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2011-4657

  • Federal Register, Volume 76 Issue 42 (Thursday, March 3, 2011)[Federal Register Volume 76, Number 42 (Thursday, March 3, 2011)]

    [Proposed Rules]

    [Pages 11701-11705]

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

    [FR Doc No: 2011-4657]

    [[Page 11701]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 4

    RIN 3038-AD49

    Amendments to Commodity Pool Operator and Commodity Trading

    Advisor Regulations Resulting From the Dodd-Frank Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rules.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is proposing to amend its regulations affecting the operations and

    activities of commodity pool operators (CPOs) and commodity trading

    advisors (CTAs) (Proposal) in order to have those regulations reflect

    changes made to the Commodity Exchange Act (CEA) by the Dodd-Frank Wall

    Street Reform and Consumer Protection Act (Dodd-Frank Act).

    DATES: Comments must be received on or before May 2, 2011.

    ADDRESSES: You may submit comments, identified by RIN 3038-AD49, 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, Commodity Futures

    Trading Commission, 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.

    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 is exempt from disclosure under the Freedom of

    Information Act (FOIA),\1\ a petition for confidential treatment of the

    exempt information may be submitted according to the procedures set

    forth in Commission Regulation 145.9.\2\

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    \1\ 5 U.S.C. 552.

    \2\ The Commission's regulations are found at 17 CFR Ch. I

    (2010) and can be accessed through the Commission's Web site, http://www.cftc.gov.

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    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, such as 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: Barbara S. Gold, Associate Director,

    or Christopher W. Cummings, Special Counsel, Division of Clearing and

    Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.

    Telephone number: 202-418-5450 and electronic mail: bgold@cftc.gov or

    ccummings@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\3\

    Title VII of the Dodd-Frank Act \4\ amended the CEA \5\ to establish a

    comprehensive new regulatory framework for swaps and security-based

    swaps. The goal of this legislation was to reduce risk, increase

    transparency, and promote market integrity within the financial system

    by, among other things: (1) Providing for the registration and

    comprehensive regulation of SDs and MSPs; (2) imposing clearing and

    trade execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the Commission's rulemaking and enforcement authorities with

    respect to, among others, all registered entities and intermediaries

    subject to the Commission's oversight. Among the changes made by the

    Dodd-Frank Act to the CEA were to include within the CPO definition the

    operator of a collective investment vehicle that trades swaps, and to

    include within the CTA definition a person who provides advice

    concerning swaps.\6\

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    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

    \4\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \5\ 7 U.S.C. 1 et seq. (2006). The CEA also can be accessed

    through the Commission's web site.

    \6\ See Section 721(a) of the Dodd-Frank Act, which re-organized

    (and in some cases amended) existing definitions in, and added new

    definitions to, Section 1a of the CEA. The CPO and CTA definitions,

    as amended, are to be codified respectively at CEA sections 1a(11)

    and 1a(12).

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    Part 4 of the Commission's regulations sets forth a comprehensive

    regulatory scheme for the operations and activities of CPOs and CTAs.

    It includes disclosure, reporting and recordkeeping requirements for

    registered CPOs and CTAs, registration and compliance exemptions for

    CPOs and CTAs, and other provisions, including anti-fraud provisions,

    applicable to CPOs and CTAs regardless of registration status. Many of

    the Part 4 regulations generally apply to CPOs and CTAs and, thus, they

    will be applicable to CPOs and CTAs with respect to their swap

    activities.\7\ In other instances, however, the text of certain Part 4

    regulations is specific to activities involving futures contracts,

    commodity options, and off-exchange retail foreign currency

    transactions, and it does not include, refer to or otherwise take

    account of swap activities.\8\ The Proposal is intended to clarify and

    ensure that the requirements governing the operations and activities of

    CPOs and CTAs continue to apply to these intermediaries in the context

    of their involvement with swap transactions.\9\

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    \7\ See, e.g., Regulations 4.21 and 4.31, which respectively

    require registered CPOs and CTAs to deliver a Disclosure Document to

    prospective pool participants and clients. See also Regulation 4.41,

    which proscribes fraudulent advertising by CPOs, CTAs, and their

    principals.

