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2011-2437

  • Federal Register, Volume 76 Issue 29 (Friday, February 11, 2011)[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]

    [Proposed Rules]

    [Pages 7976-8066]

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

    [FR Doc No: 2011-2437]

    [[Page 7975]]

    Vol. 76

    Friday,

    No. 29

    February 11, 2011

    Part IV

    Commodity Futures Trading Commission

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    17 CFR Parts 4, 145, and 147

    Commodity Pool Operators and Commodity Trading Advisors: Amendments to

    Compliance Obligations; Proposed Rule

    Federal Register / Vol. 76 , No. 29 / Friday, February 11, 2011 /

    Proposed Rules

    [[Page 7976]]

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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:

    Amendments to Compliance Obligations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission is proposing to amend

    its existing regulations and proposing one new regulation regarding

    Commodity Pool Operators and Commodity Trading Advisors. The Commission

    is proposing a new data collection for CPOs and CTAs that is consistent

    with the data collection required under the Dodd-Frank Act. The

    proposed amendments would: Rescind the exemptions from registration

    provided in the Commission's regulations; rescind the relief from the

    certification requirement for annual reports provided to operators of

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

    modify the criteria for claiming relief under the Commission's

    regulations; and require the annual filing of notices claiming

    exemptive relief. Finally, the proposal includes new risk disclosure

    requirements for CPOs and CTAs regarding swap transactions.

    DATES: Comments must be in writing and received on or before April 12,

    2011.

    ADDRESSES: You may submit comments, identified by RIN number 3033-AD30,

    by any of the following methods:

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    Please specify the regulation(s) to which your comment refers in

    the subject field of comments submitted by e-mail, and otherwise

    clearly indicate the regulation(s) on written submissions. All comments

    must be submitted in English, or if not, accompanied by an English

    translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that you believe is exempt from disclosure under the Freedom of

    Information Act, a petition for confidential treatment of the exempt

    information may be submitted according to the procedure established in

    17 CFR 145.9.

    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, including, but not limited to, obscene

    language. All submissions that have been redacted or removed that

    contain comments on the merits of the rulemaking will be retained in

    the public comment file and will be considered as required under the

    Administrative Procedure Act and other applicable laws, and may be

    accessible under the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: For further information about the

    proposed amendments to existing Sec. Sec. 4.5, 4.7, 4.13, 4.14, 4.24,

    4.34, or 145.5, contact Kevin P. Walek, Assistant Director, Telephone:

    (202) 418-5463, E-mail: kwalek@cftc.gov, or Amanda Lesher Olear,

    Special Counsel, Telephone: (202) 418-5283, E-mail: aolear@cftc.gov,

    Division of Clearing and Intermediary Oversight, Commodity Futures

    Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,

    Washington, DC 20581.

    For further information about proposed Sec. 4.27 or proposed Forms

    CPO-PQR or CTA-PR, contact Kevin P. Walek, Assistant Director,

    Telephone: (202) 418-5463, E-mail: kwalek@cftc.gov, or Daniel Konar,

    Attorney-Advisor, Telephone: (202) 418-5405. E-mail: dkonar@cftc.gov,

    Division of Clearing and Intermediary Oversight, Commodity Futures

    Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,

    Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Statutory and Regulatory Background

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

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

    legislation was enacted to reduce risk, increase transparency, and

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

    enhancing the Commodity Futures Trading Commission's (the

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

    respect to all registered entities and intermediaries subject to the

    Commission's oversight.

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

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

    Dodd-Frank Act may be accessed at http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

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

    purpose of the legislation is:

    To promote the financial stability of the United States by

    improving accountability and transparency in the financial system,

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

    bailouts, to protect consumers from abusive financial services

    practices, and for other purposes.\2\

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    \2\ Id.

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

    scope of Federal financial regulation to include instruments such as

    swaps, enhanced the rulemaking authorities of existing Federal

    financial regulatory agencies including the Commission and the

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

    regulatory entities.

    The Commodity Exchange Act (``CEA'') \3\ empowers the Commission

    with the authority to register Commodity Pool Operators (``CPOs'') and

    Commodity Trading Advisors (``CTAs''),\4\ exclude any entity from

    registration as a CPO or CTA,\5\ 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.'' \6\ The Commission

    also has the power 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].'' \7\ The Commission's discretionary power to exclude or exempt

    persons from registration was intended to be exercised ``to exempt from

    registration those persons who otherwise meet the criteria for

    registration * * * if, in the opinion of

    [[Page 7977]]

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

    the registration.'' \8\ It is pursuant to this authority that the

    Commission has promulgated the various exemptions from registration as

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

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

    4.5.

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    \3\ 7 U.S.C. 1, et seq.

    \4\ 7 U.S.C. 6m.

    \5\ 7 U.S.C. 1a(11) and 1a(12).

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

    regulations, entities registered as CPOs have reporting obligations

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

    have recordkeeping obligations under part 4, the Commission has not

    required reporting by CTAs, See generally, 17 CFR part 4.

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

    \8\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p. 20.

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    Following the recent economic turmoil, and consistent with the

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

    reconsidered the level of regulation that it believes is appropriate

    with respect to entities participating in the commodity futures and

    derivatives markets. The Commission believes that it is necessary to

    rescind or modify several of its exemptions and exclusions to more

    effectively oversee its market participants and manage the risks that

    such participants pose to the markets. Additionally, the Commission has

    re-evaluated its prior decision not to require reporting by CTAs and

    has concluded that additional information regarding CTAs' activities is

    needed to provide the Commission with a more complete understanding of

    such activities' effects on commodities and derivatives markets.

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

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

    Dodd-Frank Act created the Financial Stability Oversight Council

    (``FSOC'').\9\ The FSOC is composed of the leaders of various State and

    Federal financial regulators and is charged with identifying risks to

    the financial stability of the United States, promoting market

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

    county's financial system.\10\ The Dodd-Frank Act anticipates that the

    FSOC will be supported in these responsibilities by the Federal

    financial regulatory agencies.\11\ The Commission is among those

    agencies that could be asked to provide information necessary for the

    FSOC to perform its statutorily mandated duties.\12\

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    \9\ See section 111 of the Dodd-Frank Act.

    \10\ See section 112(a)(1)(A) of the Dodd-Frank Act.

    \11\ See sections 112(a)(2)(A) and 112(d)(1) of the Dodd-Frank

    Act.

    \12\ See section 112(d)(1) of the Dodd-Frank Act.

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    Consistent with the Commission's view regarding the appropriate

    level of regulation for its registrants in light of the recent economic

    turmoil and the current regulatory environment, and in anticipation of

    any requests for information from the FSOC, the Commission is

    performing two tasks. First, the Commission is working with the SEC to

    jointly promulgate the rules and forms needed to gather the data

    required under section 406 of Title IV of the Dodd-Frank Act.\13\

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

    to ensure that its regulatory structure is appropriately designed to

    effectuate its views regarding the necessary level of regulation in the

    current economic environment and to be responsive to any informational

    requests made to the Commission by other governmental agencies or FSOC.

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    \13\ The Commission and the SEC are jointly proposing Form PF

    with respect to entities registered with both agencies in a

    forthcoming release.

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    A. Title IV of the Dodd-Frank Act

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

    funds \14\ to register with the SEC.\15\ Through this registration

    requirement, Congress sought to make available to the SEC ``information

    regarding [the] size, strategies and positions'' of large private

    funds, which Congress believed ``could be crucial to regulatory

    attempts to deal with a future crisis.'' \16\ In section 404 of the

    Dodd-Frank Act, Congress amended section 204(b) of the Investment

    Advisers Act to direct the SEC to require private fund advisers

    registered solely with the SEC \17\ to file reports containing such

    information as is deemed necessary and appropriate in the public

    interest and for investor protection or for the assessment of systemic

    risk. These reports and records must include a description of certain

    prescribed information, such as the amount of assets under management,

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

    investment positions for each private fund advised by the adviser.\18\

    Section 406 of the Dodd-Frank Act also requires that the rules

    establishing the form and content of reports filed by private fund

    advisers that are dually registered with the SEC and the CFTC be issued

    jointly by both agencies after consultation with the FSOC.\19\

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    \14\ Section 202(a)(29) of the Investment Advisers Act of 1940

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

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

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

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

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

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

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

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

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

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

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

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

    outstanding securities of which are owned exclusively by persons

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

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

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

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

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

    \15\ The Dodd-Frank Act requires private fund adviser

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

    repeal the exemption from registration for any adviser that during

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

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

    advised any registered investment company or business development

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

    from this registration requirement for advisers to venture capital

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

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

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

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

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

    the Dodd-Frank Act.

    \16\ See S. Conf. Rep. No. 111-176, at 38 (2010).

    \17\ In this release, the term ``private fund adviser'' means

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

    registered with the SEC (including any investment adviser that is

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

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

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

    \18\ See section 404 of the Dodd-Frank Act.

    \19\ See section 406 of the Dodd-Frank Act.

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    To fulfill this statutory mandate, the Commission and the SEC today

    are jointly proposing sections 1 and 2 of Form PF in a forthcoming

    proposal. Additionally, to ensure that necessary data is collected from

    CPOs and CTAs that are not operators or advisors of private funds, the

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

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

    Commission is promulgating proposed Sec. 4.27 pursuant to the

    Commission's authority to require the filing of reports by registered

    CPOs and CTAs under section 4n of the CEA.\20\ In an effort to

    eliminate duplicative filings, proposed Sec. 4.27(d) would allow

    certain CPOs and/or CTAs that are also registered as private fund

    advisers with the SEC pursuant to the securities laws to satisfy

    certain of the Commission's systemic reporting requirements by

    completing and filing the appropriate sections of Form PF with the SEC

    with respect to advised private funds.

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    \20\ 7 U.S.C. 6n(3)(A).

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    B. Reason for Amending Existing CPO and CTA Regulations

    In order to ensure that the Commission can adequately oversee the

    commodities and derivatives markets and assess market risk associated

    with pooled investment vehicles under its jurisdiction, the Commission

    is re-

    [[Page 7978]]

    evaluating its regulation of CPOs and CTAs. Additionally, the

    Commission does not want its registration and reporting regime for

    pooled investment vehicles and their operators and/or advisors to be

    incongruent with the registration and reporting regimes of other

    regulators, such as that of the SEC for investment advisers under the

    Dodd-Frank Act.

    Ultimately, the Commission has determined that to address these

    concerns it will be necessary to amend certain sections of its existing

    regulations. These proposed amendments are designed to (1) bring the

    Commission's CPO and CTA regulatory structure into alignment with the

    stated purposes of the Dodd-Frank Act; (2) encourage more congruent and

    consistent regulation of similarly-situated entities among Federal

    financial regulatory agencies; (3) improve accountability and increase

    transparency of the activities of CPOs, CTAs, and the commodity pools

    that they operate or advise, and (4) facilitate a collection of data

    that will assist the FSOC, acting within the scope of its jurisdiction,

    in the event that the FSOC requests and the Commission provides such

    data. Additionally, these proposed amendments will have the added

    benefit of enabling the Commission to more efficiently deploy its

    regulatory resources and to more expeditiously take necessary action to

    ensure the stability of the commodities and derivatives markets,

    thereby promoting the stability of the financial markets as a whole.

