF for their commodity pools will do

    so, as it is less burdensome on the filer. Therefore, the Commission

    has included burden estimates for CPOs to file Form PF for their

    commodity pools that are not private funds, which is an incremental

    increase over the burden imposed by the obligation to file Form PF

    for the entity's private funds.

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

    i. Comments on Sec. 4.27 Reporting Requirements

    The Commission received numerous comments in response to proposed

    Sec. 4.27, and in response has adopted a number of cost-mitigating

    measures. Several commenters questioned whether the data collection was

    necessary for the Commission's oversight of its registrants.\193\

    Others asserted that certain groups, such as registered investment

    companies or family offices, should be exempted from completing the

    data collection.\194\ In the Commission's judgment, in order to fulfill

    the Commission's systemic-risk mitigation mandate, it is necessary to

    obtain information from the full universe of registrants to fully

    assess the activities of CPOs and CTAs in the derivatives markets.

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

    \193\ See Fidelity Letter; and AIMA Letter.

    \194\ See ICI Letter; AIMA Letter; and K&L Letter.

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

    With respect to the assertion that registered investment companies

    should not be required to file form CPO-PQR, the Commission believes

    that it is important to collect the data in form CPO-PQR from

    registered investment companies whose activities require CPO

    registration to assess the risk posed by such investment vehicles in

    the derivatives markets and the financial system generally. In this

    respect, the Commission intends to require the same information from

    the CPOs of registered investment companies as it is requiring from

    other registered CPOs. Additionally, the Commission notes that to the

    extent that the entity registered as the CPO for the registered

    investment company is registered as an investment adviser and is

    required to file Form PF with the SEC, the activities of the registered

    investment company may be reported on Form PF rather than form CPO-PQR.

    The Commission further believes that the same reasoning applies

    with respect to the collection of data from family offices. To enable

    the Commission to evaluate a potential family offices exemption

    following the collection and analysis of data regarding their

    activities, the Commission believes that it is essential that family

    offices remain subject to the data collection requirements.

    One commenter recommended that the Commission clarify the filing

    obligations for CPOs and CTAs that are required to file form PF with

    the SEC and streamline the reporting obligations.\195\ Another

    commenter argued that a very large private fund that has a limited

    amount of derivatives trading should not be subject to schedule C of

    form CPO-PQR.\196\

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

    \195\ See Fidelity Letter.

    \196\ See AIMA Letter; see also, SIFMA Letter; and Fidelity

    Letter.

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

    As stated in the Proposal, CPOs that are dually registered with the

    SEC and that file form PF must still file schedule A, containing basic

    demographic information, with the Commission, and CTAs must still file

    form CTA-PR. The Commission intends to adopt Sec. 4.27 as proposed and

    permit dual registrants to

    [[Page 11274]]

    file form PF with the SEC in lieu of completing schedules B and/or C of

    form CPO-PQR.

    However, the Commission did not intend to require very large dual

    registrants to file anything more than the general identifying

    information required on schedule A with the Commission, and neither

    Sec. 4.27 nor the forms require dual registrants to file schedules B

    or C if they are filing form PF. Similarly, the Commission is not

    adopting schedule B from form CTA-PR, and therefore, will be limiting

    the information collected from registered CTAs to demographic data and

    the names of the pools advised by the CTA. These measures will mitigate

    costs to market participants by limiting the number of registrants that

    must file these forms with the Commission.

    One commenter questioned whether the information collected on forms

    CTA-PR and CPO-PQR will provide the Commission with real-time data that

    will enable it to have an accurate and timely picture of a CTA's

    activities and operating status.\197\ Another commenter questioned

    whether the Commission possessed the staffing and financial resources

    necessary to meaningfully use such data as part of its oversight.\198\

    The Commission recognizes the limitations of the data collection

    instruments with respect to the timeliness of the information

    requested. The Commission believes, however, that the forms strike the

    appropriate balance between the time needed to compile complex data and

    the Commission's need for timely information. Information that is less

    than real-time is nevertheless useful in assisting the Commission in

    overseeing registrants as it will provide additional information upon

    which the Commission can base future program adjustments to ensure

    efficient deployment of the Commission's resources.

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

    \197\ See Barnard Letter.

    \198\ See Dechert Letter.

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

    As an offset to the costs otherwise associated with additional

    reporting, the Commission intends for the data to be collected from

    registrants in an electronic format. The Commission anticipates that

    electronic data filing will be less time-intensive and should lower

    compliance costs for participants, as well as processing costs for the

    Commission. Moreover, the Commission believes that, over time,

    participants will develop certain efficiencies in the filing of their

    annual CPO-PQR and CTA-PR forms, allowing costs to continue to decrease

    over time. Further, the Commission recognizes that the resources

    available to it are variable. As a further cost-mitigating measure, the

    Commission will leverage any limits on its resources through its

    coordination with NFA to accomplish the analysis necessary to make full

    use of the data collected from Commission registrants.

    The Commission received several comments regarding the appropriate

    reporting thresholds for the various schedules of form CPO-PQR.\199\

    The commenters stated that $150 million in assets under management was

    too low of a threshold for entities to be categorized as mid-sized and

    required to file schedule B. Rather, the commenters urged the

    Commission to increase the threshold to $500 million in assets under

    management.\200\ These commenters also suggested that the Commission

    increase the threshold for large CPOs to $5 billion in assets under

    management.\201\

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

    \199\ See AIMA Letter; MFA II Letter; Seward Letter. See also,

    AIMA II Letter.

    \200\ See AIMA Letter.

    \201\ See AIMA Letter; MFA II Letter; and Seward Letter.

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

    The Commission believes that $150 million in assets under

    management is still the appropriate threshold for mid-sized CPOs. The

    Commission will retain this threshold because it is consistent with the

    threshold for advisers filing section 1 of form PF, which is

    substantively similar to schedule B of form CPO-PQR, and it will ensure

    comparable treatment of entities of similar magnitude. In addition, the

    Commission has decided not to increase the large CPO threshold to $5

    billion. The Commission has decided, however, to increase the threshold

    for large CPOs from $1 billion to $1.5 billion. The Commission

    anticipates that increasing the threshold to $1.5 billion will lower

    costs by reducing the number of CPOs required to file schedule C of

    form CPO-PQR, while still capturing data concerning a substantial

    portion of the assets under management by registered CPOs. The

    Commission believes that increasing the threshold beyond $1.5 billion,

    however, could limit the Commission's access to information necessary

    to oversee entities that could pose a risk to the derivatives markets

    or the financial system as a whole.

    In response to comments, the Commission has also determined to

    mitigate costs and promote efficiency by modifying the frequency of

    reporting for filers of form CPO-PQR. As adopted, all CPOs other than

    large CPOs will be required to file schedule A on an annual basis; mid-

    size CPOs will be required to file schedule B on an annual basis; and

    large CPOs will be required to file schedules A, B, and C on a

    quarterly basis.

    The Commission received several comments asserting that the 15-day

    period for reporting was not sufficient to permit reporting CPOs to

    complete and file the form and all suggested extending the period to 30

    or 45 days.\202\ The Commission agrees that reporting CPOs will need

    additional time in which to submit the various schedules of form CPO-

    PQR. In a further effort to reduce costs to participants, all CPOs

    other than large CPOs will be required to file schedule A within 90

    days of the end of the calendar year. This time period was chosen for

    efficiency and cost mitigation inasmuch as it coincides with the annual

    questionnaire required by NFA of its entire population of member CPOs

    and with the vast majority of annual report filings for commodity

    pools. Moreover, because the Commission has transferred the pool

    position information from schedule A to schedule B, the Commission

    believes that CPOs should be able to comply with filing basic

    demographic data within 90 days.

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

    \202\ See NFA Letter; Seward Letter; and AIMA Letter.

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

    For schedule B, mid-sized CPOs are required to submit that schedule

    within 90 days; the Commission believes this is an adequate time period

    for compiling and reporting that schedule. The Commission notes that

    CPOs are generally required to file annual reports for their pools

    within 90 days of their fiscal year end, most of which coincide with

    the calendar year end. The Commission believes that the alignment of

    pools' fiscal years with the calendar year end should facilitate the

    preparation of schedule B and reduce the burden imposed on mid-size

    CPOs because some of the information required will be similar to that

    included in a pool's annual financial statements.

    With respect to the quarterly reporting by large CPOs on schedules

    A, B, and C, the Commission believes that 60 days is a sufficient

    amount of time to complete those schedules for large CPOs. The

    Commission notes that the entities required to file on a quarterly

    basis have a significant amount of assets under management, and as

    such, the Commission anticipates that such entities routinely generate

    the type of information requested on schedules B and C as part of their

    internal governance. Accordingly, the Commission will require large

    CPOs to file schedules A, B, and C within 60 days following the end of

    the reporting period as defined in form CPO-PQR.

    [[Page 11275]]

    The Commission received several comments regarding the content of

    form CTA-PR.\203\ Most commenters urged the Commission to eliminate the

    form in its entirety.\204\ The Commission does not believe that the

    complete elimination of form CTA-PR is appropriate; however, the

    Commission agrees that schedule B of the form contains redundant

    information that will already be collected through form CPO-PQR.

    Accordingly, the Commission has decided to adopt only schedule A of

    form CTA-PR. In so doing, the Commission believes the burden on CTAs

    should be significantly reduced. Because form CTA-PR will be limited to

    demographic data, the Commission believes that it is appropriate for

    CTAs to file the form on an annual basis within 45 days of the end of

    the fiscal year.

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

    \203\ See e.g., IAA Letter; MFA II Letter; AIMA Letter; SIFMA

    Letter; and Fidelity Letter.

    \204\ Id.

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

    Finally, because the regulations have been modified to allow dually

    registered entities to file only form PF (plus the first schedule A of

    form CPO-PQR) for all of their commodity pools, even those that are not

    ``private funds,'' the Commission expects that such entities should not

    be burdened by the costs of dual registration and dual filing.

    ii. Information Collection Estimates for Forms CPO-PQR, PF, and CTA-PR

    The Commission expects the following burden with respect to the

    various schedules of Forms CPO-PQR, PF, and CTA-PR:

    Form CPO-PQR: Schedule A:

    Estimated number of respondents (excluding large CPOs): 3,890.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 6.

    Annual reporting burden: 23,340.

    Estimated number of respondents (large CPOs): 170.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 6.

    Annual reporting burden: 4,080.

    Form CPO-PQR: Schedule B:

    Estimated number of respondents (mid size CPOs): 440.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 4.

    Annual reporting burden: 1,760.

    Estimated number of respondents (large CPOs): 170.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 4.

    Annual reporting burden: 2,720.

    Form CPO-PQR: Schedule C:

    Estimated number of respondents: 170.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 18.

    Annual reporting burden: 12,240.

    Form PF (non-large CPOs):

    Estimated number of respondents: 220.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 4.

    Annual reporting burden: 880.