    \8\ See, e.g., Regulations 4.24(l) and 4.34(k), which currently

    do not include ``swap dealer'' among the intermediaries for whom a

    CPO or CTA must provide information concerning material litigation

    in its Disclosure Document. See also Regulations 4.24(g) and

    4.34(g), which do not specify any risks unique to trading swaps in

    calling for disclosure of principal risk factors.

    \9\ Part 4 applies to CPOs with respect to their activities

    affecting pool participants and to CTAs with respect to their

    activities affecting clients. Depending on the nature of its

    activities, a CPO or CTA may also come within the definition of the

    term ``swap dealer'' or ``major swap participant'' in new CEA

    Section 1a(49) or 1a(33), respectively (added to the CEA by Section

    721(a) of the Dodd-Frank Act). As directed by the Dodd-Frank Act,

    the Commission has proposed new regulations that would establish

    business conduct standards for swap dealers and major swap

    participants. See 75 FR 80638 (Dec. 22, 2010). These new regulations

    would apply to swap dealers and major swap participants with respect

    to the counterparties with whom they transact swap business, and

    would govern different activity than that to which the Part 4

    regulations apply.

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    The Commission is proposing still other rulemakings in response to

    the Dodd-Frank Act that could affect the Part 4 regulations.\10\ The

    Commission intends to resolve any discrepancies that may arise between

    any of these other rulemakings and the Proposal in

    [[Page 11702]]

    the course of finalizing its rulemaking under the Dodd-Frank Act.

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    \10\ See, e.g., Commodity Pool Operators and Commodity Trading

    Advisors: Amendments to Compliance Obligations, 76 FR 7976 (Feb. 11,

    2011); and Swap Data Recordkeeping and Reporting Requirements;

    Proposed Rule, 75 FR 76574 (Dec. 8, 2010).

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    II. The Proposal

    The Part 4 regulations employ the term ``commodity interest''

    throughout.\11\ This term currently is defined in Regulation 1.3(yy) to

    mean:

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    \11\ See, e.g., Regulations 4.10(f) and (g), which respectively

    define the terms ``direct'' and ``trading program;''

    4.12(b)(1)(i)(D), which provides an exemption from CPO registration

    where, among other things, the pool at issue ``will trade * * *

    commodity interests in a manner solely incidental to its securities

    trading activities;'' 4.22(a)(1), which requires itemization in a

    pool's periodic Account Statement of certain information concerning

    commodity interest trading; 4.23 and 4.33, which respectively

    require CPOs and CTAs to make and keep certain books and records

    relating to commodity interest trading; and 4.24 and 4.34, which

    respectively require CPOs and CTAs to disclose specified information

    with respect to ``commodity interests.''

    (1) Any contract for the purchase or sale of a commodity for

    future delivery;

    (2) Any contract, agreement or transaction subject to Commission

    regulation under section 4c or 19 of the Act; and

    (3) Any contract, agreement or transaction subject to Commission

    jurisdiction under section 2(c)(2) of the Act.

    To ensure that the Part 4 regulations adequately and accurately

    encompass swap transactions, the Proposal would adopt in new Regulation

    4.10(a) a definition of the term ``commodity interest'' to be employed

    for the purposes of Part 4. That definition would include the text of

    existing Regulation 1.3(yy) along with reference to the term ``swap''

    as defined in Section 1a(47) of the CEA.\12\

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    \12\ Section 721(a) of the Dodd-Frank Act added this new

    definition to Section 1a of the CEA.

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    At various regulations throughout Part 4, the Proposal would insert

    ``swap,'' ``swap transaction'' or a similar term. See the proposed

    amendments to Regulations 4.23(a)(1), 4.24(g), (h)(1), and (i)(2) for

    CPOs and Regulations 4.34(g) and 4.34(i)(2) for CTAs. For example,

    regulation 4.23(a)(1) would be amended to include ``swap type and

    counterparty'' in the itemized daily record that a CPO must make and

    keep with respect to a pool's commodity interest transactions.

