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2013-19894

  • Federal Register, Volume 78 Issue 163 (Thursday, August 22, 2013)[Federal Register Volume 78, Number 163 (Thursday, August 22, 2013)]

    [Rules and Regulations]

    [Pages 52308-52335]

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

    [FR Doc No: 2013-19894]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 4

    RIN 3038-AD75

    Harmonization of Compliance Obligations for Registered Investment

    Companies Required To Register as Commodity Pool Operators

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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

    ``CFTC'') is adopting final regulations with respect to certain

    compliance obligations for commodity pool operators (``CPOs'') of

    investment companies registered under the Investment Company Act of

    1940 (``registered investment companies'' or ``RICs'') that are

    required to register due to the recent amendments to its regulations.

    The Commission is also adopting amendments to certain provisions of

    part 4 of the Commission's regulations that are applicable to all CPOs

    and Commodity Trading Advisors (``CTAs'').

    DATES: Effective dates: This rule is effective August 22, 2013, except

    the amendments to Sec. Sec. 4.7(b)(4), 4.12(c)(3)(i), 4.23, 4.26, and

    4.36 which are effective September 23, 2013.

    Compliance dates: Registered CPOs seeking exemption under these

    rules shall be required to comply with the conditions adopted in Sec.

    4.12(c)(3)(i) when the associated registered investment company updates

    its prospectus as described in Section II.F., below, and files the

    prospectus with the SEC. Moreover, the publication of these rules

    trigger the conditional compliance date that was established in the

    Commodity Pool Operators and Commodity Trading Advisors: Compliance

    Obligations rulemaking. 77 FR 11252, 11252 (Feb. 24, 2012). With the

    publication of these rules, registered CPOs of RICs must comply with

    Sec. 4.27 on or before October 21, 2013.

    FOR FURTHER INFORMATION CONTACT: Amanda Lesher Olear, Associate

    Director, Telephone: (202) 418-5283, Email: aolear@cftc.gov, or 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

    This rulemaking is related to the final rule adopted under RIN

    3038-AD30.

    A. Recent Amendments to Sec. 4.5 as Applicable to RICs

    The Commodity Exchange Act (``CEA'') \1\ provides the Commission

    with the authority to require registration of CPOs and CTAs,\2\ to

    exclude any entity from registration as a CPO or CTA,\3\ and to 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.'' \4\ The Commission also 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].'' \5\

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

    \2\ 7 U.S.C. 6m.

    \3\ 7 U.S.C. 1a(11) and 1a(12).

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

    regulations, unless otherwise provided by the Commission, entities

    registered as CPOs have reporting obligations with respect to their

    operated pools. See 17 CFR 4.22.

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

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    In February 2012, the Commission adopted modifications to the

    exclusions from the definition of CPO that are delineated in Sec. 4.5

    (``2012 Final Rule'').\6\ Specifically, the Commission amended Sec.

    4.5 to modify the exclusion from the definition of ``commodity pool

    operator'' for those entities that are investment companies registered

    as such with the Securities and Exchange Commission (``SEC'') pursuant

    to the Investment Company Act of 1940 (`` '40 Act'').\7\ This

    modification amended the terms of the exclusion available to CPOs of

    RICs to include only those CPOs of RICs that commit no more than a de

    minimis portion of their assets to the trading of commodity interests

    that do not fall within the definition of bona fide hedging and who do

    not market themselves as a commodity pool or other commodity

    investment.\8\ Pursuant to this amendment, any such CPO of a RIC that

    exceeds this level, or markets itself as such, will no longer be

    excluded from the definition of CPO. Accordingly, except for those CPOs

    of RICs who commit no more than a de minimis portion of their assets to

    the trading of commodity interests that do not fall within the

    definition of bona fide hedging and who do not market themselves as a

    commodity pool or other commodity investment, an operator of a RIC that

    meets the definition of ``commodity pool operator'' under Sec. 4.10(d)

    of the Commission's regulations and Sec. 1a(11) of the CEA must

    register as such with the Commission.\9\

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    \6\ 17 CFR 4.5. See 77 FR 11252 (Feb. 24, 2012); correction 77

    FR 17328 (March 26, 2012). Prior to this Amendment, all RICs, and

    the principals and employees thereof, were excluded from the

    definition of ``commodity pool operator,'' by virtue of the RICs

    registration under the Investment Company Act of 1940. The 2012

    amendment to Sec. 4.5 maintained this exclusion for those RICs that

    engage in a de minimis amount of non-bona fide hedging commodity

    interest transactions. See id. Specifically, the amendment to Sec.

    4.5 retained this exclusion for RICs whose non-bona fide hedging

    commodity interest transactions require aggregate initial margin and

    premiums that do not exceed five percent of the liquidation value of

    the qualifying pool's portfolio, or whose non-bona fide hedging

    commodity interest transactions' aggregate net notional value does

    not exceed 100 percent of the liquidation value of the pool's

    portfolio.

    \7\ 15 U.S.C. 80a-1, et seq. ``SEC'' as used herein means the

    Securities and Exchange Commission or its staff, as the context

    requires.

    \8\ 17 CFR 1.3(yy).

    \9\ Pursuant to the terms of Sec. 4.14(a)(4), CPOs are not

    required to register as CTAs if the CPOs' commodity trading advice

    is directed solely to, and for the sole use of, the pool or pools

    for which they are registered as CPOs. 17 CFR 4.14(a)(4).

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    B. Harmonization Proposal

    In response to the Commission's February 2011 proposal to amend the

    Sec. 4.5 exclusion with respect to CPOs of RICs,\10\ as well a staff

    roundtable held on July 16, 2011 (``Roundtable''),\11\ and meetings

    with interested parties, the Commission received numerous

    [[Page 52309]]

    comments expressing concern about the relationship between part 4 of

    the Commission's regulations applicable to CPOs of RICs and the SEC

    rules and guidance under the '40 Act, the Securities Act of 1933

    (``Securities Act''),\12\ and the Securities Exchange Act of 1934 \13\

    regarding disclosure, reporting and recordkeeping by RICs

    (collectively, ``SEC RIC Rules'').\14\ Commenters asserted variously

    that the two sets of requirements touched upon similar areas, imposed

    undue burdens on CPOs of RICs, or conflicted such that CPOs of RICs

    could not comply with both. On this basis, some commenters argued that

    CPOs of RICs should not be required to comply with the full set of

    requirements under part 4. Several previously received comments, which

    were noted in the Proposal, suggested that the Commission make relief

    available, with respect to document and report distribution, similar to

    that which it has recently adopted with respect to exchange-traded

    funds (``ETFs'').\15\

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    \10\ 76 FR 7976 (Feb. 11, 2011).

    \11\ 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.

    \12\ 15 U.S.C. 77a, et seq.

    \13\ 15 U.S.C. 78a, et seq.

    \14\ The Commission understands that that SEC provides guidance

    in a variety of ways to market participants, including interpretive

    guidance, no action letters, frequently asked questions, and staff

    feedback in response to document submissions. The Commission also

    notes that RICs may be subject to separate requirements imposed by

    the Financial Industry Regulatory Authority.

    \15\ See 76 FR 28641 (May 18, 2011). The Commission adopted

    rules to relieve individual CPOs of publicly offered, ETFs of

    certain requirements in part 4 of the Commission's regulations.

    Specifically, the Commission adopted amendments to Sec. 4.12

    providing exemptive relief from Sec. Sec. 4.21, 4.22, and 4.23 for

    operators of ETFs. Such relief includes providing disclosure and

    periodic accounts statements to participants through the Internet

    and permitting the use of third-party service providers for

    recordkeeping obligations. Previously, Commission staff had issued

    relief to ETFs only on a case-by-case basis. ETFs that are also RICs

    may rely on the relief provided herein.

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    Some commenters suggested ways in which the two agencies'

    requirements could be harmonized to eliminate the inconsistencies

    between the two compliance regimes with respect to those entities

    subject to dual registration as a result of the recent amendments to

    Sec. 4.5. Specific areas of focus identified by the commenters

    include: The timing of delivery of Disclosure Documents to prospective

    participants; the signed acknowledgement requirement for receipt of

    Disclosure Documents; the cycle for updating Disclosure Documents; the

    timing of financial reporting to participants; the requirement that a

    CPO maintain its books and records on site; the required disclosure of

    fees; the required disclosure of past performance; the inclusion of

    mandatory certification language; and the SEC-permitted use of a

    summary prospectus for open-ended registered investment companies.

    Commenters advocated different approaches to harmonization. Some

    suggested that where requirements are inconsistent, the Commission

    should defer to SEC requirements.\16\ A few commenters made

    recommendations about the treatment of specific disclosures, such as

    presenting both SEC and CFTC-required fee information and presenting

    certain performance information required by the CFTC in the Statement

    of Additional Information (``SAI'').\17\ One commenter noted that CPOs

    of RICs should be required to comply with all disclosure and other

    requirements applicable to registered CPOs.\18\

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    \16\ See, e.g., Comment letter from the Investment Company

    Institute (April 12, 2011) (ICI Letter).

    \17\ See, e.g., Comment letter from the National Futures

    Association (April 12, 2011) (NFA Letter).

    \18\ See Comment letter from Steben & Company, Inc. (April 25,

    2012) (Steben letter).

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    Sections 4n(3) and (4) of the CEA \19\ authorize the Commission to

    adopt regulations requiring that CPOs maintain books and records and

    file reports with the Commission in the manner and form it prescribes.

    Such compliance obligations for CPOs are set forth in part 4 of the

    Commission's regulations and include a set of requirements that address

    disclosure, recordkeeping, and reporting obligations. The regulations

    are designed to promote market integrity and transparency, facilitate

    necessary Commission oversight, and provide important information to

    prospective participants. The requirement to comply with the full

    panoply of obligations set forth in part 4 of the Commission's

    regulations does not, however, follow inexorably from registration

    under the 2012 Final Rule requiring CPOs of RICs to register. The

    Commission determined, after consideration of the comments received,

    that further consideration was warranted concerning whether and to what

    extent CPOs of RICs ought to be subject to various part 4 requirements,

    and in the 2012 Final Rule suspended the obligations of CPOs of RICs

    with respect to most of the requirements of part 4 until further

    rulemaking.\20\ The Commission's 2012 Final Rule imposed upon CPOs of

    RICs that do not otherwise qualify for an exemption only the

    requirement to register.\21\ The Commission also finalized, but

    suspended compliance with, pending the completion of further

    rulemaking, a requirement that CPOs of RICs file certain information on

    form CPO-PQR, pursuant to Sec. 4.27. At the same time, consistent with

    the Commission's authority under Sec. 4.12(a), the Commission

    commenced a new rulemaking to evaluate the necessity and reasonableness

    of additional requirements and, where possible, to devise ways in which

    the Commission's requirements for CPOs of RICs could be harmonized with

    applicable requirements of the SEC.\22\

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    \19\ 7 U.S.C. 6n(3) and (4).

    \20\ See 2012 Final Rule, supra note 6, 77 FR at 11252, 11255.

    The Commission exercised its authority under Sec. Sec. 4 and 8a of

    the CEA, 7 U.S.C. 6 and 12a, and Sec. 4.12(a) of its regulations

    thereunder, which provides that the Commission may exempt any person

    or class of persons from any or all of part 4 requirements if the

    Commission finds that the exemption is not contrary to the public

    interest or the purposes of the provision from which the exemption

    is sought. 17 CFR 4.12(a).

    \21\ The Commission's regulations also provide for exemptions

    from registration for CPOs of privately offered pools that engage in

    a de minimis amount of commodities trading (17 CFR 4.13(a)(3)), CPOs

    whose total capital contributions for all operated pools do not

    exceed $400,000 and whose total participants do not exceed 15 (17

    CFR 4.13(a)(2)), and CPOs that do not advertise and who do not

    receive any incentive or management fees (17 CFR 4.13(a)(1)).

    \22\ See 2012 Final Rule, supra note 6, 77 FR at 11260

    (``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.'').

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    The Commission therefore published for comment in the Federal

    Register proposed amendments to part 4 of the Commission's regulations

    designed to address potentially conflicting or duplicative compliance

    obligations administered by the Commission and the SEC regarding

    disclosure, reporting and recordkeeping by CPOs of RICs (the

    ``Proposal'').\23\ The Commission proposed changes to part 4 designed

    to better harmonize the Commission's compliance obligations for CPOs

    with those of the SEC for entities that are subject to both regimes in

    such a way that would allow the Commission to fulfill its regulatory

    mandate while, at the same time, avoiding unnecessary regulatory

    burdens on dually-regulated CPOs of RICs with respect to disclosure,

    annual and periodic reporting to participants, and Commission

    recordkeeping requirements.\24\

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    \23\ 77 FR 11345 (Feb. 24, 2012).

    \24\ The Commission issued its proposal under the authority of

    Sec. Sec. 4m, 4n, and 8a(5) of the CEA. 7 U.S.C. 6m, 6n, and

    12a(5).

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    The Proposal to harmonize the Commission's regulatory regime with

    that of the SEC as it applies to CPOs of RICs is grounded in the

    concept of substituted compliance. That is, insofar as the disclosure,

    reporting, and recordkeeping regime administered by

    [[Page 52310]]

    the SEC under SEC RIC Rules were designed to achieve substantially

    similar goals to those of the Commission's part 4 regulations, then

    CPOs of RICs that maintain compliance under the SEC regime would be

    deemed to fulfill their obligations under part 4 of the Commission's

    regulations. At the same time, in the event that a CPO of a RIC fails

    to comply with the SEC administered regime, the CPO will be in

    violation of its obligations under part 4 of the Commission's

    regulations and thus subject to enforcement action by the Commission.

    As such, the Proposal contemplated an alternative means for a CPO of a

    RIC to comply with its obligations under part 4 of the Commission's

    regulations by modifying certain of the requirements. These proposed

    modifications included: The timing of the delivery of Disclosure

    Documents to prospective participants; the signed acknowledgement

    requirement for receipt of Disclosure Documents; the cycle for updating

    Disclosure Documents; the timing of financial reporting to

    participants; the requirement that a CPO maintain its books and records

    on site; the required disclosure of fees; the required disclosure of

    past performance; the inclusion of mandatory certification language;

    and the SEC-permitted use of a summary prospectus for open-ended

    registered investment companies.

    As stated in the 2012 Final Rule, the justification for the

    amendments to Sec. 4.5 was to enable the Commission to adequately

    discharge its duties to oversee the commodity interest markets.

    Therefore, the Commission determined to require the CPOs of RICs that

    exceeded a de minimis threshold of commodity interest trading,

    excluding bona fide hedging, or which marketed themselves as a

    commodity pool or other commodity investment, to register with the

    Commission. The Commission recognizes, however, that its understanding

    of RICs and their use of commodity interests continues to evolve as it

    gains experience regarding RICs, and their regulation and operation.

    Thus, at this time, the Commission believes that the prudent approach

    is to provide a substituted compliance regime based largely upon

    adherence to the regime administered by the SEC as it continues to

    expand its knowledge of RICs and their use of commodity interests.

    Therefore, in this final rule, the Commission has determined to

    broaden the approach set forth in the Proposal. The Commission is

    adopting a substituted compliance regime for CPOs of RICs largely

    premised upon such entities' adherence to the compliance obligations

    under SEC RIC Rules, whereby the Commission will accept compliance by

    such entities with the disclosure, reporting, and recordkeeping regime

    administered by the SEC as substituted compliance with part 4 of the

    Commission's regulations. The Commission has concluded that this is

    appropriate because, as the Commission continues to gain experience

    regulating CPOs of RICs, it believes that general reliance upon the

    SEC's compliance regime, with minor additional disclosure, should

    provide market participants and the general public with meaningful

    disclosure, including for example, with regard to risks and fees,

    provide the Commission with information necessary to its oversight of

    CPOs, and ensure that CPOs of RICs maintain appropriate records

    regarding their operations. As noted, in the event that the operator of

    the RIC fails to comply with the SEC administered regime, the operator

    of the RIC will be in violation of its obligations under part 4 of the

    Commission's regulations and subject to enforcement action by the

    Commission.

    C. Comments on the Proposal

    The Commission received 66 comment letters regarding the Proposal

    from a wide range of entities, including trade and public interest

    organizations, family offices, a registered futures association,

    individuals, currently registered CPOs, RICs, and law firms.\25\

    Generally, commenters favored the Commission's effort to harmonize for

    CPOs of RICs the Commission's part 4 regulations with SEC-administered

    rules.\26\ Commenters particularly focused on disclosure issues,

    including the ``break-even'' disclosure, required statements of risk,

    cycle for updating Disclosure Documents, financial reporting including

    periodic account statements, and books and records requirements.\27\ In

    addition, some commenters advocated modifications to part 4

    requirements that they believed were necessary to maintain suitable

    regulatory requirements for all CPOs.\28\ Commenters also addressed

    potential costs and benefits of harmonizing CFTC and SEC rules

    applicable to RICs.\29\

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    \25\ See http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1161. The Commission notes that it received six

    duplicate comment letters; thus, the Commission received 60 unique

    comments. Of the comments received, many focused on the advisability

    of an exemption for single-family pools (``Family Offices''). The

    Commission's Division of Swap Dealer and Intermediary Oversight

    issued a letter on November 29, 2012, providing that it would not

    recommend enforcement action against the operator of a ``family

    office'' as that term has been defined in the SEC's regulations.

    See, CFTC Staff Letter, 12-37, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-37.pdf. The

    Commission further notes that it has considered additional comments,

    including those received at and following the Roundtable, see supra

    note 11, regarding the harmonization of CFTC and SEC regulation

    applicable to operators of RICs.

    \26\ See, e.g., NFA Letter; Comment letter from Campbell &

    Company, Inc. (April 24, 2012) (Campbell Letter).

    \27\ See, e.g., Comment letter from New York City Bar

    Association (May 30, 2012) (NYCBA Letter); Comment letter from

    Securities Industry and Financial Markets Association Asset

    Management Group (April 24, 2012) (SIFMA AMG Letter); Comment letter

    from Fidelity Management and Research Company (April 24, 2012)

    (Fidelity Letter).

    \28\ NFA Letter; Campbell Letter; Comment letter from the

    Managed Funds Association (April 24, 2012) (MFA Letter).

    \29\ ICI Letter.

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    Beginning in 2011, Commission staff has engaged in ongoing

    substantive discussions with SEC staff regarding possible areas of

    harmonization between the compliance regimes of the two commissions as

    applicable to RICs and their CPOs, including disclosure to prospective

    investors and financial reporting. Such consultations occurred

    throughout the process culminating in this final rule and have informed

    the Commission's understanding of RICs and the SEC's regulation

    thereof.

    D. Significant Changes From the Proposal

    In the Proposal, the Commission stated its intent to facilitate

    compliance by CPOs of RICs with the Commission's disclosure, reporting,

    and recordkeeping requirements. As a result, the Commission proposed

    various alternative mechanisms to enable dually registered operators of

    RICs to comply with the Commission's part 4 requirements.\30\ After

    consideration of the comments received and further deliberation, the

    Commission is adopting rules that effectively

    [[Page 52311]]

    implement a substituted compliance approach for dually registered CPOs

    of RICs, whereby such CPOs, largely through compliance with obligations

    imposed by the SEC, will be deemed compliant with the Commission's

    regulatory regime. This is consistent with the Commission's conclusion

    that substituted compliance is appropriate because it believes that the

    regime administered by the SEC under SEC RIC Rules, with minor

    additional disclosure, should provide market participants with

    meaningful disclosure as required under part 4, enable the Commission

    to discharge its regulatory oversight function with respect to the

    derivatives markets, and ensure that CPOs of RICs maintain appropriate

    records regarding their operations.

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    \30\ In five of the eleven areas of potential redundancy,

    inconsistency, or conflict addressed in the Proposal, the Commission

    proposed allowing substituted compliance by adherence to SEC

    regulations. Under the proposal, CPOs of RICs would be exempt from

    disclosure requirements under Sec. Sec. 4.21, 4.22, and 4.23. See

    Proposal, supra note 23, 77 FR at 11346. CPOs of RICs would also be

    exempt from more frequent disclosures required by Sec. 4.26, and

    the oath or affirmation required by Sec. 4.22(h). Id. For four

    other areas of potential conflict, the Commission proposed allowing

    the requested information to be disclosed instead in SEC filings.

    Specifically, the proposal provides alternative methods of

    satisfying Sec. Sec. 4.24(a), 4.25(d)(5), 4.25(d), and 4.24(i),

    which ordinarily require a cautionary statement, break-even points,

    and disclosure of fees and expenses, and requires that they be

    located in the forepart of the document. With respect to the last

    two areas--the frequency of the provision to customers of account

    statements and the content of disclosures regarding past performance

    of commodity pools less than three years old--the Commission

    proposed maintaining its own standards, but also solicited comments

    on how it could harmonize those last two areas.

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    The Commission is also modifying certain part 4 requirements that

    are applicable to all CPOs to recognize certain technological

    improvements and operational efficiencies that have developed since

    part 4 was last revised. The key changes from the Proposal that the

    Commission is making in the rules it is adopting today are as follows:

    (1) Operators of RICs will be deemed to be in compliance with

    Sec. Sec. 4.21, 4.22(a) and (b), 4.24, 4.25, and 4.26 if they satisfy

    all applicable SEC RIC Rules as well as certain other conditions; (2)

    all CPOs will be permitted to use third-party service providers to

    maintain their books and records; and (3) the signed acknowledgement

    requirement is being rescinded for all CPOs. The reasoning underlying

    each of the enumerated changes is discussed infra.

    Accordingly, a CPO of a RIC may comply with part 4 requirements

    applicable to all CPOs or elect to comply through substituted

    compliance, subject to the conditions specified in amended Sec.

    4.12(c). In the latter case, the CPO of a RIC will be subject to the

    following requirements:

    The CPO of a RIC will be required to file notice of its

    use of the substituted compliance regime outlined in Sec. 4.12 with

    NFA;

    The CPO of a RIC with less than three years operating

    history will be required to disclose the performance of all accounts

    and pools that are managed by the CPO and that have investment

    objectives, policies, and strategies substantially similar to those of

    the offered pool;

    The CPO of a RIC will be required to file the financial

    statements with the National Futures Association (``NFA'') that it

    prepares pursuant to its obligations with respect to the SEC; and

    If the CPO of a RIC uses or intends to use third-party

    service providers for recordkeeping purposes, it will be required to

    file notice with NFA.

