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C1-2012-3390

  • Federal Register, Volume 77 Issue 58 (Monday, March 26, 2012)[Federal Register Volume 77, Number 58 (Monday, March 26, 2012)]

    [Rules and Regulations]

    [Pages 17328-17331]

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

    [FR Doc No: C1-2012-3390]

    =======================================================================

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 4, 145, and 147

    RIN 3038-AD30

    Commodity Pool Operators and Commodity Trading Advisors:

    Compliance Obligations

    Correction

    Editorial Note: FR DOC 2012-3390 appearing on pages 11252-11344

    in the issue of Friday, February 24, 2012 is being partially

    republished due to numerous errors.

    1. On page 11252, in the first column, the SUMMARY section is being

    republished in its entirety.

    SUMMARY: The Commodity Futures Trading Commission is adopting

    amendments to its existing part 4 regulations and promulgating one new

    regulation regarding Commodity Pool Operators and Commodity Trading

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

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

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

    Securities and Exchange Commission. The adopted amendments rescind an

    exemption from registration as a CPO; rescind relief from the

    certification requirement for annual reports provided to operators of

    certain pools offered only to qualified eligible persons (``QEPs'');

    modify the criteria for claiming exclusion from the definition of CPO;

    and require the annual filing of notices claiming exemptive relief

    under several sections of the Commision's regulations. Finally, the

    adopted amendments include new risk disclosure requirements for CPOs

    and CTAs regarding swap transactions.

    2. In 17 CFR Part 4, beginning on page 11283, in the second column,

    in 31st line of text, amendatory instructions 1-8 and their

    corresponding amendments to the Code of Federal Regulations are being

    republished as follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    0

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

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a,

    and 23.

    0

    2. In Sec. 4.5, add paragraphs (c)(2)(iii) and (c)(5) to read as

    follows:

    Sec. 4.5 Exclusion from the definition of the term ``commodity pool

    operator.''

    * * * * *

    (c) * * *

    (2) * * *

    (iii) Furthermore, if the person claiming the exclusion is an

    investment company registered as such under the Investment Company Act

    of 1940, then the notice of eligibility must also contain

    representations that such person will operate the qualifying entity as

    described in Rule 4.5(b)(1) in a manner such that the qualifying

    entity:

    (A) Will use commodity futures or commodity options contracts, or

    swaps solely for bona fide hedging purposes within the meaning and

    intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5);

    Provided however, That in addition, with respect to positions in

    commodity futures or commodity option contracts, or swaps which do not

    come within the meaning and intent of Rules 1.3(z)(1) and 151.5, a

    qualifying entity may represent that the aggregate initial margin and

    premiums required to establish such positions will not exceed five

    percent of the liquidation value of the qualifying entity's portfolio,

    after taking into account unrealized profits and unrealized losses on

    any such contracts it has entered into; and, Provided further, That in

    the case of an option that is in-the-money at the time of purchase, the

    in-the-money amount as defined in Rule 190.01(x) (17 CFR 190.01(x)) may

    be excluded in computing such five percent; or

    (B) The aggregate net notional value of commodity futures,

    commodity options contracts, or swaps positions not used solely for

    bona fide hedging purposes within the meaning and intent of Rules

    1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5), determined at the

    time the most recent position was established, does not exceed 100

    percent of the liquidation value of the pool's portfolio, after taking

    into account unrealized profits and unrealized losses on any such

    positions it has entered into. For the purpose of this paragraph:

    (1) The term ``notional value'' shall be calculated for each

    futures position by multiplying the number of contracts by the size of

    the contract, in contract units

    [[Page 17329]]

    (taking into account any multiplier specified in the contract), by the

    current market price per unit, for each such option position by

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

    adjusted by its delta, in contract units (taking into account any

    multiplier specified in the contract), by the strike price per unit,

    for each such retail forex transaction, by calculating the value in

    U.S. Dollars for such transaction, at the time the transaction was

    established, excluding for this purpose the value in U.S. Dollars of

    offsetting long and short transactions, if any, and for any cleared

    swap by the value as determined consistent with the terms of 17 CFR

    part 45; and

    (2) The person may net futures contracts with the same underlying

    commodity across designated contract markets and foreign boards of

    trade; and swaps cleared on the same designated clearing organization

    where appropriate; and (C) Will not be, and has not been, marketing

    participations to the public as or in a commodity pool or otherwise as

    or in a vehicle for trading in the commodity futures, commodity

    options, or swaps markets.