    At other Part 4 regulations, the Proposal would include the term

    ``swap dealer'' among the persons for whom a CPO or CTA must provide

    information in its Disclosure Document and a CPO must provide

    information in a pool's periodic Account Statement. See the proposed

    amendments to Regulations 4.22(a)(3), 4.24(j)(1), (j)(3), (l)(1), and

    (l)(2) for CPOs and Regulations 4.34(j)(1), (j)(3), (k)(1) and (k)(2)

    for CTAs. For example, Regulations 4.24(j) and 4.34(j) would be amended

    to include swap dealers in the group of persons as to which conflicts

    of interest must be disclosed by CPOs and CTAs. Also, the Proposal

    would include a registered swap dealer among the persons listed in

    Regulation 4.7(a)(2) that do not have to satisfy a portfolio

    requirement in order to be a qualified eligible person (QEP), such that

    a CPO or CTA that has claimed relief under Regulation 4.7 may accept

    the swap dealer as a pool participant or advisory client without regard

    to the size of its investment portfolio. This would be consistent with

    the current treatment of other financial intermediaries registered with

    the Commission (such as futures commission merchants and retail foreign

    exchange dealers) as QEPs under Regulation 4.7(a)(2).

    Yet other proposed amendments would require a CPO or CTA to make

    and keep certain books and records generated by the swap transactions

    in which they engage on behalf of not only their pool participants and

    clients, but also themselves. See the proposed amendments to

    Regulations 4.23(a)(7) and (b)(1) for CPOs and Regulations 4.33(a)(6)

    and (b)(1) for CTAs. The proposed amendments to Regulations 4.23(a)(7)

    and 4.33(a)(6) would require CPOs and CTAs to retain each

    acknowledgment of a swap transaction received from a swap dealer. The

    proposed amendments to Regulations 4.23(b)(1) and 4.33(b)(1) would make

    clear that if a CPO or CTA was a counterparty to a swap transaction,

    then it would be subject to the swap data recordkeeping and reporting

    requirements of Part 45.\13\

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    \13\ See Proposed Regulation 45.2, 75 FR 76574. In this regard,

    the Commission notes that it intends to propose regulations

    concerning recordkeeping and reporting requirements for ``pre-

    enactment swaps'' and ``transition swaps,'' as those terms will be

    defined in that proposal. The Commission further intends to provide

    a cross-reference in Regulations 4.23(b)(1) and 4.33(b)(1) to any

    such requirements it may adopt.

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    The Proposal would also amend Regulation 4.30. Currently, this

    regulation provides:

    No commodity trading advisor may solicit, accept or receive from

    an existing or prospective client funds, securities or other

    property in the trading advisor's name (or extend credit in lieu

    thereof) to purchase, margin, guarantee or secure any commodity

    interest of the client; Provided, however, That this section shall

    not apply to a futures commission merchant that is registered as

    such under the Act or to a leverage transaction merchant that is

    registered as a commodity trading advisor under the Act or to a

    retail foreign exchange dealer that is registered as such under the

    Act.

    Because swap dealers will generally fall within the statutory

    definition of CTA, and because a swap dealer engaging in uncleared swap

    transactions may be accepting funds or other property from its

    counterparties as variation and initial margin payments,\14\ the

    Commission is proposing to amend Regulation 4.30 by excluding a

    registered swap dealer from the regulation's prohibition in connection

    with a swap that is not cleared through a derivatives clearing

    organization. This action would result in four distinct categories of

    intermediaries being excluded from the operative requirements of

    Regulation 4.30. Accordingly, the Commission also is proposing to amend

    the regulation by reorganizing its text where applicable to these

    exclusions.

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    \14\ The Commission intends to address the circumstances in

    which non-bank swap dealers may be required or permitted to accept

    margin payments in uncleared swap transactions in a future proposed

    rulemaking. Accordingly, this proposed amendment to Regulation 4.30

    should not be interpreted to impose or authorize any such margin

    requirements.