    The existing regulations that the Commission proposes to amend are

    enumerated below.

    II. The Proposals

    The Commission's proposed amendments are designed to (1) bring the

    Commission's CPO and CTA regulatory structure into alignment with the

    stated purposes of the Dodd-Frank Act; (2) encourage more congruent and

    consistent regulation of similarly situated entities among Federal

    financial regulatory agencies; (3) improve accountability and increase

    transparency of the activities of CPOs, CTAs, and the commodity pools

    that they operate or advise; and (4) facilitate a collection of data

    that will assist the FSOC, acting within the scope of its jurisdiction,

    in the event that the FSOC requests and the Commission provides such

    data. The proposed amendments will also allow the Commission to more

    effectively oversee its market participants and manage the risks posed

    by the commodities and derivatives markets. To those ends, the

    amendments: (A) Require the periodic reporting of data by CPOs and CTAs

    regarding their direction of commodity pool assets; (B) identify

    certain proposed filings with the Commission as being afforded

    confidential treatment; (C) revise the requirements for determining

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

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

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

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

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

    disclosure statement from CPOs and CTAs that engage in swaps

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

    Commission's regulations as described below in subsection (H) of this

    preamble. In addition, the proposed amendments make conforming changes

    to the Commission's regulations in light of certain provisions in the

    Dodd-Frank Act, including updating the accredited investor definition,

    which the Commission has incorporated into the definition of QEP in

    Sec. 4.7.

    The Commission requests comment on all aspects of the proposal, as

    well as comment on the specific provisions and issues highlighted in

    the discussion below.

    A. Proposed New Sec. 4.27 and Appendices A and C: Data Collection for

    CPOs and CTAs

    1. General Purpose of Forms CPO-PQR and CTA-PR

    Section 4n of the CEA empowers the Commission to require all

    registered CPOs and CTAs to file such reports as the Commission deems

    necessary.\21\ Following the recent economic turmoil, and consistent

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

    has determined that the reports currently required of Commission

    registrants do not provide sufficient information regarding their

    activities for the Commission to effectively monitor the risks posed by

    those participants to the commodity futures and derivatives markets.

    Moreover, the Commission has re-evaluated its prior decision not to

    require reporting by CTAs and has concluded that additional information

    regarding CTAs' activities is needed to provide it with a more complete

    understanding of such activities.

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    \21\ 17 U.S.C. 6n(3)(A).

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    Therefore, the Commission is proposing Forms CPO-PQR (proposed to

    appear in the Commission's regulations as appendix A to part 4), and

    CTA-PR (proposed to appear in the Commission's regulations as appendix

    C to part 4) to collect information from CPOs and CTAs that are solely

    registered with the Commission to permit the Commission to more

    effectively oversee participants acting within its jurisdiction. The

    information that the Commission currently receives is limited, not

    designed to measure systemic or market risk in any meaningful way, and

    is only submitted by registered CPOs on an annual basis. In addition,

    the annual financial reports filed by CPOs do not disclose information

    regarding CPOs' use of stress testing or the tenor of fixed income

    assets held by commodity pools.

    The Commission proposes Forms CPO-PQR and CTA-PR to solicit

    information that is generally identical to that sought through Form PF,

    which is being jointly promulgated in a forthcoming release in

    conjunction with the SEC. These forms were developed in consultation

    with other financial regulators tasked with overseeing the financial

    integrity of the economy. Through the collection of the data delineated

    in proposed Forms CPO-PQR and CTA-PR, the Commission will be able, if

    requested, by other financial regulators or FSOC, to provide them with

    the information needed to identify whether any commodity pools are

    systemically relevant and, as a result, warrant additional examination

    or scrutiny.

    The amount of information that a CPO or CTA will be required to

    disclose on proposed Forms CPO-PQR and CTA-PR will vary depending on

    both the size of the operator or advisor and the size of the advised

    pools. This tiered approach to disclosure acknowledges the fact that

    smaller operators, advisors, and pools are less likely to present

    significant risk to the stability of the commodities futures and

    derivatives markets and the financial market as a whole, and therefore,

    such entities should have a lesser compliance burden. As detailed

    infra, the Commission is proposing to collect more detailed information

    from operators and advisors managing a large amount of commodity pool

    assets.

    2. Persons Required To Report on Proposed Forms CPO-PQR and CTA-PR

    Pursuant to proposed Sec. 4.27, any CPO or CTA that is registered

    or required to be registered must complete and submit proposed Forms

    CPO-PQR and CTA-PR, respectively, with NFA as the Commission's

    delegatee.\22\ As discussed

    [[Page 7979]]

    infra, only certain large CPOs and CTAs would have to complete the

    sections of Forms CPO-PQR and CTA-PR that require the most detailed

    information. It is expected that most CPOs would only have to complete

    schedule A of form CPO-PQR, which contains essentially the same

    information that NFA currently collects through form PQR. In addition,

    the Commission expects that most CTAs only would have to complete

    schedule A of form CTA-PR, which consists of limited questions

    regarding self-identification, general operations of the CTA, and

    whether the CTA directs assets for commodity pools equal to or

    exceeding $150 million.

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    \22\ In a forthcoming release, the Commission and the SEC will

    be jointly promulgating Form PF with respect to the advisers to

    private funds that are registrants with both agencies. CPOs and CTAs

    that are dual registrants and that operate or advise commodity pools

    that are not private funds will still be required to file the

    proposed reports required in this release.

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    Those CPOs with assets under management equal to or greater than

    $150 million would be required to complete schedule B of form CPO-PQR,

    which solicits basic information regarding the commodity pools operated

    by such CPOs. CPOs with assets under management equal to or greater

    than $1 billion would be required to complete schedule C of form CPO-

    PQR, which solicits aggregate information regarding the commodity pools

    operated by such CPOs and commodity pools with a net asset value

    exceeding $500 million. Similarly, a CTA with commodity pool assets

    under management equal to or exceeding $150 million would be required

    to complete schedule B of form CTA-PR, which solicits basic information

    regarding the CTA's trading program, the identification of the CTA's

    client pool(s), and the position data of each commodity pool advised by

    the CTA.

    The Commission estimates that the number of CPOs that would have to

    file schedule C of form CPO-PQR will be relatively small. The

    Commission believes that it is appropriate to limit the more extensive

    reporting obligations to the large entities detailed above because it

    would provide information about those entities that are most likely to

    pose market and systemic risk, and it minimizes the burden on smaller

    registrants that are less likely to pose such risk.

    The Commission requests comment on the proposed reporting scheme.

    Should the Commission require that all CPOs and CTAs registered or

    required to be registered with the Commission complete all of the

    information on their respective forms regarding the pools that they

    operate or advise? Please provide detail supporting your position. Are

    there more appropriate thresholds for determining which CPOs and CTAs

    must report more extensive information? Should the assets under

    management thresholds be lower or higher? Is there additional

    information that should be requested?

    3. Frequency of Reporting

    The Commission proposes to require the completion and filing of the

    required section(s) of forms CPO-PQR and CTA-PR on a quarterly basis,

    with the exception of mid-sized CPOs filing schedule B of form CPO-PQR

    on an annual basis. The Commission believes that the proposed frequency

    of reporting would permit the Commission to effectively monitor key

    information relevant to the assessment of market risk posed by the

    advisors and operators of commodity pools both on an individual and

    aggregate basis. The proposal would require CPOs and CTAs to file the

    appropriate reports within 15 days of each quarter end as set forth in

    proposed Sec. 4.27. Additionally, proposed form CPO-PQR would require

    schedule B to be filed by mid-sized CPOs within 90 days of the end of

    the calendar year. The Commission believes that this periodic reporting

    for CPOs and CTAs is necessary to provide the Commission with timely

    data to effectively monitor CPOs' and CTAs' activities and to identify

    emerging market issues. It is expected that this reporting would

    coincide with registrants' existing internal reporting and risk

    assessment system cycles. The various reporting schedules for

    Commission registrants are set forth in the charts below.

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

    Form PF and Form

    ADV PQR Schedule A PQR Schedule B PQR Schedule C

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

    Dual Registrant CPO for Quarterly.......... Quarterly.

    Private Funds Only (Assets

    under Management equal to or

    exceeding $1 Billion).

    Dual Registrant CPO for Annually........... Quarterly.

    Private Funds Only (Assets

    under Management less than $1

    Billion).

    Large CPO--Not Dual........... ................... Quarterly.......... Quarterly......... Quarterly.

    Mid-size CPO.................. ................... Quarterly.......... Annually.

    Small CPOs.................... ................... Quarterly.

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    Form PF and Form ADV PR Schedule A PR Schedule B

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    Dual Registrant CTA (Assets under Quarterly............... Quarterly.

    Management equal to or exceeding

    $1 Billion).

    Dual Registrant CTA (Assets under Annually................ Quarterly.

    Management less than $1 Billion).

    Large and Mid-size CTAs............ ........................ Quarterly............... Quarterly.

    Small CTAs......................... ........................ Quarterly.

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    The Commission requests comment on the proposed filing frequency.

    Is quarterly reporting an appropriate amount of time to gather the

    information necessary to assess risk posed by filers? Is the 15-day

    deadline for reports too long to ensure reporting of timely information

    by filers?

    4. Implementation of Reporting Obligation

    The Commission currently anticipates that the proposed rules

    requiring the filing of forms CPO-PQR and CTA-PR would become effective

    six months after the adoption of the proposed forms, which will allow

    sufficient time for the registrants to develop any systems necessary to

    collect the information requested on the forms and prepare them for

    filing. This effective date will also provide NFA with sufficient time

    to modify its ``EasyFile'' system to enable registrants to file the

    forms through that system.

    The Commission has determined to authorize NFA to maintain and

    serve as official custodian of record for the filings, notice, reports,

    and claims

    [[Page 7980]]

    required by Sec. 4.27. This designation is consistent with the

    Commission's prior designation of NFA as the official custodian of

    record for the financial information filed as part of the annual

    reports required under Sec. Sec. 4.7(b)(3) and 4.22(c).\23\ This

    determination is based upon NFA's representations regarding procedures

    for maintaining and safeguarding all such records, in connection with

    NFA's assumption of the responsibilities for the activities referenced

    herein. In maintaining the Commission's records, NFA shall be subject

    to all other requirements and obligations imposed upon it by the

    Commission in existing or future orders or regulations. In this regard,

    NFA shall also implement such additional procedures (or modify existing

    procedures) as are acceptable to the Commission and as are necessary

    to: Ensure the security and integrity of the records in NFA's custody;

    to facilitate prompt access to those records by the Commission and its

    staff, particularly as described in other Commission orders or rules;

    to facilitate disclosure of public or nonpublic information in those

    records when permitted by the Commission concerning disclosure of

    nonpublic information; and otherwise to safeguard the confidentiality

    of records.\24\

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    \23\ 67 FR 77470, Dec. 18, 2002.