    Form PF (large CPOs):

    Estimated number of respondents: 90.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 18.

    Annual reporting burden: 6,480.

    Form CTA-PR:

    Estimated number of respondents: 450.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 0.5.

    Annual reporting burden: 225.

    C. Considerations of Costs and Benefits

    The Commission has historically exercised its authority to exempt

    certain categories of entity from the CPO and CTA registration

    requirement set forth in Section 4m(1) of the CEA, which states that it

    is otherwise ``unlawful for any commodity trading advisor or commodity

    pool operator, unless registered under this Act'' to conduct business

    in interstate commerce.\205\ Exempted entities have included certain

    investment companies registered with the SEC pursuant to the Investment

    Company Act of 1940, and certain entities whose only participants are

    ``qualified eligible persons.'' \206\ This system of exemptions was

    appropriate because such entities engaged in relatively little

    derivatives trading, and dealt exclusively with qualified eligible

    persons, who are considered to possess the resources and expertise to

    manage their risk exposure.

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

    \205\ 7 U.S.C. 6m.

    \206\ 17 CFR Sec. Sec. 4.5(a)(1), 4.13(a)(4).

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

    In the Commission's judgment, changed circumstances warrant

    revisions to these rules. The Commission is aware, for example, of

    increased derivatives trading activities by entities that have

    previously been exempted from registration with the Commission, such

    that entities now offering services substantially identical to those of

    registered entities are not subject to the same regulatory oversight.

    Meanwhile, the Dodd-Frank Act has given the Commission a more robust

    mandate to manage systemic risk and to ensure safe trading practices by

    entities involved in the derivatives markets, including qualified

    eligible persons and other participants in commodity pools. Yet, while

    the Commission must execute this mandate, there currently is no source

    of reliable information regarding the general use of derivatives by

    registered investment companies.

    The Commission, therefore, is adopting a new registration and data

    collection regime for CPOs and CTAs that is consistent with the data

    collection required under the Dodd-Frank Act. In these final rules, the

    adopted amendments to part 4 of the Commission's regulations will do

    the following: (A) Rescind the exemption from CPO registration provided

    in Sec. 4.13(a)(4) of the Commission's regulations; (B) rescind relief

    from CTA registration for those CTAs who advise pools with relief under

    Sec. 4.13(a)(4); (C) rescind relief from the certification requirement

    for annual reports provided to operators of certain pools only offered

    to qualified eligible persons (``QEPs'') under Sec. 4.7(b)(3); (D)

    modify the criteria for claiming relief under Sec. 4.5 of the

    Commission's regulations; (E) require the annual filing of notices

    claiming exemptive relief under Sec. 4.5, Sec. 4.13, and Sec. 4.14

    of the Commission's regulations; and (F) require additional risk

    disclosures for CPOs and CTAs regarding swap transactions and, certain

    conforming amendments. By these amendments, the Commission seeks to

    eliminate informational ``blind spots,'' which will benefit all

    investors and market participants by enhancing the Commission's ability

    to form and frame effective policies and procedures.

    Section 15(a) \207\ of the CEA requires the Commission to consider

    the costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing an order. Section 15(a) further specifies that

    the costs and benefits shall be evaluated in light of the following

    five broad areas of market and public concern: (1) Protection of market

    participants and the public; (2) efficiency, competitiveness, and

    financial integrity of futures markets; (3) price discovery; (4) sound

    risk management practices; and (5) other public interest

    considerations. To the extent that these new regulations reflect the

    statutory requirements of the Dodd-

    [[Page 11276]]

    Frank Act, they will not create costs and benefits beyond those

    resulting from Congress's statutory mandates in the Dodd-Frank Act.

    However, to the extent that the new regulations reflect the

    Commission's own determinations regarding implementation of the Dodd-

    Frank Act's provisions, such Commission determinations may result in

    other costs and benefits. It is these other costs and benefits

    resulting from the Commission's own determinations pursuant to and in

    accordance with the Dodd-Frank Act that the Commission considers with

    respect to the Section 15(a) factors.

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

    \207\ 7 U.S.C. 19(a).

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

    The Commission has quantified estimated costs and benefits where it

    is reasonably practicable to do so. The Commission notes that, unless

    otherwise specified, all costs discussed herein are estimates based on

    the Commission's knowledge of the operations and registration statuses

    of CPOs and CTAs. Moreover, the Commission is obligated to estimate the

    burden of and provide supporting statements for any collections of

    information it seeks to establish under considerations contained in the

    PRA, 44 U.S.C. 3501 et seq., and to seek approval of those requirements

    from the OMB. Therefore, the estimated burden and support for the

    collections of information in this this rulemaking, as well as the

    consideration of comments thereto, are discussed in the PRA section of

    this rulemaking and the information collection requests filed with OMB

    as required by that statute. All estimates are based on average costs;

    actual costs may vary depending on the entity's individual business

    model and compliance procedures.

    The Commission is sensitive to costs incurred by market

    participants and has attempted in a variety of ways to minimize burdens

    on affected entities. These include the Commission's efforts to

    harmonize its compliance requirements with those of the SEC, including

    through specific harmonizing provisions in the joint SEC-CFTC rule for

    dually registered investment advisers, as well as through tailoring of

    the current amendments.\208\ A number of other cost-mitigation measures

    are discussed later in this section.

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

    \208\ See Reporting by Investment Advisers to Private Funds and

    Certain Commodity Pool Operators and Commodity Trading Advisors on

    Form PF, 76 FR 71128 (Nov. 16, 2011).

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

    In its Proposal, the Commission invited commenters to ``to submit

    any data and other information that they may have quantifying or

    qualifying the costs and benefits of this proposed rule with their

    comment letters.'' \209\ Many comments addressed the costs and benefits

    of the proposed rule in qualitative terms. These comments are

    considered below.

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

    \209\ 76 FR 7976, 7989 (Feb. 11, 2011).

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

    In the following discussion, the Commission sets forth its own

    assessment of the benefits and costs of the amendments; addresses

    relevant comments on the Proposal and alternatives to the Proposal

    submitted by commenters; and evaluates the benefits and costs in light

    of the five broad areas of market and public concern set forth in

    Section 15(a) of the CEA. The analysis begins by addressing general

    comments related to cost-benefit analysis in the context of the

    Proposal as a whole, and then proceeds to examine the specific issues

    according to the following three categories of regulation contained

    within the Proposal: (1) registration (including changes to Sec. 4.5,

    Sec. 4.13(a), and Sec. 4.14); (2) data collection (including the

    adoption of forms CPO-PQR and CTA-PR); and (3) complementary amending

    provisions (including changes to Sec. 4.7, Sec. 4.24, Sec. 4.34, and

    parts 145 and 147).

    1. General Comments

    Several commenters claimed that the Commission did not provide a

    sufficient consideration of costs and benefits in the Notice of

    Proposed Rulemaking.\210\ One commenter noted that the cost-benefit

    considerations focused on benefits that are already provided by other

    federal securities laws, making the regulations duplicative.\211\

    Another commenter asserted that until other rules, such as the further

    definition of ``swaps,'' as well as capital and margin requirements,

    have been finalized, it is not possible to determine the costs and

    benefits of these rules.\212\ Other commenters suggested there be

    another roundtable meeting to discuss the proposed rules.\213\

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

    \210\ See SIFMA Letter; USCC Letter; Reed Smith Letter; NFA

    Letter; Invesco Letter; Dechert II Letter; and ICI Letter.

    \211\ See ICI Letter.

    \212\ See Dechert II Letter.

    \213\ See Vanguard Letter; MFA Letter.

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

    In response to these comments, the Commission has further

    considered costs and benefits as they relate to the final rules. As

    explained below in the discussion concerning dual SEC and Commission

    registrants, the Commission believes that the benefits provided by

    these rules are supplementary to, and not duplicative or redundant of,

    benefits provided by the federal securities laws. The Commission does

    not believe that the adoption of these regulations should be postponed

    until after other regulations are finalized and believes that the costs

    and benefits are sufficiently clear at this point and that delay is not

    justified.\214\ In addition, the Commission has no reason to believe

    that another roundtable meeting would yield information substantially

    different from that gleaned from prior roundtables, comment letters,

    and meetings with industry representatives.

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

    \214\ As noted above, however, the Commission agrees that it

    should not implement the inclusion of swaps within the threshold

    test prior to the effective date of such relevant final rules.

    Therefore, it is the Commission's intention to delay the effective

    date of the inclusion of swaps into the threshold calculation until

    60 days after the final rules regarding the definition of ``swap''

    and the delineation of the margin requirement for such instruments

    are effective.

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

    The Commission has determined that these amendments will create

    additional compliance costs for affected participants. These costs

    include, but may not be limited to, the cost to prepare and file new

    forms CPO-PQR and CTA-PR; the cost to file an annual notice to claim

    exemptive relief under Sec. Sec. 4.5, 4.13, and 4.14; the cost of

    preparing, certifying, and submitting annual reports as required for

    registrants; the cost of preparing required disclosure documents; the

    cost of preparing and distributing account statements on a periodic

    basis to participants; the cost of keeping certain records as required;

    and the cost of registering as a CPO or CTA. These costs each relate to

    collections of information subject to PRA compliance, and therefore

    have been accounted for in the PRA section of this rulemaking and the

    information collection requests filed with OMB as required by that

    statute.

    Notably, many of the benefits associated with the requirements

    adopted or amended in these regulations are recognized not only by the

    Commission in its mission to protect derivatives markets and the

    participants in them but also by the industry. Several ``best

    practices'' manuals highlight the benefits of being registered with the

    Commission, preparing and disseminating risk disclosure documents,

    confirming receipt of disclosure documents, and ensuring independent

    audit of financial statements and annual reports.\215\ These benefits

    include increased consumer

    [[Page 11277]]

    confidence in offered pools and funds as well as increased internal

    risk management structures.

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

    \215\ See, e.g. ``Sound Practices for Hedge Fund Managers.''

    Managed Funds Association (MFA). Washington DC, 2007.; ``Principles

    and Best Practices for the Hedge Fund Industry.'' Investors

    Committee Report to the President's Working Group on Financial

    Markets, Washington DC, 2008.; and ``Best Practices for the Hedge

    Fund Industry.'' Asset Managers Committee Report to the President's

    Working Group on Financial Markets, Washington DC, 2009.

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

    2. Regulations Regarding Registration Requirements for CPOs and CTAs

    As discussed above, the amendments to the registration provisions

    under part 4 include rescissions of the exemptions for entities

    functioning as commodity pools with only ``qualified eligible persons''

    as participants and the exclusion of registered investment companies

    under the Investment Company Act of 1940, unless those investment

    companies fall below a certain threshold level of derivatives

    investment activity. With respect to those entities that will continue

    to claim exemption or exclusion from registration as CPOs or CTAs under

    the rules, the amendments will also require annual reaffirmance of

    those claims of exemption or exclusion.

    a. Benefits of Registration Provisions

    As discussed above in II.A.1, the Commission believes that

    registration provides two significant interrelated benefits. First,

    registration allows the Commission to ensure that entities with greater

    than a de minimis level of participation in the derivatives markets

    meet minimum standards of fitness and competency. Second, registration

    provides the Commission and members of the public with a direct means

    to address wrongful conduct by participants in the derivatives markets.