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    Finally, the Proposal would delete Regulation 4.32. This regulation

    deals with trading by a registered CTA on or subject to the rules of a

    derivatives transaction execution facility (DTEF) for non-institutional

    numbers. Section 734(a) of the Dodd-Frank Act repeals Section 5a of the

    CEA, which is the section establishing and providing for the regulation

    of DTEFs. Accordingly, because subsequent to the effective date of the

    Dodd-Frank Act \15\ Regulation 4.32 will no longer have a statutory

    basis or purpose, the Proposal would remove and reserve Regulation

    4.32.

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    \15\ Subject to certain limited exceptions, the provisions of

    the Dodd-Frank Act become effective 360 days after its enactment

    (Jul. 21, 2010).

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    The Commission requests comment on the foregoing. In addition, the

    Commission seeks comment on any other amendments it should make to the

    Part 4 regulations to clarify and ensure that that the requirements

    governing the operations and activities of CPOs and CTAs continue to

    apply to these intermediaries in the context of their involvement with

    swap transactions.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \16\ requires that

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

    small businesses.\17\ The Commission previously has established certain

    definitions of ``small entities'' to be used by the Commission in

    evaluating the impact of its rules on such entities in accordance with

    the

    [[Page 11703]]

    RFA.\18\ With respect to CPOs, the Commission previously has determined

    that a CPO is a small entity for the purpose of the RFA if it meets the

    criteria for an exemption from registration under Regulation

    4.13(a)(2).\19\ Thus, because the Proposal applies to registered CPOs,

    the RFA is not applicable to it. As for CTAs, the Commission previously

    has stated that it would evaluate within the context of a particular

    rule proposal whether all or some affected CTAs would be considered to

    be small entities and, if so, the economic impact on them of the

    particular rule. In this regard, the Commission notes that the Proposal

    applies to registered CTAs. Moreover, the Proposal would not have a

    significant economic impact on any CPO or CTA who would be affected

    thereby, because it would merely bring within the current Part 4

    regulatory structure of disclosure, reporting and recordkeeping

    information with respect to swap activities. It would not impose any

    additional operative requirements or otherwise direct or confine the

    activities of CPOs and CTAs.\20\ Accordingly, the Chairman, on behalf

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

    the Proposal would not have a significant economic impact on a

    substantial number of small entities. However, the Commission invites

    the public to comment on this certification.

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    \16\ 5 U.S.C. 601 et seq.

    \17\ By its terms, the RFA does not apply to ``individuals.''

    See 48 FR 14933, n. 115 (Apr. 6, 1983).

    \18\ See 47 FR 18618 (Apr. 30, 1982).

    \19\ Id. at 18619-20.

    \20\ While the Proposal would amend Regulation 4.30, which

    concerns prohibited activities by a CTA regardless of registration

    status, that amendment would extend to persons registered as a swap

    dealer the existing exclusion from the regulation's scope.

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    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \21\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. The Proposal would not, if adopted,

    require any new collection of information from any entity that would be

    subject to the affected regulations. Accordingly, for purposes of the

    PRA, the Chairman, on behalf of the Commission, certifies that the

    proposed amendments to Part 4, if adopted, would not impose any new

    reporting or recordkeeping requirements.

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    \21\ 44 U.S.C. 3501 et seq.

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    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \22\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

    the CEA. By its terms, Section 15(a) does not require the Commission to

    quantify the costs and benefits of a rule or to determine whether the

    benefits of the rulemaking outweigh its costs; rather, it simply

    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 five broad areas of market and public

    concern: (1) Protection of market participants and the public; (2)

    efficiency, competitiveness and financial integrity of futures markets;

    (3) price discovery; (4) sound risk management practices; and (5) other

    public interest considerations. 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 its costs, a

    particular rule 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.

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    \22\ 7 U.S.C. 19(a).