    \24\ Id.

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

    The Commission requests comment as to when proposed Sec. 4.27

    should become effective, requiring the filing of forms CPO-PQR and CTA-

    PR.

    5. Information Required on Form CPO-PQR

    The questions contained in form CPO-PQR reflect the experience of

    the Commission in regulating CPOs, in consultation with staff of the

    FSOC, the SEC, and NFA,\25\ as well as the purpose and requirements of

    the Dodd-Frank Act. The information that the Commission proposes to

    collect from CPOs is largely identical to that required under form PF

    for private fund advisers and incorporates the information already

    being collected by NFA in its form PQR. As stated previously, the

    Commission expects that the collection of the data required by form

    CPO-PQR would enhance the Commission's oversight of CPOs. A discussion

    of the information required by form CPO-PQR follows.

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

    \25\ NFA is currently the only registered futures association

    under the CEA and is the self regulatory organization overseeing all

    CPOs and CTAs registered with the Commission. It is also responsible

    for the administration of the Commission's registration program and

    exemptions therefrom. See the Commission's delegation order

    regarding the registration of CPOs and CTAs at 49 FR 39593, Oct. 9,

    1984. Additionally, NFA currently collects certain data from CPOs

    that are NFA members on its form PQR under NFA Rule 2-46.

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

    a. Proposed Schedule A

    Generally, the information required under proposed schedule A will

    be substantially similar to that required under form PF. Proposed

    schedule A would be required of all CPOs that are registered or

    required to be registered and incorporates all of the information

    currently required by NFA's PQR data collection instrument. Proposed

    part 1 of schedule A seeks basic identifying information about the CPO,

    including its name, NFA identification number, and the CPO's assets

    under management. Proposed part 2 of schedule A requires the reporting

    of information regarding each of the CPO's pools, including the names

    and NFA identification numbers for the pools operated during the

    reporting period, position information for positions comprising five

    percent or more of each pool's net asset value, and the pool's key

    relationships with brokers, other advisors, administrators, etc. CPOs

    that advise multiple pools will be required to complete and file a

    separate part 2 of schedule A for each pool that they advise.

    Proposed part 2 also requires the identification of each operated

    pool's carrying brokers, administrators, trading managers, custodians,

    auditors, and marketers. This information would enable the Commission

    to determine which entities are exposed and connected to commodity

    pools. The Commission is also proposing to include quarterly and

    monthly performance information about each pool. This information would

    permit the Commission to monitor trends regarding the commodity pool

    industry, such as whether certain funds are engaging in investment

    strategies that include significant risks having marketwide or even

    systemic implications. Finally, the Commission is proposing to collect

    information regarding a pool's subscriptions and redemptions, and any

    restrictions thereon. The Commission believes that this information is

    important to ensure adequate oversight of a CPO's decision to restrict

    pool participants' access to their funds, given the recent economic

    conditions that gave rise to the imposition of restrictions on

    redemptions by CPOs.

    The Commission is requesting comment on the appropriateness and

    completeness of the information requested in proposed schedule A of

    form CPO-PQR. Is there additional basic information that the Commission

    should require of all CPOs filing form CPO-PQR or regarding the

    commodity pools that they operate? Is there any information that is

    included in schedules B and C for larger CPOs that should be included

    in schedule A for all CPOs? Conversely, is there any information in

    schedule A that the Commission should not require or that the

    Commission should only require of large CPOs and, if so, why?

    b. Proposed Schedule B

    The Commission is proposing that all CPOs that are registered or

    required to be registered that have assets under management equal to or

    exceeding $150 million be required to file schedule B of form CPO-PQR.

    CPOs satisfying the assets under management threshold would be required

    to report detailed information for all operated pools, including

    information regarding each pool's investment strategy; borrowings by

    geographic area and the identities of significant creditors; credit

    counterparty exposure; and entities through which the pool trades and

    clears its positions. The Commission believes that this more detailed

    pool information is necessary from mid-sized and large CPOs as these

    CPOs and their pools are more likely to be a source of risk to both the

    commodity futures and derivatives markets and the financial markets as

    a whole.

    The Commission is requesting comment on the appropriateness and

    completeness of the information proposed to be requested from all CPOs

    with assets under management equal to or exceeding $150 million. Is

    there additional information that the Commission should request of mid-

    sized and large CPOs? Is there information that the Commission should

    not require to be reported? Should the Commission set a threshold net

    asset value for pools for which CPOs must report information under

    proposed schedule B, and if so, what threshold would be appropriate?

    c. Proposed Schedule C

    The Commission is also proposing that all CPOs with assets under

    management equal to or exceeding $1 billion be required to file

    schedule C of proposed form CPO-PQR. Part 1 of schedule C would require

    certain aggregate information about the commodity pools advised by

    large CPOs, such as the market value of assets invested, on both a long

    and short basis, in different types of securities and derivatives,

    turnover in these categories of financial instruments, and the tenor of

    fixed income portfolio holdings, including asset-backed securities.

    This

    [[Page 7981]]

    information will assist the Commission in monitoring asset classes in

    which commodity pools may be significant investors and trends in pools'

    exposures to allow the Commission to identify concentrations in

    particular asset classes that are building or transitioning over time.

    It also would aid the Commission in examining large CPOs' roles as a

    source of liquidity in different asset classes.

    Proposed part 2 of schedule C would require large CPOs to report

    certain information about any commodity pool that they advise with a

    net asset value of at least $500 million as of the end of any business

    day during the reporting period. The Commission has selected $500

    million as a threshold for more extensive individual commodity pool

    reporting because the Commission believes that a pool with $500 million

    in net asset value is a substantial fund whose activities could have an

    impact on particular markets in which it invests or on its

    counterparties. The Commission further believes that setting $500

    million as the threshold will lessen the reporting burdens on smaller

    or start-up pools that are less likely to pose systemic risk. This

    threshold is the same threshold proposed by the Commission and the SEC

    in their joint release for form PF.

    Proposed part 2 would require information on the individual pool

    level that is substantially similar to that requested in part 1 of

    schedule C on an aggregate level. Part 2, however, would also require

    additional information. The CPO would be required to report a

    geographic breakdown of the reportable pool's assets as well as

    information regarding asset liquidity, concentration of positions,

    material investment positions, collateral practices with significant

    counterparties, and clearing relationships. This information is

    designed to assist the Commission in monitoring the composition of

    commodity pool exposures over time as well as the liquidity of those

    exposures.\26\

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    \26\ It is noteworthy that the information in this proposed part

    2 also could aid the FSOC, if it so requests such information from

    the Commission and such request is granted, in monitoring: (1)

    Credit counterparties' unsecured exposure to commodity pools, as

    well as the pools' exposure; (2) a CPO's ability to respond to

    market stresses; and (3) a CPO's interconnectedness with certain

    central clearing counterparties.

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

    Proposed part 2 of schedule C also proposes to require the

    reporting of data regarding commodity pool risk metrics, financial

    information, and investor information. If during the reporting period

    the CPO regularly calculated a value at risk (``VaR'') metric for the

    reportable pool, the CPO would have to report VaR for each month of the

    reporting period.\27\ Form CPO-PQR would also require the CPO to report

    the impact on the pool's portfolio when stressing certain identified

    market factors, if applicable, broken down by the long and short

    components of the reportable pool's portfolio. It also requires the CPO

    to note whether it regularly performed stress tests in which that

    market factor was considered as part of its risk management

    process.\28\ This information is designed to allow the Commission to

    track basic sensitivities of the commodity pool to common market

    factors, correlations in those factor sensitivities, and trends in

    those factor sensitivities among large commodity pools.

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

    \27\ If VaR was calculated, the CPO would have to report the

    confidence interval, time horizon, whether any weighting was used,

    and whether VaR was calculated using historical simulation or Monte

    Carlo simulation. If historical simulation was used, the CPO would

    have to report the historical lookback period used.

    \28\ The market factors are changes in: Equity prices; risk-free

    interest rates; credit spreads; currency rates; commodity prices;

    implied volatilities; implied correlations; default rates; and

    prepayment speeds.

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

    Proposed part 2 of schedule C would require a CPO to report certain

    financing information for its reportable pool, including a monthly

    breakdown of its secured, unsecured, and synthetic borrowing, as well

    as information about the collateral supporting the secured and

    synthetic borrowing and the types of creditors. It also would require

    certain information about the term of the fund's committed financing.

    This information would assist the Commission in monitoring the

    reportable pool's leverage, credit counterparties' unsecured exposure

    to the pool, and the committed term of that leverage, which the

    Commission may find important in monitoring if the pool comes under

    stress.

    Finally, proposed part 2 of schedule C would require a CPO to

    report information about the reportable pool's investor composition and

    liquidity. For example, proposed part 2 contains questions regarding

    the pool's use of side pockets and gates, as well as information

    relating to investor liquidity. The Commission believes this

    information may be important in enabling the Commission to monitor the

    commodity pool's susceptibility to failure through investor redemptions

    in the event that the pool experiences stress due to market risks or

    other factors.

    The Commission requests comment on the information proposed in

    schedule C for large CPOs. Is there additional information that should

    be included and, if so, why? Is there information that should be

    omitted and, if so, why? Is there information that the Commission

    should require only on an aggregate basis that the Commission is

    proposing to require CPOs to report on an individual pool basis? Are

    there additional risk metrics or market factors that the Commission

    should require CPOs to employ? Should the Commission require the

    proposed market factors but with different parameters? Is there

    information currently proposed that would not result in comparable or

    meaningful information for the Commission? If so, how can changes to

    the questions or instructions improve the utility of the information?

    Is there information that should be broken down further and reported as

    of smaller time increments, such as weekly? Is there information that

    should be reported to show ranges, high points, or low points during

    the reporting period, rather than as of the last day of the month or

    quarter? Should clearing information be collected with respect to pools

    with a net asset value less than $500 million?

    6. Information Required on Proposed Form CTA-PR

    The questions contained in proposed form CTA-PR reflect the

    experience of the Commission in regulating CTAs, its knowledge

    regarding how pools allocate funds among various CTAs, and the purpose

    and requirements of the Dodd-Frank Act. The Commission is proposing

    that all CTAs that direct commodity pool assets would be required to

    report on form CTA-PR. As stated previously, the Commission expects

    that the collection of the data required by form CTA-PR would enhance

    the Commission's oversight of CTAs and its information regarding the

    role that CTAs play in the investment of pool assets. A discussion of

    the information required by form CTA-PR follows.

    a. Proposed Schedule A

    Proposed schedule A of form CTA-PR would collect general

    information about the CTA and the pool assets under management by that

    CTA. All CTAs that are registered or required to be registered would be

    required to file proposed schedule A. Proposed schedule A consists of

    general information, including: The name of the CTA; the CTA's NFA

    identification number; the number of offered trading programs and

    whether any pool assets are directed under those trading programs; the

    total assets directed by the CTA; and the total pool assets

    [[Page 7982]]

    directed by the CTA. The Commission believes that this information will

    assist the Commission in gaining a more complete understanding of CTAs

    and their relationships with commodity pools without imposing any

    significant burden on CTAs that do not manage a substantial amount of

    pool assets. The Commission is proposing that all CTAs be required to

    file proposed schedule A because the Commission believes that basic

    information about entities registered as CTAs will assist the

    Commission in making future determinations regarding their regulatory

    obligations.