    The Commission has direct authority to take punitive and/or remedial

    action against registered entities for violations of the CEA or of the

    Commission's regulations. The Commission also has the ability to deny

    or revoke registration, thereby prohibiting an unfit individual or

    entity from serving as an intermediary in the industry. Members of the

    public also may access the Commission's reparations program to seek

    redress for wrongful conduct by a Commission registrant.

    The Commission believes that the registration procedures enacted as

    part of its regulatory regime upgrade the overall quality of market

    participants, which, in turn, strengthens the derivatives industry by

    minimizing lost business due to customer dissatisfaction and by

    reducing litigation arising from acts of market participants.

    Therefore, the Commission believes that its registration requirements

    further critical regulatory objectives and serve important public

    policy goals.

    By expanding the Commission's regulatory oversight of entities

    performing the functions of CPOs and CTAs, the Commission believes that

    the final rules related to registration will help to ensure that such

    entities meet basic standards of competency and fitness, which in turn

    will provide a greater level of protection to market participants.

    Ensuring that CPOs and CTAs are qualified in the first instance--as

    opposed to relying solely on after-the-fact enforcement actions to

    deter and remedy misconduct--should reduce such instances of misconduct

    and resulting litigation, and thereby promote overall market

    confidence. Therefore, the Commission believes that its registration

    requirements are integral to its regulatory objectives and are in the

    public interest.

    With specific respect to the annual reaffirmance requirement, this

    amendment will promote transparency regarding the number of entities

    either exempt or excluded from the Commission's registration and

    compliance programs. One primary purpose of the Dodd Frank Act is the

    promotion of transparency in the financial system, particularly in the

    derivatives market. This requirement is consistent with and will

    further that purpose. Finally, the annual notice requirement will

    enable the Commission to determine whether exemptions and exclusions

    should be modified, repealed, or maintained as part of the Commission's

    ongoing assessment of its regulatory scheme.

    These benefits--enhancing the quality of entities operating within

    the market, and the screening of unfit participants from the markets--

    are substantial, even if unquantifiable. Through registration, the

    Commission will be better able to protect the public and markets from

    unfit persons and conduct that may threaten the integrity of the

    markets subject to its jurisdiction.

    b. Costs of Registration Provisions

    Because of the amendments to part 4 as adopted here, the Commission

    recognizes that some participants who previously were excluded or

    exempted from registering as a CPO or CTA will now be required to

    register with the Commission through NFA. In addition to costs

    associated with registration accounted for under the PRA, which one

    commenter said would ``vary significantly depending on a range of

    factors, including the number of employees who will need to pass

    examinations, the number of funds advised, investment strategy and

    complexity, existing IT systems, and whether or not an adviser is

    already registered or authorized and subject to a different regulatory

    regime,'' \216\ the commenter estimated ongoing costs to be in the

    range of $150,000 to $250,000 per year, a substantial part of which

    would be made up of additional compliance personnel, information

    technology development and legal/accounting advice that will be

    required, and again vary significantly depending on the factors

    mentioned above.\217\ The Commission presents these estimates for the

    consideration of affected entities, reiterating the high variability of

    costs depending on the factors enumerated by the commenter. This

    variability is one reason the Commission presented its own estimates of

    costs on a per-requirement basis; affected entities should be aware

    that the total cost of registration and compliance will most likely be

    the sum of any number of the estimates presented in this section and

    under the PRA. In addition to the information collection costs

    addressed by the Commission under the PRA, entities that will be

    required to register with the Commission also will become subject to

    NFA rules and to NFA audit procedures. NFA assesses annual membership

    dues on CPOs and CTAs, currently $750, and charges $90 for the National

    Commodity Futures Examination (NCFE) or Series 3 Examination for each

    AP. The Commission understands that NFA audits CPOs and CTAs, on

    average, every two to three years, though the frequency of audit

    depends greatly on individual risk factors, and NFA generally conducts

    an audit within the first year following registration of an

    entity.\218\ The cost of such an audit may be incurred by the CPO or

    CTA through an ``audit fee'' imposed by NFA; however, the audit fee

    varies greatly by individual entity and individual audit and thus is

    difficult to quantify on any sort of aggregated basis. Notwithstanding

    the difficulty of quantifying such a burden, the Commission notes this

    cost will most likely arise in the first year of registration and on

    average every few years thereafter, and entities should expect such a

    fee to be incurred.

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

    \216\ See AIMA II Letter.

    \217\ Id.

    \218\ For more information on audit procedures, visit the NFA

    Web site, currently at http://www.nfa.futures.org/NFA-compliance/NFA-general-compliance-issues/nfa-audits.HTML.

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

    c. Comments Regarding Registration Provisions

    1. Sec. 4.5 Amendments

    Commenters who opposed the changes to Sec. 4.5 claimed that

    requiring registered investment companies to register and comply with

    the Commission's regulatory regime would

    [[Page 11278]]

    provide no benefit, because such entities are already subject to

    comprehensive regulation by the SEC.\219\ The Commission disagrees.

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

    \219\ See, e.g., ICI Letter.

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

    While the Commission and the SEC share many of the same regulatory

    objectives, including protecting market users and the public from fraud

    and manipulation, the Commission administers the CEA to foster open,

    competitive, and financially sound commodity and derivatives markets.

    The Commission's programs are structured and its resources deployed to

    meet the needs of the markets it regulates. In light of this

    Congressional mandate, it is the Commission's view that entities

    engaging in more than a de minimis amount of derivatives trading should

    be required to register with the Commission. The alternative approaches

    suggested by commenters would, as discussed above, detract from the

    benefits of registration.

    As also discussed above, the Commission is aware that currently

    unregistered entities are offering services substantially identical to

    those of registered CPOs. Several commenters also asserted that

    modifying Sec. 4.5 would result in a significant burden on entities

    required to register with the Commission without any meaningful benefit

    to the Commission.\220\ The Commission recognizes that significant

    burdens may arise from the modifications to Sec. 4.5; however, the

    Commission believes, as discussed throughout this release, that

    entities that are offering services substantially identical to those of

    a registered CPO should be subject to substantially identical

    regulatory obligations.

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

    \220\ See ICI Letter; Vanguard Letter; Reed Smith Letter;

    AllianceBernstein Letter; USAA Letter; PMC Letter; IAA Letter;

    Dechert II Letter; Janus Letter; STA Letter; Invesco Letter; and

    Equinox Letter.

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

    Nevertheless, the Commission has not eliminated altogether the

    exemption available under Sec. 4.5. Where an entity's trading does not

    exceed five percent of the liquidation value of its portfolio, that

    entity will remain exempt from registration. In the Commission's

    judgment, trading exceeding five percent of the liquidation value of a

    portfolio evidences a significant exposure to the derivatives

    markets.\221\ This threshold was adopted by the Commission in its

    earlier enactment of Sec. 4.13(a)(3).\222\ In promulgating that

    exemption for de minimis activity, the Commission determined that five

    percent is an appropriate threshold beyond which oversight by the

    Commission is warranted.\223\ Because current data and information does

    not allow the Commission to evaluate the difference in market impact at

    various threshold levels \224\ the Commission believes it is prudent to

    maintain the current threshold level. Further, as discussed above, no

    facts have been put before the Commission that would warrant deviation

    from the five-percent threshold, including data respecting the costs

    and benefits of the same. The Commission also received numerous

    comments on the proposed addition of a trading threshold to the

    exclusion under Sec. 4.5.\225\ Some commenters stated that a five

    percent de minimis threshold is too low in light of the Commission's

    determination to include swaps within the measured activities. Although

    these commenters presented alternatives to this five percent threshold

    (some said twenty percent would be more reasonable, for example) the

    Commission believes, as stated in the Proposal, that trading exceeding

    five percent of the liquidation value of a portfolio evidences a

    significant exposure to the derivatives markets.\226\ Moreover, in its

    adoption of the exemption under Sec. 4.13(a)(3),\227\ the Commission

    previously determined that five percent is an appropriate threshold to

    determine whether an entity warrants oversight by the Commission.\228\

    Current data and information does not allow the Commission to evaluate

    the difference in market impact at various threshold levels; \229\

    thus, the Commission believes it is prudent to maintain the current

    threshold level. Commenters also recommended that the Commission

    exclude from the threshold calculation various instruments including

    broad-based stock index futures, security futures generally, or

    financial futures contracts as a whole.\230\ As discussed above, the

    Commission does not believe that a meaningful distinction can be drawn

    between those security or financial futures and other categories of

    futures for the purposes of registration; thus, the Commission does not

    believe that exempting any of these instruments from the threshold

    calculation is appropriate.

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

    \221\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the]

    Commission believes that it is possible for a commodity pool to have

    a portfolio that is sizeable enough that even if just five percent

    of the pool's portfolio were committed to margin for futures, the

    pool's portfolio could be so significant that the commodity pool

    would constitute a major participant in the futures market'').

    \222\ 17 CFR 4.13(a)(3).

    \223\ 68 FR 47221, 47225 (Aug. 8, 2003).

    \224\ The Commission currently only has information on the

    positions held by CPOs in futures markets, i.e., those entities

    already registered as CPOs, as opposed to those excluded from the

    definition of CPO under Sec. 4.5. The Commission does not have

    access to information on the total liquidation value of funds

    operated by registered CPOs or those operated by excluded CPOs,

    values that are needed to determine the universe of entities

    affected by one particular percentage threshold versus another.

    These data limitations are one reason why the Commission is pursuing

    additional data collection initiatives under these final rules.

    \225\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed

    Smith Letter; AllianceBernstein Letter; AII Letter; STA Letter;

    Janus Letter; PMC Letter; USAA Letter; Fidelity Letter; SIFMA

    Letter; Dechert III Letter; Rydex Letter; USCC Letter; Sidley

    Letter; NFA Letter; Campbell Letter; AQR Letter; Steben Letter; ICI

    II Letter; and AII Letter.

    \226\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the]

    Commission believes that it is possible for a commodity pool to have

    a portfolio that is sizeable enough that even if just five percent

    of the pool's portfolio were committed to margin for futures, the

    pool's portfolio could be so significant that the commodity pool

    would constitute a major participant in the futures market'').

    \227\ 17 CFR 4.13(a)(3).

    \228\ 68 FR 47221, 47225 (Aug. 8, 2003).

    \229\ The Commission currently only has information on the

    positions held by CPOs in futures markets, i.e., those entities

    already registered as CPOs, as opposed to those excluded from the

    definition of CPO under Sec. 4.5. The Commission does not have

    access to information on the total liquidation value of funds

    operated by registered CPOs or those operated by excluded CPOs,

    values that are needed to determine the universe of entities

    affected by one particular percentage threshold versus another.