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    Summary of Proposed Amendments. As is explained above, the proposed

    amendments to Part 4 would ensure that the Commission's regulations

    governing the operations and activities of CPOs and CTAs reflect

    changes made to the CEA by the Dodd-Frank Act by, e.g., including swap

    dealers among the intermediaries for whom CPOs and CTAs must disclose

    information to prospective pool participants and clients, and swap

    transaction confirmations among the books and records that CPOs and

    CTAs must make and keep.

    Costs. With respect to costs, the Commission has determined that

    the costs of the Proposal would not be significant. This is because the

    Proposal would simply conform the language of the existing Part 4

    regulatory scheme to take into account the changes made to the

    Commission's overall regulatory scheme as a result of the Dodd-Frank

    Act. There will be additional disclosure and recordkeeping requirements

    on CPOs and CTAs as a result of the Proposal. The information required

    for compliance should be readily available, with minimal administrative

    burdens, to CPOs and CTAs.

    Benefits. With respect to benefits, the Commission has determined

    that the benefits of the Proposal would be significant. This is because

    it would enhance the customer protections currently provided under Part

    4 by increasing the transparency of swap activities by CPOs and CTAs to

    their pool participants and clients. This will be accomplished by

    including information on swap activities in the disclosure, reporting

    and recordkeeping scheme already existing under Part 4.

    Public Comment. The Commission invites public comment on its cost-

    benefit considerations. Commenters are also invited to submit any data

    or other information that they may have quantifying or qualifying the

    costs and benefits of the Proposal with their comment letters.

    List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Customer protection, Reporting and

    recordkeeping requirements, Swaps.

    For the reasons presented above, the Commission proposes to amend

    Chapter I of Title 17 of the Code of Federal Regulations as follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

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

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 23,

    as amended by Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (Jul. 21,

    2010).

    2. Section 4.7 is amended by adding paragraph (a)(2)(i)(C) 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) * * *

    (2) * * *

    (i) * * *

    (C) A swap dealer registered pursuant to section 4s(a)(1) of the

    Act, or a principal thereof;

    * * * * *

    3. Section 4.10 is amended by adding paragraph (a) to read as

    follows:

    Sec. 4.10 Definitions.

    * * *

    (a) Commodity interest means:

    (1) Any contract for the purchase or sale of a commodity for future

    delivery;

    (2) Any contract, agreement or transaction subject to Commission

    regulation under section 4c or 19 of the Act;

    (3) Any contract, agreement or transaction subject to Commission

    jurisdiction under section 2(c)(2) of the Act; and

    [[Page 11704]]

    (4) A swap as defined under section 1a(47) of the Act and any

    Commission regulations implemented thereunder.

    * * * * *

    4. Section 4.22 is amended by revising paragraph (a)(3) to read as

    follows:

    Sec. 4.22 Reporting to pool participants.

    (a) * * *

    (3) The Account Statement must also disclose any material business

    dealings between the pool, the pool's operator, commodity trading

    advisor, futures commission merchant, retail foreign exchange dealer,

    swap dealer, or the principals thereof that previously have not been

    disclosed in the pool's Disclosure Document or any amendment thereto,

    other Account Statements or Annual Reports.

    * * * * *

    5. Section 4.23 is amended by:

    a. Revising paragraphs (a)(1) and (a)(7); and

    b. Revising paragraph (b)(1), to read as follows:

    Sec. 4.23 Recordkeeping.

    * * * * *

    (a) * * *

    (1) An itemized daily record of each commodity interest transaction

    of the pool, showing the transaction date, quantity, commodity

    interest, and, as applicable, price or premium, delivery month or

    expiration date, whether a put or a call, strike price, underlying

    contract for future delivery or underlying physical, swap type and

    counterparty, the futures commission merchant and/or retail foreign

    exchange dealer carrying the account and the introducing broker, if

    any, whether the commodity interest was purchased, sold (including, in

    the case of a retail forex transaction, offset), exercised, expired

    (including, in the case of a retail forex transaction, whether it was

    rolled forward), and the gain or loss realized.