    * * * * *

    (5) Annual notice. Each person who has filed a notice of exclusion

    under this section must affirm on an annual basis the notice of

    exemption from registration, withdraw such exemption due to the

    cessation of activities requiring registration or exemption therefrom,

    or withdraw such exemption and apply for registration within 60 days of

    the calendar year end through National Futures Association's electronic

    exemption filing system.

    * * * * *

    0

    3. In Sec. 4.7:

    0

    a. Revise paragraphs (a)(3)(ix), (a)(3)(x), and (b)(3) to read as

    follows:

    Sec. 4.7 Exemption from certain part 4 requirements for commodity

    pool operators with respect to offerings to qualified eligible persons

    and for commodity trading advisors with respect to advising qualified

    eligible persons.

    * * * * *

    (a) * * *

    (3) * * *

    (ix) A natural person whose individual net worth, or joint net

    worth with that person's spouse at the time of either his purchase in

    the exempt pool or his opening of an exempt account would qualify him

    as an accredited investor as defined in Sec. 230.501(a)(5) of this

    title;

    (x) A natural person who would qualify as an accredited investor as

    defined in Sec. 203.501(a)(6) of this title;

    * * * * *

    (b) * * *

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

    requirements of Sec. 4.22(c) of this part; Provided, that within 90

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

    permanent cessation of trading, whichever is earlier, the commodity

    pool operator electronically files with the National Futures

    Association and distributes to each participant in lieu of the

    financial information and statements specified by that section, an

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

    4.22(h) which contains, at a minimum:

    (A) A Statement of Financial Condition as of the close of the

    exempt pool's fiscal year (elected in accordance with Sec. 4.22(g));

    (B) A Statement of Operations for that year;

    (C) Appropriate footnote disclosure and such further material

    information as may be necessary to make the required statements not

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

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

    of income, management and incentive fees associated with each

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

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

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

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

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

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

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

    the specific amounts of management and incentive fees charged by an

    investee fund, the commodity pool operator must disclose the percentage

    amounts and computational basis for each such fee and include a

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

    for this fund;

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

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

    statements are reporting should be presented in addition to the

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

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

    the different series, the financial statements are not required to

    include consolidated information for all series.

    (ii) Legend. If a claim for exemption has been made pursuant to

    this section, the commodity pool operator must make a statement to that

    effect on the cover page of each annual report.

    * * * * *

    0

    4. In Sec. 4.13:

    0

    a. Revise paragraphs (a)(3)(ii)(B)(1) and (2);

    0

    b. Remove and reserve paragraph (a)(4);

    0

    c. Revise paragraph (b)(1)(ii);

    0

    d. Redesignate paragraph (b)(4) as paragraph (b)(5) and add new

    paragraph (b)(4); and

    0

    e. Revise paragraph (e)(2).

    The revisions and additions read as follows:

    Sec. 4.13 Exemption from registration as a commodity pool operator.

    * * * * *

    (a) * * *

    (3) * * *

    (ii) * * *

    (B) * * *

    (1) The term ``notional value'' shall be calculated for each

    futures position by multiplying the number of contracts by the size of

    the contract, in contract units (taking into account any multiplier

    specified in the contract), by the current market price per unit, for

    each such option position by multiplying the number of contracts by the

    size of the contract, adjusted by its delta, in contract units (taking

    into account any multiplier specified in the contract), by the strike

    price per unit, for each such retail forex transaction, by calculating

    the value in U.S. Dollars of such transaction, at the time the

    transaction was established, excluding for this purpose the value in

    U.S. Dollars of offsetting long and short transactions, if any, and for

    any cleared swap by the value as determined consistent with the terms

    of 17 CFR part 45; and

    (2) The person may net futures contracts with the same underlying

    commodity across designated contract markets and foreign boards of

    trade; and swaps cleared on the same derivatives clearing organization

    where appropriate; and

    * * * * *

    (b) * * *

    (2) * * *

    (ii) Contain the section number pursuant to which the operator is

    filing the notice (i.e., Sec. 4.13(a)(1), (2), or (3)) and represent

    that the pool will be operated in accordance with the criteria of that

    paragraph; and

    * * * * *

    (4) Annual Notice. Each person who has filed a notice of exemption

    from registration under this section must

    [[Page 17330]]