    These data limitations are one reason why the Commission is pursuing

    additional data collection initiatives under these final rules.

    \230\ See Rydex Letter; Invesco Letter; and ICI Letter.

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

    Several panelists at the Roundtable suggested that, instead of a

    trading threshold that is based on a percentage of margin, that the

    Commission should focus solely on entities that offer ``actively

    managed futures'' strategies.\231\ As discussed in section II.A.2, the

    Commission does not find it appropriate to establish a differentiation

    between ``active'' and ``passive'' derivative investments because, in

    addition to other reasons,\232\ establishing such differentiation would

    introduce an element of subjectivity to an otherwise objective standard

    and make the threshold more difficult to interpret, apply, and enforce.

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

    \231\ See Transcript of CFTC Staff Roundtable Discussion on

    Proposed Changes to Registration and Compliance Regime for Commodity

    Pool Operators and Commodity Trading Advisors (``Roundtable

    Transcript''), at 19, 25, 30, 76-77, 87-90, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.

    \232\ Additional reasons for not accepting this alternative are

    discussed in section II.A.2 of this release.

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

    One commenter suggested that the Commission should consider the

    adoption of an alternative test that would be identical to the

    aggregate net notional value test that is currently available under

    Sec. 4.13(a)(3)(ii)(B).\233\ Section 4.13(a)(3)(ii)(B) provides that

    an entity can claim exemption from

    [[Page 11279]]

    registration if the net notional value of its fund's derivatives

    trading does not exceed one hundred percent of the liquidation value of

    the fund's portfolio.\234\

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

    \233\ See Dechert III Letter.

    \234\ 17 CFR 4.13(a)(3)(ii)(B).

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

    Conversely, several panelists at the Roundtable opposed such a

    test, stating that it was not a reliable means to measure an entity's

    exposure in the market.\235\ As stated previously herein, the

    Commission believes that the adoption of an alternative net notional

    test will provide consistent standards for relief from registration as

    a CPO for entities whose portfolios only contain a limited amount of

    derivatives positions and will afford registered investment companies

    with additional flexibility in determining eligibility for exclusion.

    Therefore, the Commission will adopt an alternative net notional test,

    consistent with that set forth in Sec. 4.13(a)(3)(ii)(B) as amended

    herein, for registered investment companies claiming exclusion from the

    definition of CPO under Sec. 4.5.

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

    \235\ See Roundtable Transcript at 69-71.

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

    The Commission also received several comments supporting both the

    imposition of a trading threshold in general and the five percent

    threshold specifically.\236\ At least one commenter suggested, however,

    that the Commission consider requiring registered investment companies

    that exceed the threshold to register, but not subjecting them to the

    Commission's compliance regime beyond requiring them to be subject to

    the examination of their books and records, and examination by

    NFA.\237\ In effect, this commenter requested that the Commission

    subject such registrant to ``notice registration.'' The Commission

    believes that adopting the approach proposed by the commenter would not

    materially change the information that the Commission would receive

    regarding the activities of registered investment companies in the

    derivatives markets, which is one of the Commission's purposes in

    amending Sec. 4.5. Moreover, a type of notice registration would not

    provide the Commission with any real means for engaging in consistent

    ongoing oversight. Notwithstanding such notice registration, the

    Commission would still be deemed to have regulatory responsibility for

    the activities of these registrants. In the Commission's view, notice

    registration does not equate to an appropriate level of oversight. For

    that reason, the Commission has determined not to adopt the alternative

    proposed by the commenter. The Commission is adopting the amendment to

    Sec. 4.5 regarding the trading threshold without modification for the

    reasons stated herein and those previously discussed in the Proposal.

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

    \236\ See NFA Letter, Campbell Letter, AQR Letter, and Steben

    Letter.

    \237\ See AQR Letter.

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

    2. Sec. Sec. 4.13(a)(3) and (a)(4) Rescissions

    In addition to the comments that the Commission received regarding

    the specific parts of the Proposal rescinding Sec. Sec. 4.13(a)(3) and

    (a)(4), the Commission received numerous comments regarding the

    proposed rescissions generally.\238\ Broadly, the comments opposed the

    rescission of the provisions. In the Proposal, the Commission proposed

    rescinding the ``de minimis'' exemption in Sec. 4.13(a)(3). The

    Commission received ten comments specifically on this aspect of the

    Proposal, which consistently urged the Commission to retain a de

    minimis exemption. As discussed above in section II.C.2, the

    Commission, after consideration of the comments and the Commission's

    stated rationale for proposing to rescind the exemption in Sec.

    4.13(a)(3), has determined to retain the ``de minimis'' exemption

    currently set forth in that section without modification.

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

    \238\ See NYSBA Letter; Skadden Letter; MFA Letter; Katten

    Letter; Fidelity Letter; Dechert Letter; AIMA Letter; AIMA II

    Letter; IAA Letter; SIFMA Letter; HedgeOp Letter; PIC Letter; and

    Seward Letter.

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

    Several commenters asserted that rescission was not necessary

    because the Commission has the means to obtain any needed information

    from exempt CPOs through its large trader reporting requirements and

    its special call authority.\239\ Although the Commission has those

    means, neither of those rules were intended to provide the kind of data

    requested of registered entities on forms CPO-PQR or CTA-PR with the

    regularity proposed under Sec. 4.27.

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

    \239\ See Skadden Letter; Katten Letter; and MFA Letter.

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

    Another commenter asserted that the compliance and regulatory

    obligations under the Commission's rules are burdensome for private

    businesses and would unnecessarily distract entities from their primary

    focus of managing client assets.\240\ The Commission believes that

    regulation is necessary to ensure a well functioning market and to

    provide protection of those clients. The Commission further believes

    that the compliance regime that the Commission has adopted strikes the

    appropriate balance between limiting the burden placed on registrants

    and enabling the Commission to carry out its duties under the Act.

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

    \240\ See MFA Letter; Seward Letter; and Katten Letter.

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

    In the Proposal, the Commission also proposed to rescind the

    exemption in Sec. 4.13(a)(4) for operators of pools that are offered

    only to individuals and entities that satisfy the qualified eligible

    person standard in Sec. 4.7 or the accredited investor standard under

    the SEC's Regulation D.\241\ Several commenters argued that the

    Commission should consider retaining the exemption in Sec. 4.13(a)(4)

    for funds that do not directly invest in commodity interests, but do so

    through a fund of funds structure, and who are advised by an SEC

    registered investment adviser. The Commission has not developed a

    comprehensive view regarding the role of funds of funds in the

    derivatives markets, in part, due to a lack of data regarding their

    investment activities. The Commission, therefore, believes that it is

    prudent to withhold consideration of a fund of funds exemption until

    the Commission has received data regarding such firms on forms CPO-PQR

    and/or CTA-PR, as applicable, to enable the Commission to better assess

    the universe of firms that may be appropriate to include within the

    exemption, should the Commission decide to adopt one. Therefore, the

    Commission declines to adopt the commenter's alternative to provide an

    exemption for funds of funds at this time.

    One commenter argued that rescission is not necessary because any

    fund that seeks to attract qualified eligible persons is already

    required to maintain oversight and controls that exceed those mandated

    by part 4 of the Commission's regulations such that any regulation

    imposed would be duplicative and unnecessarily burdensome.\242\ The

    commenter primarily focused on the significant level of controls that

    the fund operator implements independent of regulation. The Commission

    believes that, contrary to the commenter's arguments as to the import

    of that fact, such controls and internal oversight should make

    compliance with the Commission's regulatory regime easier and cheaper

    rather than more burdensome. If the information required to be

    disclosed under the Commission's regulations is to a large extent

    already being disclosed by the firm, the Commission anticipates that

    this would limit the costs of compliance to those costs directly

    involved with formatting such information as required by the

    Commission's disclosure and reporting

    [[Page 11280]]

    rules. The Commission adopts the rescission of Sec. 4.13(a)(4) as

    proposed.

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

    \242\ See Cranwood Letter.

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

    The Commission has also elected to mitigate costs by phasing in

    gradually the rescission of Sec. 4.13(a)(4). As discussed in section

    II.C.5, in response to certain comments, the Commission will implement

    the rescission of Sec. 4.13(a)(4) for all entities currently claiming

    exemptive relief thereunder on December 31, 2012, but the rescission

    will be implemented for all other CPOs upon the effective date of this

    final rulemaking. This timeline reflects the Commission's belief that

    entities currently claiming relief under Sec. 4.13(a)(4) should be

    capable of becoming registered and complying with the Commission's

    regulations within 11 months following the issuance of the final rule.

    For entities that are formed after the effective date of the

    rescission, the Commission expects the CPOs of such entities to comply

    with the Commission's regulations upon formation and commencement of

    operations.

    3. Annual Notice of Exemption or Exclusion Requirement

    The amendments will require annual reaffirmance of any claim of

    exemption or exclusion from registration as a CPO or CTA.\243\ In the

    Proposal, the Commission stated that an annual notice requirement would

    promote transparency, a primary purpose of the Dodd Frank Act,

    regarding the number of entities either exempt or excluded from the

    Commission's registration and compliance programs. Moreover, the

    Commission stated that an annual notice requirement would enable the

    Commission to determine whether exemptions and exclusions should be

    modified, repealed, or maintained as part of the Commission's ongoing

    assessment of its regulatory scheme.

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

    \243\ 76 FR 7976, 7986 (Feb. 12, 2011).

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

    Two commenters suggested that the 30-day time period for filing was

    not adequate to enable firms to comply.\244\ One commenter proposed a

    60-day time period,\245\ whereas the other commenter proposed 90 days

    as the necessary amount of time.\246\ As a further cost-mitigating

    measure, and for the reasons discussed in section II.D, the Commission

    has elected to extend the filing period from 30 days to 60 days.

    Further, the Commission will adopt the annual notice requirement with

    one significant modification designed, among other things, to mitigate

    costs--that the notice be filed at the end of the calendar year and not

    the anniversary of the original filing. The Commission believes this

    alternative presented by a commenter will be more operationally

    efficient.\247\

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

    \244\ See NFA Letter; and SIFMA Letter.

    \245\ See NFA Letter.

    \246\ See SIFMA Letter.

    \247\ See NFA Letter.

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

    d. Section 15(a)

    In this section, the Commission considers the costs and benefits of

    its actions in light of five broad areas of market and public concern

    set forth in Sec. 15(a) of the CEA: (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.

    1. Protection of Market Participants and the Public

    Registration provides many benefits for both the registrants and

    their customers. The registration process allows the Commission to

    ensure that all entities participating in derivative markets meet a

    minimum standard of fitness and competency. The regulations governing

    who must register and what registrants must do provide clear direction

    for CPOs and CTAs. At the same time, clients wishing to invest with

    registered entities have the knowledge that such entities are held to a

    high financial standard through periodic account statements, disclosure

    of risk, audited financial statements, and other measures designed to

    provide transparency to investors. The Commission believes its

    regulations protect market participants and the public by requiring

    certain parties previously excluded or exempt from registration to be

    held to the same standards as registered operators and advisors, which

    ensures the fitness of such market participants and professionals.