    * * * * *

    (7) Copies of each confirmation or acknowledgment of a commodity

    interest transaction of the pool, and each purchase and sale statement

    and each monthly statement for the pool received from a futures

    commission merchant or retail foreign exchange dealer or swap dealer.

    * * * * *

    (b) * * *

    (1) An itemized daily record of each commodity interest transaction

    of the commodity pool operator and each principal thereof, showing the

    transaction date, quantity, commodity interest, and, as applicable,

    price or premium, delivery month or expiration date, whether a put or a

    call, strike price, underlying contract for future delivery or

    underlying physical, the futures commission merchant or retail foreign

    exchange dealer carrying the account and the introducing broker, if

    any, whether the commodity interest was purchased, sold, exercised, or

    expired, and the gain or loss realized; Provided, however, that if the

    pool operator is a counterparty to a swap, it must comply with the swap

    data recordkeeping and reporting requirements of part 45 of this

    chapter.

    * * * * *

    6. Section 4.24 is amended by:

    a. Revising paragraph (g);

    b. Revising paragraph (h)(1)(i);

    c. Revising paragraph (i)(2)(xii);

    d. Revising paragraphs (j)(1)(vi) and (j)(3); and

    e. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and

    (l)(2)(i), to read as follows:

    Sec. 4.24 General disclosures required.

    * * * * *

    (g) Principal risk factors. A discussion of the principal risk

    factors of participation in the offered pool. This discussion must

    include, without limitation, risks relating to volatility, leverage,

    liquidity, counterparty creditworthiness, as applicable to the types of

    trading programs to be followed, trading structures to be employed and

    investment activity (including retail forex and swap transactions)

    expected to be engaged in by the offered pool.

    (h) * * *

    (1) * * *

    (i) The approximate percentage of the pool's assets that will be

    used to trade commodity interests, securities and other types of

    interests, categorized by type of commodity or market sector, type of

    swap, type of security (debt, equity, preferred equity), whether traded

    or listed on a regulated exchange market, maturity ranges and

    investment rating, as applicable;

    * * * * *

    (i) * * *

    (2) * * *

    (xii) Any costs or fees included in the spread between bid and

    asked prices for retail forex or, if known, swap transactions; and

    * * * * *

    (j) * * *

    (1) * * *

    (vi) Any other person providing services to the pool, soliciting

    participants for the pool, or acting as a counterparty to the pool's

    retail forex transactions, acting as a swap dealer with respect to the

    pool, or acting as a counterparty to the pool's swap transactions.

    * * * * *

    (3) Included in the description of such conflicts must be any

    arrangement whereby a person may benefit, directly or indirectly, from

    the maintenance of the pool's account with the futures commission

    merchant and/or retail foreign exchange dealer and/or from the

    maintenance of the pool's positions with a swap dealer, or from the

    introduction of the pool's account to a futures commission merchant

    and/or retail foreign exchange dealer and/or swap dealer by an

    introducing broker (such as payment for order flow or soft dollar

    arrangements) or from an investment of pool assets in investee pools or

    funds or other investments.

    * * * * *

    (l) * * *

    (1) * * *

    (iii) The pool's futures commission merchants and/or retail foreign

    exchange dealers and/or swap dealers and its introducing brokers, if

    any.

    (2) With respect to a futures commission merchant and/or retail

    foreign exchange dealer and/or swap dealer or an introducing broker, an

    action will be considered material if:

    (i) The action would be required to be disclosed in the notes to

    the futures commission merchant's, retail foreign exchange dealer's,

    swap dealer's or introducing broker's financial statements prepared

    pursuant to generally accepted accounting principles;

    * * * * *

    7. Section 4.30 is revised to read as follows:

    Sec. 4.30 Prohibited activities.

    (a) Except as provided in paragraph (b) of this section, no

    commodity trading advisor may solicit, accept or receive from an

    existing or prospective client funds, securities or other property in

    the trading advisor's name (or extend credit in lieu thereof) to

    purchase, margin, guarantee or secure any commodity interest of the

    client.