    In light of the requirements applicable to RICs under SEC RIC

    Rules, the Commission has endeavored to harmonize its regulations to

    achieve a reasonable balance that serves the Commission's regulatory

    goals under part 4 of its regulations.\31\ In addition, the Commission

    has determined to modify certain part 4 requirements applicable to all

    CPOs, including CPOs of RICs. In particular, this final rule will

    permit a CPO of a RIC to use a third-party service provider for

    recordkeeping purposes. A CPO electing to do so will be required to

    file a notice with the NFA. Additionally, all CPOs and CTAs will be

    permitted to use a Disclosure Document for up to 12 months.

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    \31\ 7 U.S.C. 19(a). It is the Commission's intent that if any

    portion of this rulemaking is held invalid, such invalidity shall

    not affect other provisions or applications of the Commission's

    regulations which can be given effect without the invalid provision

    or application, including without limitation other amendments to

    part 4 in this or the February 2012 Final Rule, and to this end each

    provision of this final rule is severable.

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    II. Discussion

    A. Scope and Timing

    The Commission received many comments that pertained to the scope

    and timing of the Proposal. For example, some commenters expressed

    displeasure with the Commission's recent amendments to Sec. 4.5 and

    Sec. 4.27.\32\ One commenter said the Proposal is unripe and should be

    withdrawn pending the judicial challenge of the Sec. 4.5

    amendments.\33\ Another commenter suggested the Commission withdraw its

    Proposal and re-propose harmonized compliance obligations for RICs.\34\

    Other commenters requested broad exemptions from all part 4

    regulations.\35\ One commenter, for example, suggested that the

    Commission more narrowly tailor the part 4 requirements to those funds

    that use derivatives as a primary investment strategy and exempt from

    registration funds that only use derivatives for diversification and/or

    hedging purposes.\36\ Another commenter contended that the rules must

    take into account the differences between open-ended funds (which

    continuously offer shares and redeem through the company) and closed-

    ended funds (which generally have an initial offering and then trade

    shares on an exchange).\37\ Some commenters suggested that the

    Commission work with the SEC in order to more effectively harmonize the

    requirements of the two regimes, and in particular, ensure that

    compliance with the one regulatory regime would not cause a violation

    of the other.\38\

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    \32\ ICI Letter, comment letter from U.S. Chamber of Commerce

    (April 24, 2012) (Chamber Letter); comment letter from Dechert LLP

    and Clients (April 24, 2012) (Dechert Letter).

    \33\ Chamber Letter. This commenter also stated that

    harmonization is unripe because, among other things, regulations

    needed to complete the implementation of Title VII of Dodd-Frank are

    still not finalized. To the extent this commenter was referring to

    the finalization of the Commission and SEC's further definition of

    ``swap,'' that definition has now been finalized. This commenter and

    others have stated that the Commission could not, prior to the

    adoption of that final definition, properly consider the costs and

    benefits of the amendments to Sec. 4.5 and proposed, therefore, the

    exclusion of swaps from the thresholds above which the operator of a

    RIC must register as a CPO. As the Commission explained in the 2012

    Final Rule amending Sec. 4.5, however, the costs and benefits were

    sufficiently clear at that time. The Commission explained that swap

    trading above a de minimis threshold implicates its regulatory

    interests, whereas trading below the threshold may not. To permit

    unlimited swap trading without registration would undermine the

    regulatory interest described throughout the 2012 Final Rule

    release. Consistent with the Commission's expectation at the time of

    the 2012 Final Rule amending Sec. 4.5, the 2012 Final Rule further

    defining ``swap'' did not further define the term ``swap'' in a

    manner that would have materially affected the Commission's decision

    to amend Sec. 4.5. On December 12, 2012, the U.S. District Court

    for the District of Columbia affirmed the 2012 Final Rule's

    amendments to Sec. 4.5 and adoption of Sec. 4.27 as applicable to

    CPOs of RICs. The District Court's opinion is available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv0612-42.

    \34\ ICI Letter.

    \35\ ICI Letter; comment letter from American Bar Association

    Federal Regulation of Securities Committee, Business Law Section

    (April 24, 21012) (ABA Letter); comment letter from AXA Equitable

    Funds Management Group, LLC (April 24, 2012) (AXA Letter); comment

    letter from The Association of Institutional Investors (April 24,

    2012) (AII Letter); comment letter from Investment Adviser

    Association (April 24, 2012) (IAA Letter); NYCBA Letter; Fidelity

    Letter.

    \36\ Comment letter from Katten Muchin Rosenman LLP (April 24,

    2012) (Katten Letter).

    \37\ SIMFA AMG Letter.

    \38\ Fidelity Letter; NYCBA Letter; ICI Letter.

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

    The Commission is aware that some commenters do not believe that

    CPOs of RICs should be required to register with the Commission. The

    CPO registration requirement in Sec. 4.5, however, is outside the

    scope of this rulemaking. The Commission previously determined that,

    given its new responsibilities under the Dodd-Frank Act, and the

    changes in the markets within the Commission's responsibilities in

    recent years, the operator of a RIC that engages in more than a de

    minimis amount of non-bona fide hedging commodity interest transactions

    or markets itself as a commodity pool or other commodity investment

    must register as a CPO and file form CPO-PQR.\39\

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

    \39\ See, 2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24,

    2012); corrected by 77 FR 17328 (Mar. 26, 2012); affirmed by U.S.

    District Court for the District of Columbia (Dec. 12, 2012),

    available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv0612-42.

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

    [[Page 52312]]

    Regarding obligations of registered CPOs, the Commission notes the

    concerns of commenters that dual registrants may be unable, or

    encounter substantial difficulty trying, to comply with both the CFTC

    and SEC regulatory regimes were they both required in their current

    state. The Commission believes that harmonization will reduce or

    eliminate such difficulty.

    This rule release is focused on the harmonization of the

    Commission's compliance obligations under part 4 of its regulations

    with the requirements under the SEC RIC Rules. To that end, the

    Commission has considered the various provisions of part 4 and sought

    to address conflict, inconsistency, and duplication with SEC-

    administered disclosure, reporting and recordkeeping by RICs.

    Commission staff has also engaged in ongoing discussions with their

    counterparts at the SEC. The Commission believes that, with the final

    rules being adopted today, it has harmonized its compliance obligations

    with those of the SEC to the fullest extent practicable consistent with

    achieving the regulatory objectives of its part 4 regulations and its

    experience to date with CPOs of RICs.

    B. Disclosure Requirements

    a. Filing and Updating Disclosure Documents

    Currently, Sec. 4.26(a)(2) states that ``[n]o commodity pool

    operator may use a Disclosure Document or profile document dated more

    than nine months prior to the date of its use.'' An identical provision

    applying to CTAs can be found in Sec. 4.36(b). These provisions are

    designed to ensure that required disclosure materials remain current,

    complete, and accurate over time. Similarly, Sec. 10(a)(3) of the

    Securities Act effectively requires an annual update of an open-end

    RIC's registration statement, and provides 4 months after the end of

    the fiscal year in order to do so.\40\

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

    \40\ Section 10(a)(3) of the Securities Act provides generally

    that when a prospectus is used more than nine months after the

    effective date of a registration statement, the information

    contained in the prospectus shall be as of a date not more than

    sixteen months prior to its use.

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

    Additionally, Sec. 4.26(c) states that if a CPO becomes aware of

    any incompleteness or material inaccuracy in its Disclosure Document,

    the CPO must correct the defect and distribute the correction to

    participants within 21 days of becoming aware of the defect. Section

    4.26(c)(2) lists acceptable means of distributing the correction. The

    federal securities laws prohibit the offer or sale of a security,

    including shares of a RIC, by means of a materially misleading

    prospectus and impose liability for the use of such a prospectus.\41\

    Section 4.26(d) requires a CPO to submit all Disclosure Documents to

    NFA prior to distributing the document to participants and to submit

    updates to Disclosure Documents to NFA that correct material

    inaccuracies or incompleteness within 21 days of becoming aware of any

    defects. Registration statements for RICs are required to be filed with

    the SEC prior to becoming effective,\42\ and the RIC Rules prescribe

    the timeframes for effectiveness of registration statement amendments

    after filing with the SEC.\43\

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

    \41\ Section 12(a)(2) of the Securities Act. See also, Section

    17(a)(2) of the Securities Act (unlawful to obtain money or property

    by means of materially misleading statements and omissions in the

    offer or sale of securities).

    \42\ See, e.g., Section 8(a) of the Securities Act (effective

    date of registration statement shall be the twentieth day after

    filing or an earlier date determined by the SEC).

    \43\ See, Securities Act Rule 285, 17 CFR 230.485.

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

    In the Proposal, to facilitate compliance with part 4 requirements

    for CPOs of RICs, the Commission proposed amending Sec. 4.26 and Sec.

    4.36 to allow CPOs and CTAs to use Disclosure Documents up to twelve

    months from the date of the document. In response to comments received,

    the Commission is also addressing in this final rule Sec. 4.26(c),

    which governs the time period for correcting materially inaccurate or

    incomplete disclosure, and Sec. 4.26(d), which requires Disclosure

    Documents and updates to be filed with NFA.

    1. Effective Time Period for Disclosure Documents

    Commenters were generally supportive of the Commission's proposed

    amendments to Sec. Sec. 4.26 and 4.36,\44\ but also expressed

    concerns. Regarding the timing of disclosure, for example, some

    commenters suggested that the Commission extend the deadline applicable

    to all CPOs for using Disclosure Documents to sixteen months from the

    date of the document in order to accommodate the SEC's 120-day

    allowance under Rule 8b-16.\45\ One commenter stated that the Proposal

    ``provides no rationale for imposing the updating requirements of Sec.

    4.26(a)(1) on RICs'' and does not ``address the substantial costs these

    updates would impose.'' \46\

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

    \44\ AXA Letter; Steben Letter; IAA Letter.

    \45\ NYCBA Letter SIFMA AMG Letter; AII Letter.

    \46\ SIFMA AMG Letter.

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

    After careful consideration, the Commission has determined to adopt

    the amendment of Sec. Sec. 4.26(a) and 4.36 as proposed. CPOs and CTAs

    will be permitted to use a Disclosure Document for up to 12 months. In

    addition, for CPOs of RICs, the Commission has determined that

    compliance with the applicable timeframes under the regime administered

    by the SEC under SEC RIC Rules will be deemed to satisfy the timing

    requirements in Sec. Sec. 4.26(a) and 4.36.

    As a general matter of policy, the Commission believes that sixteen

    months is not an optimal time period for providing updated information

    to participants. This is of particular concern with respect to past

    performance information and financial statements. The more distant the

    update of disclosure from the date of the pool's most recent financial

    statements, the less meaningful the information becomes to prospective

    participants deciding whether to invest. The Commission does believe,

    however, that efficiency can be gained by extending the time within

    which CPOs must update their Disclosure Documents from nine months to

    twelve months, as that time period aligns with the time period mandated

    for filing annual financial statements, which must be disclosed within

    the Disclosure Document. In the Commission's judgment, such efficiency

    justifies some delay in updating the Disclosure Document and the

    currency of the information thus available to participants. The

    Commission believes that the information available to participants will

    be sufficiently timely to enable participants to make informed

    investment decisions. Consistent with this determination that a twelve

    month updating cycle provides participants with information in a

    sufficiently timely manner, while also aligning with the larger CPO-

    industry twelve month regulatory calendar, the Commission is extending

    to twelve months the Disclosure Document update cycle requirement for

    all CPOs.

    The Commission recognizes, however, that, absent harmonization,

    dual registrants may be required to comply with the disparate deadlines

    applicable under Sec. 4.26 and the updating process implemented by the

    SEC pursuant to Sec. 10(a)(3) of the Securities Act \47\ and SEC Rule

    485 \48\ thereunder. As noted above, Sec. 4.26, as amended, requires a

    CPO to update a pool's Disclosure Document within 12 months of that

    Document's date of first use. As described above, Sec. 10(a)(3) of the

    Securities Act and Securities Act Rule 485 requires open-end RICs to

    amend their registration statements annually

    [[Page 52313]]

    and provides four months after the end of the fiscal year to do so.

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

    \47\ 15 U.S.C. 77j-24.

    \48\ 17 CFR 230.485.

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

    Because the Commission is declining to adopt a sixteen-month update

    period for Disclosure Documents, absent other relief, CPOs of open-end

    RICs would have two different filing deadlines which would limit the

    ability for the CPO to take advantage of operational efficiencies that

    might be available if the Commission's deadlines coincided with those

    of the SEC. The Commission believes that the burden associated with

    requiring CPOs of open-end RICs to comply with two different updating

    schedules for their Disclosure Documents is not justified by the

    benefit of more frequent disclosures. Thus, the Commission has

    determined to permit CPOs of open-end RICs to satisfy these obligations

    through substituted compliance in accordance with the timeframe

    administered by the SEC. The Commission believes that this is

    appropriate because the past performance information required to be

    disclosed by CPOs of open-end RICs will differ from that generally

    required of CPOs, and, as discussed infra, CPOs of open-end RICs will

    not be required to separately submit their disclosures documents for

    review by the NFA.

    2. Interim Updating of Disclosure Documents

    Section 4.26(c) requires a CPO to correct material inaccuracies in

    a Disclosure Document within 21-days of the date upon which the CPO

    first becomes aware of the defect. The purpose of the 21-day window in

    which to correct material inaccuracies is to provide participants with

    timely corrected information. As described above, the federal

    securities laws prohibit the offer or sale of the shares of a RIC by

    means of a materially misleading prospectus and impose liability for

    the use of such a prospectus.

    One commenter noted that the 21-day period under Sec. 4.26(c)(1)

    is not required under SEC RIC Rules and that RICs which do not normally

    supplement their prospectuses would be required to do so in order to

    comply with Sec. 4.26.\49\ Another commenter suggested that existing

    securities law obligations for RICs regarding material misstatements or

    omissions should satisfy Sec. 4.26, and thus ``a simple exemption from

    the Part 4 requirements is appropriate.'' \50\ Another commenter

    suggested that RICs that are in compliance with SEC updating rules

    should be deemed compliant with Sec. 4.26(a) and (c).\51\

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

    \49\ SIFMA AMG Letter.

    \50\ ABA Letter.

    \51\ SIFMA AMG Letter.

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

    In light of the substantively similar goals of the two regulatory

    regimes to ensure that participants receive accurate information in a

    timely manner, and recognizing that, absent relief from Sec. 4.26(c),

    CPOs of RICs could be required to provide an additional mailing to

    participants, the Commission has determined to deem CPOs of RICs that

    adhere to the disclosure requirements under SEC RIC Rules compliant

    with Sec. 4.26(c). Subject to additional experience that the

    Commission expects to acquire regarding the operation and oversight of

    CPOs of RICs, the Commission, at this time, believes that correcting

    any inaccuracies within this pre-scheduled and near-term update should

    be considered to be timely. Moreover, the Commission does not believe

    that the schedule for updates imposed by the SEC will impair the

    Commission's regulatory interest in ensuring that prospective and

    current participants in a commodity pool receive accurate and complete

    information. As such, the Commission believes that substituted

    compliance is appropriate with respect to the updating of disclosures

    to participants and, therefore, the Commission has determined to deem

    CPOs of RICs compliant with the provisions of Sec. 4.26, provided that

    they are in compliance with the regime administered by the SEC under

    SEC RIC Rules.

    3. Review of Disclosure Documents by NFA

    Many commenters who addressed Sec. 4.26 were concerned that NFA's

    review process (Sec. 4.26(d)) is unnecessary and duplicative, and thus

    should not be required.\52\ Commenters said that this additional review

    process could result in regulatory delays, create investor confusion,

    tax NFA's resources, prevent funds from issuing shares, and potentially

    subject funds to conflicting reviews from securities and derivatives

    regulators.\53\ Some commenters noted that NFA's review process would

    be particularly challenging for RICs that make offerings through

    variable insurance products, as the distribution and updating of

    prospectuses for such RICs must be coordinated with their affiliated

    insurance companies, and that the Proposal does not address this

    issue.\54\ One commenter also requested confirmation that ``sticker''

    supplements--supplements tacked onto existing Disclosure Documents--

    would not be subject to NFA review, as Sec. 4.26(d)(2) provides that

    updates may be filed with NFA at the same time they are distributed to

    participants.\55\ Another commenter stated that the timelines for

    review between the SEC and CFTC requirements are different and

    conflicting. For example, if the NFA requests material changes, a CPO

    of a RIC may have to file the amendment with the SEC, triggering SEC

    review and potentially disrupting the issuance of shares. The commenter

    suggested that, should the CFTC decide to retain the NFA review

    requirement, it should limit the scope of the review to the part 4

    disclosure requirements. This commenter further suggested that the SEC,

    CFTC, and NFA coordinate policies and processes to ``avoid conflicting

    comments and prevent multiple filings and back-and-forth'' during the

    review process.\56\

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

    \52\ AXA Letter; ABA Letter; Katten Letter; ICI Letter; SIFMA

    AMG Letter.

    \53\ AXA Letter; ABA Letter; NYCBA Letter; ICI Letter; SIFMA AMG

    Letter.

    \54\ AXA Letter; ICI Letter.

    \55\ ABA Letter.

    \56\ SIFMA AMG Letter.

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

    The Commission has determined that, although such disclosures must

    be made available to NFA to enable NFA to discharge its duty to monitor

    and examine CFTC registrants during an examination, it will not be

    necessary to file those documents with NFA according to the schedules

    provided in part 4 of the Commission's regulations or concurrent with

    their filing with the SEC, and those documents will not be subject to

    NFA approval. The Commission has decided that CPOs of RICs that take

    advantage of the relief provided under this rule must file a notice

    with NFA so that NFA and the Commission can identify which CPOs are

    claiming such relief and are not required to comply with the specific

    provisions of Sec. Sec. 4.21, 4.24, 4.25, and 4.26. Providing this

    notice to NFA will facilitate compliance by market participants, assist

    the Commission's monitoring of the compliance of its registrants over

    time, and facilitate the enforcement of its rules with respect to all

    CPOs.

    In sum, the Commission has determined to deem CPOs of RICs

    compliant with the provisions of Sec. 4.26, provided that they are in

    compliance with the regime administered by the SEC under SEC RIC Rules.

    b. Delivery and Acknowledgement of Disclosure Documents

    Currently, Sec. 4.21 requires a CPO to deliver a Disclosure

    Document to each participant, and obtain from that prospective

    participant a signed acknowledgment of receipt of the Disclosure

    Document before accepting

    [[Page 52314]]

    or receiving funds from that participant. The federal securities laws

    require delivery of a ``statutory'' prospectus to each RIC investor no

    later than the confirmation of the transaction and do not require

    signed acknowledgment prior to receipt of funds from an investor.\57\

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

    \57\ Securities Act Sec. 5(b)(2) (unlawful to carry through the

    mails or in interstate commerce any security for the purpose of sale

    or delivery after sale unless accompanied or preceded by a

    ``statutory'' prospectus, i.e., a prospectus that meets the

    requirements of Sec. 10(a) of the Securities Act). Open-end RICs

    may satisfy the prospectus delivery obligation by sending or giving

    a summary prospectus to investors and providing the statutory

    prospectus on an Internet Web site. Rule 498 under the Securities

    Act. 17 CFR 230.498.

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

    The Commission proposed to modify Sec. 4.12(c) to allow the CPO of

    a RIC to claim relief from Sec. 4.21. The proposed revisions to Sec.

    4.12(c) would enable CPOs of RICs to claim relief from Sec. 4.21

    provided that the Disclosure Document is readily available on the RIC's

    Web site, or that of its designee.

    Some commenters suggested a broad exemption from Sec. 4.21 for all

    CPOs of RICs.\58\ Another commenter noted that a listed, closed-end RIC

    does not normally post its prospectus or annual report online when not

    conducting an offering, and suggested that such funds should be fully

    exempted from Sec. 4.21. This commenter also requested confirmation

    that: (a) the Web site may be the main Web site for the RIC's fund

    family or the RIC's distributor, so long as the Disclosure Document

    page is readily available from the main Web site; (b) password-

    protected Web sites (used by privately-offered funds) will remain

    acceptable under the Commission's rules; and (c) the distributor for a

    RIC would be permitted to maintain the Web site for a RIC under the

    Commission's rules.\59\

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

    \58\ Katten Letter; ABA Letter.

    \59\ SIFMA AMG Letter.

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

    One commenter did not support the proposed amendments. This

    commenter claimed that the requirements are duplicative, as the

    information required to be posted on a Web site is already provided to

    investors through various SEC regulations. The commenter also suggested

    that compliance with Sec. 4.12 may harm investors by broadly

    disclosing a fund's trading strategy.\60\

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

    \60\ AII Letter.

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

    The Commission has determined to deem CPOs of RICs compliant with

    the provisions of Sec. 4.21 provided that the CPO provides disclosure

    to participants and prospective participants consistent with the regime

    administered by the SEC under SEC RIC Rules. The SEC RIC Rules permit

    open-end RICs to send or give a summary prospectus, provided that the

    statutory prospectus and other information are available on an Internet

    Web site, the address of which is provided on cover page or at the

    beginning of the summary prospectus.\61\ Any Web site permitted under

    the SEC RIC Rules will also be deemed compliant with the provisions of

    Sec. 4.21 SEC regulations further provide that the RIC must provide

    paper copies of the statutory prospectus, SAI, and shareholder reports

    upon request at no cost to the requestor.\62\ As the SEC RIC rules

    require that a participant receive substantial information about the

    fund (information that, as discussed above, would be deemed compliant

    with Commission regulations under part 4), the Commission believes that

    this SEC requirement is commensurate with the provisions of Sec. 4.21

    in that it provides a mechanism through which information about the

    investment in the RIC is disseminated to prospective participants.

    Under both part 4 of the Commission's regulations and the SEC's

    disclosure regime, information is made readily available to prospective

    investors in the pools. Therefore, the Commission believes it is

    appropriate to deem entities that comply with SEC disclosure delivery

    requirements to be compliant with their disclosure delivery obligation

    under part 4.

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

    \61\ See, 17 CFR 230.498.

    \62\ Id.

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

    With respect to closed-end funds, under the Commission's

    regulations, CPOs are not required to maintain a current Disclosure

    Document for a pool if they are not soliciting participants for that

    pool.\63\ Consistent with the Commission's reasoning regarding open-end

    RICs, provided that the closed-end fund is operated consistent with its

    obligations under SEC RIC Rules, the Commission believes that it is

    appropriate to deem CPOs of closed-end funds compliant with the

    requirements of Sec. 4.21.

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

    \63\ See, 17 CFR 4.21 (requiring delivery of a Disclosure

    Document concurrent with the delivery of a subscription agreement to

    prospective participants).