    Additionally furthering the goal of investor protection, NFA

    provides an on-line, public database with information on the

    registration status of market participants and their principals as well

    as certain additional registrant information such as regulatory actions

    taken by the NFA or Commission.\248\ This information is intended to

    assist the public in making investment decisions regarding the use of

    derivatives professionals. Although those previously exempt entities

    may incur costs associated with registering and the compliance

    obligations arising therefrom, or may incur costs to inform the

    Commission of their exempt status, the Commission believes the benefits

    of transparency in the derivatives markets in the long term will

    outweigh these costs, which should decrease over time as efficiencies

    develop.

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

    \248\ The National Futures Association's Background Affiliation

    Status Information Center (BASIC) is currently available at http://www.nfa.futures.org/basicnet/.

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

    2. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    The amendments adopted herein will result in the registration of

    more CPOs and CTAs, which will enable the Commission to better oversee

    their activities in the derivatives markets, thereby protecting the

    integrity of the markets. Indeed, even including those entities still

    exempt under revised part 4 that are required to file notice with the

    Commission on an annual basis, the Commission will be able to better

    understand who is operating in derivatives markets and identify any

    threats to the efficiency, competitiveness, or integrity of markets.

    Moreover, because similarly situated entities in the derivatives

    markets will be subject to the same regulatory regime, the

    competitiveness of market participants will be enhanced.

    3. Price Discovery

    The Commission has not identified any impact on price discovery

    through the registration of additional CPOs and CTAs as a result of

    these regulations.

    4. Sound Risk Management

    The information the Commission gains from the registration of

    entities allows the Commission to better understand the participants in

    the derivatives markets and the interconnectedness of all market

    participants. Such an understanding allows the Commission to better

    assess potential threats to the soundness of derivatives markets and

    thus the financial system of the United States. The Commission also

    believes that the information required of registrants, to the extent

    that producing such information requires entities to examine their

    internal systems and operations in a manner not previously assessed,

    provides registrants with an additional method of understanding the

    risk inherent in their day-to-day businesses.

    5. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations impacted by the registration of additional CPOs and CTAs

    as a result of these regulations.

    3. Data Collection

    In these final rules, the Commission is enacting new Sec. 4.27,

    which requires CPOs and CTAs to report certain

    [[Page 11281]]

    information to the Commission on forms CPO-PQR and CTA-PR,

    respectively. The forms, reporting thresholds, and filing deadlines are

    further detailed in section II.F of this release.

    a. Benefits of Data Collection

    The Commission expects that the data collected from forms CPO-PQR

    and CTA-PR will increase the amount and quality of information

    available to the Commission regarding a previously opaque area of

    investment activity. Entities that are required to file all three

    schedules of the forms are large enough to have, potentially, a great

    impact on derivatives markets should such entities default, whereas

    smaller entities are required to file only basic demographic

    information. Because the data currently available to the Commission

    regarding CPOs and CTAs is limited in scope, the Commission does not

    have complete information as to who is transacting in derivatives

    markets. With the additional information that the Commission will have

    as a result of the new requirements under Sec. 4.27, the Commission

    will be able to tailor its regulations to the needs of, and risks posed

    by, entities in the market, and to protect investors and the general

    public from potentially negative or overly risky behavior.

    The Dodd-Frank Act charged the Commission, as a member of FSOC and

    as a financial regulatory agency, with mitigating risks that may impact

    the financial stability of the United States. The Commission is

    dedicated to assisting FSOC in that goal, and these final regulations

    are essential for the Commission to be able to fulfill that role

    effectively because the Commission cannot protect against risks of

    which it is not aware. By creating a reporting regime that makes the

    operations of commodity pools more transparent to the Commission, the

    Commission is better able to identify and address potential threats.

    The total benefit of risk mitigation as it pertains to the overall

    financial stability of the United States is not quantifiable, but it is

    significant insofar as the Commission may be able to use this data to

    prevent further future shocks to the U.S. financial system.

    b. Costs of Data Collection

    The Commission has not identified costs of data collection that are

    not associated with an information collection subject to the PRA. These

    costs therefore have been accounted for in the PRA section of this

    rulemaking and the information collection requests filed with OMB, as

    required by the PRA.

    c. Section 15(a) Determination

    This section analyzes the data collection rules according to the

    five factors set forth in section 15(a) of the CEA: (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.

    1. Protection of Market Participants and the Public

    The Commission believes that the information to be gathered from

    forms CPO-PQR and CTA-PR increases the amount and quality of

    information available regarding a previously opaque area of investment

    activity and, thereby, enhances the ability of the Commission to

    protect investors and oversee derivatives markets. This enhanced

    ability provides a better understanding of the participants in

    derivatives markets and their operations, and as such, the Commission

    is better able to protect the public from the potential risk that

    large, unregulated entities could bring to markets under the

    Commission's jurisdiction, many of which are essential to society at

    large. Moreover, to mitigate reporting costs to regulated entities that

    may be registered both with the Commission and with the SEC, the

    regulations have been modified to allow dually registered entities to

    file only form PF (plus the first schedule A of form CPO-PQR) for all

    of their commodity pools, even those that are not ``private funds.''

    The cost mitigation has been accounted for in the PRA section of this

    rulemaking and the information collection requests filed with OMB, as

    required by the PRA.

    2. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    Although the Commission does not believe this rule relates directly

    to the efficiency or competitiveness of futures markets, the Commission

    does recognize that the interconnectedness of the participants within

    derivatives markets can be extensive such that the proper oversight of

    each category of participants affects proper oversight of derivatives

    markets and the financial system as a whole. To the extent that the

    information collected by form CPO-PQR and form CTA-PR and the adopted

    amendments to the Commission's compliance regime assist the Commission

    in identifying threats in derivatives markets, the regulations herein

    protect the integrity of futures markets.

    3. Price Discovery

    The Commission has not identified any impact on price discovery as

    a result of this data collection initiative.

    4. Sound Risk Management

    The Dodd-Frank Act tasks FSOC and its member agencies (including

    both the SEC and the Commission) with mitigating risks to the financial

    stability the United States. The Commission believes these regulations

    are necessary to fulfill that obligation. These regulations improve the

    ability of the Commission to oversee the derivatives markets. As the

    Commission's understanding of the regulated entities, their behavior in

    derivatives markets, and the overall riskiness of their positions

    increases through the data collection in these rules, the Commission

    will be able to better understand any risks posed to the financial

    system as a whole arising from markets under the Commission's

    jurisdiction. These benefits are shared by market participants, at

    least indirectly, as a part of the United States financial system. In

    addition, CPOs and CTAs may benefit from these regulations to the

    extent that reporting form CPO-PQR and form CTA-PF requires such

    entities to review their firms' portfolios, trading practices, and risk

    profiles; thus, the CFTC believes that these regulations may improve

    the sound risk management practices within their internal risk

    management systems.

    5. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations impacted by this data collection initiative.

    4. Complementary Provisions

    As part of these final regulations, the Commission is also adopting

    other amending provisions that complement the registration and data

    collection provisions, including changes to Sec. 4.7, Sec. 4.22,

    Sec. Sec. 4.24 and 4.34, and parts 145 and 147. This section sets

    forth the Commission's consideration of related costs and benefits in

    general, responds to relevant comments, and then analyzes the

    complementary provisions in light of the five factors enumerated in

    Sec. 15(a) of the CEA.

    a. Benefits of the Complementary Provisions

    The provisions in this category amend additional sections of part 4

    in order to improve the Commission's ability to effectively regulate

    derivatives markets and their participants. Some of these complementary

    provisions are specifically designed to protect

    [[Page 11282]]

    investors, e.g., requiring certified annual reports and disclosure of

    swaps risk ensures investors are getting complete and accurate

    information regarding their investment, which increases consumer

    confidence in the financial system. As the information available to

    consumers becomes more accurate and complete, a prospective investor

    can more easily compare investment vehicles to choose the investment

    vehicle best suited to the investor's individual financial plan and

    risk tolerance.

    Other provisions protect market participants by amending the

    Commission's internal procedures to provide for the confidentiality of

    certain proprietary information. Moreover, the Commission's planned

    harmonization rules are designed to limit the impact to entities

    regulated by multiple entities, protecting those participants from

    overly burdensome regulatory regimes.

    b. Costs of the Complementary Provisions

    The Commission has identified no costs of the complementary

    provisions that are not associated with an information collection

    subject to the PRA. These costs therefore have been accounted for in

    the PRA section of this rulemaking and the information collection

    requests filed with OMB, as required by the PRA.

    c. Comments on the Complementary Provisions

    1. Sec. 4.7 Amendments

    As stated previously, the Commission is adopting an amendment to

    Sec. 4.7 that would rescind the relief provided in Sec. 4.7(b)(3)

    from the certification requirement of Sec. 4.22(c) for financial

    statements contained in commodity pool annual reports. The Commission

    received two comments regarding this proposed amendment. One commenter

    supported the proposed rescission and the Commission's stated

    justification for doing so. The other commenter recommended that the

    Commission retain an exemption from certification of financial

    statements for entities where the pool's participants are limited to

    the principals of its CPO(s) and CTA(s) and other categories of

    employees listed in Sec. 4.7(a)(2)(viii). It is unclear how many of

    the pools operated under Sec. 4.7 would qualify for such relief if

    adopted. The Commission is therefore unable to agree that such

    exclusions would materially reduce costs or increase any benefit

    achieved by the rule.

    2. Sec. 4.24 and Sec. 4.34 Amendments

    The Commission also proposed adding standard risk disclosure

    statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.

    4.24(b) and 4.34(b), respectively. The Commission received three

    comments with respect to the proposed standard risk disclosure

    statement for swaps. Two argued that a standard risk disclosure

    statement does not beneficially disclose the risks inherent in swaps

    activity to participants or clients. A third recommended that the

    Commission consider whether the wording of the standard disclosure

    should be modified depending on whether the swaps were cleared or

    uncleared.

    The Commission respectfully disagrees with the assertions of those

    commenters who believe that a standard risk disclosure statement is not

    beneficial. The Commission believes that a standardized risk disclosure

    statement addressing certain risks associated with the use of swaps is

    necessary due to the revisions to the statutory definitions of CPO,

    CTA, and commodity pool enacted by the Dodd-Frank Act. In addition,

    based on the language proposed, the Commission does not believe that

    different language must be adopted to account for the differences

    between cleared and uncleared swaps. In particular, the Commission

    notes that the proposed risk disclosure statement is not intended to

    address all risks that may be associated with the use of swaps, but

    that the CPO or CTA is required to make additional disclosures of any

    other risks in its disclosure document pursuant to Sec. Sec. 4.24(g)

    and 4.34(g) of the Commission's regulations. Moreover, the language of

    the proposed risk disclosure statement is conditional and does not

    purport to assert that all of the risks discussed are applicable in all

    circumstances.