    The Commission is seeking comment on the content of proposed

    schedule A and which entities would be required to report under form

    CTA-PR. Should all CTAs be required to file proposed schedule A of form

    CTA-PR? If not, what criteria would be appropriate for limiting which

    CTAs are required to file proposed schedule A of form CTA-PR?

    b. Proposed Schedule B

    Under the Commission's proposal, CTAs that direct pool assets equal

    to or exceeding $150 million would be required to complete and file

    proposed schedule B with details regarding the CTA's trading

    program(s). CTAs would be required to file detailed position,

    performance, and trading strategy information for each trading program.

    CTAs also would be required to identify the pools advised under each

    program and the percentage of the pool's assets that are directed by

    the CTA. Finally, the CTA would be required to disclose whether it uses

    the services of an administrator. Through analysis of the information

    collected on form CTA-PR, in conjunction with that collected through

    form CPO-PQR, the Commission will obtain a more complete understanding

    of the relationships between CTAs and pools and interconnectedness of

    the Commission's registrants. This information will also assist the

    Commission in determining whether there is concentration of pool assets

    with particular CTAs that could result in market risk.

    The Commission is seeking comment on the information proposed to be

    required under schedule B of form CTA-PR. Is there additional

    information that should be included and, of so, why? Is there

    information that should be omitted and, if so, why? Is there

    information currently proposed that would not result in comparable or

    meaningful information for the Commission? If so, how can changes to

    the questions or instructions improve the utility of the information?

    B. Amendments to Sec. Sec. 145.5 and 147.3: Confidential Treatment of

    Data Collected on Forms CPO-PQR and CTA-PR

    1. Proposed Amendments to Sec. 145.5

    The Commission's collection of certain proprietary information

    through proposed forms CPO-PQR and CTA-PR raises concerns regarding

    whether the Commission could protect such information from public

    disclosure. If publicly disclosed, this proprietary information could

    put reporting entities at a significant competitive disadvantage.

    Certain questions in both proposed forms request information on pool

    assets under management, key service providers used by operators and

    advisors, position-level information, pool performance, pool

    subscriptions and redemptions, and the market value of pool assets

    invested in different types of securities and swaps. The Commission has

    determined that at least one of the nine exemptions to the Freedom of

    Information Act, 5 U.S.C. 552 et seq., (``FOIA'') \29\ and section

    8(a)(1) of the CEA \30\ protect certain proprietary information like

    the information described above that the Commission would obtain

    through proposed forms CPO-PQR and CTA-PR.\31\ A discussion of the

    specific exemption from FOIA disclosure and the privacy protections

    afforded under section 8(a)(1) of the CEA is described immediately

    below.

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

    \29\ The nine exemptions are found in 5 U.S.C. 552(b)(1)-(7).

    \30\ See 7 U.S.C. 12(a)(1).

    \31\ Section 16 of the CEA, 7 U.S.C. 20, also prohibits the

    Commission from disclosing such data and information in market

    reports furnished to the public under that section. Section 16 is

    not, however, applicable to the proposed rulemaking because the

    reports to which it refers are investigations of such conditions as

    supply, demand, and prices in the markets for ``goods, articles,

    services, rights, and interests which are the subject of futures

    contracts.''

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

    In general, FOIA requires the Commission and other Federal agencies

    to provide the fullest possible disclosure of information unless such

    information is otherwise exempted pursuant to one (or more) of nine

    exemptions under FOIA.\32\ Accordingly, the Commission is required by

    FOIA to make public its records and actions unless a specific exemption

    is available.

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

    \32\ Section 552(b)(3) of FOIA provides that another statute may

    provide a FOIA exemption. Section 404 of the Dodd-Frank Act sets out

    such an exemption. Specifically, section 404 precludes the SEC from

    being compelled under FOIA to reveal proposed Form PF or information

    contained therein required to be filed with the SEC except to

    Congress upon agreement of confidentiality or to comply with a court

    order or other regulatory request. As noted above, the Commission

    and SEC are jointly proposing Form PF in a forthcoming release. The

    Dodd-Frank Act does not include similar language precluding the

    Commission from being compelled to reveal similar information to the

    public.

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

    Commercial and financial information and trade secrets are

    generally exempted from public disclosure under FOIA.\33\ Information

    will qualify for this exemption if the public disclosure of such

    information would cause substantial harm to the competitive position of

    the person from whom the information was obtained.\34\ As noted above,

    the Commission believes that proposed forms CPO-PQR and CTA-PR would

    require CPOs and CTAs, respectively, to report a great deal of

    proprietary information that, if publicly disclosed, would cause

    substantial harm to the competitive positions of those entities.

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

    \33\ See 5 U.S.C. 552(b)(4). ``Commercial'' and ``financial''

    are given ``ordinary meanings.'' See Bd. of Trade of the City of

    Chicago v. CFTC, 627 F.2d 392, 394-95 (DC Cir. 1980).

    \34\ See, e.g., Pub. Citizen Health Research Group v. FDA, 704

    F.2d 1280,1291 (DC Cir. 1983).

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

    Section 8(a)(1) of the CEA provides, in relevant part, that

    ``except as otherwise specifically authorized in the [CEA], the

    Commission may not publish data and information that would separately

    disclose the business transactions or market positions of any person

    and trade secrets or names of customers.'' \35\ The CEA does not

    specifically authorize the Commission to disclose to the public the

    type of proprietary information collected in proposed forms CPO-PQR and

    CTA-PR.

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

    \35\ 7 U.S.C. 12(a)(1).

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

    Currently, Sec. 145.5 of the Commission's regulations sets out the

    Commission's general policy to protect from public disclosure those

    portions of ``nonpublic records'' \36\ filed with it, which are

    exempted under the commercial and financial information exemption from

    FOIA.\37\ Specifically, Sec. 145.5 provides that ``[t]he Commission

    shall publish or make available reasonably segregable portions of

    `nonpublic records' * * *'' subject to a FOIA request if those portions

    are not listed in Sec. 145.5.\38\

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    \36\ Nonpublic records are defined as, among other things,

    information published in the Federal Register, final Commission

    opinions, orders, statements of policy and interpretations,

    administrative manuals and instructions, indices, and records

    released in response to FOIA requests that have been, or the

    Commission anticipates will be, the subject of additional FOIA

    requests.

    \37\ See 17 CFR 145.5.

    \38\ Id.

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

    To clarify the Commission's determination to treat certain

    proprietary information collected in proposed forms CPO-PQR and CTA-PR

    as nonpublic records--thereby protecting such information from public

    disclosure--the Commission proposes

    [[Page 7983]]

    to list such information in Sec. 145.5(d).\39\ Specifically, the

    Commission proposes to list the following schedules and questions in

    proposed forms CPO-PQR and CTA-PR, the responses to which the

    Commission would deem to be nonpublic records:

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

    \39\ Section 145.5(d) tracks the language of its FOIA

    counterpart, exemption (b)(4).

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

    Proposed form CPO-PQR:

    Proposed schedule A: Question 2, subparts (b) and (d);

    Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),

    (e), and (g); Question 11; Question 12; and Question 13.

    Proposed schedule B: All.

    Proposed schedule C: All.

    Proposed form CTA-PR:

    Proposed schedule B: Question 4, subparts (b), (c), (d),

    and (e); Question 5; and Question 6.

    2. Proposed Amendments to Sec. 147.3

    The Commission's collection of certain proprietary information

    through proposed forms CPO-PQR and CTA-PR raises concerns regarding

    whether the Commission could protect such information from public

    disclosure under The Government in the Sunshine Act, 5 U.S.C. 552b

    (``Sunshine Act''), which are substantively identical to those

    discussed above with respect to FOIA. The Sunshine Act was enacted to

    ensure that agency action is open to public scrutiny and contains

    exceptions to publication to the extent that such agency actions, or

    portions of them, are protected by one or more exemptions,\40\ which

    are identical to those under FOIA, discussed above. Accordingly, the

    Commission is required by the Sunshine Act to make public its records

    and actions unless a specific exemption is available. Commission

    meetings, or portions thereof, may be ``closed'' under the Sunshine Act

    where the Commission determines that open meetings will likely reveal

    information protected by an exemption.\41\

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    \40\ The exemptions from disclosure set forth in the Sunshine

    Act are codified in 5 U.S.C. 552b(c). There are 10 listed

    exemptions.

    \41\ The Commission's Sunshine Act obligations are codified in

    its part 147 rules, 17 CFR part 147.

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

    The Commission believes that portions of the filings required by

    proposed Sec. 4.27 through proposed forms CPO-PQR and CTA-PR are

    protected from disclosure as confidential commercial or financial

    information under Sunshine Act exemption (c)(4), which prohibits the

    disclosure of ``trade secrets and commercial or financial information

    obtained from a person and privileged or confidential,'' \42\ for

    reasons that are substantively identical to the rationale discussed

    supra with respect to FOIA.

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

    \42\ 5 U.S.C. 552b(c)(4).

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

    The Commission further believes that the portions of forms CPO-PQR

    and CTA-PR that are protected under Sunshine Act exemption (c)(4) are

    also protected from disclosure by Sunshine Act exemption (c)(8),

    pursuant to which the Commission is authorized to withhold from the

    public matter ``contained in or related to examination, operating, or

    condition reports prepared by, on behalf of, or for the use of an

    agency responsible for the regulation or supervision of financial

    institutions.'' \43\ Section 147.3(b) of the Commission's regulations

    provides that the Commission generally will not make public matters

    that are ``contained in or related to examinations, operating, or

    conditions reports prepared by, on behalf of, or for the use of the

    Commission or any other agency responsible for the regulation or

    supervision of financial institutions.'' The Commission is aware that

    no court has considered directly whether Commission registrants are

    financial institutions for the purposes of Sunshine Act exemption

    (c)(8). The Commission believes, however, that the language of the

    Sunshine Act's legislative history contemplates the inclusion of

    commodities professionals, including futures commission merchants,

    designated contract markets, derivatives transaction execution

    facilities, CPOs, and CTAs.\44\

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

    \43\ 5 U.S.C. 552b(c)(8).

    \44\ See S. Rep. No. 354, 94th Cong., 1st Sess. 24 (1975)

    (stating that ``financial institution'' is ``intended to include

    banks, savings and loan associations, credit unions, brokers and

    dealers in securities or commodities, exchanges dealing in

    securities and commodities, such as the New York Stock Exchange,

    investment companies, investment advisors, self-regulatory

    organizations subject to 15 U.S.C. 78s, and institutional managers

    as defined in 15 U.S.C. 78m.'').