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

    Additionally, for those funds that are organized as series entities

    with inter-series limitation of liability, the SEC permits multiple

    series to be included in a single registration statement, but permits

    reporting and disclosure to be accomplished on a series by series

    basis. Under the Commission's regulations, the pool is considered to be

    the discrete legal entity.\64\ As such, the Commission's regulations

    would require any such filings to be prepared at the legal entity

    level, not at the series level. The Commission recognizes that under

    part 4, RICs would be required to undertake substantial efforts to

    reorganize their filings to comply with both regimes.\65\ However,

    because the Commission has already determined to accept compliance with

    the regime administered by the SEC as substituted compliance with the

    Commission's compliance program, the Commission believes that such

    entities will continue to be able to make such filings consistent with

    SEC guidance regarding the same.

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

    \64\ The Commission has determined that, per Regulation

    4.20(a)(1), a pool is considered to be a separately cognizable legal

    entity. See, CFTC Staff Interpretative letter 10-29, available at

    http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/10-29.pdf.

    \65\ The Commission reaffirms its position with respect to the

    entity qualification of ``pool'' as embodied in CFTC Staff

    Interpretative letter 10-29, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/10-29.pdf.

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

    c. Use of the Summary Prospectus

    Commenters also expressed concern about continuing to use the

    Summary Prospectus adopted by the SEC.\66\ Because the SEC limits the

    information allowed in the Summary Prospectus, a commenter requested

    clarification that the CFTC is not requiring that any of the specific

    part 4 disclosure requirements be included in that document.\67\

    Another commenter suggested that the Commission allow registrants the

    option of providing a combined document or maintaining separate SEC-

    and CFTC-required disclosures.\68\ Several commenters urged the

    Commission to provide assurances to CPOs of RICs that Summary

    Prospectus documents may still be utilized by funds in the format they

    currently use.\69\ Another commenter expressed concern that requiring

    RICs to highlight new and amended disclosures under Sec. 4.26 ``would

    add unnecessary costs to the update process and could prove confusing

    to RIC shareholders'' because such requirements are ``not consistent

    with past practices.'' \70\

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

    \66\ 17 CFR 230.498.

    \67\ SIFMA AMG Letter.

    \68\ MFA Letter.

    \69\ ABA Letter; Katten Letter; NYCBA Letter.

    \70\ AXA Letter.

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

    The Commission has determined to deem CPOs of RICs compliant with

    the provisions of Sec. Sec. 4.24 and 4.25, provided that they are in

    compliance with the disclosure requirements of the Securities Act, the

    '40 Act, and the applicable SEC RIC Rules. By deeming such CPOs

    compliant, the ability to use a statutory prospectus and/or Summary

    Prospectus in a format recognizable to both funds and their

    participants has not been disturbed.

    [[Page 52315]]

    d. Risk Statements and Legends

    Section 4.24(a)-(b) details specific disclosure statements that

    must appear in a CPO's Disclosure Document. The Commission requires a

    specific Cautionary Statement (Sec. 4.24(a)) to appear prominently on

    the cover page of the Disclosure Document.\71\

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

    \71\ The Cautionary Statement reads as follows: THE COMMODITY

    FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF

    PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE

    ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

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

    The Commission also requires certain Risk Disclosure Statements to

    be displayed immediately following any disclosures required to appear

    on the cover page. The disclosures most relevant to this rulemaking are

    found in Sec. 4.24(b)(1).\72\

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

    \72\ Section 4.24(b)(1) reads as follows:

    YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION

    PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU

    SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO

    LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY

    REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF

    YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS

    MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.

    FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES

    FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY

    FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE

    SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF

    THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE

    DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT (insert page

    number) AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK

    EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT

    PAGE (insert page number).

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

    1. The Standard Cautionary Statement

    The Commission proposed that, in lieu of the standard Cautionary

    Statement, the cover page of the RIC's prospectus may contain a

    statement that combines the language required by Sec. 4.24(a) and Rule

    481(b)(1) under the Securities Act.\73\ The Proposal required the Risk

    Disclosure Statements to be presented concomitantly with SEC-required

    information in the RIC's prospectus.

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

    \73\ The proposed rules provided suggested language in two

    examples; for instance, one example states: ``The Securities and

    Exchange Commission and the Commodity Futures Trading Commission

    have not approved or disapproved these securities or this pool, or

    passed upon the adequacy or accuracy of this prospectus. Any

    representation to the contrary is a criminal offense.'' See

    Proposal, supra note 23, 77 FR at 11351.

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

    One commenter claimed that the SEC must also grant relief to permit

    inclusion of the Cautionary Statement mandated in Sec. 4.24(a) on the

    cover page of a prospectus; the commenter suggested the Commission

    ensure that the SEC has issued such relief before imposing the combined

    statement requirement.\74\

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

    \74\ ICI Letter.

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

    Other commenters objected to the disclosure statements, including

    the Cautionary Statement in Sec. 4.24(a), as being ``boilerplate,''

    ``technical,'' and ``duplicative.'' \75\ Commenters stated that such

    language is inconsistent with the SEC's ``Plain English'' disclosure

    requirements, which are designed to make prospectuses easier for

    investors to read, and thus their inclusion may create investor

    confusion.\76\

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

    \75\ ABA Letter; Dechert Letter; Fidelity Letter; AII Letter;

    SIFMA AMG Letter.

    \76\ AXA Letter; ABA Letter; Dechert Letter; AII Letter.

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

    With respect to the prescribed cautionary statement required under

    Sec. 4.24(a), the Commission finds that the statement as required by

    the SEC \77\ performs a similar function as that required by the

    Commission, and has concluded that the cautionary statement prescribed

    in SEC Rule 481 under the Securities Act,\78\ with minor modifications,

    addresses the Commission's concerns regarding the need for CPOs to

    adequately apprise investors that the Commission has not approved a

    particular disclosure that is provided to prospective participants.

    Therefore, the Commission has determined that it would be acceptable

    for CPOs of RICs to include the CFTC in the statement prescribed by the

    SEC under Securities Act Rule 481,\79\ such that the statement would

    read either:

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

    \77\ Securities Act Rule 481 (17 CFR 230.481) requires that the

    outside front cover page of a prospectus contain a legend that

    indicates that the SEC has not approved or disapproved the

    securities or passed upon the accurace or adequacy of the disclosure

    in the prospectus and that any contrary representation is a criminal

    offense. The legend may be one of the two following statements in

    clear and concise language:

    The Securities and Exchange Commission has not approved or

    disapproved these securities or passed upon the adequacy of this

    prospectus. Any representation to the contrary is a criminal

    offense; or

    The Securities and Exchange Commission has not approved or

    disapproved these securities or determined if this prospectus is

    truthful or complete. Any representation to the contrary is a

    criminal offense.

    \78\ 17 CFR 230.481(b)(1).

    \79\ 17 CFR 230.481(b)(1).

    The Securities and Exchange Commission and the Commodity Futures

    Trading Commission have not approved or disapproved these securities

    or passed upon the adequacy of this prospectus. Any representation

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

    to the contrary is a criminal offense.

    or

    The Securities and Exchange Commission and the Commodity Futures

    Trading Commission have not approved or disapproved these securities

    or determined if this prospectus is truthful or complete. Any

    representation to the contrary is a criminal offense.

    2. The Standard Risk Disclosure Statement

    Commenters also objected to the inclusion of the standard Risk

    Disclosure Statements found in Sec. 4.24(b).\80\ Several commenters

    remarked that the CFTC-required disclosures, designed for commodity

    pools, are not appropriate for funds because (a) SEC regulations

    prohibit a fund from maintaining high degrees of leverage; and/or (b)

    SEC regulations do not allow funds to restrict redemption rights.\81\

    These commenters contended that requiring such ``inappropriate''

    disclosures would be misleading and confusing for investors.

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

    \80\ AXA Letter; ABA Letter; Dechert Letter; Fidelity Letter;

    AII Letter; NYCBA Letter; SIFMA AMG Letter.

    \81\ AXA Letter; ABA Letter; Dechert Letter; NYCBA Letter; SIFMA

    AMG Letter; ICI Letter.

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

    In addition, one commenter contended that because the risks

    described in Sec. 4.24(b) are non-principal risks for most mutual

    funds, and because the SEC has indicated that only principal risks

    should be disclosed in the summary prospectus, RICs should be exempt

    from these requirements. This commenter also noted that ``[e]xhaustion

    of a fund's assets is essentially impossible'' under the '40 Act.\82\

    Another commenter requested clarification about the placement of

    required disclosures. Specifically, the commenter noted that putting

    the standard CFTC risk disclosures in a RIC's summary prospectus may

    violate SEC Rule 498, which prohibits information other than that

    prescribed by that Rule from inclusion in the summary prospectus.\83\

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

    \82\ Dechert Letter.

    \83\ AXA Letter.

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

    Commenters also requested that the Commission allow RICs to use the

    term ``fund'' instead of ``pool'' in the Cautionary Statement as well

    as any mandated disclosure statements, as fund investors are unfamiliar

    with the term ``pool'' and may be confused by such language.\84\

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

    \84\ AXA Letter; Dechert Letter; SIFMA AMG Letter; comment

    letter from Invesco Advisers, Inc. (April 24, 2012) (Invesco

    Letter); ICI Letter.

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

    The standard risk disclosure statement under Sec. 4.24(b) sets

    forth standard disclosures of risks associated with the use of

    commodity interests, including generic discussions of liquidity,

    counterparty

    [[Page 52316]]

    creditworthiness, and limits on the ability to alter the terms of

    certain swap agreements.\85\ Because open-end RICs are required to

    honor redemption requests within 7 days,\86\ the Commission believes

    that, absent information to the contrary, the generic discussion of

    risks required as part of the standard risk disclosure statement under

    Sec. 4.24(b) may differ with respect to RICs, in that investor

    liquidity is necessarily required as a function of fulfilling the

    redemption obligations under the '40 Act. Therefore, the risk that a

    participant will be unable to redeem in a timely manner appears to be

    mitigated. Further, with respect to closed-end funds, because interests

    in such funds are generally not redeemed directly from the fund, but

    rather are traded in the secondary market, it would appear that the

    risks discussed in the prescribed risk disclosure statement under Sec.

    4.24(b) may not be precisely applicable to their operation. For the

    foregoing reasons, the Commission believes that the specific risks

    delineated in the prescribed cautionary statement may not reflect those

    associated with investment in a RIC, and therefore, has determined not

    to require CPOs of RICs to include the standard risk disclosure

    statement required under Sec. 4.24(b).\87\ Having considered the

    comments received as well as the redemption requirements of RICs under

    the '40 Act, the Commission has determined to deem CPOs of RICs

    compliant with the requirements of Sec. 4.24(a) and (b) provided that

    the CPO complies with the related regime administered by the SEC

    pursuant to the SEC RIC Rules, including disclosure requirements in

    Section 10 of the Securities Act and other provisions of the Securities

    Act and '40 Act,, Rule 498 \88\ under the Securities Act, and forms N-

    1A and N-2.

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

    \85\ 17 CFR 4.24(b).

    \86\ 15 U.S.C. 80a-22(e).

    \87\ Because the Commission has determined not to require CPOs

    of RICs to include the Standard Risk Disclosure statement in their

    Disclosure Documents, the Commission does not have to address the

    issue of using the term ``fund'' in lieu of ``pool'' within the risk

    disclosure statement.

    \88\ 17 CFR 230.498.

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

    e. Risk Disclosure

    Section 4.24(g) requires a discussion of the principal risk factors

    of participation in the offered pool. It further requires that the

    discussion must include, without limitation, risks relating to

    volatility, leverage, liquidity, and counterparty creditworthiness, as

    applicable to the trading programs followed, trading structures used,

    and investment activities of the offered pool.

    One commenter suggested that the risks required to be disclosed

    pursuant to the SEC's disclosure requirements provide comparable

    information to that mandated by the Commission's regulations.\89\ That

    commenter also suggested that the Commission should exempt CPOs of RICs

    from the risk disclosure requirements set forth in Sec. 4.24(g)

    because they are generic and are required to appear in a single section

    of the Disclosure Document rather than in various sections of the

    disclosure as permitted by the SEC.

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

    \89\ ICI Letter.

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

    The Commission believes that, although the CPOs of RICs may elect

    to comply with Sec. Sec. 4.24, 4.25 and 4.26 through substituted

    compliance, the disclosure provided by CPOs of RICs to prospective

    participants should include true, accurate, and complete information

    describing the commodity-interest activities of the pool, including a

    discussion of the material risks of those assets and activities. The

    Commission understands that SEC forms N-1A and N-2 require disclosure

    of the principal risks associated with investment in the RIC and that,

    to the extent that the use of commodity interests creates such a risk,

    it must be disclosed to prospective investors. This is consistent with

    the requirements set forth in Sec. 4.24(g), which also requires the

    disclosure of the principal risks of investing in the pool, and which

    mandates that such disclosures be appropriately tailored to reflect the

    risks associated with the investment strategy and instruments traded by

    the offered pool. Moreover, the Commission does not believe that the

    fact that the disclosures may appear in multiple places under the SEC's

    disclosure requirements is inconsistent with the Commission's

    regulations, as such regulations do not require that such disclosures

    appear in a single section of the Disclosure Document. The Commission

    believes that the disclosure requirements on SEC forms N-1A and N-2,

    consistent with guidance from SEC staff, including the letter issued by

    the Division of Investment Management in 2010,\90\ should satisfy the

    Commission's concern that participants receive complete and accurate

    disclosure about the risks associated with investment in commodity

    interests. CPOs of RICs must likewise comply with any applicable SEC

    guidance, including guidance that may be issued hereafter, concerning

    these disclosure requirements, which the Commission will evaluate for

    consistency with its own regulatory interests. The Commission

    understands, for example, that the Division of Investment Management at

    the SEC intends to issue additional guidance to RICs regarding

    compliance with certain aspects of the SEC RIC Rules.

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

    \90\ Letter from the Division of Investment Management,

    Securities and Exchange Commission, to the Investment Company

    Institute, July 30, 2010, available at http://www.sec.gov/divisions/investment/guidance/ici073010.pdf.

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

    f. Break Even Disclosure

    Section 4.24(d)(5) requires CPOs to include in the forepart of the

    Disclosure Document the break-even point per unit of initial

    investment. Section 4.10(j) defines the break-even point as ``the

    trading profit that a pool must realize in the first year of a

    participant's investment to equal all fees and expenses such that such

    participant will recoup its initial investment, as calculated pursuant

    to rules promulgated by a registered futures association pursuant to

    section 17(j) of the Act.''

    The Commission proposed to consider the ``forepart'' of the

    document to be the section immediately following all disclosures

    required by SEC form N-1A. The Commission did not propose to relieve

    RICs of the requirement to provide the break-even point disclosure,

    however, stating that ``[the] Commission continues to believe that the

    inclusion of . . . the break-even point . . . is a necessary disclosure

    because, among other requirements, it mandates a greater level of

    detail regarding brokerage fees and does not assume a specific rate of

    return.''

    One commenter supported the Commission's position that the break-

    even table should be included in the prospectus of an investment

    company.\91\

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

    \91\ Steben Letter.

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

    However, other commenters generally believed that RICs should be

    exempt from disclosing the break-even point.\92\ Some commenters

    claimed that the break-even point and analysis serves the same purpose

    as the tabular presentation of fees required by SEC regulations, and

    thus including such information would be duplicative and

    unnecessary.\93\ One commenter believed that the current SEC-required

    disclosures are better suited to funds ``given that they are

    continually offered and have daily changing asset levels.'' This

    commenter also believed that the CFTC did not identify why the break-

    even point is necessary or why the fact that it does not assume a rate

    of return

    [[Page 52317]]

    makes the disclosure more meaningful for investors.\94\ Some commenters

    contended that including the break-even point and analysis may

    undermine the SEC's goal of providing comparable disclosures and make

    it harder for potential investors to compare information across

    funds.\95\ Another commenter argued that the Commission is incorrect in

    suggesting that the SEC's fee table requirements are based on assumed

    rate of return, as form N-1A requirements for fee disclosure in general

    do not assume a specific rate of return.\96\

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

    \92\ AXA Letter; ABA Letter; Dechert Letter; ICI Letter; NYCBA

    Letter.

    \93\ AXA Letter; ABA Letter; ICI Letter.

    \94\ Dechert Letter.

    \95\ AXA Letter; NYCBA Letter.

    \96\ ICI Letter.

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

    The Commission understands that the same types of fees and costs

    are disclosed through SEC-required disclosures, even if in a different

    format.\97\ For example, Sec. 4.24(i) requires a full and complete

    discussion of all management fees. Form N-1A, item 3 requires similar

    disclosure. The Commission is persuaded by the commenters that the

    information required by the SEC achieves substantially the same

    purposes as the break-even point analysis. The Commission has concluded

    that the disclosure required by the SEC is sufficient to communicate

    the fees and costs associated with a RIC that engages in derivatives.

    Therefore, the Commission has determined to deem the CPOs of RICs

    compliant with the requirements under Sec. 4.24(d)(5) of the

    Commission's regulations contingent upon their compliance with the SEC

    RIC Rules.

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

    \97\ See generally SEC form N-1A, Item 3.

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

    g. Past Performance Disclosure

    Section 4.24(n) requires CPOs to disclose past performance

    information in accordance with Sec. 4.25. Section 4.25(a) requires

    various disclosures, including, but not limited to: aggregate gross

    capital subscriptions to the pool; the pool's current net asset value;

    the largest monthly draw-down during the most recent five calendar

    years and year-to-date; the worst peak-to-valley draw-down during the

    most recent five calendar years and year-to-date; and the annual and

    year-to-date rate of return for the pool for the most recent five

    calendar years and year-to-date, including a bar graph depicting such

    rates of return. Similar information is required for each account

    traded by the CPO or CTA on behalf of a client.

    Section 4.25(c) states that when the offered pool has less than a

    three-year operating history, the CPO must disclose the past

    performance of each other pool it operates. By contrast, the SEC's

    regulations do not require RICs to disclose past performance for any

    fund other than the offered fund. Most of the other performance-related

    disclosures are similar between the two regulatory regimes. However,

    some information is presented in a different manner. For example,

    whereas Sec. 4.25 requires disclosure of the pool's performance for

    the year-to-date and the most recent five calendar years, Item

    4(b)(2)(iii) of Form N-1A requires disclosure of average annual total

    returns for the previous year, five years, and ten years (or the life

    of the fund, if shorter than five or ten years).

    The Commission proposed to maintain the past performance disclosure

    requirements, but requested comment on the advisability of doing so.

    Most commenters suggested that the Commission exempt RICs from

    disclosing past performance information.\98\ Some commenters claimed

    that the SEC generally does not permit disclosure of the past

    performance of funds other than the offered fund, and that the CFTC's

    requirement to do so would cause funds to be in a position of having to

    choose which regulator's rules to violate.\99\

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

    \98\ AXA Letter; ABA Letter; Dechert Letter; Katten Letter; IAA

    Letter; Fidelity Letter; NYCBA Letter; SIFMA AMG Letter.

    \99\ AXA Letter; Dechert Letter; Katten Letter; SIFMA AMG

    Letter; ICI Letter.

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

    Numerous commenters highlighted a footnote in the Proposal that

    said the Commission had had preliminary discussions with the SEC

    regarding past performance disclosures and that the SEC may consider

    no-action relief for dually-registered RIC/CPOs. These commenters

    argued that it would unreasonable for the CFTC to expect hundreds of

    funds (according to one commenter) to apply for no-action relief,

    stressing the inefficiencies and burdens for RICs and for the SEC to

    comply with such a volume of requests.\100\ Some commenters noted that

    the SEC is under no obligation to grant such relief, and that even if

    it did, no-action letters are typically non-binding.\101\ Other

    commenters noted that even if the SEC does grant no-action relief for

    this provision, such an action may create disparate treatment between

    RICs and RIC/CPOs that would confuse investors who are accustomed to

    the SEC's provisions on performance disclosure. These commenters

    further noted that the dual requirements may complicate the

    registration process for RICs subject to the dual disclosure

    requirement, which could operate to their competitive

    disadvantage.\102\

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

    \100\ Dechert Letter; IAA Letter; Fidelity Letter; SIFMA AMG

    Letter; ABA Letter.

    \101\ Dechert Letter; Fidelity Letter.

    \102\ ABA Letter; Katten Letter.

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

    One commenter expressed concern that this provision does not

    accomplish the CFTC's stated objective of providing material

    information while reducing duplicative disclosure.\103\ Another

    commenter suggested that funds with fewer than three years' performance

    should be required to disclose information only for other funds with

    substantially similar objectives and strategies that are managed by the

    same adviser.\104\

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

    \103\ Dechert Letter.

    \104\ ICI Letter.

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

    Other commenters disagreed. One commenter suggested that while

    allowing CPOs of RICs to show only the results of similar pools (as

    permitted by the SEC) would lessen the burden on such firms, it ``would

    also create interpretive questions'' and allow funds to exclude the

    performance of relevant pools.\105\ Another commenter recommended that

    the Commission maintain the requirement, but limit the scope of the

    disclosure to include past performance information only for other

    commodity pools listed with NFA by the RIC/CPO. This commenter

    suggested that the Commission encourage the SEC to provide no-action

    relief and to do so on a ``global'' basis, as opposed to a case-by-case

    basis.\106\

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

    \105\ Steben Letter.

    \106\ NFA Letter, Campbell Letter.

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

    Some commenters suggested that the CFTC exempt RICs from the

    requirement to disclose aggregate gross capital subscriptions.\107\ One

    commenter stated that such a requirement is not practicable for open-

    ended RICs, which are publicly-offered.\108\ Another commenter stated

    that the measurement ``is meaningless to fund investors, as

    subscriptions are frequently offset . . . by redemptions.'' \109\

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

    \107\ SIFMA AMG Letter, Dechert Letter.

    \108\ SIFMA AMG Letter.

    \109\ Dechert Letter.

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

    One commenter believed that the differences in how the charts

    required by SEC and CFTC regulations are calculated could result in an

    additional preparation burden for RICs and additional confusion for

    investors, and suggested that the CFTC harmonize this requirement to

    the SEC's disclosure. Similarly, the commenter suggested the Commission

    harmonize the different methodologies of the CFTC- and SEC-reporting

    requirements to avoid duplicative and confusing information. For

    example, the commenter noted that past performance disclosures are

    [[Page 52318]]

    required for different timeframes (the SEC requires 1, 5, and 10 year

    disclosure; the CFTC requires each of the most recent 5 years to be

    disclosed).\110\

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

    \110\ Id.