    For the reasons discussed above in section II.E and those stated in

    the Proposal, the Commission adopts the proposed risk disclosure

    statements for CPOs and CTAs regarding swaps. These additional risk

    disclosure statements will be required for all new disclosure documents

    and all updates filed after the effective date of this final

    rulemaking.

    3. Harmonization of Regulations and Fund-of-Fund Investments

    The Commission received numerous other comments regarding such

    subjects as harmonizing CFTC regulations with SEC regulations and fund

    of fund investments. These comments are discussed in detail in sections

    II.F.3 and 4 and adopted by reference herein.

    4. Confidentiality of Submitted Data

    Additionally, as the Commission stated in the Proposal, the

    collection of certain proprietary information through forms CPO-PQR and

    CTA-PR raises concerns regarding the protection of such information

    from public disclosure. The Commission received two comments requesting

    that the Commission treat the disclosure of a pool's distribution

    channels as nonpublic information, and numerous other comments urging

    the Commission to be exceedingly circumspect in ensuring the

    confidentiality of the information received as a result of the data

    collections.

    The Commission agrees that the distribution and marketing channels

    used by a CPO for its pools may be sensitive information that

    implicates other proprietary secrets, which, if revealed to the general

    public, could put the CPO at a competitive disadvantage. Accordingly,

    and to mitigate costs and eliminate risks to participants, the

    Commission is amending Sec. Sec. 145.5 and 147.3 to include question 9

    of schedule A of form CPO-PQR as a nonpublic document. Additionally,

    the Commission is amending Sec. Sec. 145.5 and 147.3 to remove

    reference to question 13 in Schedule A of Form CPO-PQR because that

    such question no longer exists due to amendments to that schedule.

    Similarly, the Commission will be designating subparts c. and d. of

    question 2 of form CTA-PR as nonpublic because it identifies the pools

    advised by the reporting CTA.

    d. Section 15(a) Determination

    This section considers these costs and benefits in light of the

    five broad areas of market and public concern set forth in section

    15(a) of the CEA: (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.

    1. Protection of Market Participants and the Public

    The complementary provisions discussed in this section protect

    market participants and the public in a variety of ways. The changes

    under Sec. 4.7 require entities to have their annual financial

    statements independently audited; such a requirement protects the

    investors in pools registered under Sec. 4.7 by ensuring that the

    financial statements provided to participants are accurate and correct.

    As most CPOs registered under Sec. 4.7 currently file audited annual

    reports, the burden to the industry as a whole will be relatively minor

    whereas the benefits, including increased consumer confidence, are

    likely to be

    [[Page 11283]]

    large. The dollar value of improvements to overall accuracy of

    financial reporting is not quantifiable, but is a significant benefit.

    Registered entities can remain confident in the confidentiality of

    their reports to the Commission, as the revised parts 145 and 147

    protect proprietary information from being released to the public,

    while still giving the Commission needed information to protect

    derivatives markets and their participants.

    The amending provisions that require similar information from CPOs

    transacting in swaps products and markets increase the Commission's

    awareness of transactions in the previously unregulated over-the-

    counter markets. That awareness will help to bring transparency to the

    swaps markets, as well as to the interaction of swaps and futures

    markets, protecting the participants in both markets from potentially

    negative behavior.

    2. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    Although the Commission does not believe this part of these

    regulations has a direct impact on the efficiency of futures markets,

    the Commission does recognize that the protection of proprietary

    information is essential for the competitiveness and integrity of

    futures markets. The Commission believes that requiring all registered

    CPOs to provide participants and the Commission with annual financial

    statements that are certified by independent public accountants will

    increase the reliability of the information provided, which will serve

    to enhance the financial integrity of market participants, and by

    extension, the market as a whole. Moreover, the Commission also

    believes that requiring such certified statement of all registrants

    serves to make market participants more competitive as it enables

    prospective participants to more easily compare various investment

    vehicles.

    3. Price Discovery

    The Commission has not identified any impact on price discovery as

    a result of these regulations.

    4. Sound Risk Management

    The Commission has not identified any other impacts on sound risk

    management as a result of the other amending provisions that are

    different from the impacts of the registration and data collection

    initiatives described in sections III.A.3 and 4.

    5. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations impacted by as a result of these regulations.

    5. Conclusion

    The Commission recognizes that the final regulations will impose

    some significant costs on the industry, as described above and in the

    PRA section. Notwithstanding the costs, the Commission has determined

    to adopt this rule because the Commission believes that proper

    regulation and oversight of market participants is necessary to promote

    fair and orderly derivatives markets.

    List of Subjects

    17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Consumer protection, Reporting and

    recordkeeping requirements.

    17 CFR Part 145

    Commission records and information.

    17 CFR Part 147

    Open commission Meetings.

    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. 4.5, add paragraphs (c)(2)(iii) and (c)(5) to read as

    follows:

    Sec. 4.5 Exclusion from the definition of the term ``commodity pool

    operator.''

    * * * * *

    (c) * * *

    (2) * * *

    (iii) Furthermore, if the person claiming the exclusion is an

    investment company registered as such under the Investment Company Act

    of 1940, then the notice of eligibility must also contain

    representations that such person will operate the qualifying entity as

    described in Rule 4.5(b)(1) in a manner such that the qualifying

    entity:

    (A) Will use commodity futures or commodity options contracts, or

    swaps solely for bona fide hedging purposes within the meaning and

    intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5);

    Provided however, That in addition, with respect to positions in

    commodity futures or commodity option contracts, or swaps which do not

    come within the meaning and intent of Rules 1.3(z)(1) and 151.5, a

    qualifying entity may represent that the aggregate initial margin and

    premiums required to establish such positions will not exceed five

    percent of the liquidation value of the qualifying entity's portfolio,

    after taking into account unrealized profits and unrealized losses on

    any such contracts it has entered into; and, Provided further, That in

    the case of an option that is in-the-money at the time of purchase, the

    in-the-money amount as defined in Rule 190.01(x) (17 CFR 190.01(x)) may

    be excluded in computing such five percent;

    (B) The aggregate net notional value of commodity futures,

    commodity options contracts, or swaps positions not used solely for

    bona fide hedging purposes within the meaning and intent of Rules

    1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5), determined at the

    time the most recent position was established, does not exceed 100

    percent of the liquidation value of the pool's portfolio, after taking

    into account unrealized profits and unrealized losses on any such

    positions it has entered into. For the purpose of this paragraph:

    (1) The term ``notional value'' shall be calculated for each

    futures position by multiplying the number of contracts by the size of

    the contract, in contract units (taking into account any multiplier

    specified in the contract, by the current market price per unit, for

    each such option position by multiplying the number of contracts by the

    size of the contract, adjusted by its delta, in contract units (taking

    into account any multiplier specified in the contract, by the strike

    price per unit, for each such retail forex transaction, by calculating

    the value in U.S. Dollars for such transaction, at the time the

    transaction was established, excluding for this purpose the value in

    U.S. Dollars of offsetting long and short transactions, if any, and for

    any cleared swap by the value as determined consistent with the terms

    of 17 CFR part 45; and

    (2) The person may net futures contracts with the same underlying

    commodity across designated contract markets and foreign boards of

    trade; and swaps cleared on the same designated clearing organization

    where appropriate; and

    (C) Will not be, and has not been, marketing participations to the

    public as or in a commodity pool or otherwise as or in a vehicle for

    trading in the commodity futures, commodity options, or swaps markets.

    * * * * *

    (5) Annual notice. Each person who has filed a notice of exclusion

    under

    [[Page 11284]]

    this section must affirm on an annual basis the notice of exemption

    from registration, withdraw such exemption due to the cessation of

    activities requiring registration or exemption therefrom, or withdraw

    such exemption and apply for registration within 30 days of the

    calendar year end through National Futures Association's electronic

    exemption filing system.

    * * * * *

    0

    3. In Sec. 4.7:

    0

    a. Revise paragraphs (a)(3)(ix), (a)(3)(x), and (b)(3) 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) * * *

    (3) * * *

    (ix) A natural person whose individual net worth, or joint net

    worth with that person's spouse at the time of either his purchase in

    the exempt pool or his opening of an exempt account would qualify him

    as an accredited investor as defined in Sec. 230.501(a)(5) of this

    title;

    (x) A natural person who would qualify as an accredited investor as

    defined in SSec. 203.501(a)(6) of this title;

    * * * * *

    (b) * * *

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

    requirements of Sec. 4.22(c) 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 that section, an

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

    4.22(h) which contains, at a minimum:

    (A) A Statement of Financial Condition as of the close of the

    exempt pool's fiscal year (elected in accordance with Sec. 4.22(g));

    (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) Legend. If a claim for exemption has been made pursuant to

    this section, the commodity pool operator must make a statement to that

    effect on the cover page of each annual report.

    * * * * *

    0

    4. In Sec. 4.13:

    0

    a. Revise paragraphs (a)(3)(ii)(B)(1) and (2);

    0

    b. Remove and reserve paragraph (a)(4);

    0

    c. Revise paragraph (b)(1)(ii);

    0

    d. Redesignate paragraph (b)(4) as paragraph (b)(5) and add new

    paragraph (b)(4); and

    0

    e. Revise paragraph (e)(2) introductory text.

    The revisions and additions read as follows:

    Sec. 4.13 Exemption from registration as a commodity pool operator.

    * * * * *

    (a) * * *

    (3) * * *

    (ii) * * *

    (B) * * *

    (1) The term ``notional value'' shall be calculated for each

    futures position by multiplying the number of contracts by the size of

    the contract, in contract units (taking into account any multiplier

    specified in the contract, by the current market price per unit, for

    each such option position by multiplying the number of contracts by the

    size of the contract, adjusted by its delta, in contract units (taking

    into account any multiplier specified in the contract, by the strike

    price per unit, for each such retail forex transaction, by calculating

    the value in U.S. Dollars of such transaction, at the time the

    transaction was established, excluding for this purpose the value in

    U.S. Dollars of offsetting long and short transactions, if any, and for

    any cleared swap by the value as determined consistent with the terms

    of part 45 of the Commission's regulations; and

    (2) The person may net futures contracts with the same underlying

    commodity across designated contract markets and foreign boards of

    trade; and swaps cleared on the same designated clearing organization

    where appropriate; and

    * * * * *

    (b) * * *

    (2) * * *

    (ii) Contain the section number pursuant to which the operator is

    filing the notice (i.e., Sec. 4.13(a)(1), (2), or (3)) and represent

    that the pool will be operated in accordance with the criteria of that

    paragraph; and

    * * * * *

    (4) Annual Notice. Each person who has filed a notice of exemption

    from registration under this section must affirm on an annual basis the

    notice of exemption from registration, withdraw such exemption due to

    the cessation of activities requiring registration or exemption

    therefrom, or withdraw such exemption and apply for registration within

    30 days of the calendar year end through National Futures Association's

    electronic exemption filing system.