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

    In light of the foregoing considerations, the Commission is

    proposing to amend Sec. 147.3 to exempt from mandatory disclosure,

    pursuant to Sunshine Act exemptions (c)(4) and (c)(8), the portions of

    proposed forms CPO-PQR and CTA-PR as set forth below:

    Proposed form CPO-PQR:

    Proposed schedule A: Question 2, subparts (b) and (d);

    Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),

    (e), and (g); Question 11; Question 12; and Question 13.

    Proposed schedule B: All.

    Proposed schedule C: All.

    Proposed form CTA-PR:

    Proposed schedule B: Question 4, subparts (b), (c), (d),

    and (e); Question 5; and Question 6.

    C. Proposed Amendments to Sec. 4.5: Reinstating Trading Criteria for

    Exclusion From the CPO Definition

    The exclusion from the CPO definition under Sec. 4.5 is available

    to certain otherwise regulated persons, including investment companies

    registered under the Investment Company Act of 1940,\45\ in connection

    with their operation of specified trading vehicles. Prior to amendments

    that the Commission made in 2003, Sec. 4.5 required entities to file a

    notice of eligibility that contained a representation that the use of

    commodity futures for non bona fide hedging purposes will be limited to

    five percent of the liquidation value of the qualifying entity's

    portfolio and that the entity will not market the fund as a commodity

    pool to the public.\46\

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

    \45\ 15 U.S.C. 80a-1 et seq.

    \46\ 50 FR 15868, 15883, Apr. 23, 1985.

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

    The 2003 amendments revised Sec. 4.5 to require that notices of

    eligibility only include representations that:

    [T]he qualifying entity: (i) Will disclose in writing to each

    participant, whether existing or prospective, that the qualifying

    entity is operated by a person who has claimed an exclusion from the

    definition of the term `commodity pool operator' under the

    [Commodity Exchange] Act, and therefore, who is not subject to

    registration or regulation as a pool operator under the [Commodity

    Exchange] Act * * * and (ii) Will submit to special calls as the

    Commission may require.\47\

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

    \47\ 17 CFR 4.5(c)(2).

    When adopting the final amendments, the Commission explained that its

    decision to delete the prohibition on marketing was driven by comments

    claiming that ``the `otherwise regulated' nature of the qualifying

    entities * * * would provide adequate customer protection, and,

    further, that compliance with the subjective nature of the marketing

    restriction could give rise to the possibility of unequal enforcement

    where commodity interest trading was restricted.'' \48\

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

    \48\ 68 FR 47221, 47223, Aug. 8, 2003.

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

    In 2010, the Commission became aware of certain registered

    investment companies that were offering series of de facto commodity

    pool interests claiming exclusion under Sec. 4.5. The Commission

    consulted with market participants and NFA regarding this practice.

    Following this consultation, NFA submitted a petition for rulemaking in

    which NFA suggested certain revisions to Sec. 4.5 with respect to

    registered investment companies.\49\ On September 17, 2010, the

    Commission solicited comments from the public on

    [[Page 7984]]

    NFA's petition for rulemaking, which proposed the reinstatement of the

    pre-2003 operating restrictions in Sec. 4.5. In its petition, NFA

    proposed that Sec. 4.5(c)(2) be amended to read as follows:

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

    \49\ 75 FR 56997, Sept. 17, 2010.

    (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 solely for bona fide hedging purposes within the

    meaning and intent of [Rule] 1.3(z)(1) \50\; Provided, however, That

    in addition, with respect to positions in commodity futures or

    commodity option contracts that may be held by a qualifying entity

    only which do not come within the meaning and intent of [Rule]

    1.3(z)(1), 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) may be excluded in computing such [five]

    percent; (b) 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 (or otherwise seeking investment exposure to)

    the commodity futures or commodity options markets.\51\ (Emphasis

    removed).

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

    \50\ The revisions to Sec. 4.5 proposed herein contain a

    reference to the definition of ``bona fide hedging'' as it is

    currently set forth in Sec. 1.3(z) of the Commission's regulations.

    The Commission notes that rules proposed in the future regarding

    ``bona fide hedging'' may require the proposed revisions to be

    amended to reflect such new regulations.

    \51\ 75 FR 56997, 56998, Sept. 17, 2010.

    To stop the practice of registered investment companies offering

    futures-only investment products without Commission oversight, the

    Commission is proposing to amend Sec. 4.5 to reinstate the pre-2003

    operating criteria consistent with the language proposed by NFA in its

    petition. The Commission believes that NFA's proposed language is an

    appropriate point at which to begin discussions regarding the

    Commission's concerns. Moreover, the Commission believes that imposing

    such restrictions would limit the possibility of entities engaging in

    regulatory arbitrage whereby operators of otherwise regulated entities

    that have significant holdings in commodity interests would avoid

    registration and compliance obligations under the Commission's

    regulations. The Commission believes that this is appropriate to ensure

    consistent treatment of operators of commodity pools regardless of

    registration status with other regulators. In addition, the Commission

    has determined that adopting the restrictions proposed by NFA would

    ensure that entities that operate funds that are de facto commodity

    pools would be required to report the activities of such pools on the

    proposed form CPO-PQR. The Commission, however, is cognizant of the

    fact that the structure of these otherwise regulated entities may

    result in operational difficulties with respect to compliance with part

    4 of the Commission's regulations. To that end, the Commission poses

    several questions, immediately below, derived from comments received

    with respect to NFA's petition to solicit comments regarding what the

    Commission should consider with respect to the regulation of such

    entities:

    Several commenters to NFA's petition have suggested that

    the marketing strategies used by entities claiming relief under Sec.

    4.5 would be prohibited under NFA's proposal. Specifically, it has been

    argued that marketing these funds under proposed Sec. 4.5 would be

    impossible, or nearly impossible, as it would be cost prohibitive. The

    Commission solicits comments on how these marketing strategies would be

    affected by the proposed rule change. Specifically, should the proposed

    restriction on marketing as a commodity pool or as a vehicle for

    providing exposure to commodity interests be broader or more narrow?

    It has been suggested that funds operated pursuant to

    relief under Sec. 4.5 are now following numerous trading strategies,

    including ``life cycle'' fund strategies, which are set to maximize

    trading successes for certain trading periods, or horizons. The

    Commission seeks comment on the differential impact the proposed

    rulemaking would have on the various trading strategies implemented by

    funds operated under Sec. 4.5, including which types of funds might be

    more severely impacted than others, and, if so, why?

    Some commenters to the NFA petition have suggested that

    the term ``marketing'' needs to be clarified. What considerations

    should be made with respect to such a definition? Further, what

    specific areas related to marketing are most problematic and, if so,

    why?

    Commenters to the NFA petition have suggested that the

    changes to Sec. 4.5 would result in direct conflicts with SEC

    regulations relating to registered investment companies. Please detail

    which rules and regulations are in conflict, and indicate how these

    could be best addressed by the two Commissions.

    Is a limit of five percent of the liquidation value of the

    portfolio attributable to non-bona fide hedging purposes the

    appropriate threshold? Should a higher or lower limit apply? Should the

    calculation of the limit include swaps, or be limited to futures and

    options? Is a portfolio based criterion appropriate or is there another

    more effective means for identifying entities that should be registered

    as CPOs?

    Additionally, the Commission is soliciting comment

    regarding the implementation of the proposed changes to Sec. 4.5. What

    issues should the Commission consider with respect to the ability of

    registered investment companies to comply with the disclosure document

    and reporting delivery requirements; recordkeeping; and related fund

    performance disclosure requirements under part 4 of the Commission's

    regulations? How much time will be necessary for entities that have

    previously claimed exclusion under this section to comply with the

    proposed changes? Should any entities that have previously claimed

    exclusion under this section be exempted from compliance with the

    proposed revisions to Sec. 4.5?

    D. Proposed Amendments to Sec. 4.7: Removing Exemptive Relief From the

    Certification Requirement for Pool Annual Reports and Incorporating

    Accredited Investor Definition

    1. Removing Exemptive Relief From the Certification Requirement for

    Financial Statements in Pool Annual Reports

    In 1992, the Commission proposed and adopted Sec. 4.7, which

    provided relief from disclosure, reporting, and recordkeeping

    obligations under part 4 of the Commission's regulations for CPOs and

    CTAs that are privately offered to sophisticated persons.\52\ Section

    4.7(b)(3) provides relief from the certification requirement for

    financial statements contained in annual reports distributed to

    participants and filed with NFA.\53\

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

    \52\ See 17 CFR 4.7.

    \53\ See 17 CFR 4.7(b)(3).

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

    Despite the availability of the exemption from the audit

    requirement under Sec. 4.7(b)(3)(i), the vast majority of CTAs and

    CPOs that operate commodity pools under Sec. 4.7 have their annual

    reports for those pools audited by certified public accountants. For

    example, 759 of the 892 pools that operated pursuant to exemptive

    relief

    [[Page 7985]]

    under Sec. 4.7 in fiscal year 2009 (i.e., 85% of all pools operated

    under Sec. 4.7 in that year) filed certified annual reports despite

    being eligible for exemptive relief from certification in Sec.

    4.7(b)(3).

    In light of the stated purposes of the Dodd-Frank Act (i.e.,

    transparency and accuracy of information across market participants),

    the Commission proposes to extend the requirement for certified

    financial statements in commodity pool annual reports to commodity

    pools with participants who are QEPs. The Commission believes that

    requiring certification of financial information by an independent

    accountant in accordance with established accounting standards will

    ensure the accuracy of the financial information submitted by its

    registrants. Accordingly, proposed section 3 of the amendatory text

    would remove the exemption in Sec. 4.7(b)(3)(C)(ii) from the

    requirement that certified financial statements be included in the

    annual reports to participants in their commodity pools. Commission

    staff will continue to consider requests for exemption from the audit

    requirement pursuant to the general exemptive provisions of Sec.

    4.12(a), in accordance with the criteria under which such relief

    previously has been granted.\54\

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    \54\ See, e.g., CFTC Staff Letters 10-02, Feb. 23, 2010; 10-07,

    Jan. 7, 2010; 10-08, Feb. 23, 2010; 10-09, Feb. 25, 2010; 10-11,

    Mar. 3, 2010; 10-18, Apr. 12, 2010, at: http://www.cftc.gov/LawRegulation/CFTCStaffLetters/LettersAcrchive/2010/index.htm.

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

    2. Incorporating by Reference the Accredited Investor Standard

    The Commission is also proposing to amend Sec. Sec. 4.7(a)(3)(ix)

    and (a)(3)(x), which list those persons required to satisfy the

    portfolio requirement to be QEPs.\55\ In 1992, when the Commission

    proposed and adopted Sec. 4.7, it stated that the relief provided in

    Sec. 4.7 was intended for persons who were ``highly accredited

    investors'',\56\ which was defined as ``accredited investors'', per the

    terms of Sec. 230.501 of regulation D \57\ under the Securities Act of

    1933,\58\ who also satisfy a portfolio value requirement.\59\ Section

    4.7(a)(3)(ix) incorporates the specific net worth provision set forth

    in Sec. 230.501(a)(5) of the SEC's regulations.\60\ Similarly, Sec.