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

    After consideration, and in light of the comments received, the

    Commission has determined to deem CPOs of RICs with less than three

    years of performance history to be compliant with Sec. 4.25(c),

    provided that the CPO disclose the performance of all accounts and

    pools that are managed by the CPO and that have investment objectives,

    policies, and strategies substantially similar to the offered

    pool.\111\

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

    \111\ With respect to the commenter that suggested requiring the

    disclosure of other pools that trigger registration as a CPO with

    the Commission, the Commission is concerned that it may result in

    requiring the CPO of a RIC to disclose the performance of a pool or

    account that does not have investment objective, policies, and

    strategies substantially similar to those of offered pool, thereby

    causing the CPO of the RIC to violate the restrictions imposed by

    the SEC.

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

    The requirements for disclosure of commodity pools' past

    performance exist because the Commission, drawing on its experience,

    believes they provide prospective participants with useful information.

    The markets for commodity interests are highly complex and require

    specialized knowledge to manage funds effectively. The Commission

    continues to believe that the presentation of past performance provides

    investors with information regarding the experience of a CPO of a

    relatively new pool. A prospective investor will, as a result of this

    requirement, be better able to assess the experience and expertise of

    the CPO as a result of this disclosure. As summarized by participants

    in the rulemaking process in which the Commission adopted Sec. 4.25,

    while ``past performance data alone are not directly predictive of

    future trading results, . . . past performance data provide information

    that is important in evaluating a contemplated pool offering or trading

    program. For example, patterns of volatility and other trading patterns

    in various market conditions may be evident.'' \112\

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

    \112\ 60 FR 38148 (July 25, 1995); see also 68 FR 42964 (July

    21, 2003).

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

    Although the SEC does not mandate the disclosure of the performance

    of other funds and accounts, guidance provided by the SEC's Division of

    Investment Management indicates that a RIC is permitted to show the

    performance of funds and accounts that are managed by the same

    investment adviser as the RIC and that have investment objectives,

    policies, and strategies substantially similar to those of the

    RIC.\113\ Recognizing that the SEC approaches this issue differently,

    and would not allow the performance disclosures of each other pool the

    CPO operates, the Commission understands that the SEC's Division of

    Investment Management would permit a subset of that information to be

    disclosed. Notably, it would permit all the disclosure of past

    performance that is most germane to that of the offered pool and

    provide precisely the information that a prospective investor would

    need to evaluate the historical behavior of the markets and instruments

    in which the offered pool invests. As such, the Commission has made the

    judgment to confine this requirement for CPOs of RICs with less than

    three years operating history to disclose information concerning pools

    or accounts that are managed by the CPO and that have substantially

    similar investment objectives, policies, and strategies because it

    provides prospective participants with additional information regarding

    the historical performance of accounts and pools traded pursuant to the

    trading strategy used by the offered pool, and provides data regarding

    the experience of the CPO trading substantially similar instruments and

    trading strategies.

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

    \113\ See, e.g., ITT Hartford Mutual Funds (pub. avail. Feb. 7,

    1997) (fund may include in marketing materials performance

    information for other funds managed by the same adviser with

    investment objectives, policies, and strategies substantially

    similar to those of the fund); Nicolas-Applegate Mutual Funds (pub.

    avail. Aug. 6, 1996) (fund may include in prospectus information for

    private accounts managed by the fund's adviser with investment

    objectives, policies, and strategies substantially similar to those

    of the fund).

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

    The Commission believes that this requirement appropriately

    addresses the Commission's concerns about ensuring that prospective

    participants have the information that the Commission believes is

    essential to making informed decisions, prior to investing in a

    commodity pool, while respecting the limitations on disclosure imposed

    by the SEC. CPOs of RICs with less than 3 years performance history

    will be required to identify which other accounts and pools have

    investment objectives, policies, and strategies substantially similar

    to those of the offered pool. In contrast to Sec. 4.25 as applied to

    CPOs generally, the Commission's acceptance of substituted compliance

    for CPOs of RICs introduces a mildly subjective element that is

    otherwise absent under the regulation. The Commission believes that any

    such subjectivity is tightly constrained due to the guidance that SEC

    staff has provided in this area. The Commission believes that the

    result will be reasonably tailored to provide prospective participants

    with materially useful information that otherwise would not be

    mandatorily disclosed under the SEC's regulatory regime.\114\

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

    \114\ See, the Commission's discussion of costs and benefits,

    infra, regarding the costs associated with this disclosure

    requirement.

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

    Additionally, the Commission has determined to deem CPOs of RICs

    compliant with the remainder of Sec. 4.25, which includes the

    requirement to disclose aggregate gross capital subscriptions, to the

    extent that the CPOs comply with applicable SEC Rules. The Commission

    has reached this decision after considering the requirements imposed by

    the SEC and concluding that the compliance obligations, with the

    limited exception noted above for CPOs of RICs with less than three

    years of performance history, generally achieve the same disclosure

    objective. For example, although the timeframes for performance

    disclosure differ, with the Commission requiring 5 years of

    performance, whereas the SEC requires up to 10 years performance, the

    Commission believes that the disclosure required by the SEC provides a

    reasonable means for ensuring effective disclosure of a pool's past

    performance to a prospective participant as the information provided

    under the SEC's regulatory regime includes that required under part 4

    of the Commission's regulations. Additionally, the Commission

    recognizes the challenges that a continuously offered RIC might face in

    determining its aggregate gross capital subscriptions. It may not be

    possible for the CPO of a continuously offered RIC to make such a

    determination given the continually variable number of subscriptions

    and redemptions. Therefore, the Commission is deeming CPOs of RICs

    compliant with the requirements of Sec. 4.25 subject to compliance

    with the regime set forth under SEC RIC Rules, with the exception of

    those pools which have a less than three year operating history, the

    CPO of which must make the additional disclosures as discussed supra.

    h. Fee Disclosure

    Section 4.24(i) requires CPOs to include in the Disclosure Document

    a complete description of each fee, commission, and other expense which

    the CPO knows has been incurred or expects to be incurred. This

    description must include management fees, brokerage fees and

    commissions, any fees and commissions paid for trading advice, fees

    incurred within investments in investee pools and

    [[Page 52319]]

    funds, incentive fees, any allocations paid out to the CPO, commissions

    or other benefits paid to any person in connection with soliciting

    participation in the pool, administrative fees and expenses, offering

    expenses, and clearance, exchange, and SRO fees, along with certain

    other fees as applicable.

    Many of these fees are disclosed by RICs in SEC form N-1A. Item 3

    of that form requires a table of fees to be presented. The Commission

    proposed to require any such expenses not included in the fee table in

    Item 3 of Form N-1A to be disclosed in the prospectus in addition to

    those fees and expenses required by both the CFTC and the SEC.

    Commenters generally contended that the CFTC's requirement under

    Sec. 4.24(i)(2)(ii) to disclose brokerage fees and commissions should

    not apply to RICs as such disclosures may be misleading and/or

    confusing for fund investors.\115\ One commenter noted that if RICs

    decide that the inconsistent disclosures warrant changing existing

    practices, the process of separating out prospectuses would carry

    ``inevitable initial and ongoing operational, legal, compliance, and

    marketing costs.'' \116\ Another commenter stated that the SEC has

    determined its fee disclosure regime to be adequate and that the CFTC

    has not identified any reason why additional disclosure is necessary to

    protect investors. This commenter also noted that expected fees,

    required to be disclosed under Sec. 4.24(i)(1), are predictive and

    could be misleading if projected expenses are more favorable than the

    actual expenses incurred.\117\

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

    \115\ ABA Letter; Dechert Letter; Katten Letter; SIFMA AMG

    Letter.

    \116\ ABA Letter.

    \117\ Dechert Letter.

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

    The Commission understands that the same types of fees and costs

    are disclosed through SEC-required disclosures, although perhaps in a

    different format, as discussed supra, with respect to the break-even

    information. The Commission, moreover, is persuaded by the commenters

    that the information required under its break-even point and table is

    not meaningfully different from what the SEC already requires. For

    example, the SEC-required disclosure permits brokerage fees to be

    included in the cost of securities, whereas the Commission requires

    such fees to be disclosed separately. In both cases, information

    regarding such fees is being provided to the investor. Moreover, item

    21 of SEC form N-1A requires a discussion of brokerage commissions paid

    by the RIC during its three most recent fiscal years.\118\ The

    Commission believes that the disclosure required by the SEC is

    sufficient to communicate the fees and costs associated with a RIC that

    engages in derivatives, notwithstanding the fact that the format is

    different from that generally prescribed by the Commission with respect

    to CPOs and CTAs. Therefore, the Commission has determined to deem the

    CPOs of RICs compliant with the requirements under Sec. 4.24(d)(5) of

    the Commission's regulations, provided that they comply with the SEC's

    required disclosures.

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

    \118\ See SEC form N-1A, item 21.

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

    i. Controlled Foreign Corporations (CFCs)

    In the 2012 Final Rule, the Commission explained its position on

    the use of CFCs by RICs, stating that, although the Commission does not

    oppose the use of CFCs by RICs, it nevertheless believes that CFCs that

    fall within the statutory definition of commodity pool may necessitate

    the registration of a CPO.\119\ As such, operators of such entities,

    whether or not the RIC that owns the CFC may be excluded under Sec.

    4.5, may be required to register as CPOs with the Commission.

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

    \119\ See 2012 Final Rule, supra note 6, 77 FR at 11260.

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

    As stated in the 2012 Final Rule, the Commission understands that a

    RIC may invest up to 25 percent of its assets in a CFC, which then

    engages in actively managed derivatives strategies, either on its own

    or under the direction of one or more CTAs.\120\

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

    \120\ See 2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24,

    2012) for a discussion of CFCs and their use by RICs.

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

    One commenter agreed with the Commission's position that RICs

    should be permitted to use CFCs under appropriate circumstances. This

    commenter further articulated their belief that in certain situations

    additional disclosures regarding CFCs may be necessary, as the

    relationship between a RIC and related CFCs is ``significantly

    different than a typical fund-of-funds structure.'' The commenter

    suggested that the Commission clarify that the RIC's Disclosure

    Document must contain a full discussion of this relationship and the

    impact of the CFC on the pool/RIC, including on the performance of the

    pool/RIC.\121\

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

    \121\ NFA Letter.

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

    Another commenter noted that a CFC may constitute a major investee

    pool and, as such, the CPO of a RIC would have to include certain

    disclosures regarding the CFC in its Disclosure Document pursuant to

    the Commission's regulations. However, this commenter suggested the

    Commission require additional ``extensive, particularized disclosure

    regarding [CFCs] used by investment companies'' and claimed that

    ``[s]uch information is needed . . . to help investors and regulators

    identify and understand the expenses . . . and risks'' associated with

    CFCs.\122\

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

    \122\ Steben Letter.

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

    One commenter requested that the Commission exempt a CFC that is

    wholly owned by a RIC from the detailed disclosure and reporting

    requirements under part 4 because the only recipients of such

    information would be the RIC that owns the CFC.\123\

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

    \123\ SIFMA AMG Letter.

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

    The Commission reaffirms its earlier statements in the 2012 Final

    Rule that RICs may continue to use CFCs and that such CFCs, depending

    on their investment activities, may fall within the statutory and

    regulatory definitions of ``commodity pool.'' \124\ The provisions of

    SEC forms N-1A and N-2 require a discussion of the investment

    strategies of the offered funds and the principal risk factors

    associated with investment in the fund.\125\ The Commission understands

    that if a RIC is using a CFC to effectuate its investment strategy, the

    RIC is required to disclose in its prospectus filed with the SEC

    information about the RIC's investment in the CFC and the principal

    risks associated with the CFC investment, including those related to

    swaps and other commodity interests. Accordingly, the Commission has

    determined that, if the RIC provides full disclosure of material

    information regarding the activities of its CFC through its obligations

    to the SEC, the CFC will not be required to separately prepare a

    Disclosure Document that complies with part 4 of the Commission's

    regulations. Moreover, provided that the RIC consolidates the financial

    statements of the CFC with those of the RIC in the financial statements

    that are filed by the RIC with the NFA, the CFC will not be required to

    file separate financial statements.\126\ Given the foregoing, the

    Commission does not believe that additional relief pertaining to CFCs

    is necessary.

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

    \124\ See 2012 Final Rule, supra note 6, 77 FR at 11260.

    \125\ See Items, 4, 9, and 16(b) of SEC form N-1A; and Item 8

    and 17 of SEC form N-2.

    \126\ 17 CFR 4.22(c)(8).

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

    C. Financial Reporting

    a. Periodic Financial Statements

    Section 4.22 requires that every CPO must periodically distribute

    to each

    [[Page 52320]]

    participant in each pool that it operates an Account Statement in the

    form and with the content prescribed therein. Further, Sec. 4.22(b)

    requires that Account Statements must be distributed at least monthly

    for pools with net assets greater than $500,000 and at least quarterly

    for all other pools.

    The '40 Act requires open-end RICs to sell and redeem their shares

    based on the current net asset values of those shares,\127\ and these

    net asset values may be posted on the RIC's Web site or otherwise made

    available to investors. RICs are also required to furnish semi-annual

    and annual reports, including financial statements, to investors, as

    well as to file quarterly schedules of portfolio holdings and semi-

    annual and annual reports, including financial statements, with the SEC

    (which are publicly available to investors via the EDGAR system).\128\

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

    \127\ 15 U.S.C. 80a-22; 17 CFR 270.2a-4; 17 CFR 270.22c-1(a).

    \128\ See 17 CFR 270.30b1-5 (quarterly schedule of portfolio

    holdings on Form N-Q); 17 CFR 270.30b2-1 (semi-annual and annual

    reports on Form N-CSR); 17 CFR 270.30e-1 (semi-annual and annual

    reports to shareholders).

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

    The Commission proposed to exempt the CPO of any RIC from the

    distribution requirements of Sec. 4.22, provided the Account

    Statements are readily accessible on the RIC's Web site. The Commission

    also proposed to exempt such entities from the requirement under Sec.

    4.26(b) to attach the Account Statements to the Disclosure Document,

    again provided such materials are readily accessible on the RIC's Web

    site. The Commission did not propose to alter the requirement that

    Account Statements be distributed at least monthly.

    Commenters generally appreciated the proposed relief under Sec.

    4.12(c) but requested a broader exemption from the requirements in

    Sec. 4.22(a)-(b), which require monthly statements to be prepared and

    provided to participants.\129\ Alternatively, others suggested that the

    Commission allow RICs to file quarterly statements, rather than

    monthly, as such a requirement is more in line with the SEC's

    requirements under the federal securities laws.\130\ One commenter

    suggested that the Commission permit RICs to satisfy the requirements

    of Sec. 4.22(a)-(b) by posting on its public Web site all reports to

    shareholders in compliance with and as required by SEC RIC Rules.\131\

    Some commenters noted that RIC investors have ready access to daily

    performance information, which, according to one commenter, achieves

    the ``key purpose of the Account Statement'' on a more current

    basis.\132\ Some commenters noted that there are significant

    similarities between the publicly available disclosures required by the

    SEC and the information required in Sec. 4.22, making the CFTC's

    requirement redundant.\133\

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

    \129\ AXA Letter; SIFMA AMG Letter; ICI Letter; ABA Letter.

    \130\ NFA Letter; ABA Letter.

    \131\ Katten Letter.

    \132\ NFA Letter; SIFMA AMG Letter.

    \133\ Katten Letter; NYCBA Letter.

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

    Several commenters contended that requiring Account Statements

    would create a substantial burden on RICs that would ultimately be

    passed on to shareholders without any corresponding benefit.\134\

    Another commenter was concerned that CPOs will now be required to

    create and maintain an online reporting regime to provide information

    that is already available to investors.\135\ One commenter recommended

    that the Commission change the number of days that a CPO registered

    under Sec. 4.7 has to prepare and distribute quarterly statements from

    30 days to 45 days.\136\

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

    \134\ SIFMA AMG Letter; NYCBA Letter; AXA Letter.

    \135\ AII Letter.

    \136\ MFA Letter.

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

    The Commission has been persuaded by commenters and has concluded

    that providing relief to CPOs of RICs from the requirement to send

    monthly financial statements is appropriate, provided that the RIC's

    current net asset value per share is available to investors, and

    provided that the RIC furnishes semi-annual and annual reports to

    investors and files periodic reports with the SEC as required by the

    SEC. When current net asset value per share is available to investors,

    coupled with more detailed periodic reports as described above, the

    Commission believes that the decision not to require monthly statements

    would not reduce the transparency available to investors. Importantly,

    a fund investor could calculate his/her position in the fund using the

    current net asset value per share.

    The Commission does not believe that its interest in ensuring that

    financial information is provided to pool participants is negatively

    impacted if such information is made available through the Web site of

    the RIC or its designee. This is consistent with Sec. 4.1(c) of the

    Commission's regulations, wherein the Commission permits the

    distribution of information to participants through electronic

    means.\137\ In accordance with the permitted use of electronic

    distribution, the Commission does not believe that electronic delivery

    meaningfully changes the information available to participants and may,

    in fact, make the information more readily accessible to participants

    and the public in general. The Commission also believes that such

    relief will eliminate the costs of preparing monthly financial

    statements and thereby eliminate any marginal impact on CPOs of RICs

    related to compliance with Sec. 4.22.

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

    \137\ 17 CFR 4.1(c).

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

    D. Books and Records

    a. Location of Records

    Sections 4.23 and 4.7(b)(4) require that all CPOs maintain full

    books and records at the main business office of the CPO. Such books

    and records must include the following: a detailed and itemized daily

    record of each commodity interest transaction of the pool; all receipts

    and disbursements of money, securities, and other property; a

    participant ledger; copies of each confirmation of a commodity interest

    transaction; and other relevant records.

    The records of RICs are often maintained by third parties, such as

    administrators. Because of this, the Commission proposed extending the

    same type of relief currently available to ETFs through Sec. 4.23 to

    RICs. The relief in Sec. 4.23 allows maintenance of records at certain

    third party sites, such as those of an administrator or custodian.

    Commenters suggested that the Commission extend the proposed relief

    to include not only RICs but all CPOs and CTAs, including private pools

    or funds; these commenters claimed such an extension would be more

    consistent with prevailing technologies, current market practices, and

    SEC requirements.\138\ Commenters also suggested that the Commission

    remove the limitation on which entities are permitted to maintain books

    and records, because SEC rules permit a wider range of entities to do

    so.\139\

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

    \138\ MFA Letter; IAA Letter.

    \139\ MFA Letter; IAA Letter; Dechert Letter; ICI Letter; SIFMA

    AMG Letter.

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

    The Commission understands the current practice for RICs, as well

    as many other CPOs, to maintain their books and records with a third

    party vendor, or other such record-keeper, to be part of efficient

    management practices regarding such records.\140\ Such practice allows

    the CPO to avail itself of the lower cost and increased record security

    of a third party vendor, as such vendors often specialize in such

    services. The Commission

    [[Page 52321]]

    acknowledges that its requirement to keep such books and records at the

    main business address of a CPO is rooted in the timely and certain

    access of that data. However, to the extent that such data is readily

    accessible to a CPO, the Commission believes that the requirement that

    such data be maintained at the main business address of a CPO is

    similarly met so long as timely and complete access to that data is

    available. Further, as suggested by the comments, the Commission

    believes that the advantages of such recordkeeping practices are

    applicable to all CPOs. Accordingly, the Commission has determined that

    so long as at the time that such CPO registers with the Commission, or

    delegates its recordkeeping obligations, whichever is later, the CPO

    files a statement with the Commission describing the delegated record

    keeper, and maintains timely access to those records in such manner as

    set forth by the Commission, that CPO will be permitted to utilize the

    services of third-parties with respect to the maintenance of books and

    records.

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

    \140\ See, 17 CFR 270.31a-3 (person maintaining required records

    on behalf of a RIC must agree that records are the property of the

    RIC).

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

    b. Other Recordkeeping Obligations

    Section 4.23 also requires that a CPO's books and records be made

    available to participants for inspection and/or copying at the request

    of the participant.\141\ The Commission did not propose altering this

    requirement. The SEC does not have a comparable requirement. Indeed,

    disclosure of non-public information to some, but not all, participants

    is prohibited where inconsistent with the antifraud provisions of the

    federal securities laws and the fund's or adviser's fiduciary duties

    (``selective disclosure'').\142\

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

    \141\ Certain confidential or proprietary information, including

    participants' personal information and subscription information as

    well as the records of the CPO's personal investments, are not

    required to be made available for inspection by pool participants.

    \142\ See SEC Regulation FD (17 CFR 243.100-103) (with respect

    to closed-end RICs); Items 9(d) and 16(f) of SEC form N-1A (open-end

    RICs required to disclose policies and procedures with respect to

    disclosure of portfolio securities and ongoing arrangements to make

    available information about portfolio securities.

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

    Additionally, Sec. 4.23(a)(4) requires a ledger (or other record)

    to be kept for each participant in the pool that shows the

    participant's name, address, and all funds received from or distributed

    to the participant.

    One commenter noted that the investor access provision is

    inconsistent with SEC regulations, which the commenter claimed are

    sufficient to provide investors with information.\143\ Some commenters

    suggested the Commission exempt RICs from the requirement to make

    available a CPO's books and records at the request of an investor.\144\

    These commenters noted the possibility of investors accessing trading

    and position information to use in trading against the pool/fund,

    leading to unfair competition and front-running.

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

    \143\ ABA Letter.

    \144\ Katten Letter; ABA Letter; ICI Letter; AII Letter.

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

    Commenters were concerned with the ledger requirement in Sec.

    4.23(a)(4) because they noted that most shares are held in omnibus

    accounts or through intermediaries and that transfer agents typically

    keep records of investors.\145\ These commenters requested

    clarification that a transfer agent's maintenance of records and/or a

    list of relevant intermediaries would be deemed to satisfy the

    information requirements regarding pool participants under Sec.

    4.23(a)(4).

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

    \145\ Dechert Letter; Katten Letter; SIFMA AMG Letter.

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

    The Commission recognizes the concerns that, if a participant were

    to inspect such books and records of a pool, SEC requirements may then

    compel the pool to publicly disclose such information to avoid

    prohibitions against selective disclosure. Even in the absence of wide

    disclosure of such positions, which would at a minimum require

    substantial effort to compile and distribute such information to all

    fund participants at unplanned intervals, disclosure of transaction

    level data on a real time or near real-time basis to even a single

    participant may make such a pool vulnerable to front-running or market

    manipulation. Accordingly, to remove these risks, a registered CPO that

    operates a RIC will not be required to make its records available for

    inspection and copying.

