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: [email protected], or Michael
Ehrstein, Attorney-Advisor, Telephone: 202-418-5957, Email:
[email protected], 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/idc/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.
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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\
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\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.
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[[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\
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\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.
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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\
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\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.
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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\
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\44\ AXA Letter; Steben Letter; IAA Letter.
\45\ NYCBA Letter SIFMA AMG Letter; AII Letter.
\46\ SIFMA AMG Letter.
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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.
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\47\ 15 U.S.C. 77j-24.
\48\ 17 CFR 230.485.
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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\
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\49\ SIFMA AMG Letter.
\50\ ABA Letter.
\51\ SIFMA AMG Letter.
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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\
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\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.
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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\
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\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\
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\58\ Katten Letter; ABA Letter.
\59\ SIFMA AMG Letter.
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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\
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\60\ AII Letter.
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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.
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\61\ See, 17 CFR 230.498.
\62\ Id.
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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.
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\63\ See, 17 CFR 4.21 (requiring delivery of a Disclosure
Document concurrent with the delivery of a subscription agreement to
prospective participants).
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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.
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\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/idc/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/idc/groups/public/@lrlettergeneral/documents/letter/10-29.pdf.
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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\
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\66\ 17 CFR 230.498.
\67\ SIFMA AMG Letter.
\68\ MFA Letter.
\69\ ABA Letter; Katten Letter; NYCBA Letter.
\70\ AXA Letter.
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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\
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\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\
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\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).
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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.
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\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.
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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\
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\74\ ICI Letter.
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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\
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\75\ ABA Letter; Dechert Letter; Fidelity Letter; AII Letter;
SIFMA AMG Letter.
\76\ AXA Letter; ABA Letter; Dechert Letter; AII Letter.
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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:
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\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\
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\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\
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\84\ AXA Letter; Dechert Letter; SIFMA AMG Letter; comment
letter from Invesco Advisers, Inc. (April 24, 2012) (Invesco
Letter); ICI Letter.
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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.
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\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.
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\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\
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\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\
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\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).
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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\
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\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\
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\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\
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\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).
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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).
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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\
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\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.
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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).
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\145\ Dechert Letter; Katten Letter; SIFMA AMG Letter.
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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\
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\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:
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\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.
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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\
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\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\
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\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:
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\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.
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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.
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\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; . . .''
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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.
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\179\ ICI Letter.
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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:
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\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.
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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:
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\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.
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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\
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\183\ See Items, 4, 9, and 16(b) of Form N-1A; and Item 8 and 17
of Form N-2.
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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:
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\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.
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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:
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\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.
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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.
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\186\ See 2012 Final Rule, supra note 6, 77 FR at 11273.
\187\ See Proposal, supra note 23, 77 FR at 11349.
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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).
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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.
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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.
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\192\ See 47 FR at 18620.
\193\ 17 CFR 4.27.
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[[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\
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\194\ 7 U.S.C. 19(a).
\195\ 7 U.S.C. 19(a)(2).
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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\
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\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.
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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\
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\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).
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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\
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\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.
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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.
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[[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).
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\222\ SIFMA AMG Letter.
\223\ Id.
\224\ Id.
\225\ Id.
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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\
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\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.
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[[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.
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\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.
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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\
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\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.
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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\
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\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.
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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