    affirm on an annual basis the notice of exemption from registration,

    withdraw such exemption due to the cessation of activities requiring

    registration or exemption therefrom, or withdraw such exemption and

    apply for registration within 60 days of the calendar year end through

    National Futures Association's electronic exemption filing system.

    * * * * *

    (e) * * *

    (2) If a person operates one or more commodity pools described in

    paragraph (a)(3) of this section, and one or more commodity pools for

    which it must be, and is, registered as a commodity pool operator, the

    person is exempt from the requirements applicable to a registered

    commodity pool operator with respect to the pool or pools described in

    paragraph (a)(3) of this section; Provided, That the person:

    (i) Furnishes in written communication physically delivered or

    delivered through electronic transmission to each prospective

    participant in a pool described in paragraph (a)(3) of this section

    that it operates:

    (A) A statement that it will operate the pool as if the person was

    exempt from registration as a commodity pool operator;

    (B) A description of the criteria pursuant to which it will so

    operate the pool;

    (ii) Complies with paragraph (c) of this section; and

    (iii) Provides each existing participant in a pool that the person

    elects to operate as described in paragraph (a)(3) of this section a

    right to redeem the participant's interest in the pool, and informs

    each such participant of that right no later than the time the person

    commences to operate the pool as described in paragraph (a)(3) of this

    section.

    * * * * *

    0

    5. In Sec. 4.14:

    0

    a. Revise paragraph (a)(8)(i)(D); and

    0

    b. Redesignate paragraph (a)(8)(iii)(D) as (a)(8)(iii)(E) and add a new

    paragraph (a)(8)(iii)(D).

    The revision and addition read as follows:

    Sec. 4.14 Exemption from registration as a commodity trading adviser.

    * * * * *

    (a) * * *

    (8) * * *

    (i) * * *

    (D) A commodity pool operator who has claimed an exemption from

    registration under Sec. 4.13(a)(3), or, if registered as a commodity

    pool operator, who may treat each pool it operates that meets the

    criteria of Sec. 4.13(a)(3) as if it were not so registered; and

    * * * * *

    (iii) * * *

    (D) Annual notice. Each person who has filed a notice of exemption

    from registration under this section must affirm on an annual basis the

    notice of exemption from registration, withdraw such exemption due to

    the cessation of activities requiring registration or exemption

    therefrom, or withdraw such exemption and apply for registration within

    60 days of the calendar year end through National Futures Association's

    electronic exemption filing system.

    * * * * *

    0

    6. In Sec. 4.24, add paragraph (b)(5) to read as follows:

    Sec. 4.24 General disclosures required.

    * * * * *

    (b) * * *

    (5) If the pool may engage in swaps, the Risk Disclosure Statement

    must further state:

    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A

    VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A

    PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE

    TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS

    TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,

    COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL

    RISK.

    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE

    LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY

    LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN

    VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF

    AN UNDERLYING OR RELATED MARKET FACTOR.

    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH

    A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP

    TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE

    ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED

    TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL

    OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE

    POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS

    SCHEDULED TERMINATION DATE.

    * * * * *

    0

    7. In Sec. 4.34, add paragraph (b)(4) to read as follows:

    Sec. 4.34 General disclosures required.

    * * * * *

    (b) * * *

    (4) If the commodity trading advisor may engage in swaps, the Risk

    Disclosure Statement must further state:

    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A

    VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A

    PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE

    TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS

    TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,

    FUNDING RISK, AND OPERATIONAL RISK.

    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE

    LIQUIDITY RISK, WHICH MAY RESULT IN YOUR ABILITY TO WITHDRAW YOUR FUNDS

    BEING LIMITED. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL

    GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE

    VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.