    The Commission recognizes that the practice of many RICs to hold

    account shares in an omnibus account, with such records of participant

    information being kept by a transfer agent or financial intermediary,

    such as a broker-dealer or bank, would make the requirement that the

    CPO keep custody of such records both duplicative and unduly burdensome

    on the CPO of a RIC. Because a subsidiary ledger of largely the form

    and substance required by the Commission is kept by those transfer

    agents and financial intermediaries, the Commission agrees that in such

    instances, the maintenance of these records by a transfer agent or

    financial intermediary, in such form that complies with that as set

    forth by the Commission, shall satisfy the requirement of Sec.

    4.23(a)(4).

    The Commission has also determined to amend Sec. 4.23 to permit

    all CPOs to use third-party service providers to maintain their books

    and records. The Commission believes that expansion of the relief

    previously limited to exchange traded funds appropriately recognizes

    technological advances in recordkeeping and the ability to make books

    and records readily available to regulatory agencies. The Commission

    will continue to require CPOs of RICs to file with the NFA (1) a notice

    providing information about the third-party service provider, and (2) a

    statement from the service provider agreeing to maintain the pool's

    books and records consistent with the Commission's regulations. This

    requirement is identical to the notices previously required under Sec.

    4.12(c)(iii). Therefore, the Commission is adopting final amendments to

    Sec. 4.23 permitting all registered CPOs to use third party service

    providers to maintain their books and records.

    E. Broader Applicability

    The Commission proposed harmonization of compliance obligations for

    CPOs of RICs only. The Commission did not propose extending relief to

    other CPOs or other SEC-registered entities, such as investment

    advisers to private funds. However, the Commission did request comment

    on whether it should consider applying any of the harmonization

    provisions to operators of pools that are not RICs.

    One commenter supported the Commission's proposal to amend Sec.

    4.12(c) to extend relief to RICs similar to the relief granted to ETFs,

    as well as the Commission's proposal to extend the same relief to

    operators of all publicly offered pools, regardless of whether they are

    traded on a securities exchange.\146\ Several commenters requested the

    Commission extend relief under 4.12(c) to privately offered pools.\147\

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

    \146\ NFA Letter.

    \147\ MFA Letter; IAA Letter; SIFMA AMG Letter; Campbell Letter;

    Steben Letter.

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

    The Commission believes that publicly offered pools that are not

    traded on an exchange should be afforded the same relief as ETFs. Both

    are subject to regulation under the Securities Act, and therefore,

    required to comply with certain disclosure and reporting obligations.

    Accordingly, the Commission adopts as final the proposed extension of

    relief under Sec. 4.12(c) to all publicly offered pools, regardless of

    whether such pools are traded on an exchange.

    [[Page 52322]]

    Unlike publicly offered pools, privately offered pools avail

    themselves of an exemption from registration under the Securities

    Act.\148\ Ownership interests in privately offered pools are not

    subject to the same types of regulatory obligations under the

    securities laws as publicly offered pools. As a result, CPOs of

    privately offered pools are not subject to the prospect of being

    required to comply with two different compliance regimes. Therefore,

    the Commission will not extend the full scope of the exemptions

    provided under Sec. 4.12(c) to all CPOs. However, the Commission has

    determined to liberalize the third party recordkeeping and document

    distribution requirements under part 4 of the Commission's regulations,

    as discussed supra, for all CPOs.

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

    \148\ See, e.g., 17 CFR 230.501 (``Reg. D); 15 U.S.C. 77d

    (``Section 4(2)'').

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

    With respect to the specific compliance obligations under part 4,

    one commenter requested that the Commission extend the relief from the

    Disclosure Document delivery and acknowledgment requirements in Sec.

    4.21 to any CPO of a private pool/fund, so long as the pool/fund has an

    investment advisor registered with the SEC and is either registered

    under Sec. 4.7 or would have been exempt under rescinded Sec.

    4.13(a)(4).\149\ The commenter noted that because the participants in

    these private pools would be sophisticated investors, the Commission

    should not deny these pools the same relief granted to CPOs of RICs,

    whose investors are less sophisticated retail investors.\150\

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

    \149\ Commission Regulation 4.7 and former Regulation 4.13(a)(4)

    provide for an exemption of certain Part 4 requirements, or an

    exemption from registration as a CPO, respectively, for, among other

    things, operating a pool of which all the participants therein are

    qualified eligible persons. 17 CFR 4.7 and 17 CFR 4.13(a)(4). See

    2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24, 2012);

    correction 77 FR 17328 (March 26, 2012).

    \150\ SIFMA AMG Letter.

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

    The Commission has determined to rescind the signed acknowledgement

    requirement under Sec. 4.21(b) for all registered CPOs. Through its

    expansion of Sec. 4.12(c) to exempt all publicly offered funds, the

    Commission has recognized that publicly offered pools that are not

    exchange traded are similarly situated with respect to the requirements

    under Sec. 4.21 as ETFs. The Commission believes that because

    participants in privately offered pools are not retail participants but

    are sophisticated persons, the concerns underlying the signed-

    acknowledgment requirement are not present. Moreover, the elimination

    of this requirement would align the Commission's requirements regarding

    the offering of ownership interests in commodity pools with the

    requirements imposed on the offerings of interests in other types of

    funds. Therefore, the Commission is rescinding the signed

    acknowledgement requirement under Sec. 4.21(b) for all CPOs.

    One commenter requested that the Commission amend Sec. 4.7(b) and

    Sec. 4.13(a)(3) \151\ in response to the Jumpstart Our Business

    Startups Act (``JOBS Act''), which eliminates the prohibition on

    general solicitation in connection with private funds.\152\ The JOBS

    Act amends certain sections of the Securities Act, but does not change

    similar provisions in the CEA or under part 4 of the Commission's

    regulations. The commenter contended that this disparity will create a

    situation in which private funds may market to the public but private

    pools may not.

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

    \151\ See supra footnote 149.

    \152\ Comment letter from Managed Futures Association (July 17,

    2012) (MFA II Letter).

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

    The Commission recognizes that there may be some disparity between

    the treatment of privately offered funds under the securities laws and

    the Commission's regulations; however, this issue was not included in

    the Proposal and was not subject to notice and comment. Therefore, the

    Commission does not believe that this final rule is the appropriate

    mechanism for addressing the difference between the two regimes. The

    Commission has directed Commission staff to evaluate the issue and make

    recommendations to the Commission for future action.

    F. Effective Dates and Implementation

    The harmonized compliance obligations for CPOs of RICs under Sec.

    4.12, except for Sec. 4.12(c)(3)(i), will become effective upon

    publication in the Federal Register.

    Section 4.12(c)(3)(i) will become effective 30 days after

    publication in the Federal Register. Compliance will be required with

    the conditions adopted herein in Sec. 4.12(c)(3)(i) for open-end RICs

    beginning when a RIC files with the SEC an initial registration

    statement on form N-1A or, for an existing RIC, its first post-

    effective amendment that is an annual update to an effective

    registration statement on form N-1A. For CPOs of closed-end RICs,

    compliance will be required when the closed-end RIC files an initial

    registration statement with the SEC, or, for existing closed-end RICs,

    when the closed-end RIC is required to update its registration

    statement. Consistent with the Commission's statements in the 2012

    Final Rule, CPOs of RICs must begin to comply with Sec. 4.27, which

    implements Commission forms CPO-PQR and CTA-PR, 60 days following the

    effective date of this rulemaking.\153\ Accordingly, initial reporting

    on forms CPO-PQR for CPOs of RICs will begin October 21, 2013.\154\

    Section 4.21 will become effective upon publication in the Federal

    Register. With respect to the amendments to Sec. Sec. 4.7(b)(4), 4.23,

    4.26, and 4.36 that are applicable to all registered CPOs, these

    amendments will become effective 30 days after publication in the

    Federal Register and CPOs may comply upon the effective date.

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

    \153\ See 2012 Final Rule, supra note 6, 77 FR 11252 (Feb. 24,

    2012); correction 77 FR 17328 (March 26, 2012).

    \154\ The instructions for form CPO-PQR specify different dates

    by which CPOs must file the form, depending on the amount of assets

    under management by the pool operator. 77 FR at 11288. CTAs must

    file form CTA-PR annually. 77 FR at 11339.

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

    III. Related Matters

    A. Paperwork Reduction Act

    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.\155\ 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''). This final

    release affects OMB Control Numbers 3038-0023 and 3038-0005 to reflect

    the obligations associated with the registration of new CPOs that were

    previously excluded from registration under Sec. 4.5. Specifically,

    this final release is amending Collection 3038-0005 to accommodate the

    modified compliance obligations under part 4 of the Commission's

    regulations.

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

    \155\ See 44 U.S.C. 3501 et seq.

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

    a. Estimated Number of Affected Entities

    In the Proposal, the Commission derived the number of estimated

    entities affected and the number of burden hours associated with this

    proposal through the use of statistical analysis. According to the

    single and limited source of data available to the Commission, in 2010,

    there were 669 sponsors of 9,719 registered investment companies,

    including mutual funds, closed end funds, exchange traded funds, and

    unit investment trusts.\156\ In the comment letter submitted by the

    Investment Company Institute (``ICI'') in

    [[Page 52323]]

    response to the Commission's proposed amendments to Sec. 4.5, the ICI

    stated that it surveyed its membership and 13 sponsors responded

    representing 2,111 registered investment companies. Of those 2,111

    registered investment companies, the 13 sponsors estimated that 485

    would trigger registration and compliance obligations under Sec. 4.5

    as amended. This constituted approximately 23% of the reported

    registered investment companies.

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

    \156\ See 2011 Investment Company Fact Book, Chap. 1 and Data

    Tables, Investment Company Institute (2011), available at http://www.icifactbook.org/.

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

    The Commission then deducted the 2,111 registered investment

    companies discussed in the ICI comment letter from the 9,719 entities

    comprising the universe of registered investment companies, and

    deducted the 13 sponsors surveyed by the ICI from the universe of 669

    fund sponsors to arrive at a balance of 656 fund sponsors operating

    7,608 registered investment companies. This resulted, for the

    calculated remainder, in an average of 11.6 registered investment

    companies being offered per sponsor.

    The Commission then calculated 23% of the 7,608 registered

    investment companies not covered by the ICI survey, resulting in 1,750

    additional registered investment companies that the Commission would

    expect to trigger registration under amended Sec. 4.5. The Commission

    then divided this number by the previously calculated average number of

    registered investment companies operated per sponsor to which it added

    the 13 sponsors from the ICI survey to reach 164 sponsors expected to

    be required to register under amended Sec. 4.5. Because the Commission

    could not state with certainty that only 164 entities would be required

    to register the Commission indicated that the number of sponsors or

    advisors required to register were somewhere between 164 and 669

    entities. For PRA purposes, the Commission concluded that it was

    appropriate to use the midpoint between the outer bounds of the range,

    which was 416 entities.

    Pursuant to the request for comments on the Proposal, the

    Investment Company Institute (``ICI'') submitted a comment letter in

    response which provided additional and differing information that it

    obtained through a further survey of its membership.\157\ In its

    letter, the ICI stated that in its return, 42 advisers reported

    operating 4,188 funds, which constituted 43 percent of the universe of

    RICs.\158\ Therefore, the total universe of RICs can be calculated to

    equal 9,740.

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

    \157\ ICI Letter.

    \158\ Id.

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

    The ICI further stated that of these 42 advisers, 33 stated that

    they operated 551 funds that would trigger registration.\159\

    Therefore, according to the ICI's data, 13 percent of the surveyed

    funds would trigger registration of their operators.\160\ Applying this

    percentage to the total universe of RICs less the 4188 surveyed RICs,

    results in an estimated 5552 non-surveyed RICs and an estimated total

    of 722 non-surveyed RICs with operators required to register.\161\ The

    total number of surveyed and non-surveyed RICs with operators required

    to register is approximately 1,266.\162\

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

    \159\ Id.

    \160\ Percentage obtained by dividing 551 by 4,188 surveyed

    RICs.

    \161\ Total of non-surveyed RICs subject to registration

    obtained by multiplying 5552 non-surveyed RICs by .13.

    \162\ Total obtained by multiplying 9740 by .13.

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

    As stated above, the ICI also noted that 33 advisers would be

    required to register as CPOs due to the activities of 551 RICs.\163\

    According to the 2012 ICI Fact Book, there were 713 advisers to RICs in

    2011.\164\ The Commission deducted the 42 surveyed advisers from the

    total universe of 713 advisers to find a total of 671 non-surveyed

    advisers. When the Commission compared the number of non-surveyed RICs

    with the number of non-surveyed advisers, the Commission determined

    that each adviser advises an average of 8 RICs. The Commission then

    applied the average of 8 RICs per adviser to the 722 estimated number

    of non-surveyed RICs required to register, and obtained an estimate of

    90 non-surveyed advisers being required to register. The Commission

    then added the 33 surveyed advisers to its estimate, and determined

    that an estimated 123 advisers may be required to register. Because the

    Commission cannot state with certainty that only 123 entities would be

    required to register, the Commission believes that the number of

    sponsors or advisors required to register to be somewhere between 123

    and 713 entities, the midpoint of which is 418 entities.

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

    \163\ ICI Letter.

    \164\ See 2012 Investment Company Fact Book at 13, available at

    http://www.icifactbook.org/2012_factbook.pdf.

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

    b. OMB Control Number 3038-0023

    On February 24, 2012, the Commission finalized amendments to

    Collection 3038-0023, titled ``Part 3--Registration,'' to allow for an

    increase in response hours for the rulemaking resulting from the

    amendments to Sec. 4.5 that the Commission recently adopted.\165\

    Collection 3038-0023 affects part 3 of the Commission's regulations

    that concern registration requirements. The Commission amended 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. 4.5 that had not previously been required

    to register.\166\ Because the registration requirements are in all

    respects the same as for current registrants, the collection was

    amended only insofar as it concerns the estimated increase in the

    number of respondents and the corresponding estimated annual burden.

    These burdens were associated with the 2012 Final Rule amending Sec.

    4.5, which was published in the Federal Register on February 24, 2012.

    Responses to this collection of information are mandatory. The total

    burden associated with registration including the registration of

    operators of RICs was as follows:

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

    \165\ See 2012 Final Rule, supra note 6, 77 FR at 11272.

    \166\ See 2012 Final Rule, supra note 6, 77 FR at 11273.

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

    Estimated number of respondents: 75,425.

    Annual responses by each respondent: 75,932.

    Estimated average hours per response: 0.09.

    Annual reporting burden: 6,833.9.

    In the Proposal, the Commission published a proposed amendment to

    Collection 3038-0023 that inadvertently reflected an additional

    amendment to the collection arising from the registration of additional

    CPOs that were previously excluded from the definition of CPO under

    Sec. 4.5.\167\ As stated above, the Commission amended existing

    Collection 3038-0023 in the 2012 Final Rule to reflect the obligations

    associated with the registration of new CPOs that were previously

    excluded from registration under Sec. 4.5. Thus, these entities were

    already included in the Commission's final amendment to Collection

    3038-0023 associated with the 2012 Final Rule, and therefore, the

    additional amendments to Collection 3038-0023 in the Proposal resulted

    in those entities being erroneously double counted. Accordingly, the

    burden hours previously estimated for Collection 3038-0023 in the 2012

    Final Rule that amended Sec. 4.5 and the estimates for this collection

    remain unchanged from the 2012 Final Rule.

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

    \167\ See Proposal, supra note 23, 77 FR at 1349. The Proposal

    stated that there were 75,841 estimated number of respondents,

    76,350 annual responses by each respondent and 6,871.6 annual

    reporting burden.

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

    c. OMB Control Number 3038-0005

    Also, on February 24, 2012, the 2012 Final Rule amended Collection

    3038-0005 to allow for an increase in

    [[Page 52324]]

    response hours for the rulemaking resulting from the amendments to

    Sec. 4.5.\168\ Collection 3038-0005 affects part 4 of the Commission's

    regulations that concern compliance obligations of CPOs and CTAs, and

    the circumstances under which they may be exempted or excluded from

    registration. The estimated average time spent per response was not

    altered in the 2012 Final Rule; however, adjustments were made to the

    collection to account for the new burden expected under the rulemaking.

    The total burden associated with Collection 3038-0005, in the

    aggregate, was as follows:

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

    \168\ See 2012 Final Rule, supra note 6, 77 FR at 11272.

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

    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.

    In the Proposal, the Commission proposed changes to part 4 that

    were designed to better harmonize the Commission's compliance

    obligations for CPOs and minimize the burden imposed on those dually-

    regulated by the Commission and the SEC while still enabling the

    Commission to fulfill its regulatory goals.\169\ The Proposal was

    designed to, where possible, minimize the regulatory burden on these

    entities with respect to disclosure, annual and periodic reporting to

    participants and the Commission, recordkeeping requirements, and ensure

    that requirements among the SEC and CFTC did not conflict such that

    compliance with one regime would cause a violation of another. With

    respect to the PRA, the Proposal increased the number of estimated

    entities that would be subject to the compliance obligations of CPOs

    and CTAs,\170\ which are part of Collection 3038-0005.\171\ The

    Proposal specifically added the following burden with respect to

    compliance obligations other than Form CPO-PQR:

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

    \169\ The Commission issued its proposal under the authority of

    Sec. Sec. 4m, 4n, and 8a(5) of the CEA. 7 U.S.C. 6m, 6n, and

    12a(5).

    \170\ See Proposal, supra note 23, 77 FR at 11349, finding that

    416 entities would be required to register under amended Sec. 4.5.

    \171\ See Proposal, supra note 23, 77 FR at 11349, which, to

    account for the increased number of entities, proposed that the

    total burden associated with Collection 3038-0005, in the aggregate,

    including the burden imposed by regulations that were not proposed

    to be amended by that rulemaking, was expected to be, as follows:

    Estimated number of respondents: 44,142.

    Annual responses by each respondent: 62,121.

    Estimated average hours per response: 4.22.

    Annual reporting burden: 262,347.8.

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

    Estimated number of respondents: 416.

    Annual responses by each respondent: 5.

    Estimated average hours per response: 2.

    Annual reporting burden: 4160.

    As further discussed below, the Commission in this final release is

    amending Collection 3038-0005 to accommodate the modified compliance

    obligations under part 4 of the Commission's regulations resulting from

    these revisions. The title for this collection is ``Part 4--Commodity

    Pool Operators and Commodity Trading Advisors'' (OMB Control number

    3038-0005). Responses to this collection of information will be

    mandatory. The new total burden associated with Collection 3038-0005,

    in the aggregate, including the burden imposed by regulations that are

    not being amended by this rulemaking, is as follows:

    Estimated number of respondents: 49,008.

    Annual responses for all respondents: 69,382.

    Estimated average hours per response: 3.99.\172\

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

    \172\ The Commission rounded the average hours per response to

    the second decimal place for ease of presentation.

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

    Annual reporting burden: 276,540.3.\173\

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

    \173\ This total estimate for Collection 3038-0005, in the

    aggregate, has been increased from the Proposal to accurately

    reflect the average under Collection 3038-0005. While the total

    annual reporting burden has increased, the total annual reporting

    burden reflects the decreased burden associated with the preparation

    of Disclosure Documents by CPOs under the amendments to Sec. Sec.

    4.26 and 4.36.

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

    The new total burden associated with Collection 3038-0005, as a

    result of the amendments adopted in this rulemaking, is as follows:

    Estimated number of respondents: 5,894.

    Annual responses for all respondents: 7,694.

    Estimated average hours per response: 2.66.\174\

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

    \174\ The Commission rounded the average hours per response to

    the second decimal place for ease of presentation.

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

    Annual reporting burden: 20,464.5

    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.'' \175\ The

    Commission is also required to protect certain information contained in

    a government system of records according to the Privacy Act of

    1974.\176\

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

    \175\ See 7 U.S.C. 12.

    \176\ See 5 U.S.C. 552a.

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

    d. Changes Resulting From Harmonization and Additional Information

    Provided by CPOs and CTAs

    1. OMB Control Number 3038-0023

    This rule does not impact the burden hours previously estimated for

    Collection 3038-0023 in the 2012 Final Rule that amended Sec. 4.5 and

    the estimates for this collection have not been changed by this rule.

    2. OMB Control Number 3038-0005

    The Commission is amending Collection 3038-0005 to increase the

    estimated total number of respondents, total annual responses for all

    respondents, and annual reporting burden from the estimates that

    appeared in the Proposal. These amendments are in response to comments

    that the Commission received regarding the burdens imposed by the

    Proposal and also reflect the differences between the Proposal and the

    final rule. Thus, the new total burden in the 2012 Final Rule

    associated with Collection 3038-0005, listed in the aggregate above,

    has increased to account for the burdens associated with the various

    information collections in this final rule, as discussed below.

    i. Amendments to Timeframe for Updating Disclosure Documents

    In this release, the Commission is finalizing the collection of

    information regarding the frequency with which CPOs and CTAs must

    update their Disclosure Documents under Sec. Sec. 4.26 and 4.36,

    respectively. While the total annual reporting burden has increased to

    account for the total annual reporting by CPOs for the various

    information collections in this final release, the Commission believes

    that the amendments to Sec. Sec. 4.26 and 4.36 will result in a

    reduction of the burden on CPOs and CTAs.\177\ The Commission estimates

    the burden associated with the

    [[Page 52325]]

    amendments to Sec. Sec. 4.26 and 4.36 to be as follows:

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

    \177\ To facilitate compliance with part 4 requirements for CPOs

    of RICs, the Commission amended Sec. 4.26 and Sec. 4.36 to extend

    the period that CPOs and CTAs may use Disclosure Documents from nine

    months to twelve months from the date of the document. Section

    4.26(a)(2) in this final release now provides that no commodity pool

    operator may use a Disclosure Document or profile document dated

    more than twelve months prior to the date of its use. Section

    4.36(b) provides that no commodity trading advisor may use a

    Disclosure Document dated more than twelve months prior to the date

    of its use.

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

    Section 4.26:

    Estimated number of respondents: 160.

    Annual responses by each respondent: 1.8.

    Estimated average hours per response: 3.25

    Total Annual reporting burden hours: 936.

    Section 4.36:

    Estimated number of respondents: 450.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 1.85.

    Total Annual reporting burden hours: 832.5.

    ii. Past Performance for Pools With Less Than Three Years Performance

    The Commission is adopting a rule in Sec. 4.12(c) of this release

    that would require operators of RICs with less than three years

    performance history to disclose the performance of all pools and

    accounts that are managed by the CPO and that have investment

    objectives, policies, and strategies substantially similar to those of

    the offered pool.\178\ Not all RICs will fall into this category and

    therefore, not all RICs will be subject to this disclosure requirement.