    4.7(a)(3)(x) incorporates the income standards of Sec. 230.501(a)(6)

    of the SEC's regulations.\61\

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

    \55\ See 17 CFR 4.7(a)(3)(ix).

    \56\ See 57 FR 34853, Aug. 7, 1992.

    \57\ See 17 CFR 203.501.

    \58\ See 15 U.S.C. 77a, et seq.

    \59\ See 57 FR at 34855.

    \60\ See id. at 34855.

    \61\ See id.

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

    Section 413 of the Dodd-Frank Act instructs the SEC to examine and

    adjust the threshold for ``accredited investor'' status under its

    regulations and initially increases the threshold amount so that it is

    significantly greater than the current provisions of regulation D.

    Because the Commission has incorporated the ``accredited investor''

    definition from regulation D into its definition of QEP, the Commission

    has determined that it is necessary to amend Sec. Sec. 4.7(a)(3)(ix)

    and (a)(3)(x) to incorporate the new accredited investor standard.

    Thus, the Commission's proposal seeks to amend Sec. 4.7 to incorporate

    the accredited investor standard from Regulation D by reference, rather

    than by direct inclusion of its terms. Incorporation by reference will

    permit the Commission's definition of QEP to continue to include the

    specific terms of the accredited investor standard in the event that it

    is later modified by the SEC without requiring the Commission to amend

    Sec. 4.7 each time to maintain parity.

    E. Proposed Amendments to Sec. Sec. 4.13(a)(3) and (a)(4): Rescission

    of Exemption From Registration

    The Commission proposes to rescind certain exemptions from

    registration provided in Sec. Sec. 4.13(a)(3) and (a)(4). Section

    4.13(a)(3) of the Commission's regulations currently provides that a

    person is exempt from registration as a CPO if the interests in the

    pool are exempt from registration under the Securities Act of 1933 and

    offered only to QEPs, accredited investors, or knowledgeable employees,

    and the pool's aggregate initial margin and premiums attributable to

    commodity interests do not exceed five percent of the liquidation value

    of the pool's portfolio.\62\ Section 4.13(a)(4) of the Commission's

    regulations provides that a person is exempt from registration as a CPO

    if the interests in the pool are exempt from registration under the

    Securities Act of 1933 and the operator reasonably believes that the

    participants are all QEPs.\63\

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

    \62\ See 17 CFR 4.13(a)(3). CPOs claiming relief under Sec.

    4.13 are required to submit to special calls by the Commission to

    demonstrate eligibility, however, even if the Commission determined

    to make a special call, it would not be entitled to information

    regarding the pool's activities beyond those implicated by the claim

    for exemptive relief. Therefore, the efficacy of special calls as a

    tool to gain any information on par with that required by Part 4 of

    the Commission's regulations is limited.

    \63\ See id. 4.13(a)(4). Natural persons who are required to

    satisfy the portfolio requirement to be considered QEPs are not

    included in the persons to whom a pool operating under this

    exemption may be offered.

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

    As a result of the creation of exemptions from registration as a

    CPO under Sec. Sec. 4.13(a)(3) and (a)(4), a large group of market

    participants have fallen outside of the oversight of regulators (i.e.,

    there is very little if any transparency or accountability over the

    activities of these participants). The Commission has concluded that

    continuing to grant an exemption from registration and reporting

    obligations for these market participants is outweighed by the

    Commission's concerns of regulatory arbitrage.

    To address the lack of transparency and accountability, the

    Commission's proposal would eliminate the exemption under Sec.

    4.13(a)(3). Indeed, the Commission believes that it is possible for a

    commodity pool to have a portfolio that is sizeable enough that even if

    just five percent of the pool's portfolio were committed to margin for

    futures, the pool's portfolio could be so significant that the

    commodity pool would constitute a major participant in the futures

    market.

    In addition, the Commission proposes to eliminate the exemption in

    Sec. 4.13(a)(4) because there are no limits on the amount of commodity

    interest trading in which pools operating under this regulation can

    engage. That is, it is possible that a commodity pool that is exempted

    from registration under Sec. 4.13(a)(4) could be invested solely in

    commodities.

    With the passage of the Dodd-Frank Act, the regulatory environment

    has changed from that which was in existence when Sec. Sec. 4.13(a)(3)

    and (a)(4) were promulgated in 2003. As stated previously, one of the

    primary purposes of the Dodd-Frank Act is to promote transparency with

    respect to the activities of participants in the financial markets.

    Sections 403 and 404 of the Dodd-Frank Act generally require

    registration and reporting by investment advisers to private funds.\64\

    Many private funds claim an exemption from SEC registration under

    sections 3(c)(1) and (7) of the Investment Company Act of 1940 (the

    ``Investment Company Act'').\65\ The Dodd-Frank Act, although not

    rescinding these exemptions from registration under the Investment

    Company Act, requires the advisers of such funds to register with the

    SEC as ``private fund investment advisers''.\66\ The Commission's

    proposal seeks to eliminate the exemptions under

    [[Page 7986]]

    Sec. Sec. 4.13(a)(3) and (4) for operators of pools that are similarly

    situated to private funds that previously relied on the exemptions

    under Sec. Sec. 3(c)(1) and (7) of the Investment Company Act and

    Sec. 203(b)(3) of the Investment Advisers Act. It is the Commission's

    view that the operators of these pools should be subject to similar

    regulatory obligations, including proposed form CPO-PQR, in order to

    provide improved transparency and increased accountability with respect

    to these pools. The Commission has determined that it is appropriate to

    limit regulatory arbitrage through harmonization of the scope of its

    data collection with respect to pools that are similarly situated to

    private funds so that operators of such pools will not be able to avoid

    oversight by either the Commission or the SEC through claims of

    exemption under the Commission's regulations.

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

    \64\ See sections 403 and 404 of the Dodd-Frank Act. The Dodd-

    Frank Act does grant a few exemptions from the registration

    requirement. For example, section 407 provides that [venture

    capital] funds are not required to register with the SEC.

    \65\ See 15 U.S.C. 80a-3.

    \66\ See sections 403 and 404 of the Dodd-Frank Act for the

    general registration provisions for private fund investment

    advisers.

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

    The Commission is soliciting comment regarding the implementation

    of the proposed rescission of Sec. Sec. 4.13(a)(3) and (a)(4). How

    much time will be necessary for entities that have previously claimed

    exemption under these sections to comply with the proposed changes? How

    should the Commission address entities whose activities do not require

    registration; i.e., should such entities be required to file notice

    with the Commission to avoid registration? Should any entities that

    have previously claimed exemption under these sections be exempted from

    compliance with the proposed revisions to Sec. Sec. 4.13(a)(3) and

    (a)(4)? Should the Commission consider an alternative de minimis

    exemption under Sec. 4.13, and, if so, what criteria should be

    required to claim such exemption?

    F. Proposed Amendments to Sec. Sec. 4.5, 4.13, and 4.14: Requiring

    Annual Filings of Notices of Claims of Exemption

    The Commission has the power 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 the purposes of

    [the CEA].'' \67\ It is pursuant to this authority that the Commission

    promulgated the various exemptions from registration set forth in

    Sec. Sec. 4.5, 4.13, and 4.14. It is also pursuant to this authority

    that the Commission may revise the criteria for claiming such exemptive

    relief.

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

    \67\ 7 U.S.C. 12a(5).

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

    Under the current provisions of part 4 of the Commission's

    regulations, persons claiming exemptive relief from inclusion in the

    definition of a CPO or from registration as a CPO or CTA are required

    to file only a notice of such claim with NFA and to comply with a few

    ministerial requirements.\68\ For entities claiming relief under

    Sec. Sec. 4.5, 4.13, or 4.14, the filing of an exemption notice is the

    end of these entities' interaction with the Commission or NFA (in the

    absence of a special call or their capture by the large trader

    reporting system). The Commission's regulations do not explicitly

    require these entities to inform the Commission in the event that these

    entities cease operating as a going concern.\69\

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

    \68\ Under the Commission's regulations, persons claiming such

    relief remain subject to special calls (17 CFR 4.5(c)(2)(ii),

    4.13(c)(2), 4.14(a)(8)(iv)(B)) and remain subject to all

    requirements applicable to traders on our markets (i.e., large

    trader reporting, position limits, anti-fraud provisions, etc.).

    \69\ Since 2003, the Commission, through NFA, has received over

    10,000 notices of claim for exemptive relief under Sec. Sec.

    4.13(a)(3) and (a)(4), which represent approximately 30,000 pools.

    The Commission has no simple and economical way of determining

    whether all of the approximately 10,000 entities filing the notices

    claiming relief remain going concerns. Therefore, it is difficult to

    estimate the number of exempt entities currently operating in the

    derivative markets.

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

    Based on the foregoing, the Commission proposes to require all

    persons claiming exemptive or exclusionary relief under Sec. Sec. 4.5,

    4.13, and 4.14 of the Commission's regulations to confirm their notice

    of claim of exemption or exclusion on an annual basis.\70\ The

    Commission believes that an annual notice requirement would promote

    improved transparency regarding the number of entities either exempt or

    excluded from the Commission's registration and compliance programs,

    which is consistent with one of the primary purposes of the Dodd-Frank

    Act. An annual notice requirement would enable the Commission to

    determine whether exemptions and exclusions should be modified,

    repealed, or maintained as part of the Commission's ongoing assessment

    of its regulatory scheme. If a person chooses to withdraw their

    certification other than due to the cessation of activities requiring

    registration or exemption therefrom, the Commission's proposal would

    require such person to file a registration application with NFA within

    30 days of the anniversary date of the initial claim for exemptive

    relief. Because persons are required to file electronically with NFA,

    NFA would conduct the annual confirmation process through its

    electronic system, similar to the annual updates to registration

    information that are required of registered firms under Sec. 3.10(d).

    The Commission's proposal would make the failure to comply with the

    annual notice requirement result in a deemed withdrawal of the

    exemption or exclusion and under those circumstances could result in

    the initiation of an enforcement action.

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

    \70\ If the proposed repeal of Sec. Sec. 4.13(a)(3) and (a)(4)

    is adopted, annual notices will still be required to be filed

    pursuant to Sec. Sec. 4.13(a)(1) and (a)(2) under this proposal.

    Regardless of whether the repeal of Sec. Sec. 4.13(a)(3) and (a)(4)

    is adopted, all CPOs will be required to file annual notices in

    order to claim exemptive relief under all provisions of Sec. 4.13.

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

    The Commission invites comment on whether 30 days is an adequate

    period of time in which to affirm. Does it make sense to require a

    filing within 30 days of the anniversary date of the initial filing, or

    within 30 days of the end of the calendar year?