    * * * * *

    (e) * * *

    (2) If a person operates one or more commodity pools described in

    paragraph (a)(3) of this section, and one or more commodity pools for

    which it must be, and is, registered as a commodity pool operator, the

    person is exempt from the requirements applicable to a registered

    commodity pool operator with respect to the pool or pools described in

    paragraph (a)(3) of this section; Provided, That the person:

    * * * * *

    0

    5. In Sec. 4.14:

    0

    a. Revise paragraph (a)(8)(i)(D); and

    0

    b. Redesignate paragraph (a)(8)(iii)(D) as (a)(8)(iii)(E) and add a new

    paragraph (a)(8)(iii)(D).

    The revision and addition read as follows:

    Sec. 4.14 Exemption from registration as a commodity trading adviser.

    * * * * *

    (a) * * *

    [[Page 11285]]

    (8) * * *

    (i) * * *

    (D) A commodity pool operator who has claimed an exemption from

    registration under Sec. 4.13(a)(3), or, if registered as a commodity

    pool operator, who may treat each pool it operates that meets the

    criteria of Sec. 4.13(a)(3) as if it were not so registered; and

    * * * * *

    (iii) * * *

    (D) Annual notice. Each person who has filed a notice of exemption

    from registration under this section must affirm on an annual basis the

    notice of exemption from registration, withdraw such exemption due to

    the cessation of activities requiring registration or exemption

    therefrom, or withdraw such exemption and apply for registration within

    30 days of the calendar year end through National Futures Association's

    electronic exemption filing system.

    * * * * *

    0

    6. In Sec. 4.24, add paragraph (b)(5) to read as follows:

    Sec. 4.24 General disclosures required.

    * * * * *

    (b) * * *

    (5) If the pool may engage in swaps, the Risk Disclosure Statement

    must further state:

    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A

    VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A

    PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE

    TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS

    TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,

    COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL

    RISK.

    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE

    LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY

    LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN

    VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF

    AN UNDERLYING OR RELATED MARKET FACTOR.

    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH

    A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP

    TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE

    ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED

    TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL

    OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE

    POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS

    SCHEDULED TERMINATION DATE.

    * * * * *

    0

    7. In Sec. 4.34, add paragraph (b)(4) to read as follows:

    Sec. 4.34 General disclosures required.

    * * * * *

    (b) * * *

    (4) If the commodity trading advisor may engage in swaps, the Risk

    Disclosure Statement must further state:

    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A

    VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A

    PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE

    TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS

    TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,

    FUNDING RISK, AND OPERATIONAL RISK.

    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE

    LIQUIDITY RISK, WHICH MAY RESULT IN YOUR ABILITY TO WITHDRAW YOUR FUNDS

    BEING LIMITED. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL

    GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE

    VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.

    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH

    A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP

    TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE

    ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED

    TERMS. THEREFORE, IT MAY NOT BE POSSIBLE TO MODIFY, TERMINATE, OR

    OFFSET YOUR OBLIGATIONS OR YOUR EXPOSURE TO THE RISKS ASSOCIATED WITH A

    TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.

    * * * * *

    0

    8. Effective July 2, 2012, revise Sec. 4.27, as added November 16,

    2011, at 76 FR 71114, and effective March 31, 2012 to read as follows:

    Sec. 4.27 Additional reporting by advisors of certain large commodity

    pools.

    (a) General definitions. For the purposes of this section:

    (1) Commodity pool operator or CPO has the same meaning as

    commodity pool operator defined in section 1a(11) of the Commodity

    Exchange Act;

    (2) Commodity trading advisor or CTA has the same meaning as

    defined in section 1a(12);

    (3) Direct has the same meaning as defined in section 4.10(f);

    (4) Net asset value or NAV has the same meaning as net asset value

    as defined in section 4.10(b);

    (5) Pool has the same meaning as defined in section 1(a)(10) of the

    Commodity Exchange Act;

    (6) Reporting period means the reporting period as defined in the

    forms promulgated hereunder;

    (b) Persons required to report. A reporting person is:

    (1) Any commodity pool operator that is registered or required to

    be registered under the Commodity Exchange Act and the Commission's

    regulations thereunder; or

    (2) Any commodity trading advisor that is registered or required to

    be registered under the Commodity Exchange Act and the Commission's

    regulations thereunder.

    (c) Reporting. (1) Except as provided in paragraph (c)(2) of this

    section, each reporting person shall file with the National Futures

    Association, a report with respect to the directed assets of each pool

    under the advisement of the commodity pool operator consistent with

    appendix A to this part or commodity trading advisor consistent with

    appendix C to this part.

    (2) All financial information shall be reported in accordance with

    generally accepted accounting principles consistently applied.

    (d) Investment advisers to private funds. Except as otherwise

    expressly provided in this section, CPOs and CTAs that are dually

    registered with the Securities and Exchange Commission and are required

    to file Form PF pursuant to the rules promulgated under the Investment

    Advisers Act of 1940, shall file Form PF with the Securities and

    Exchange Commission in lieu of filing such other reports with respect

    to private funds as may be required under this section. In addition,

    except as otherwise expressly provided in this section, CPOs and CTAs

    that are dually registered with the Securities and

    [[Page 11286]]

    Exchange Commission and are required to file Form PF pursuant to the

    rules promulgated under the Investment Advisers Act of 1940, may file

    Form PF with the Securities and Exchange Commission in lieu of filing

    such other reports with respect to commodity pools that are not private

    funds as may be required under this section. Dually registered CPOs and

    CTAs that file Form PF with the Securities and Exchange Commission will

    be deemed to have filed Form PF with the Commission for purposes of any

    enforcement action regarding any false or misleading statement of a

    material fact in Form PF.

    (e) Filing requirements. Each report required to be filed with the

    National Futures Association under this section shall:

    (1)(i) Contain an oath and affirmation that, to the best of the

    knowledge and belief of the individual making the oath and affirmation,

    the information contained in the document is accurate and complete;

    Provided, however, That it shall be unlawful for the individual to make

    such oath or affirmation if the individual knows or should know that

    any of the information in the document is not accurate and complete and

    (ii) Each oath or affirmation must be made by a representative duly

    authorized to bind the CPO or CTA.

    (2) Be submitted consistent with the National Futures Association's

    electronic filing procedures.

    (f) Termination of reporting requirement. All reporting persons

    shall continue to file such reports as are required under this section

    until the effective date of a Form 7W filed in accordance with the

    Commission's regulations.

    (g) Public records. Reports filed pursuant to this section shall

    not be considered Public Records as defined in Sec. 145.0 of this

    chapter.

    0

    9. Revise appendix A to part 4 to read as follows:

    Appendix A to Part 4--Form CPO-PQR

    BILLING CODE 6351-01-P

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    0

    10. Add appendix C to part 4 to read as follows:

    Appendix C to Part 4--Form CTA-PR

    [[Page 11338]]

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    [GRAPHIC] [TIFF OMITTED] TR24FE12.056

    BILLING CODE 6351-01-C

    PART 145--COMMISSION RECORDS AND INFORMATION

    0

    11. The authority citation for part 145 continues to read as follows:

    Authority: Publ. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80

    Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.

    1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389

    (5 U.S.C. 4a(j)).

    0

    12. In Sec. 145.5, revise paragraphs (d)(1)(viii) and (h) to read as

    follows:

    Sec. 145.5 Disclosure of nonpublic records.

    * * * * *

    (d) * * *

    (1) * * *

    (viii) The following reports and statements that are also set forth

    in paragraph (h) of this section, except as specified in 17 CFR

    1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant

    to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR

    pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to

    17 CFR 31.13; the accountant's report on material inadequacies filed in

    accordance with 17 CFR 1.16(c)(5); all reports and statements required

    to be filed pursuant to 17 CFR 1.17(c)(6); and

    (A)(1) The following portions of Form CPO-PQR required to be filed

    pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d);

    Question 3, subparts (g) and (h); Question 9; Question 10, subparts

    (b), (c), (d), (e), and (g); Question 11; Question 12; and Schedules B

    and C;

    (2) The following portions of Form CTA-PR required to be filed

    pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d);

    * * * * *

    (h) Contained in or related to examinations, operating, or

    condition reports prepared by, on behalf of, or for the use of the

    Commission or any other agency responsible for the regulation or

    supervision of financial institutions, including, but not limited to

    the following reports and statements that are also set forth in

    paragraph (d)(1)(viii) of this section, except as specified in 17 CFR

    1.10(g)(2) and 17 CFR 31.13(m): Forms 1-FR required to be filed

    pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms

    1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed

    pursuant to 17 CFR 31.13; the accountant's report on material

    inadequacies filed in accordance with 17 CFR 1.16(c)(5); all reports

    and statements required to be filed pursuant to 17 CFR 1.17(c)(6); and

    (1) The following portions of Form CPO-PQR required to be filed

    pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d);

    Question 3, subparts (g) and (h); Question 9; Question 10, subparts

    (b), (c), (d), (e), and (g); Question 11; Question 12; and Question 13;

    and Schedules B and C;

    (2) The following portions of Form CTA-PR required to be filed

    pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d); and

    * * * * *

    PART 147--OPEN COMMISSION MEETINGS

    0

    13. The authority citation for part 147 continues to read as follows:

    Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.

    552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.

    4a(j) (Supp. V, 1975)).

    0

    14. In Sec. 147.3, revise paragraphs (b)(4)(i)(H) and (b)(8) to read

    as follows:

    Sec. 147.3 General requirement of open meetings; grounds upon which

    meetings may be closed.