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

    \178\ Section 4.12(c)(3)(i) states that ``The commodity pool

    operator of a pool whose units of participation meet the criteria of

    paragraph (c)(1)(ii) of this section may claim the following relief:

    (i) The pool operator of an offered pool will be exempt from the

    requirements of Sec. Sec. 4.21, 4.24, 4.25, and 4.26; Provided,

    that (A) The pool operator of an offered pool with less than a

    three-year operating history discloses the performance of all

    accounts and pools that are managed by the same pool operator and

    that have investment objectives, policies, and strategies

    substantially similar to those of the offered pool; . . .''

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

    Based on information provided by the ICI in its comment letter, of

    the 551 RICs in the survey that would trigger registration of their

    advisor, 159 of those RICs had less than three years operating

    history.\179\ This constitutes approximately 30 percent of the RICs in

    the survey whose CPOs would not be excluded under Sec. 4.5. The RICs

    with less than three years operating history that would require

    registration in the ICI survey were operated by 29 of the 33 advisers

    that expected to register, which constitutes 88 percent of the surveyed

    sponsors expecting to register. Applying these percentages to the

    Commission's estimated number of 418 sponsors required to register, the

    Commission expects approximately 368 pool operators to be subject to

    the disclosure requirements for substantially similar accounts and

    funds with respect to 380 pools. The Commission is not aware of any

    source of data to assist it in estimating the number of operators of

    RICs with substantially similar pools or accounts or to assist in

    estimating the number of those substantially similar pools or accounts

    that do not independently have regulatory obligations requiring the

    preparation of past performance data. To be conservative, therefore,

    the Commission will assume that all operators of RICs with less than

    three years operating history will have multiple pools or accounts that

    are substantially similar in all material respects and that such

    substantially similar pools or accounts do not have separate compliance

    obligations requiring preparation of past performance information.

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

    \179\ ICI Letter.

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

    The ICI, in its comment letter, estimated that costs associated

    with prior performance disclosure required under the Proposal for funds

    with less than a three year operating history would amount to 34 hours

    per fund initially, and 25.5 hours per fund each year in ongoing

    compliance requirements.\180\ The ICI's estimates are based on the

    requirement in the Proposal to include past performance information for

    all other funds operated by the sponsor of the fund with less than a

    three year operating history. As noted supra, the Commission has

    altered this provision to require disclosure of only those funds and

    accounts that are substantially similar in all material respects to the

    fund with less than a three year operating history. In so doing, the

    Commission believes that it has significantly reduced the requirements

    regarding past performance disclosure. As such, the Commission believes

    it can reasonably reduce the number of hours required both initially

    and in ongoing compliance. The Commission anticipates initial and

    ongoing cost of approximately 15 hours per fund.\181\ The Commission

    believes that 15 hours is a reasonable estimate for the preparation of

    past performance information for a substantially similar pool or

    account. The total burden associated with the past performance

    assessment and disclosure is:

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

    \180\ ICI Letter.

    \181\ The burden estimate assumes that all RICs with less than

    three years performance are newly formed and have no performance

    history, whereas some of these RICs likely have anywhere from no

    past performance to just less than three full years. Therefore, the

    Commission believes that this calculation overestimates the ongoing

    burden to these CPOs.

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

    Estimated number of respondents: 368.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 15.

    Total Annual reporting burden hours: 5,520.

    iii. Notice To Claim Substituted Compliance

    This final rule requires a notice to be filed for operators of RICs

    to claim relief under revised Sec. 4.12(d) to enable the Commission to

    know which entities are claiming this relief.\182\ The notice is

    effective upon submission and must only be filed once per pool. The

    Commission estimates the burden associated with this filing to be as

    follows:

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

    \182\ Section4.12(d)(1)(iv) requires pool operators to specify

    the relief sought under paragraph (b)(2), (c)(2), or (c)(3) of this

    section, as the case may be.

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

    Estimated number of respondents: 418.

    Annual responses by each respondent: 3.

    Estimated average hours per response: 2.

    Total Annual reporting burden hours: 2,508.

    The Commission does not believe that the requirement that operators

    of RICs discuss the risks associated with the derivative activities of

    the operated pools as adopted by this final rule imposes a burden

    beyond that already imposed by the Securities and Exchange Commission

    through SEC forms N-1A and N-2.\183\

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

    \183\ See Items, 4, 9, and 16(b) of Form N-1A; and Item 8 and 17

    of Form N-2.

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

    iv. Filing Annual Financial Statements by CPOs of RICs

    The final rule requires that operators of RICs file annual

    financial statements with the NFA, pursuant to the terms of Sec.

    4.22(c),\184\ which is applicable to all CPOs. It permits operators of

    RICs to file the same financial statements that it prepares for its

    compliance obligations with the SEC. The Commission anticipates that

    the additional requirement imposed by the rule in Sec. 4.22(c)

    necessitates only addressing any potential formatting changes--i.e.

    making sure the document is in PDF form as required by NFA--and

    uploading the document via NFA's Easy File system (to which advisers

    should already have access by virtue of their registration). Thus, the

    Commission anticipates at most 2 hours per fund per

    [[Page 52326]]

    sponsor. With respect to the filing of annual financial statements by

    operators of RICs with the NFA, the Commission estimates the burden to

    be as follows:

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

    \184\ Section 4.22(c) has not been amended by this rule. The

    information collection is being amended only to reflect the increase

    in the numbers of new CPOs registering.

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

    Estimated number of respondents: 418.

    Annual responses by each respondent: 3.

    Estimated average hours per response: 2.

    Total Annual reporting burden hours: 2,508.

    v. Notice of Use of Third-Party Record Keepers

    The final rule adopts amendments to Sec. Sec. 4.7(b)(4) and 4.23

    to permit the use of third-party recordkeepers by any CPO that files a

    notice with NFA. The estimated number of respondents is derived from

    the estimates finalized as part of the 2012 Final Rule adopting

    amendments to Sec. 4.5 and Sec. 4.13, and reflects the additional

    registrants expected due to the changes in those rules. Because the

    Commission cannot be sure how many CPOs will use third-party service

    providers, the Commission estimates that all CPOs will take advantage

    of the amendments to the record-keeping requirements under Sec. 4.23

    and Sec. 4.7.\185\ With respect to the filing of the notice under

    revised Sec. 4.23 to permit the use of third-party recordkeepers, the

    Commission estimates the burden to be as follows:

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

    \185\ The Commission has previously estimated that each CPO that

    subject to Sec. 4.23 had a burden of approximately 50 hours

    associated with recordkeeping obligations and that each CPO subject

    to Sec. 4.7(b)(4) had a burden of approximately 40 hours associated

    with recordkeeping obligations. Because the Commission is estimating

    that all registered CPOs will use third-party service providers for

    recordkeeping purposes, the Commission expects that burdens

    associated with Sec. Sec. 4.7(b)(4) and 4.23 will be reduced,

    although the reduction cannot be quantified at this time.

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

    For CPOs of RICs subject to Sec. 4.23:

    Estimated number of respondents: 418.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 2.

    Total Annual reporting burden: 836.

    For all other CPOs subject to Sec. 4.23:

    Estimated number of respondents: 160.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 2.

    Total Annual reporting burden: 320.

    With respect to the filing of the notice under revised Sec.

    4.7(b)(4) to permit the use of third-party recordkeepers, the

    Commission estimates the burden to be as follows:

    Estimated number of respondents: 3,502.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 2.

    Total Annual reporting burden: 7,004.

    vi. Compliance With Form CPO-PQR by CPOs of RICs

    CPOs of RICs were not required to comply with its filing

    obligations under Sec. 4.27 or file form CPO-PQR until the

    finalization of this rulemaking. The reporting obligations for CPOs of

    RICs with respect to form CPO-PQR under the PRA and the costs and

    benefits were addressed in the 2012 Final Rule,\186\ and restated in

    the Proposal only for informational purposes.\187\ To the extent that

    this rule does not impact the burden hours previously estimated in the

    2012 Final Rule for Form CPO-PQR, the estimates for Collection 3038-

    0005 associated with form CPO-PQR have not been changed by this rule.

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

    \186\ See 2012 Final Rule, supra note 6, 77 FR at 11273.

    \187\ See Proposal, supra note 23, 77 FR at 11349.

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

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \188\ requires that agencies,

    in proposing rules, consider the impact of those rules on small

    entities. The Commission has previously established certain definitions

    of ``small entities'' to be used by the Commission in evaluating the

    impact of its rules on such entities in accordance with the RFA.\189\

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

    \188\ See 5 U.S.C. 601, et seq.

    \189\ 47 FR 18618 (Apr. 30, 1982).

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

    CPOs: The Commission has previously determined that registered CPOs

    are not small entities for the purpose of the RFA.\190\ With respect to

    CPOs exempt from registration, the Commission has determined that a CPO

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

    registration under current Sec. 4.13(a)(2).\191\ Based on the

    requisite level of sophistication needed to comply with the SEC's

    regulatory regime for registered investment companies, and the fact

    that registered investment companies are generally intended to serve as

    retail investment vehicles and do not qualify for exemption under Sec.

    4.13(a)(2), the Commission believes that registered investment

    companies are generally not small entities for purposes of the RFA

    analysis. Moreover, this final rule will reduce the burden of complying

    with part 4 for CPOs of registered investment companies. The Commission

    has determined that the final rule will not create a significant

    economic impact on a substantial number of small entities.

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

    \190\ See 47 FR 18618, 18619 (Apr. 30, 1982).

    \191\ 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.\192\ The sole aspect of the final rule

    that affects CTAs that are registered with the Commission is the

    timeframe that permits Disclosure Documents to be used for 12 months

    rather than 9 months, thereby reducing the frequency with which updates

    must be prepared. While the Commission considers the reduced frequency

    with which these CTAs must prepare updates to their Disclosure

    Documents as reducing the overall burden on affected entities, it is of

    the view of the Commission that the reduction in updates mitigates the

    rule's economic impact. Over the course of three calendar years, the

    change from a 9 month update period to a 12 month update period

    eliminates 1 filing per CTA. This results in a change from 1.33 filings

    per year to 1 filing per year. In addition, because the eliminated

    filing would be an update of a document that was already prepared and

    reviewed by NFA, the Commission does not believe that the eliminated

    filing would result in a significant economic impact. As indicated

    above, it would reduce any impact that the rule would otherwise have.

    Moreover, the amended time period for updating Disclosure Documents for

    CTAs also aligns this requirement with other regulatory obligations

    that registered CTAs must comply with, including the filing of form

    CTA-PR pursuant to Sec. 4.27 of the Commission's regulations.\193\ The

    Commission believes that this will enable registered CTAs to avail

    themselves of operational efficiencies in satisfying its regulatory

    obligations as the information required under form CTA-PR is relevant

    to the preparation or updating of Disclosure Documents. Therefore, the

    Commission has determined that the final rule 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 final rule will not have a

    significant impact on a substantial number of small entities.

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

    \192\ See 47 FR at 18620.

    \193\ 17 CFR 4.27.

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

    [[Page 52327]]

    C. Cost Benefit Analysis

    a. Consideration of Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the

    costs and benefits of its actions before promulgating a regulation

    under the Act or issuing certain orders.\194\ 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.\195\

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

    \194\ 7 U.S.C. 19(a).

    \195\ 7 U.S.C. 19(a)(2).

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

    Generally, the Commission believes that, by avoiding the imposition

    of potentially duplicative, inconsistent, or conflicting regulatory

    requirements on CPOs of RICs subject to federal securities laws and SEC

    rules, the final harmonization rule should generate important benefits

    while mitigating the costs on market participants.

    In the following discussion, the Commission summarizes the key

    aspects of the final rule, and considers the benefits and costs, taking

    account of public comments received in response to the Proposal and the

    February Final Rule regarding harmonizing the compliance regime of the

    Commission with that of the SEC. The Commission then evaluates the

    final rule in light of the aforementioned Sec. 15(a) public interest

    considerations.\196\

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

    \196\ The discussion of costs and benefits in this section

    should be read in conjunction with the discussion of the effects of

    the rule and the choices made by the Commission in the remainder of

    this preamble, all of which entered into the Commission's

    consideration of costs and benefits in connection with its decision

    to promulgate this rule.

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

    1. Background

    In February 2012, the Commission adopted modifications to the

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

    4.5.\197\ Specifically, the Commission amended Sec. 4.5 to modify the

    exclusion from the definition of ``commodity pool operator'' for those

    entities that are investment companies registered as such with the SEC

    pursuant to the '40 Act.\198\ This modification amended the terms of

    the exclusion available to CPOs of RICs to include only those CPOs of

    RICs that commit no more than a de minimis portion of their assets to

    the trading of commodity interests that do not fall within the

    definition of bona fide hedging and who do not market themselves as a

    commodity pool or other commodity investment.\199\ Pursuant to this

    amendment, any such CPO of a RIC that exceeds this level will no longer

    be excluded from the definition of CPO. Accordingly, except for those

    CPOs of RICs who commit no more than a de minimis portion of their

    assets to the trading of commodity interests that do not fall within

    the definition of bona fide hedging and who do not market themselves as

    a commodity pool or other commodity investment, an operator of a RIC

    that meets the definition of ``commodity pool operator'' under Sec.

    4.10(d) of the Commission's regulations and Sec. 1a(11) of the CEA

    must register as such with the Commission.\200\

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

    \197\ 17 CFR 4.5. See 2012 Final Rule, supra note 6, 77 FR 11252

    (Feb. 24, 2012); correction 77 FR 17328 (March 26, 2012). Prior to

    this Amendment, all RICs, and the principals and employees thereof,

    were excluded from the definition of ``commodity pool operator,'' by

    virtue of the RICs registration under the Investment Company Act of

    1940. The 2012 amendment to Sec. 4.5 maintained this exclusion for

    those RICs that engage in a de minimis amount of non-bona fide

    hedging commodity interest transactions. See id. Specifically, the

    amendment to Sec. 4.5 retained this exclusion for RICs whose non-

    bona fide hedging commodity interest transactions require aggregate

    initial margin and premiums that do not exceed five percent of the

    liquidation value of the qualifying pool's portfolio, or whose non-

    bona fide hedging commodity interest transactions' aggregate net

    notional value does not exceed 100 percent of the liquidation value

    of the pool's portfolio.

    \198\ 15 U.S.C. 80a-1, et seq.

    \199\ 17 CFR 1.3(yy).

    \200\ Pursuant to the terms of Sec. 4.14(a)(4), CPOs are not

    required to register as CTAs if the CPOs' commodity trading advice

    is directed solely to, and for the sole use of, the pool or pools

    for which they are registered as CPOs. 17 CFR 4.14(a)(4).

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

    In promulgating the revisions to Sec. 4.5, the Commission received

    numerous comments that operators of RICs that also would be required to

    register as CPOs would be subject to duplicative, inconsistent, and

    possibly conflicting disclosure and reporting obligations. The

    Commission determined, after consideration of the comments received,

    that further consideration was warranted concerning whether and to what

    extent CPOs of RICs ought to be subject to various part 4 requirements,

    and in the 2012 Final Rule suspended the obligations of CPOs of RICs

    with respect to most of the requirements of part 4 until further

    rulemaking.\201\ Therefore, concurrent with the 2012 Final Rule that

    amended Sec. 4.5, the Commission issued the Proposal which was

    designed to address potentially conflicting or duplicative compliance

    obligations administered by the Commission and the SEC regarding

    disclosure, reporting and recordkeeping by CPOs of RICs.\202\

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

    \201\ See 2012 Final Rule, supra note 6, 77 FR at 11252, 11255.

    The Commission exercised its authority under Sec. 4.12(a), which

    provides that the Commission may exempt any person or class of

    persons from any or all of part 4 requirements if the Commission

    finds that the exemption is not contrary to the public interest or

    the purposes of the provision from which the exemption is sought. 17

    CFR 4.12(a).

    \202\ See, Proposal, supra note 23.

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

    As set forth in the Proposal, the harmonization rulemaking sought

    to address a number of areas identified by commenters, including: the

    timing of the delivery of disclosure documents to prospective

    participants; the signed acknowledgement requirement for receipt of

    disclosure documents; the cycle for updating disclosure documents; the

    timing of financial reporting to participants; the requirement that a

    CPO maintain its books and records on site; the required disclosure of

    fees; the required disclosure of past performance; the inclusion of

    mandatory certification language; and the SEC-permitted use of a

    summary prospectus for open-ended registered investment companies.

    In the Proposal, the Commission considered the costs and benefits

    of harmonizing the Commissions' regimes and requested comment on its

    considerations of costs and benefits, including a description of any

    cost or benefit the Commission had not considered.

    After consideration of the comments received and further

    deliberation, the Commission is adopting rules that effectively

    implement a substituted compliance approach for dually registered CPOs

    of RICs, whereby such CPOs, largely through compliance with obligations

    imposed by the SEC, will be deemed compliant with the Commission's

    regulatory regime. This is consistent with the Commission's conclusion,

    based on the information currently available, that substituted

    compliance is appropriate because it believes that the regime

    administered by the SEC under SEC RIC Rules, with minor additional

    disclosure, should provide market participants with meaningful

    disclosure as required under part 4, enable the Commission to discharge

    its regulatory oversight function with respect to the derivatives

    markets, and ensure that CPOs of RICs maintain appropriate records

    regarding their operations.\203\

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    \203\ As discussed further below, the Commission has determined,

    in light of public comments, to modify certain elements of the

    Proposal. For example, the Commission is adopting a substituted

    compliance regime with respect to providing disclosures to

    prospective participants, whereby, with minor modification, the CPO

    of a RIC can rely upon the disclosures made pursuant to the SEC RIC

    Rules as satisfying its obligations under the Commission's

    regulations. Additionally, CPOs of RICs will satisfy the obligations

    to provide periodic account statements pursuant to Sec. 4.22,

    provided that the RIC's current net asset value per share is

    available to investors, and provided that the RIC furnishes semi-

    annual and annual reports to investors and files periodic reports

    with the SEC as required by the SEC.

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

    [[Page 52328]]

    2. Summary of the Final Rules

    As discussed in greater detail in this section, the Commission

    believes that the rules finalized herein enable the Commission to

    discharge its regulatory oversight function with respect to the

    commodity interest markets and ensure that CPOs of RICs maintain

    appropriate records regarding their operations in a manner that avoids

    imposing unnecessary costs on such entities.

    The final rules represent several significant changes from the

    Proposal. The Commission is allowing CPOs of RICs to elect to comply

    with the majority of the provisions under Sec. Sec. 4.21, 4.22(a) and

    (b), 4.23, 4.24, 4.25 and 4.26 through a system of substituted

    compliance. That is, subject to certain conditions as delineated in

    Sec. 4.12(c)-(d), a CPO of a RIC may be deemed compliant with those

    enumerated portions of the CFTC's regulatory regime through compliance

    with obligations already imposed by the SEC.

    Although the final rule relies primarily on a substituted

    compliance approach, it imposes certain obligations on CPOs of RICs

    beyond what is otherwise required by the federal securities laws and

    SEC rules. These are as follows:

    The CPO of a RIC will be required to file notice of its

    use of the substituted compliance regime outlined in Sec. 4.12 with

    NFA;

    The CPO of a RIC with less than three years operating

    history will be required to disclose the performance of all accounts

    and pools that are managed by the CPO and that have investment

    objectives, policies, and strategies substantially similar to those of

    the offered pool; and

    The CPO of a RIC will be required to file the financial

    statements that it prepares pursuant to its obligations with respect to

    the SEC with NFA and may file notice requesting an extension to align

    the Commission's filing deadline with that of the SEC.

    In addition, the Commission has, after consideration of the issues

    presented in the comment letters, determined to modify three provisions

    of part 4 for all CPOs, including CPOs of RICs. Specifically, the

    Commission is deleting a provisions in Sec. Sec. 4.23 and 4.7(b)(4)

    that require books and records to be kept at the ``main business

    location'' of the CPO. The Commission is updating Sec. Sec. 4.23 and

    4.7(b)(4) to allow all CPOs to use third-party service providers to

    manage their recordkeeping obligations, provided that each CPO electing

    to do so notifies the Commission through NFA as required under amended

    Sec. Sec. 4.23(c) and 4.7(b)(4). The Commission has also determined to

    rescind the signed acknowledgement requirement in Sec. 4.21(b).

    Finally, the Commission has amended Sec. Sec. 4.26(a)(2) and 4.36(b)

    to allow the use of Disclosure Documents for a twelve-month cycle,

    rather than the current nine-month cycle, for both CPOs and CTAs.

    In the following sections, the Commission considers the benefits

    and costs of the final rules, as well as the comments received

    regarding the costs and benefits associated with the Proposal, and

    evaluates the final rules in light of the five factors enumerated in

    Section 15(a)(2) of the CEA.\204\

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    \204\ 7 U.S.C. 19(a)(2).

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

    3. Benefits

    As explained throughout this release, the basic approach the

    Commission has taken to harmonization of disclosure and recordkeeping

    requirements for CPOs of RICs under the securities and commodities laws

    is substituted compliance. With very limited exceptions, a CPO of a RIC

    will satisfy its disclosure and recordkeeping obligations by

    maintaining compliance with applicable securities law requirements and

    SEC regulations. This approach offers benefits over possible

    alternatives, which, though not readily reduced to a dollar amount, the

    Commission believes are significant.

    The Commission will benefit from the information gathered from the

    annual financial statements submitted to NFA. Though the reports filed

    with the SEC are publicly available and could be manually accessed by

    the Commission, the Commission believes that requiring CPOs of RICs to

    file a copy of their annual financial statements with NFA is a more

    efficient and expedient means of gathering required information

    necessary to monitor CPO activity and the markets. By having all CPO

    financial statements in one centralized database, the Commission will

    be better able to quickly and effectively access information about all

    CPOs trading in the markets overseen by the Commission, allowing for a

    faster and better informed response to any concerns that may arise

    regarding the trading of CPOs in derivatives markets. The submission of

    annual financial statements to NFA will also enable the Commission to

    gain a broader understanding of the financial stability and status of

    the RICs that use derivatives markets in a significant way.

    NFA will also benefit from the information submitted by CPOs of

    RICs as part of their annual financial statements. This information

    will assist NFA in allocating its examinations resources more

    effectively through the scheduling of examinations based upon risk

    analysis of the annual financial data.

    The Commission also believes that requiring CPOs of RICs to comply

    either with the full panoply of provisions in part 4 of the

    Commission's regulations or the substituted compliance regime adopted

    in this release will provide the Commission with additional information

    that it needs to monitor participants in markets subject to its

    oversight and enforce both the CEA and the Commission's regulations.

    This ability will not only provide investors with better access to a

    post-incident remedy, but will also act as a deterrent to behavior that

    is violative of the CEA and/or the Commission's regulations, and may

    reduce the frequency with which investors are harmed.