    G. Proposed Amendments to Sec. Sec. 4.24 and 4.34: New Risk Disclosure

    Statement for CPOs and CTAs

    The enactment of the Dodd-Frank Act expanded the scope of the

    Commission's authority to include swaps.\71\ In light of this expansion

    of the Commission's jurisdiction, the Commission has determined that it

    is necessary to amend the mandatory Risk Disclosure Statements \72\

    under Sec. Sec. 4.24(b) and 4.34(b) for CPOs and CTAs to describe

    certain risks specific to swaps transactions. Specifically, the

    Commission believes that it is critical that registered CPOs and CTAs

    inform pool participants and clients about the potential risks that

    swaps may have limited liquidity and may be hard to value, which may

    result in difficulties regarding the pool participants' ability to

    redeem their interests in the pool and clients' ability to liquidate

    their accounts. The Commission believes that the significance of these

    risks should be appropriately highlighted by including a discussion in

    the Risk Disclosure Statement at the beginning of the document.

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

    \71\ See generally Title VII of the Dodd-Frank Act.

    \72\ See 17 CFR 4.24(b), 4.34(b).

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

    The Commission is specifically soliciting comment as to whether the

    risks discussed in the proposed Risk Disclosure Statement are the

    significant risks to pool participants and clients that are posed by

    the use of swaps by CPOs and CTAs? Should any other risks be included

    in the proposed Risk Disclosure Statement? Should any proposed language

    be omitted?

    H. Proposed Amendments to Part 4: Conforming Amendments

    As a result of the amendments discussed in this proposal, the

    Commission proposes to amend various provisions of part 4 of the

    Commission's regulations for the purposes of making confirming changes.

    Specifically, the proposal would delete references to repealed rules

    (e.g., Sec. Sec. 4.13(a)(3) and

    [[Page 7987]]

    (a)(4), etc.) in other sections of the Commission's regulations.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \73\ requires that agencies,

    in proposing rules, consider the impact of those rules on small

    businesses.

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

    \73\ See 5 U.S.C. 601, et seq.

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

    CPOs: The Commission has determined previously that registered CPOs

    are not small entities for the purpose of the RFA.\74\ With respect to

    CPOs exempt from registration, the Commission has previously determined

    that a CPO is a small entity if it meets the criteria for exemption

    from registration under current Rule 4.13(a)(2).\75\ Such CPOs will

    continue to qualify for either exemption or exclusion from registration

    and therefore will not be required to report on proposed form CPO-PQR;

    however, they will have an annual notice filing obligation confirming

    their eligibility for exemption or exclusion from registration and

    reporting. The Commission estimates that the time required to complete

    this new requirement will be approximately 0.25 of an hour, which the

    Commission has concluded will not be a significant time expenditure.

    The Commission has determined that the proposed regulation will not

    create a significant economic impact on a substantial number of small

    entities.

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

    \74\ See 47 FR 18618, 18619, Apr. 30, 1982.

    \75\ See 47 FR at 18619-20.

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

    CTAs: The Commission has previously decided to evaluate, within the

    context of a particular rule proposal, whether all or some CTAs should

    be considered to be small entities, and if so, to analyze the economic

    impact on them of any such rule.\76\ Schedule A of proposed form CTA-PR

    is proposed to be required of all registered CTAs, which necessarily

    includes entities that would be considered small. The majority of the

    information requested on schedule A is information that is readily

    available to the CTA or readily calculable by the CTA, regardless of

    size. Therefore, the Commission estimates that the time required to

    complete the items contained in schedule A will be approximately 0.5

    hours as it is comprised of only two questions, which solicit

    information that is expected to be readily available. The Commission

    has determined that proposed schedule A will not create a significant

    economic impact on a substantial number of small entities. With respect

    to proposed form CTA-PR, only CTAs directing pool assets equal to or in

    excess of $150 million will be obligated to file schedule B. The

    Commission is hereby determining that for purposes of this rulemaking

    that CTAs directing pool assets equal to or in excess of $150 million

    are not small entities for RFA purposes. Accordingly, the Chairman, on

    behalf of the Commission hereby certifies pursuant to 5 U.S.C. 605(b)

    that the proposed rules, will not have a significant impact on a

    substantial number of small entities.

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

    \76\ See 47 FR at 18620.

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

    B. 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.\77\ 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''). The

    Commission is proposing to amend Collection 3038-0023 to allow for an

    increase in response hours for the proposed rulemaking resulting from

    the rescission of Sec. Sec. 4.13(a)(3) and (a)(4) and the modification

    of Sec. 4.5. The Commission is also proposing to amend Collection

    3038-0005 to allow for an increase in response house for the proposed

    rulemaking associated with new and modified compliance obligations

    under part 4 of the Commission's regulations resulting from this

    proposal. The Commission, therefore, is submitting this proposal to the

    OMB for its review in accordance with 44 U.S.C. 3507(d) and 5 CFR

    1320.11. The titles for these collections are ``Part 3--Registration''

    (OMB Control number 3038-0023) and ``Part 4--Commodity Pool Operators

    and Commodity Trading Advisors'' (OMB Control number 3038-0005).

    Responses to this collection of information would be mandatory.

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

    \77\ See 44 U.S.C. 3501 et seq.

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

    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.'' \78\ The

    Commission is also required to protect certain information contained in

    a government system of records according to the Privacy Act of

    1974.\79\

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

    \78\ See 7 U.S.C. 12.

    \79\ See 5 U.S.C. 552a.

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

    1. Additional Information Provided by CPOs and CTAs

    a. OMB Control Number 3038-0023

    Part 3 of the Commission's regulations concern registration

    requirements. Existing Collection 3038-0023 has been amended to reflect

    the obligations associated with the registration of new entrants, i.e.,

    CPOs that were previously exempt from registration under Sec. Sec.

    4.5, 4.13(a)(3) and 4.13(a)(4), that had not previously been required

    to register. Because the registration requirements are in all respects

    the same as for current registrants, the collection has been amended

    only insofar as it concerns the increased estimated number of

    respondents and the corresponding estimated annual burden.

    Estimated number of respondents: 77,857.

    Annual responses by each respondent: 78,109.

    Annual reporting burden: 7,029.8.

    b. OMB Control Number 3038-0005

    Part 4 of the Commission's regulations concerns the operations of

    CTAs and CPOs, and the circumstances under which they may be exempted

    from registration. Under existing Collection 3038-0005 the estimated

    average time spent per response has not been altered; however,

    adjustments have been made to the collection to account for current

    information available from NFA concerning CPOs and CTAs registered or

    claiming exemptive relief under the part 4 regulations, and the new

    burden expected under proposed Sec. 4.27. The total burden associated

    with Collection 3038-005 is expected to be:

    Estimated number of respondents: 31,322.

    Annual responses by each respondent: 69,082.

    Estimated average hours per response: 8.77.

    Annual reporting burden: 272,419.6.

    Proposed Sec. 4.27 is expected to be the main reason for the

    increased burden under Collection 3038-005. Specifically, the

    Commission expects the following burden with respect to the various

    schedules of proposed forms CPO-PQR and CTA-PR:

    Form CPO-PQR: Schedule A:

    Estimated number of respondents: 4,060.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 8.

    [[Page 7988]]

    Annual reporting burden: 129,920.

    Form CPO-PQR: Schedule B:

    Estimated number of respondents: 920.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 4.

    Annual reporting burden: 14,720.

    Form CPO-PQR: Schedule C:

    Estimated number of respondents: 260.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 18.

    Annual reporting burden: 18,720.

    Form CTA-PR: Schedule A:

    Estimated number of respondents: 450.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 0.5.

    Annual reporting burden: 900.

    Form CTA-PR: Schedule B:

    Estimated number of respondents: 150.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 7.

    Annual reporting burden: 4,200.

    2. Information Collection Comments

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the reporting and recordkeeping burdens

    discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

    solicits comments in order to: (i) Evaluate whether the proposed

    collection of information is necessary for the proper performance of

    the functions of the Commission, including whether the information will

    have practical utility; (ii) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collection of information; (ii)

    determine whether there are ways to enhance the quality, utility, and

    clarity of the information collected; and (iv) minimize the burden of

    the collection of information on those who are to respond, including

    through the use of automated collection techniques or other forms of

    information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at

    OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy

    of submitted comments so that they can be summarized and addressed in

    the final rule. Refer to the ADDRESSES section of this notice of

    proposed rulemaking for comment submission instructions to the

    Commission. A copy of the supporting statements for the collections of

    information discussed above may be obtained by visiting RegInfo.gov.

    OMB is required to make a decision concerning the collection of

    information between 30 and 60 days after publication of this release.

    Consequently, a comment to OMB is most assured of being fully effective

    if received by OMB (and the Commission) within 30 days after

    publication of this notice of proposed rulemaking.

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \80\ requires the Commission to consider

    the costs and benefits of its actions before issuing rules,

    regulations, or orders under the CEA. By its terms, section 15(a) does

    not require the Commission to quantify the costs and benefits of its

    rules, regulations or orders or to determine whether the benefits

    outweigh the costs. Rather, section 15(a) requires that the Commission

    ``consider'' the costs and benefits of its actions. Section 15(a)

    further specifies that the costs and benefits shall be evaluated in

    light of the following five broad areas of 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. The Commission may in its discretion give greater

    weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding the costs, a particular

    rule, regulation, or order is necessary or appropriate to protect the

    public interest or to effectuate any of the provisions or accomplish

    any of the purposes of the CEA.

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

    \80\ See 7 U.S.C. 19(a); see also 5 U.S.C. 801(a)(1)(B)(i).

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

    The proposed amendments to the Commission's regulations require

    CPOs and CTAs registered with the CFTC to file in an electronic format

    the proposed forms CPO-PQR and CTA-PR, respectively. Under the proposed

    rule, most CPOs and CTAs would be required to provide quarterly a

    limited amount of basic information on forms CPO-PQR and CTA-PR about

    the operations of their commodity pools. Only large CPOs and CTAs would

    have to submit on a quarterly basis the full complement of systemic

    risk related information required by forms CPO-PQR and CTA-PR.

    With respect to costs, the Commission has determined that: (1)

    Although they are necessary to U.S. financial stability, the proposed

    reporting requirements will create additional compliance costs for

    these registrants; (2) without the proposed reporting requirements

    imposed on CPOs and CTAs, the Commission may not have sufficient

    information to provide effective oversight of participants in the

    futures and derivatives markets; and (3) the proposed reporting

    requirements, once finalized, will provide the Commission with better

    information regarding the business operations, creditworthiness, use of

    leverage, and other material information of certain registered CPOs and

    CTAs.