    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH

    A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP

    TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE

    ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED

    TERMS. THEREFORE, IT MAY NOT BE POSSIBLE TO MODIFY, TERMINATE, OR

    OFFSET YOUR OBLIGATIONS OR YOUR EXPOSURE TO THE RISKS ASSOCIATED WITH A

    TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.

    * * * * *

    0

    8. Effective July 2, 2012, revise Sec. 4.27, as added November 16,

    2011, at 76 FR 71114, and effective March 31, 2012 to read as follows:

    [[Page 17331]]

    Sec. 4.27 Additional reporting by advisors of certain large commodity

    pools.

    (a) General definitions. For the purposes of this section:

    (1) Commodity pool operator or CPO has the same meaning as

    commodity pool operator defined in section 1a(11) of the Commodity

    Exchange Act;

    (2) Commodity trading advisor or CTA has the same meaning as

    defined in section 1a(12);

    (3) Direct has the same meaning as defined in section 4.10(f);

    (4) Net asset value or NAV has the same meaning as net asset value

    as defined in section 4.10(b);

    (5) Pool has the same meaning as defined in section 1(a)(10) of the

    Commodity Exchange Act;

    (6) Reporting period means the reporting period as defined in the

    forms promulgated hereunder;

    (b) Persons required to report. A reporting person is:

    (1) Any commodity pool operator that is registered or required to

    be registered under the Commodity Exchange Act and the Commission's

    regulations thereunder; or

    (2) Any commodity trading advisor that is registered or required to

    be registered under the Commodity Exchange Act and the Commission's

    regulations thereunder.

    (c) Reporting. (1) Except as provided in paragraph (c)(2) of this

    section, each reporting person shall file with the National Futures

    Association, a report with respect to the directed assets of each pool

    under the advisement of the commodity pool operator consistent with

    appendix A to this part or commodity trading advisor consistent with

    appendix C to this part.

    (2) All financial information shall be reported in accordance with

    generally accepted accounting principles consistently applied.

    (d) Investment advisers to private funds. Except as otherwise

    expressly provided in this section, CPOs and CTAs that are dually

    registered with the Securities and Exchange Commission and are required

    to file Form PF pursuant to the rules promulgated under the Investment

    Advisers Act of 1940, shall file Form PF with the Securities and

    Exchange Commission in lieu of filing such other reports with respect

    to private funds as may be required under this section. In addition,

    except as otherwise expressly provided in this section, CPOs and CTAs

    that are dually registered with the Securities and Exchange Commission

    and are required to file Form PF pursuant to the rules promulgated

    under the Investment Advisers Act of 1940, may file Form PF with the

    Securities and Exchange Commission in lieu of filing such other reports

    with respect to commodity pools that are not private funds as may be

    required under this section. Dually registered CPOs and CTAs that file

    Form PF with the Securities and Exchange Commission will be deemed to

    have filed Form PF with the Commission for purposes of any enforcement

    action regarding any false or misleading statement of a material fact

    in Form PF.

    (e) Filing requirements. Each report required to be filed with the

    National Futures Association under this section shall:

    (1)(i) Contain an oath and affirmation that, to the best of the

    knowledge and belief of the individual making the oath and affirmation,

    the information contained in the document is accurate and complete;

    Provided, however, That it shall be unlawful for the individual to make

    such oath or affirmation if the individual knows or should know that

    any of the information in the document is not accurate and complete and

    (ii) Each oath or affirmation must be made by a representative duly

    authorized to bind the CPO or CTA.

    (2) Be submitted consistent with the National Futures Association's

    electronic filing procedures.

    (f) Termination of reporting requirement. All reporting persons

    shall continue to file such reports as are required under this section

    until the effective date of a Form 7W filed in accordance with the

    Commission's regulations.

    (g) Public records. Reports filed pursuant to this section shall

    not be considered Public Records as defined in Sec. 145.0 of this

    chapter.

    Editorial Note: FR DOC 2012-3390 appearing on pages 11252-11344

    in the issue of Friday, February 24, 2012 is being partially

    republished due to numerous errors.

    [FR Doc. C1-2012-3390 Filed 3-23-12; 8:45 a.m.]

    BILLING CODE 1505-01-D

    Last Updated: March 26, 2012



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