    The Commission also believes that investors in RICs that hold

    commodity interests will benefit from this final rule as well. The

    Commission believes that the disclosure of prior performance for

    similar funds and accounts by CPOs of RICs with less than a three year

    operating history provides valuable information to investors. Pursuant

    to SEC guidance, RICs are currently permitted, but not required, to

    report past performance information for funds and accounts with

    investment objectives, policies, and strategies substantially similar

    to those of the offered RIC in the disclosure required by the SEC,

    therefore, many entities may not be accustomed to reporting such

    information. However, the Commission believes that for funds with less

    than three years of operating history, the disclosure of past

    performance information to potential investors is necessary for a

    comprehensive understanding of the risks of investing in a fund that

    trades above a de minimis amount in commodity interests. Derivative

    markets are highly complex and require specialized knowledge in order

    to manage funds effectively. The Commission continues to believe that

    the presentation of past performance provides investors with important

    information regarding the experience of the adviser of a relatively new

    fund. A prospective investor will, as a result of this requirement, be

    better able to assess the prior performance of other funds the adviser

    has managed. The Commission believes that this additional information

    [[Page 52329]]

    will give prospective investors a more complete sense of the ability of

    the adviser to trade in derivatives markets. For these reasons, the

    Commission is requiring prior performance of a CPO of a RIC with less

    than three years operating history to be disclosed as permitted by SEC

    disclosure regulations and guidance.

    The CPO industry will also benefit from the amendments that the

    Commission has made to provisions applicable to all CPOs. First, the

    Commission removed the requirement in Sec. 4.21 that a CPO receive a

    signed acknowledgement of receipt of a Disclosure Document before

    accepting funds from a new participant. Given the electronic and web-

    based solicitation strategies used by most entities today, the

    Commission believes that that requirement may be outdated, and extended

    the exemption proposed for registered investment companies to include

    all CPOs.

    Second, the Commission removed the requirement in Sec. Sec. 4.23

    and 4.7(b)(4) that all books and records must be maintained at the main

    business office of the CPO. Originally intended to ensure that books

    and records were readily accessible to the Commission, if necessary,

    the Commission believes that this requirement, in the age of electronic

    recordkeeping, may also be outdated. Eliminating that requirement

    should relieve costs for market participants without compromising the

    Commission's regulatory objectives. The notice filing under Sec. 4.23

    allows the Commission to have accurate information on hand should it

    need to access the books and records of any CPO (including CPOs of

    RICs).

    Finally, the Commission has determined to finalize the proposed

    amendments regarding the cycle for updating Disclosure Documents,

    outlined in Sec. 4.26 for CPOs and Sec. 4.36 for CTAs, to allow for a

    twelve-month cycle instead of the current nine-month cycle. In the

    Commission's opinion, the additional operational and cost efficiencies

    gained by these amendments justify the three-month delay for investors

    in receiving updated disclosure information. The Commission believes

    that the information provided in the Disclosure Document will be

    sufficiently timely for pool participants to make informed investment

    decisions. At the same time, the extended cycle allows Disclosure

    Document reporting to align with annual financial statement reporting.

    Further, with a nine-month cycle, a CPO or CTA would need to file and

    distribute two Disclosure Documents in the same calendar year

    approximately once every three years. The Commission believes the

    changes finalized within Sec. 4.26 and Sec. 4.36 eliminate the need

    to file more than one Disclosure Document in any given year, reducing

    the costs on CPOs and CTAs.

    Overall, the Commission believes the final regulations will benefit

    CPOs of RICs by permitting these entities to rely on the filings made

    with the SEC to comply with many Commission regulations. Further, the

    Commission believes that all CPOs and CTAs will benefit from the

    amendments to requirements under Sec. Sec. 4.7(b)(4), 4.21, 4.23,

    4.26(b), and 4.36(b). The Commission also believes that the final

    regulations provide the public with additional information that is

    vital to informed participation in derivative markets through

    investment in RICs. Because many participants in RICs are retail

    participants, the Commission believes that participants in RICs should

    be given additional information to help gauge the risks associated with

    derivatives trading and relevant past performance information in order

    for them to make better informed decisions. As at least one commenter

    remarked, these vehicles are important investment vehicles for many

    retirement plans, college savings plans, and other investment goals.

    The Commission believes that the final rules provide flexibility and

    cost-efficiency for dual registrants at the same time that the rules

    increase the ability for investors to participate in these vehicles in

    a more informed and responsible manner. As such, the Commission

    believes the final rules achieve the goal enumerated in the Proposal:

    to mitigate the costs associated with compliance without compromising

    the effectiveness of the Commission's regulatory regime.

    4. Costs

    i. Costs Associated With Substituted Compliance

    In this final rule, the Commission has determined to adopt a

    substituted compliance regime for CPOs of RICs. The Commission is

    adopting a compliance regime for CPOs of RICs largely premised upon

    such entities' adherence to the compliance obligations under SEC RIC

    Rules, whereby the Commission will accept compliance by such entities

    with the disclosure, reporting, and recordkeeping regime administered

    by the SEC as substituted compliance with part 4 of the Commission's

    regulations. The Commission has concluded that this is appropriate

    because it believes that general reliance upon the SEC's compliance

    regime, with minor additional disclosure, should provide market

    participants and the general public with meaningful disclosure,

    including for example, with regard to risks and fees, provide the

    Commission with information necessary to its oversight of CPOs, and

    ensure that CPOs of RICs maintain appropriate records regarding their

    operations. As noted, in the event that the operator of the RIC fails

    to comply with the SEC administered regime, the operator of the RIC

    will be in violation of its obligations under part 4 of the

    Commission's regulations and subject to enforcement action by the

    Commission.

    The substituted compliance regime adopted by the Commission in

    these final rules provides that a CPO of a RIC will be deemed compliant

    with Sec. Sec. 4.21, 4.22(a) and (b), 4.23, 4.24, 4.25, and 4.26 under

    the amendments to Sec. 4.12, provided that the CPO comply with all

    applicable SEC RIC Rules.

    Section 4.12 also provides that an entity must file a notice with

    the NFA to take advantage of the Commission's substituted compliance

    program for CPOs of RICs. The notice is effective upon submission and

    must only be filed once per pool. For purposes of calculating costs of

    the final rule, the Commission has estimated that each pool may require

    2 hours to complete the notice and file the notice with NFA at an

    average salary cost of $76.93 per hour.\205\ The Commission further

    estimates that 418 sponsors may be affected, \206\ each with an average

    of 3

    [[Page 52330]]

    pools subject to the notice requirement. On this basis, the Commission

    anticipates a one-time cost per-entity of approximately $500.\207\

    Across all affected entities, the Commission estimates a total one-time

    cost of approximately $192,900.\208\ The Commission believes that this

    is the extent of the costs associated with the substituted compliance

    regime.

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

    \205\ The Commission staff's estimates concerning the wage rates

    are based on 2011 salary information for the securities industry

    compiled by the Securities Industry and Financial Markets

    Association (``SIFMA''). The $76.93 per hour is derived from figures

    from a weighted average of salaries across different professions

    from the SIFMA Report on Management & Professional Earnings in the

    Securities Industry 2011, modified to account for an 1800-hour work-

    year, adjusted to account for the average rate of inflation in 2012,

    and multiplied by 1.3 to account for overhead and other benefits.

    The Commission anticipates that compliance with the part 4

    provisions would require the work of an information technology

    professional (to provide necessary information); a compliance

    manager (to determine whether or not an entity is eligible for an

    exemption in accordance with the Commission's regulations); and an

    associate general counsel (to prepare notices of exemption). Thus,

    the wage rate is a weighted national average of salary for

    professionals with the following titles (and their relative weight);

    ``programmer (senior)'' (30% weight), ``compliance manager'' (45%),

    and ``assistant/associate general counsel'' (25%). The Commission

    uses this wage estimate in estimating costs for provisions that were

    not included in commenters' assessments of costs and benefits; for

    provisions that were included in the commenters' assessments of

    costs and benefits, the Commission utilizes the estimates provided

    by the commenters. All estimates have been rounded to the nearest

    hundred dollars.

    \206\ There currently is no source of reliable information

    regarding the general use of derivatives by registered investment

    companies. Because of this lack of information, in the Proposal, the

    Commission derived the estimated entities affected and the number of

    burden hours associated with this proposal through the use of

    statistical analysis.

    The Commission estimated that 1,266 pools would require 418

    entities to register as CPOs due to the amendments to Sec. 4.5. To

    determine the average number of pools per entity, the Commission

    divided the estimated number of pools by the estimated number of

    entities to arrive at about 3 pools per entity. The methodology used

    to determine this estimate is fully explained supra in this release.

    The Commission understands from NFA that as of February 1, 2013,

    there were six new registered CPOs and five CPOs whose registration

    pre-dates the amendments to Sec. 4.5 that have compliance

    obligations for 149 RICs that are commodity pools. Due to

    limitations on this data arising from other actions taken by the

    Commission or divisions thereof, the Commission does not believe

    that the data is sufficiently finalized to use as the basis for its

    PRA or cost benefit calculations. Therefore, the Commission has

    determined to use the numbers derived through the methodology used

    in the Proposal. Notwithstanding the limitations in the data to

    date, the Commission believes that these numbers are useful in

    considering the likely impact on the final rule on industry.

    \207\ The Commission calculates this amount as follows: (3 pools

    per sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.

    \208\ The Commission calculates this amount as follows: ($461.58

    per sponsor) x (418 sponsors) = $192,940.44.

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

    The Commission received many comments regarding the costs of the

    Proposal.\209\ Generally, commenters expressed concern about the cost

    imposed by the Proposal with respect to the compliance obligations of

    RICs and the Commission's consideration thereof.\210\ Specifically,

    commenters stated that RICs were already subject to extensive

    regulation, and that additional compliance obligations required of CPOs

    under part 4 of the Commission's regulations may conflict with, or

    potentially be duplicative of, requirements under the SEC RIC

    Rules.\211\ Commenters further cited specific market problems that may

    occur as a result of the rule, including reduced liquidity and

    potential price impacts should funds determine to reduce their

    positions in derivatives in order to avoid additional compliance

    obligations.\212\ Commenters also stated that RIC shareholders would

    bear many of the costs of these rules in several ways, including but

    not limited to, higher fees and lower returns.\213\

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

    \209\ The Commission also received several comments regarding

    the costs of the amendments to Sec. 4.5 that were finalized in the

    February Final Rule and asserting that the Commission should not

    have considered the costs of compliance separately from those of

    registration. See, SIFMA AMG Letter, Dechert Letter, ICI Letter,

    Invesco Letter. The Commission notes that it considered those costs

    related to the registration of CPOs of RICs under Sec. 4.5 in the

    rules adopting such amendments and such comments are outside the

    scope of this rulemaking.

    \210\ See, ICI Letter; Dechert Letter; Katten Letter; NYCBA

    Letter; ABA Letter; Fidelity Letter; AII letter; Invesco Letter;

    SIFMA AMG Letter; AXA Letter.

    \211\ See, e.g., ICI Letter; SIFMA AMG Letter.

    \212\ Katten Letter; Dechert Letter; Fidelity Letter; NYCBA

    Letter.

    \213\ ABA Letter; Dechert Letter; Invesco Letter; Katten Letter;

    SIFMA AMG Letter; AXA Letter: AII Letter.

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

    In adopting a broad substituted compliance regime wherein CPOs of

    RICs will be deemed compliant with Sec. Sec. 4.21, 4.22(a) and (b),

    4.23, 4.24, 4.25, and 4.26 under the amendments to Sec. 4.12, provided

    that the CPO comply with all SEC RIC Rules, the Commission expects that

    it has reduced or eliminated any impetus for RICs to reduce their

    positions in markets overseen by the Commission and subsequently any

    negative impact on market quality indicators. The Commission also

    believes it has greatly reduced, and in many cases eliminated, the

    costs CPOs of RICs face, which could be passed through to investors in

    such RICs.

    The Commission also received comments from ICI and Invesco

    regarding the costs associated with discrete provisions in part 4 that

    would have been imposed under the Proposal.\214\ These letters

    enumerated specific costs associated with three general areas addressed

    in the Proposal: (1) General disclosure requirements under Sec. 4.24;

    (2) performance disclosure requirements under Sec. 4.25; and (3)

    financial reporting requirements under Sec. 4.22(a) and (b).\215\ ICI

    also provided estimated costs associated with revising registration

    statements to include CFTC-required disclosures under the Proposal and

    costs associated with filing prospectuses with NFA.\216\

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

    \214\ See, ICI Letter; Invesco Letter. The Commission believes

    that the industry survey conducted by ICI provides useful insight

    about potential costs associated with various part 4 requirements,

    and as described further therein, has used the results in its

    consideration of costs associated with the final rules.

    \215\ ICI Letter. ICI reported that of the 42 advisers who

    responded to their survey, 33 advisers representing 551 funds with

    total net assets of $773 billion anticipated having to register

    under the newly amended Sec. 4.5. ICI rounded all of its aggregate

    cost estimates to the nearest $100.

    ICI calculated the initial costs of prior performance disclosure

    required for all funds under Sec. 4.25 as follows: (18 hours per

    fund for initial compliance) x ($227 per initial compliance hour) =

    $4,086 per fund. ICI also calculated the ongoing costs of prior

    performance disclosure required for all funds under Sec. 4.25 as

    follows: (9.5 hours per fund for ongoing compliance) x ($225 per

    ongoing compliance hour) = $2,137.50 per fund.

    ICI calculated the aggregate initial costs for the surveyed

    funds as follows: ($4,086 initial cost per fund) x (551 surveyed

    funds) = $2,251,400. ICI also calculated the aggregate ongoing costs

    for the surveyed funds as follows: ($2,137.50 ongoing costs per

    fund) x (551 surveyed funds) = $1,177,800.

    With respect to the preparation of account statements under

    Sec. 4.22(a) and (b), ICI calculated a one-time cost associated

    with the separate calculation of brokerage commissions as follows:

    (42 hours per fund) x ($171 per hour) = $ 7,182 per fund. ICI

    calculated the aggregate costs associated with brokerage commissions

    for all surveyed funds as follows: ($7,182 cost per fund) x (551

    surveyed funds) = $3,957,300.

    ICI calculated the costs for each fund associated with preparing

    and distributing account statements per Sec. 4.22(a) and (b) as

    follows: (5.75 hours per fund) x ($122.40 average cost per hour) =

    $703.84 per fund per statement. ICI calculated that the aggregate

    costs associated with the preparation and distribution of account

    statements for all surveyed funds as follows: ($703.84 costs per

    fund) x (551 surveyed funds) x (12 monthly statements) = $4,653,800.

    In total, for all Sec. 4.24 provisions, ICI estimated the 551

    responsive funds would incur a cost of $5.8 million initially and

    $2.4 million annually. This was derived from hour and cost estimates

    for 5 different categories of disclosure that ICI developed from its

    survey data. For the industry as a whole, ICI estimated that these

    costs could be as high as $13.3 million initially and $5.5 million

    on an ongoing annual basis.

    \216\ ICI Letter. ICI calculated a one-time cost associated with

    the revision of prospectuses for all surveyed funds as follows: (15

    hours per fund) x ($215 per hour) x (551 surveyed funds) =

    $1,777,000 to revise their prospectuses. ICI also calculated the

    initial cost of filing prospectuses with NFA as follows: (29.5 hours

    per fund) x ($199 per hour) = $5,870.50 per fund. ICI calculated the

    aggregate initial cost for the surveyed funds as follows: ($5,870.50

    cost per fund) x (551 surveyed funds) = $3,234,600. ICI calculated

    the ongoing cost of filing prospectuses with NFA per fund as

    follows: (15.5 hours per fund) x ($195 per hour) = $3,022.50 per

    fund. ICI calculated the aggregate ongoing cost for all surveyed

    funds as follows: (551 surveyed funds) x ($3,022.50 cost per fund) =

    $1,665,400.

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

    The final rules provide in Sec. 4.12(c) that CPOs of RICs may take

    advantage of the Commission's substituted compliance provisions for all

    requirements under Sec. Sec. 4.24, 4.25, and 4.22(a) and (b). The

    final rules do not require the disclosures contemplated under the

    Proposal nor do they require CPOs of RICs to file Disclosure Documents

    with NFA for review. Because the Commission anticipates that all CPOs

    of RICs will take advantage of the substituted compliance program to

    avoid any additional cost, the Commission estimates that none of the

    costs identified by commenters that are associated with complying with

    Sec. Sec. 4.24, 4.25, and 4.22(a) and (b) will be incurred by CPOs of

    RICs.

    ICI, as well as other commenters, also identified the following

    additional costs of the Proposal: (1) Costs to registrants if, because

    of complications associated with a different review process and/or more

    than one reviewing entity, their

    [[Page 52331]]

    Disclosure Documents are not approved in a timely fashion and the RIC

    must temporarily stop issuing shares; \217\ (2) costs associated with

    seeking relief from the SEC, CFTC, or NFA to comply with CFTC

    disclosure and reporting regulations, where conflicts exist; \218\ (3)

    costs to the CFTC, SEC, and NFA of reviewing the additional filings,

    including the potential for multiple reviews of each filing in the

    early stages, as registrants seek to develop disclosures that are

    acceptable to all regulators; (4) likely significant investor confusion

    due to inconsistent and at times inapplicable disclosures; \219\ and

    (5) costs associated with undoing decades of effort by the SEC to

    develop its fund disclosure regime for RICs.\220\ Commenters also

    raised concerns about the costs associated with modifications to their

    internal compliance controls and additional systems that may be

    necessary to comply with the provisions of the Proposal.\221\

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

    \217\ ICI Letter. See also, Katten Letter; ABA Letter; AXA

    Letter; NYCBA Letter.

    \218\ ICI Letter. See also, Dechert Letter; IAA Letter; Fidelity

    Letter; SIFMA AMG Letter; ABA Letter; Katten Letter; AXA Letter;

    NYCBA Letter.

    \219\ ICI Letter. See, MFA Letter.

    \220\ ICI Letter. See, AXA Letter.

    \221\ NYCBA Letter; Dechert Letter; AXA Letter; ABA Letter;

    SIFMA AMG Letter.

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

    Additionally, one commenter stated that the legal conflicts and

    operational costs that would result from the application of the

    Proposal to CPOs of RICs would be substantial.\222\ According to that

    commenter, many RICs belong to large fund families that may include

    dozens, if not hundreds, of funds.\223\ This commenter further stated

    that significant economies of scale exist with respect to compliance

    with SEC regulations, because the advisers to these fund families are

    able to operate multiple funds on similar timetables and comply with

    similar filing and disclosure requirements.\224\ The commenter

    contended that complying with the CFTC rules as described in the

    Proposal would not only impose significant new costs on the RICs that

    are subject to such rules, but also impede the ability of advisers to

    efficiently manage other funds that are not subject to CFTC

    requirements.\225\

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

    \222\ SIFMA AMG Letter.

    \223\ Id.

    \224\ Id.

    \225\ Id.

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

    The Commission does not anticipate these qualitative concerns to be

    applicable as a result of the substituted compliance regime provided in

    the final rules. Registrants will not be required to submit to multiple

    review processes, eliminating the costs associated with (1)-(3) above.

    The items that will be required of CPOs of RICs in addition to what is

    required by the SEC, which are discussed infra, will be disclosed in

    accordance with SEC regulations, which are familiar to investors and

    should largely eliminate any costs associated with (4) and (5) above.

    Moreover, because the Commission has adopted in these final rules a

    substituted compliance regime wherein CPOs of RICs will be deemed

    compliant with Sec. Sec. 4.21, 4.22(a) and (b), 4.23, 4.24, 4.25, and

    4.26 under the amendments to Sec. 4.12, provided that the CPO comply

    with all SEC RIC Rules, the Commission does not believe that

    significant modifications to CPOs of RICs' compliance and disclosure

    infrastructures will be necessary.

    ii. Costs Associated With Certain Additional Requirements for CPOs of

    RICs and Other Amendments

    Although the final rule largely adopts a substituted compliance

    approach, the Commission acknowledges that there will be some costs

    associated with the final rule that will be borne by dually registered

    entities. In particular, CPOs of RICs with less than a three-year

    operating history will also have to provide disclosure regarding the

    past performance of all accounts and pools that are managed by the CPO

    and that have investment objectives, policies, and strategies

    substantially similar to those of the offered pool in accordance with

    SEC regulations and guidance. Additionally, CPOs of RICs will still be

    subject to Sec. 4.22(c) and (d), requiring the CPO of a RIC to submit

    to NFA a copy of the annual financial statements the RIC provides to

    the SEC. Finally, all CPOs that use a third-party provider to maintain

    books and records are required to submit a notice with NFA with the

    name of the third-party provider, among other details, to ensure that

    the Commission has full access to the books and records of the CPO.

    The Commission anticipates that CPOs of RICs will incur costs to

    disclose past performance information for substantially similar funds

    and accounts, if the fund has been in operation for less than three

    years. The ICI, in its estimates of costs and benefits, estimated that

    costs associated with prior performance disclosure for funds with less

    than a three year operating history would amount to 34 hours per fund

    at $265 per hour initially, and 25.5 hours per fund at $233 per hour

    each year in ongoing compliance requirements.\226\ The ICI's estimates

    are based on the requirement in the Proposal to include past

    performance information for all other funds operated by the sponsor of

    the fund with less than a three year operating history. As noted above,

    the Commission has altered this provision to require disclosure of only

    those pools and accounts that are managed by the CPO and that have

    investment objectives, policies, and strategies substantially similar

    to those of the offered pool with less than a three year operating

    history. In so doing, the Commission has significantly reduced the

    requirements regarding past performance disclosure. As such, the

    Commission believes it can reasonably reduce the number of hours

    required both initially and in ongoing compliance. The Commission

    anticipates initial and ongoing cost of approximately 15 hours per

    fund. The Commission anticipates that 368 sponsors will need to provide

    additional past performance disclosure for an average of 1 fund per

    sponsor at 15 hours per fund.\227\ Using ICI's hourly cost estimates,

    described above, the Commission estimates an initial annual cost of

    $4,000 per entity \228\ and an ongoing annual cost of $3,500 per

    entity.\229\ Across all affected entities, the Commission estimates an

    initial annual cost of $1,462,800 \230\ and an ongoing annual cost of

    $1,286,200.\231\

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

    \226\ ICI Letter.