    * * * * *

    (b) * * *

    (4)(i) * * *

    (H) The following reports and statements that are also set forth in

    paragraph (b)(8) of this section, except as specified in 17 CFR

    1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant

    to 17 CFR 1.10;

    [[Page 11343]]

    FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR

    1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the

    accountant's report on material inadequacies filed in accordance with

    17 CFR 1.16(c)(5); all reports and statements required to be filed

    pursuant to 17 CFR 1.17(c)(6); the following portions of Form CPO-PQR

    required to be filed pursuant to 17 CFR 4.27: Schedule A: Question 2,

    subparts (b) and (d); Question 3, subparts (g) and (h); Question 9;

    Question 10, subparts (b), (c), (d), (e), and (g); Question 11; and

    Question 12; and Schedules B and C; and the following portions of Form

    CTA-PR required to be filed pursuant to 17 CFR 4.27: Question 2,

    subparts (c) and (d);

    * * * * *

    (8) Disclose information contained in or related to examination,

    operating, or condition reports prepared by, on behalf of, or for the

    use of the Commission or any other agency responsible for the

    regulation or supervision of financial institutions, including, but not

    limited to the following reports and statements that are also set forth

    in paragraph (b)(4)(i)(H) of this section, except as specified in 17

    CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed

    pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms

    1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR pursuant to 17 CFR 31.13;

    the accountant's report on material inadequacies filed in accordance

    with 1.16(c)(5); and all reports and statements required to be filed

    pursuant to 17 CFR 1.17(c)(6); and

    (i) The following portions of Form CPO-PQR required to be filed

    pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D;

    Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),

    (e), and (g); Question 11; Question 12; and Question 13; and Schedules

    B and C; and

    (ii) The following portions of Form CTA-PR required to be filed

    pursuant to 17 CFR 4.27: Schedule B: Question 4, subparts (b), (c),

    (d), and (e); Question 5; and Question 6;

    * * * * *

    Issued in Washington, DC, on February 8, 2012, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

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

    Federal Regulations:

    Appendices to Commodity Pool Operators and Commodity Trading Advisors:

    Amendments to Compliance Obligations--Commission Voting Summary and

    Statements of Commissioners

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler, Commissioners Chilton, O'Malia

    and Wetjen voted in the affirmative; Commissioners Sommers voted in

    the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule increasing the transparency to

    regulators of commodity pool operators (CPOs) and commodity trading

    advisors (CTAs) acting in the derivatives marketplace--for both

    futures and swaps. This rule reinstates the regulatory requirements

    in place prior to 2003 for registered investment companies that

    trade over a de minimis amount in commodities or market themselves

    as commodity funds. This rule enhances transparency in a number of

    ways and increases customer protections through amendments to the

    compliance obligations for CPOs and CTAs.

    First, these amendments are consistent with the Dodd-Frank Wall

    Street Reform and Consumer Protection Act (Dodd-Frank Act), as these

    changes bring the swaps activities of CPOs and CTAs under the CFTC's

    oversight. If CPOs and CTAs are trading swaps, they will have to

    register with the Commission, giving their customers the benefit of

    the protections in the Dodd-Frank Act.

    Second, these amendments addressed the concerns raised by the

    National Futures Association (NFA) in its petition requesting the

    Commission to reinstate Commission oversight of CPOs and CTAs for

    futures that existed prior to 2003. Since 2003, the participation of

    registered investment companies in commodity futures, swaps, and

    options markets has increased significantly. Some registered

    investment companies have been marketing commodity pools to retail

    investors and are operating without the supervision of the CFTC and

    the NFA. In addition, foreign advisors with U.S. customers have been

    exempt from supervision since 2003. The final rule reinstates the

    protections that futures customers of CPOs and CTAs had prior to the

    exemptions the Commission granted in 2003. It is critical to bring

    the pools that have been in the dark since 2003 back into the light

    so their customers can benefit from the CFTC's oversight.

    Third, the final rule increases transparency to regulators by

    enhancing data available to the Commission and the NFA, providing a

    much more complete understanding of how these pools are operating in

    the derivatives markets for futures and swaps. The data, which CPOs

    and CTAs will submit through Form CPO-PQR and Form CTA-PR, will help

    the Commission develop further regulatory protections for customers

    of these entities, market participants and the American public.

    The Commission benefited from significant public comment on this

    rule. Some commenters raised questions about the definition of bona

    fide hedging under section 4.5, in particular that risk mitigation

    positions were not included in such bona fide hedging transactions.

    The final rule provides treatments consistent with the Commission's

    treatment of registered investment companies prior to 2003, and, in

    fact, this rule reinstates criteria in place before 2003. The

    Commission determined not to include risk management positions

    within the bona fide hedging exemption because many, if not most,

    positions in a portfolio could potentially be characterized as

    serving a risk management purpose. This would result in an overly

    broad exclusion from the definition of CPO.

    Further, bona fide hedging transactions are excluded from

    determining whether a registered investment company has to register

    under 4.5, though these transactions are not excluded when

    determining whether commodity pools not registered with the

    Securities and Exchange Commission (SEC) will be required to

    register with the CFTC under section 4.13(a)(3). With respect to the

    consideration of bona fide hedging positions under 4.13(a)(3), the

    Commission previously stated its position that bona fide hedging

    positions should not be excluded within the de minimis exemption in

    4.13(a)(3) when it proposed that rule. In the proposal for

    4.13(a)(3) (68 FR 12622, 12627), the Commission stated its belief

    that 4.13(a)(3) should not differentiate between trading for bona

    fide hedging and non-hedging purposes because the rule is intended

    to apply to strictly de minimis situations, where trading is limited

    regardless of purpose. Conversely, the exclusion under 4.5 was not

    solely determined by the de minimis nature of the trading, but

    rather the combination of the de minimis amount of trading and the

    fact that the investment vehicle was otherwise regulated by the SEC.

    See 67 FR 65743.

    Several commenters asked the Commission to reconsider the

    treatment of family offices under these rules. The Commission will

    continue to permit family offices to rely on existing guidance for

    family offices seeking relief from the requirements of Part 4. The

    Commission also is directing staff to look into the possibility of

    adopting a family offices exemption that is similar to the rule

    recently adopted by the SEC and is soliciting comment from the

    public.

    Appendix 3--Dissenting Statement of Commissioner Jill E. Sommers

    The amendments to the Commission's Part 4 regulations we are

    adopting with these final rules were prompted by a petition from the

    NFA seeking to reinstate certain operating restrictions that were in

    place prior to 2003 for entities excluded from the definition of CPO

    under Sec. 4.5. Had we limited the amendments to address the issues

    raised by the NFA's petition, we could have met our regulatory

    objectives without disrupting a significant number of business

    structures. I would have supported such an approach. As it is, we

    have gone far beyond what was needed to resolve NFA's concerns and I

    must dissent.

    Section 404 of the Dodd-Frank Act requires certain advisors of

    private funds to register

    [[Page 11344]]

    with the SEC and to report to the SEC information ``as necessary and

    appropriate * * * for the protection of investors or for the

    assessment of systemic risk by the Financial Stability Oversight

    Council.'' With the finalization of these rules, the Commission has

    determined that the ``sources of risk delineated in the Dodd-Frank

    Act with respect to private funds are also presented by commodity

    pools'' and that registration of certain previously exempt or

    excluded CPOs is therefore necessary ``to assess the risk posed by

    such investment vehicles in the derivatives markets and the

    financial system generally.'' The Commission states that the data it

    will collect as a consequence of registration is necessary ``in

    order to fulfill the Commission's systemic risk mitigation

    mandate.'' While I agree that the Commission has a regulatory

    interest in the activities of commodity pools, this overstates the

    case and gives a false impression that the data we gather will

    enable us to actively monitor pools for systemic risk, that we have

    the resources to do so, and that we will do so. Moreover, Congress

    was aware of the existing exclusions and exemptions for CPOs when it

    passed Dodd-Frank and did not direct the Commission to narrow their

    scope or require reporting for systemic risk purposes. The

    Commission justifies the new rules as a response to the financial

    crisis of 2007 and 2008 and the passage of Dodd-Frank, yet there is

    no evidence to suggest that inadequate regulation of commodity pools

    was a contributing cause of the crisis, or that subjecting entities

    to a dual registration scheme will somehow prevent a similar crisis

    in the future.

    I could nevertheless support a revision of the current

    exclusions and exemptions that would give us access to information

    we determine is necessary to carry out our regulatory mission if

    supported by a sufficient cost-benefit analysis. The rationale

    underlying a number of the decisions encompassed by the rules is

    sorely lacking, however, and is not supported by the existing cost-

    benefit analysis. The Commission concludes, for example, that bona

    fide hedging transactions are unlikely to present the same level of

    risk as risk mitigation positions because they are offset by

    exposure in the physical markets. A risk mitigation position is, by

    definition, a position that mitigates or ``offsets'' exposure in

    another market. Both are hedges and there is no explanation as to

    why the Commission believes that bona fide hedges are less risky.

    The preamble states that the alternative net notional test under

    Sec. 4.5 is meant to be consistent with the net notional test set

    forth in Sec. 4.13(a)(3), except the Sec. 4.5 test allows

    unlimited use of futures, options or swaps for bona fide hedging

    purposes, while the Sec. 4.13(a)(3) test does not. No explanation

    is given for the differing treatment. We reject an exemption for

    foreign advisors similar to the exemption allowed by the Investment

    Advisors Act of 1940 under Section 403 of Dodd-Frank because we lack

    information on the activities of foreign pools, even though, as some

    commenters observed, this may result in nearly all non-U.S. based

    CPOs operating a pool with at least one U.S. investor having to

    register and report all of their derivatives activities to the

    Commission, including activity that may be subject to comparable

    foreign regulation. While we leave open the possibility of future

    exemptions based on information we collect on Forms CPO-PQR and CTA-

    PR, the more likely result of this new policy is that U.S.

    participants will be excluded from investing in foreign pools. The

    Commission may have good reasons for this course of action, but no

    rationale is given.

    Our ``split the baby'' approach on the issue of family offices

    is illogical. The Commission states that it is ``essential that

    family offices remain subject to the data collection requirements''

    to fulfill our regulatory mission and to develop a comprehensive

    view of such firms to determine whether an exemption may be

    appropriate in the future. At the same time, we are allowing an

    unknown percentage of family offices to rely on previously issued

    interpretive letters to avoid registration, reporting and other

    compliance obligations. This makes no sense. We either need this

    data or we do not. Family offices may fit within the parameters of

    the existing interpretive letters, in which case we will not develop

    the comprehensive view we are seeking. On the other hand, we ignore

    the fact that we have consistently found, for more than three

    decades, that family offices are not the type of collective

    investment vehicle that Congress intended to regulate in adopting

    the CPO and commodity pool definitions, a finding that Congress

    confirmed in Sec. 409 of Dodd-Frank with respect to investment

    advisors. Moreover, our repeal of the family office exemption is

    inconsistent with the exclusion recently adopted by the SEC pursuant

    to Sec. 409 at a time when Dodd-Frank has urged us to harmonize our

    rules to the fullest extent possible.

    It is unlikely, in my view, that the cost-benefit analysis

    supporting the rules will survive judicial scrutiny if challenged.

    And, although I am relieved that the recordkeeping, reporting and

    disclosure obligations required by the rules will be delayed until

    after proposed harmonization rules are finalized, the rules contain

    a confusing and needlessly complicated set of compliance dates for

    other provisions.

    While I have felt that many of the rules we have finalized in

    the last few months were far too overreaching, our justification

    that a particular rule was required by statute was largely accurate.

    With regard to these rules the same justification does not hold

    true. These rules are not mandated by Dodd-Frank, and I do not

    believe that the benefits articulated within the final rules

    outweigh the substantial costs to the fund industry. We admit in the

    preamble that we do not have enough information to determine the

    validity of requiring some of these entities to register. A more

    prudent approach would have been to gather the information first and

    then decide what constitutes sound policy. For these and other

    reasons, I cannot support the final rules.

    [FR Doc. 2012-3390 Filed 2-23-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: February 24, 2012