    In addition to the costs associated with the proposed data

    collection instruments, the Commission has determined the following

    with respect to the costs of the other proposed changes to part 4 of

    the Commission's regulations impacting entitlement to exemptive relief

    from registration: (1) Unless the Commission rescinds the exemptive

    relief delineated in Sec. Sec. 4.13(a)(3) and 4.13(a)(4), the

    information collected under proposed forms CPO-PQR and CTA-PR will not

    provide a complete understanding of the risks arising from the

    activities of CPOs and CTAs in the commodity derivatives markets; (2)

    failing to adopt revisions to Sec. 4.5 that are substantively similar

    to those proposed in NFA's petition for rulemaking would result in

    disparate treatment of similarly situated collective investment

    schemes; (3) requiring the filing of an annual notice to claim

    exemptive relief under Sec. Sec. 4.5, 4.13, and 4.14 enables the

    Commission to better understand the universe of entities claiming

    relief from the Commission's regulatory scheme; and (4) although the

    Commission believes that the abovementioned amendments are necessary,

    the proposed changes will result in additional costs to certain market

    participants due to registration and compliance obligations.

    The Commission has determined that the proposed changes will

    provide a benefit to all investors and market participants by providing

    the Commission and other policy makers with more complete information

    about these registrants. In turn, this information would enhance the

    Commission's ability to form and frame appropriately tailored

    regulatory policies to the commodity pool industry and its operators

    and advisors. As mentioned above, the Commission does not have access

    to this information today and has instead made use of information from

    other, less reliable sources.

    The Commission invites public comment on its cost-benefit

    considerations. Commenters are also invited to submit any data and

    other information that they may have

    [[Page 7989]]

    quantifying or qualifying the costs and benefits of this proposed rule

    with their comment letters.

    List of Subjects

    17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Consumer protection, Reporting and

    recordkeeping requirements.

    17 CFR Part 145

    Commission records and information, Confidential business

    information.

    17 CFR Part 147

    Open commission meetings, Sunshine Act.

    Accordingly, 17 CFR chapter I is proposed to be amended as follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    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.

    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 [Rule] 1.3(z)(1); Provided however, That in addition, with

    respect to positions in commodity futures or commodity option

    contracts, or swaps that may be held by a qualifying entity only which

    do not come within the meaning and intent of Rule 1.3(z)(1), 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) may be excluded in

    computing such five percent;

    (B) 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 (or otherwise seeking investment exposure to) 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 the notice of exemption from

    registration, withdraw such exemption due to the cessation of

    activities requiring registration or exemption therefrom, or withdraw

    such exemption and apply for registration within 30 days of the

    anniversary of the initial filing date through National Futures

    Association's electronic exemption filing system.

    * * * * *

    3. In Sec. 4.7, revise paragraphs (a)(3)(ix) and (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.

    * * * * *

    4. In Sec. 4.13:

    a. Remove and reserve paragraphs (a)(3), (4), and (e)

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

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

    paragraph (b)(4).

    The revision and addition read as follows:

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

    * * * * *

    (b) * * *

    (2) * * *

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

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

    [[Page 7990]]

    represent that the pool will be operated in accordance with the

    criteria of that paragraph; and

    * * * * *

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

    from registration under this section must affirm the notice of

    exemption from registration, withdraw such exemption due to the

    cessation of activities requiring registration or exemption therefrom,

    or withdraw such exemption and apply for registration within 30 days of

    the anniversary of the initial filing date through National Futures

    Association's electronic exemption filing system.

    * * * * *

    5. In Sec. 4.14:

    a. Remove paragraph (a)(8)(i)(D)

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

    new paragraph (a)(8)(iii)(D) to read as follows:

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

    * * * * *

    (a) * * *

    (8) * * *

    (iii) * * *

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

    from registration under this section must affirm the notice of

    exemption from registration, withdraw such exemption due to the

    cessation of activities requiring registration or exemption therefrom,

    or withdraw such exemption and apply for registration within 30 days of

    the anniversary of the initial filing date through National Futures

    Association's electronic exemption filing system.

    * * * * *

    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.

    * * * * *

    7. Add Sec. 4.27 to read as follows:

    Sec. 4.27 Additional reporting by advisors of certain large commodity

    pools.

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

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

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

    Exchange Act;

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

    commodity trading advisor defined in section 1a(12);

    (3) Direct has the same meaning as direct 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 pool as defined in section

    1(a)(10) of the Commodity Exchange Act;

    (6) Reporting period means each quarter ending March 31, June 30,

    September 30, or December 31;

    (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 section (c)(2) of this

    section, each reporting person shall file with the National Futures

    Association, not later than 15 days after the end of the first

    reporting period during which such reporting person satisfies the

    requirements of paragraph (b) of this section, and not later than 15

    days after the end of each quarter during the calendar year subsequent

    thereto, 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) Mid-Sized CPOs, as that term is defined in appendix A to this

    part, shall file with the National Futures Association such reports

    consistent with the time period described in appendix A.

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

    generally accepted accounting principles consistently applied.

    (d) [Reserved]

    (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.

    8. 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,

    [[Page 7991]]

    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.

    * * * * *

    9. Appendix A is revised to read as follows:

    Appendix A to Part 4--Form CPO-PQR

    BILLING CODE P

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    10. Appendix C is added to read as follows:

    Appendix C--Form CTA-PR

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    BILLING CODE C

    PART 145--COMMISSION RECORDS AND INFORMATION

    11. The authority citation for part 145 continues to read as

    follows:

    Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80

    Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.

    1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389

    (5 U.S.C. 4a(j)).

    12. In Sec. 145.5, revise paragraphs (d)(1)(viii) and (h) to read

    as follows:

    Sec. 145.5 Disclosure of nonpublic records.

    * * * * *

    (d) * * *

    (1) * * *

    (viii) The following reports and statements that are also set forth

    in paragraph (h) of this section, except as specified in 17 CFR

    1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant

    to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR

    pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to

    17 CFR 31.13; the accountant's report on material inadequacies filed in

    accordance with 17 CFR 1.16(c)(5); all reports and statements required

    to be filed pursuant to 17 CFR 1.17(c)(6); and

    (A) The following portions of Form CPO-PQR required to be filed

    pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D;

    Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),

    (e), and (g); Question 11; Question 12; and Question 13; and Schedules

    B and C;

    (B) The following portions of Form CTA-PR required to be filed

    pursuant to 17 CFR 4.27: Schedule B: Question 4,

    [[Page 8066]]

    subparts (b), (c), (d), and (e); Question 5; and Question 6;

    * * * * *

    (h) Contained in or related to examinations, operating, or

    condition reports prepared by, on behalf of, or for the use of the

    Commission or any other agency responsible for the regulation or

    supervision of financial institutions, including, but not limited to

    the following reports and statements that are also set forth in

    paragraph (d)(1)(viii) of this section, except as specified in 17 CFR

    1.10(g)(2) and 17 CFR 31.13(m): Forms 1-FR required to be filed

    pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms

    1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed

    pursuant to 17 CFR 31.13; the accountant's report on material

    inadequacies filed in accordance with 17 CFR 1.16(c)(5); all reports

    and statements required to be filed pursuant to 17 CFR 1.17(c)(6); and

    (1) The following portions of Form CPO-PQR required to be filed

    pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D;

    Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),

    (e), and (g); Question 11; Question 12; and Question 13; and Schedules

    B and C;

    (2) The following portions of Form CTA-PR required to be filed

    pursuant to 17 CFR 4.27: Schedule B: Question 4, subparts (b), (c),

    (d), and (e); Question 5; and Question 6; and

    * * * * *

    PART 147--OPEN COMMISSION MEETINGS

    13. The authority citation for part 147 continues to read as

    follows:

    Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.

    552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.

    4a(j) (Supp. V, 1975)).

    14. In Sec. 147.3, revise (b)(4)(i)(H) and (b)(8) to read as

    follows:

    Sec. 147.3 General requirement of open meetings; grounds upon which

    meetings may be closed.

    * * * * *

    (b) * * *

    (4)(i) * * *

    (H) The following reports and statements that are also set forth in

    paragraph (b)(8) of this section, except as specified in 17 CFR

    1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant

    to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR

    pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to

    17 CFR 31.13; the accountant's report on material inadequacies filed in

    accordance with 17 CFR 1.16(c0(5); all reports and statements required

    to be filed pursuant to 17 CFR 1.17(c)(6); the following portions of

    Form CPO-PQR required to be filed pursuant to 17 CFR 4.27: Schedule A:

    Question 2, subparts (b) and D; Question 3, subparts (g) and (h);

    Question 10, subparts (b), (c), (d), (e), and (g); Question 11;

    Question 12; and Question 13; and Schedules B and C; and the following

    portions of Form CTA-PR required to be filed pursuant to 17 CFR 4.27:

    Schedule B: Question 4, subparts (b), (c), (d), and (e); Question 5;

    and Question 6;

    * * * * *

    (8) Disclose information contained in or related to examination,

    operating, or condition reports prepared by, on behalf of, or for the

    use of the Commission or any other agency responsible for the

    regulation or supervision of financial institutions, including, but not

    limited to the following reports and statements that are also set forth

    in paragraph (b)(4)(i)(H) of this section, except as specified in 17

    CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed

    pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms

    1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR pursuant to 17 CFR 31.13;

    the accountant's report on material inadequacies filed in accordance

    with 1.16(c)(5); and all reports and statements required to be filed

    pursuant to 17 CFR 1.17(c)(6); and

    (i) The following portions of Form CPO-PQR required to be filed

    pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D;

    Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d),

    (e), and (g); Question 11; Question 12; and Question 13; and Schedules

    B and C; and

    (ii) The following portions of Form CTA-PR required to be filed

    pursuant to 17 CFR 4.27: Schedule B: Question 4, subparts (b), (c),

    (d), and (e); Question 5; and Question 6;

    * * * * *

    Issued in Washington, DC on January 26, 2011 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Commodity Pool Operators and Commodity Trading Advisors:

    Amendments to Compliance Obligations--Commission Voting Summary and

    Statements of Commissioners

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

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Sommers

    (by proxy), Chilton and O'Malia voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed joint rulemaking with the Securities and

    Exchange Commission (SEC) that requires reporting by investment

    advisers to private funds that are also registered as commodity pool

    operators (CPOs) or commodity trading advisors (CTAs) with the CFTC.

    I also support the CFTC's proposed amendment to compliance

    obligations of CPOs and CTAs. The joint rule requires private fund

    investment advisers with assets under management totaling more than

    $150 million to provide the SEC with financial and other trading

    information. Private fund investment advisers with assets under

    management totaling more than $1 billion would be subject to

    heightened reporting requirements. I support the CFTC rule that

    would bring similar reporting to CPOs and CTAs with assets under

    management greater than $150 million that are not otherwise jointly

    regulated. This is to ensure that similar entities in the asset

    management arena are regulated consistently. Lastly, the proposal

    repeals certain exemptions issued under Part 4 of the Commission's

    regulations so the Commission will have a more complete picture of

    the activity of operators of and advisors to pooled investment

    vehicles in the commodities marketplace.

    [FR Doc. 2011-2437 Filed 2-10-11; 8:45 am]

    BILLING CODE P

    Last Updated: February 11, 2011



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