    \227\ Based on information provided by the ICI in its comment

    letter, of the 551 surveyed funds that would trigger registration of

    their advisor, 159 of those funds had less than three years

    operating history. This constitutes approximately 30 percent of the

    surveyed funds that would not be excluded under Sec. 4.5. The funds

    were operated by 29 of the 33 sponsors that expected to register,

    which constitutes 88 percent of the surveyed sponsors expecting to

    register. Applying these percentages to the Commission's estimated

    number of 1,266 pools and 418 sponsors, the Commission expects

    approximately 368 pool operators to be subject to the disclosure

    requirements for substantially similar accounts and funds with

    respect to 380 pools. With respect to the estimated hours required

    to prepare the past performance disclosure, the Commission has made

    an informed estimate premised upon the information provided by ICI

    and that it believes reflects the reduced disclosure obligations

    under the final rule as compared to the Proposal.

    \228\ The Commission calculates the amount as follows: (1 RIC

    per CPO) x (15 hours per RIC) x ($265 initial costs per hour) =

    $3,975.

    \229\ The Commission calculates the amount as follows: (1 RIC

    per CPO) x (15 hours per RIC) x ($233 ongoing costs per hour) =

    $3,495.

    \230\ The Commission calculates the amount as follows: ($3,975

    estimated initial cost per CPO) x (368 estimated number of CPOs of

    RICs with less than 3 years performance) = $1,462,800.

    \231\ The Commission calculates the amount as follows: ($3,495

    estimated ongoing cost per CPO) x (368 estimated number of CPOs of

    RICs with less than 3 years performance) = $1,286,160. This ongoing

    cost estimate assumes that all RICs with less than three years

    performance are newly formed and have no performance history. Many

    RICs subject to the disclosure requirement, however, may have

    operated for one or two years and thus incur a lower total cost. The

    Commission's estimate therefore may overstate the actual costs that

    past performance disclosure entails.

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

    [[Page 52332]]

    The Commission also anticipates that CPOs of registered investment

    companies will incur small costs for each fund due to the requirement

    that the CPO of each registered investment company must submit a copy

    of the fund's annual financial statements to the Commission via

    NFA.\232\ The Commission anticipates that the cost to submit each

    fund's financial statements to be relatively small because the

    Commission is requiring only a copy of the statements required to be

    submitted to the SEC under the SEC RIC Rules to be submitted to NFA.

    The Commission anticipates that the additional requirement imposed by

    the rule in Sec. 4.22 necessitates only addressing any potential

    formatting changes--i.e. making sure the document is in PDF form as

    required by NFA--and uploading the document via NFA's Easy File system

    (to which advisers should already have access by virtue of their

    registration). Thus, the Commission anticipates that CPOs of RICs will

    require no more than 2 hours per fund to comply with Sec. 4.22. The

    Commission estimates that each CPO has an average of 3 RICs. Thus, at a

    rate of $76.93 per hour,\233\ the Commission estimates an initial cost

    of approximately $500 \234\ and an annual ongoing cost of approximately

    $500.\235\ As described in the PRA section of this release, the

    Commission estimates that approximately 418 sponsors will register as a

    result of the amendments to Sec. 4.5.\236\ Using this figure, the

    Commission anticipates a total initial cost of $192,900 \237\ and an

    annual total ongoing cost of $192,900.\238\ The Commission believes

    this to be a conservative estimate, allowing for the maximum amount of

    time necessary to upload the fund's financial statements and submit

    them to NFA.

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

    \232\ The Commission notes that all CPOs are required to submit

    an annual report to NFA. Though the reports filed with the SEC are

    public domain could be manually accessed by the Commission, the

    Commission believes that requiring a copy of said reports to be

    filed with NFA is a more efficient and expedient means of gathering

    required information. By having all CPO financial statements in one

    centralized database, the Commission will be better able to quickly

    and effectively access information about all CPOs trading in the

    markets overseen by the Commission, allowing for a faster and better

    informed response to any concerns that may arise regarding the

    trading of CPOs in derivatives markets.

    \233\ See, supra note 205.

    \234\ The Commission calculates the amount as follows: (6 hours

    per entity) x ($76.93 average salary cost per hour) = $461.58.

    \235\ The Commission calculates this amount as follows: (6 hours

    per entity) x ($76.93 average salary cost per hour) = $461.58.

    \236\ See supra note 206.

    \237\ The Commission calculates this amount as follows: ($461.58

    estimated initial cost per CPO) x (418 estimated number of CPOs of

    RICs) = $192,940.44.

    \238\ The Commission calculates this amount as follows: ($461.58

    estimated ongoing cost per CPO) x (418 estimated number of CPOs of

    RICs) = $192,940.44.

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

    Finally, the Commission anticipates a small burden to be incurred

    by all CPOs, including registered investment companies required to be

    registered as CPOs under Sec. 4.5, that wish to keep their books and

    records with a third-party service provider. Under Sec. Sec. 4.23 and

    4.7(b)(4), such entities must file a notice with NFA to inform the

    Commission and NFA of the entity's intent to utilize a third-party

    service provider as well as the name and contact information of the

    third party. Because the Commission cannot be sure how many CPOs will

    use third-party service providers, the Commission estimates that all

    CPOs will take advantage of the amendments to the record-keeping

    requirements under Sec. 4.23 and Sec. 4.7.\239\ The Commission

    estimates that CPOs, including registered investment companies, will

    incur a one-time per-entity cost of $200.\240\ The Commission

    anticipates that most CPOs will take advantage of this provision, and

    thus estimates a one-time estimated cost of $627,700 for all CPOs.\241\

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

    \239\ The Commission has previously estimated that each CPO that

    subject to Sec. 4.23 had costs associated with approximately 50

    hours associated with recordkeeping obligations and that each CPO

    subject to Sec. 4.7(b)(4) had costs associated with approximately

    40 hours associated with recordkeeping obligations. Because the

    Commission is estimating that all registered CPOs will use third-

    party service providers for recordkeeping purposes, the Commission

    expects that costs associated with Sec. Sec. 4.7(b)(4) and 4.23

    will be reduced, although the reduction cannot be quantified at this

    time.

    \240\ The Commission calculates this amount as follows: (2

    estimated hours per notice) x ($76.93 estimated cost per hour) =

    $153.86.

    \241\ The Commission calculates this amount as follows: ($153.86

    estimated cost per notice) x (4,080 estimated total number of

    registered CPOs) = $627,748.80.

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

    The Commission expects that all dually-registered entities will

    take advantage of the substituted compliance regime available under the

    final regulations. The Commission thus expects that the total initial

    costs associated with the final rules will be $5,100 per entity \242\

    and $2,476,400 in the aggregate.\243\ Likewise, the Commission expects

    annual ongoing costs associated with the final rules to be $4,000 per

    entity \244\ and $1,479,100 in the aggregate.\245\

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

    \242\ The Commission calculates the per-entity initial cost by

    summing the per-entity initial costs of the provisions described

    supra. Estimates may not sum to total due to rounding effects.

    Notice of Substituted Compliance, Sec. 4.12 = (3 pools per

    sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.

    Inclusion of Past Performance, Sec. 4.25 = (1 pool per sponsor)

    x (15 hours per pool) x ($265 per hour) = $3,975.00.

    Submission of Annual Report, Sec. 4.22(c) = (3 pools per

    sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.

    Notice of Third Party Record-keeper, Sec. Sec. 4.23, 4.7(b)(4)

    = (2 hours per sponsor) x ($76.93 per hour) = $153.86.

    Total per-entity initial cost = ($461.58) + ($3,975.00) +

    ($461.58) + ($115.40) + ($153.86) = $5,061.02.

    See supra notes 207, 228, 234, and 240.

    \243\ The Commission calculates the aggregate initial cost by

    summing the aggregate initial costs of the provisions described

    supra. Estimates may not sum to total due to rounding effects.

    Notice of Substituted Compliance, Sec. 4.12 = (461.58 per

    sponsor) x (418 sponsors) = $192,940.44.

    Inclusion of Past Performance, Sec. 4.25 = ($3,975.00 per

    sponsor) x (368 sponsors) = $1,462,800.00.

    Submission of Annual Report, Sec. 4.22(c) = ($461.58 per

    sponsor) x (418 sponsors) = $192,940.44.

    Notice of Third Party Record-keeper, Sec. Sec. 4.23, 4.7(b)(4)

    = ($153.86 per operator) x (4,080 operators) = $627,748.80.

    Total aggregate initial cost = ($192,940.44) + ($1,462,800.00) +

    ($192,940.44) + ($48,235.11) + ($627,748.80) = $2,476,429.68.

    See supra notes 208, 229, 237, and 241.

    \244\ The Commission calculates the per-entity ongoing cost by

    summing the per-entity ongoing costs of the provisions described

    supra. Estimates may not sum to total due to rounding effects.

    Inclusion of Past Performance, Sec. 4.25 = (1 pool per sponsor)

    x (15 hours per pool) x ($233 per hour) = $3,475.00.

    Submission of Annual Report, Sec. 4.22(c) = (3 pools per

    sponsor) x (2 hours per pool) x ($76.93 per hour) = $461.58.

    Total per-entity ongoing cost = ($3,475.00) + ($461.58) =

    $3956.55.

    See supra notes 235 and 238.

    \245\ The Commission calculates the aggregate ongoing cost by

    summing the aggregate ongoing costs of the provisions described

    supra. Estimates may not sum to total due to rounding effects.

    Inclusion of Past Performance, Sec. 4.25 = ($3,475.00 per

    sponsor) x (368 sponsors) = $1,286,160.00.

    Submission of Annual Report, Sec. 4.22(c) = ($461.58 per

    sponsor) x (418 sponsors) = $192,940.44.

    Total aggregate ongoing cost = ($1,286,160.00) + ($192,940.44) =

    $1,479,100.44.

    See supra notes 235 and 242.

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

    b. Section 15(a) Considerations

    Section 15(a) of the CEA requires the Commission to consider the

    effects of its actions in light of the following five factors:

    1. Protection of Market Participants and the Public

    The Commission believes the rules promulgated in this release

    protect market participants by mitigating the costs associated with

    compliance. The rules maintain the effectiveness of the consumer

    protections of the

    [[Page 52333]]

    Commission's regulatory regime while reducing costs for dually-

    registered entities. Though some costs are anticipated as a result of

    the final rules in order to provide additional information beyond that

    required by the SEC, the Commission believes such costs are necessary

    because the information the Commission is requiring of CPOs of RICs

    should provide additional insight for potential investors in deciding

    whether to invest in a fund that commits more than a de minimis portion

    of its assets to derivative trading.

    In addition, the Commission believes the final rules provide a

    benefit to all CPOs by updating and modernizing certain provisions that

    may be outdated in the electronic age. CPOs will not be required to

    incur costs to comply with regulations that, in the absence of

    information to the contrary and in light of the Commission's current

    understanding, may not be necessary to ensure the effectiveness of the

    Commission's regulatory regime.

    Furthermore, by lessening the regulatory costs RICs face,

    shareholders of these vehicles should not see much of an increase in

    fees or a decrease in returns, protecting the viability of these

    vehicles that are utilized by millions of families for their investment

    needs.

    2. Efficiency, Competitiveness, and Financial Integrity of Markets

    In light of the fact that these harmonizing regulations will not

    pose significant costs on CPOs of RICs, the Commission does not believe

    that these regulations will have a negative impact on the efficiency,

    competitiveness, or financial integrity of markets.

    3. Price Discovery

    The Commission has not identified a specific effect on price

    discovery as a result of these harmonizing regulations.

    4. Sound Risk Management

    The Commission has not identified a specific effect on sound risk

    management as a result of these harmonizing regulations.

    5. Other Public Interest Considerations

    The Commission has not identified other public interest

    considerations related to the costs and benefits of these harmonizing

    regulations.

    List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Consumer protection, Reporting and

    recordkeeping requirements.

    Accordingly, CFTC amends 17 CFR part 4 as follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    0

    1. Revise the authority citation for part 4 to read as follows:

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

    and 23.

    0

    2. In Sec. 4.7, revise paragraph (b)(4) and add paragraph (b)(5) 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.

    * * * * *

    (b) * * *

    (4) Recordkeeping relief. Exemption from the specific requirements

    of Sec. 4,23; Provided, That the commodity pool operator must maintain

    the reports referred to in paragraphs (b)(2) and (3) of this section

    and all books and records prepared in connection with his activities as

    the pool operator of the exempt pool (including, without limitation,

    records relating to the qualifications of qualified eligible persons

    and substantiating any performance representations). Books and records

    that are not maintained at the pool operator's main business office

    shall be maintained by one or more of the following: the pool's

    administrator, distributor or custodian, or a bank or registered broker

    or dealer acting in a similar capacity with respect to the pool. Such

    books and records must be made available to any representative of the

    Commission, the National Futures Association and the United States

    Department of Justice in accordance with the provisions of Sec. 1.31.

    (5) If the pool operator does not maintain its books and records at

    its main business office, the pool operator shall:

    (i) At the time it registers with the Commission or delegates its

    recordkeeping obligations, whichever is later, file a statement that:

    (A) Identifies the name, main business address, and main business

    telephone number of the person(s) who will be keeping required books

    and records in lieu of the pool operator;

    (B) Sets forth the name and telephone number of a contact for each

    person who will be keeping required books and records in lieu of the

    pool operator;

    (C) Specifies, by reference to the respective paragraph of this

    section, the books and records that such person will be keeping; and

    (D) Contains representations from the pool operator that:

    (1) It will promptly amend the statement if the contact information

    or location of any of the books and records required to be kept by this

    section changes, by identifying in such amendment the new location and

    any other information that has changed;

    (2) It remains responsible for ensuring that all books and records

    required by this section are kept in accordance with Sec. 1.31;

    (3) Within 48 hours after a request by a representative of the

    Commission, it will obtain the original books and records from the

    location at which they are maintained, and provide them for inspection

    at the pool operator's main business office; Provided, however, that if

    the original books and records are permitted to be, and are maintained,

    at a location outside the United States, its territories or

    possessions, the pool operator will obtain and provide such original

    books and records for inspection at the pool operator's main business

    office within 72 hours of such a request; and

    (4) It will disclose in the pool's Disclosure Document the location

    of its books and records that are required under this section.

    (ii) The pool operator shall also file electronically with the

    National Futures Association a statement from each person who will be

    keeping required books and records in lieu of the pool operator wherein

    such person:

    (A) Acknowledges that the pool operator intends that the person

    keep and maintain required pool books and records;

    (B) Agrees to keep and maintain such records required in accordance

    with Sec. 1.31 of this chapter; and

    (C) Agrees to keep such required books and records open to

    inspection by any representative of the Commission, the National

    Futures Association, or the United States Department of Justice in

    accordance with Sec. 1.31 of this chapter.

    0

    3. In Sec. 4.12

    0

    a. Revise paragraphs (c)(1) and (2) introductory text;

    0

    b. Remove paragraph (c)(2)(iii);

    0

    c. Add paragraph (c)(3); and

    0

    d. Revise paragraphs (d)(1)(iii) and (iv).

    The revisions and addition read as follows:

    Sec. 4.12 Exemption from provisions of part 4.

    * * * * *

    (c) Exemption from Subpart B for certain commodity pool operators

    based on registration under the Securities Act of 1933 or the

    Investment Company Act

    [[Page 52334]]

    of 1940. (1) Eligibility. Subject to compliance with the provisions of

    paragraph (d) of this section, any person who is registered as a

    commodity pool operator, or has applied for such registration, may

    claim any or all of the relief available under paragraph (c)(2) of this

    section if, with respect to the pool for which it makes such claim:

    (i) The units of participation will be offered and sold pursuant to

    an effective registration statement under the Securities Act of 1933;

    or

    (ii) The pool is registered under the Investment Company Act of

    1940.

    (2) Relief available to pool operator claiming relief under

    paragraph (c)(1)(i). The commodity pool operator of a pool whose units

    of participation meet the criteria of paragraph (c)(1)(i) if this

    section may claim the following relief:

    * * * * *

    (3) Relief available to pool operator claiming relief under

    paragraph (c)(1)(ii). The commodity pool operator of a pool whose units

    of participation meet the criteria of paragraph (c)(1)(ii) of this

    section may claim the following relief:

    (i) The pool operator of an offered pool will be exempt from the

    requirements of Sec. Sec. 4.21, 4.24, 4.25, and 4.26; Provided, that

    (A) The pool operator of an offered pool with less than a three-

    year operating history discloses the performance of all accounts and

    pools that are managed by the pool operator and that have investment

    objectives, policies, and strategies substantially similar to those of

    the offered pool; and,

    (B) The disclosure provided with respect to the offered pool

    complies with the provisions of the Investment Company Act of 1940, the

    Securities Act of 1933, the Securities Exchange Act of 1934, the

    regulations promulgated thereunder, and any guidance issued by the

    Securities and Exchange Commission or any division thereof.

    (ii) Exemption from the Account Statement distribution requirement

    of Sec. Sec. 4.22(a) and (b); Provided, however, that the pool

    operator:

    (A) Causes the current net asset value per share to be available to

    participants;

    (B) Causes the pool to clearly disclose:

    (1) That the information will be readily accessible on an Internet

    Web site maintained by the pool operator or its designee or otherwise

    made available to participants and the means through which the

    information will be made available; and

    (2) The Internet address of such Web site, if applicable; and

    (iii) Exemption from the provisions of Sec. 4.23 that require that

    a pool operator's books and records be made available to participants

    for inspection and/or copying at the request of the participant.

    (d)(1) * * *

    (iii) Contain representations that:

    (A) The pool will be operated in compliance with paragraph

    (b)(1)(i) of this section and the pool operator will comply with the

    requirements of paragraph (b)(1)(ii) of this section;

    (B) The pool will be operated in compliance with paragraph (c)(1)

    of this section and the pool operator will comply with the requirements

    of paragraph (c)(2) of this section; or

    (C) The pool will be operated in compliance with paragraph (c)(1)

    of this section and the pool operator will comply with the requirements

    of paragraph (c)(3) of this section;

    (iv) Specify the relief sought under paragraph (b)(2), (c)(2), or

    (c)(3) of this section, as the case may be;

    * * * * *

    0

    4. Add Sec. 4.17 to read as follows:

    Sec. 4.17 Severability.

    If any provision of this part, or the application thereof to any

    person or circumstances, is held invalid, such invalidity shall not

    affect other provisions or application of such provision to other

    persons or circumstances which can be given effect without the invalid

    provision or application.

    Sec. 4.21 [Amended]

    0

    5. Amend Sec. 4.21 by removing and reserving paragraph (b).

    0

    6. Amend Sec. 4.23 by revising the introductory text and paragraph

    (a)(4) and adding paragraph (c) to read as follows:

    Sec. 4.23 Recordkeeping.

    Each commodity pool operator registered or required to be

    registered under the Act must make and keep the following books and

    records in an accurate, current and orderly manner. Books and records

    that are not maintained at the pool operator's main business office

    shall be maintained by one or more of the following: the pool's

    administrator, distributor or custodian, or a bank or registered broker

    or dealer acting in a similar capacity with respect to the pool. All

    books and records shall be maintained in accordance with Sec. 1.31.

    All books and records required by this section except those required by

    paragraphs (a)(3), (a)(4), (b)(1), (b)(2) and (b)(3) must be made

    available to participants for inspection and copying during normal

    business hours. Upon request, copies must be sent by mail to any

    participant within five business days if reasonable reproduction and

    distribution costs are paid by the pool participant. If the books and

    records are maintained at the commodity pool operator's main business

    office that is outside the United States, its territories or

    possessions, then upon the request of a Commission representative, the

    pool operator must provide such books and records as requested at the

    place in the United States, its territories or possessions designated

    by the representative within 72 hours after the pool operator receives

    the request.

    (a) * * *

    (4) A subsidiary ledger or other equivalent record for each

    participant in the pool showing the participant's name and address and

    all funds, securities and other property that the pool received from or

    distributed to the participant. This requirement may be satisfied

    through a transfer agent's maintenance of records or through a list of

    relevant intermediaries where shares are held in an omnibus account or

    through intermediaries.

    * * * * *

    (c) If the pool operator does not maintain its books and records at

    its main business office, the pool operator shall:

    (1) At the time it registers with the Commission or delegates its

    recordkeeping obligations, whichever is later, file a statement that:

    (i) Identifies the name, main business address, and main business

    telephone number of the person(s) who will be keeping required books

    and records in lieu of the pool operator;

    (ii) Sets forth the name and telephone number of a contact for each

    person who will be keeping required books and records in lieu of the

    pool operator;

    (iii) Specifies, by reference to the respective paragraph of this

    section, the books and records that such person will be keeping; and

    (iv) Contains representations from the pool operator that:

    (A) It will promptly amend the statement if the contact information

    or location of any of the books and records required to be kept by this

    section changes, by identifying in such amendment the new location and

    any other information that has changed;

    (B) It remains responsible for ensuring that all books and records

    required by this section are kept in accordance with Sec. 1.31;

    (C) Within 48 hours after a request by a representative of the

    Commission, it will obtain the original books and records from the

    location at which they are maintained, and provide them for inspection

    at the pool operator's main

    [[Page 52335]]

    business office; Provided, however, that if the original books and

    records are permitted to be, and are maintained, at a location outside

    the United States, its territories or possessions, the pool operator

    will obtain and provide such original books and records for inspection

    at the pool operator's main business office within 72 hours of such a

    request; and

    (D) It will disclose in the pool's Disclosure Document the location

    of its books and records that are required under this section.

    (2) The pool operator shall also file electronically with the

    National Futures Association a statement from each person who will be

    keeping required books and records in lieu of the pool operator wherein

    such person:

    (i) Acknowledges that the pool operator intends that the person

    keep and maintain required pool books and records;

    (ii) Agrees to keep and maintain such records required in

    accordance with Sec. 1.31 of this chapter; and

    (iii) Agrees to keep such required books and records open to

    inspection by any representative of the Commission or the United States

    Department of Justice in accordance with Sec. 1.31 of this chapter and

    to make such required books and records available to pool participants

    in accordance with this section.

    0

    7. Amend Sec. 4.26 by revising paragraph (a)(2) to read as follows:

    Sec. 4.26 Use, amendment and filing of Disclosure Document.

    (a) * * *

    (2) No commodity pool operator may use a Disclosure Document or

    profile document dated more than twelve months prior to the date of its

    use.

    * * * * *

    0

    8. Amend Sec. 4.36 by revising paragraph (b) to read as follows:

    Sec. 4.36 Use, amendment and filing of Disclosure Document.

    * * * * *

    (b) No commodity trading advisor may use a Disclosure Document

    dated more than twelve months prior to the date of its use.

    * * * * *

    Issued in Washington, DC, on August 12, 2013, by the Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendix to Final Rule on Harmonization of Compliance Obligations for

    Registered Investment Companies Required to Register as Commodity Pool

    Operators--Commission Voting Summary

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

    Federal Regulations

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia, and Wetjen voted in the affirmative.

    [FR Doc. 2013-19894 Filed 8-21-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 22, 2013



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