    (b) The prohibition in paragraph (a) of this section shall not

    apply to:

    (1) A futures commission merchant that is registered as such under

    the Act;

    (2) A leverage transaction merchant that is registered as a

    commodity trading advisor under the Act;

    (3) A retail foreign exchange dealer that is registered as such

    under the Act; or

    (4) A swap dealer that is registered as such under the Act, with

    respect to funds, securities or other property accepted to purchase,

    margin, guarantee

    [[Page 11705]]

    or secure any swap that is not cleared through a derivatives clearing

    organization.

    Sec. 4.32 [Removed and Reserved]

    7. Section 4.32 is removed and reserved.

    8. Section 4.33 is amended by

    a. Revising paragraph (a)(6); and

    b. Revising paragraph (b)(1), to read as follows:

    Sec. 4.33 Recordkeeping.

    * * * * *

    (a) * * *

    (6) Copies of each confirmation or acknowledgment of a commodity

    interest transaction, and each purchase and sale statement and each

    monthly statement received from a futures commission merchant or a

    retail foreign exchange dealer or a swap dealer.

    * * * * *

    (b) * * *

    (1) An itemized daily record of each commodity interest transaction

    of the commodity trading advisor, showing the transaction date,

    quantity, commodity interest, and, as applicable, price or premium,

    delivery month or expiration date, whether a put or a call, strike

    price, underlying contract for future delivery or underlying physical,

    the futures commission merchant and/or retail foreign exchange dealer

    carrying the account and the introducing broker, if any, whether the

    commodity interest was purchased, sold (including, in the case of a

    retail forex transaction, offset), exercised, expired (including, in

    the case of a retail forex transaction, whether it was rolled forward),

    and the gain or loss realized; Provided, however, that if the trading

    advisor is a counterparty to a swap, it must comply with the swap data

    recordkeeping and reporting requirements of part 45 of this chapter.

    * * * * *

    9. Section 4.34 is amended by

    a. Revising paragraph (g);

    b. Revising paragraph (i)(2);

    c. Revising paragraph (j)(3); and

    d. Revising paragraphs (k)(1)(iii), (k)(2) introductory text and

    (k)(2)(i), to read as follows:

    Sec. 4.34 General disclosures required.

    * * * * *

    (g) Principal risk factors. A discussion of the principal risk

    factors of this trading program. This discussion must include, without

    limitation, risks due to volatility, leverage, liquidity, and

    counterparty creditworthiness, as applicable to the trading program and

    the types of transactions and investment activity expected to be

    engaged in pursuant to such program (including retail forex and swap

    transactions, if any).

    * * * * *

    (i) * * *

    (2) Where any fee is determined by reference to a base amount

    including, but not limited to, ``net assets,'' ``gross profits,'' ``net

    profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading

    advisor must explain how such base amount will be calculated. Where any

    fee is based on the difference between bid and asked prices on retail

    forex or swap transactions, the trading advisor must explain how such

    fee will be calculated;

    * * * * *

    (j) * * *

    (3) Included in the description of any such conflict must be any

    arrangement whereby the trading advisor or any principal thereof may

    benefit, directly or indirectly, from the maintenance of the client's

    commodity interest account with a futures commission merchant and/or

    retail foreign exchange dealer, and/or from the maintenance of the

    client's positions with a swap dealer or from the introduction of such

    account through an introducing broker (such as payment for order flow

    or soft dollar arrangements).

    (k) * * *

    (1) * * *

    (iii) Any introducing broker through which the client will be

    required to introduce its account to the futures commission merchant

    and/or retail foreign exchange dealer and/or swap dealer.

    (2) With respect to a futures commission merchant, retail foreign

    exchange dealer, swap dealer or introducing broker, an action will be

    considered material if:

    (i) The action would be required to be disclosed in the notes to

    the futures commission merchant's, retail foreign exchange dealer's,

    swap dealer's or introducing broker's financial statements prepared

    pursuant to generally accepted accounting principles;

    * * * * *

    Issued in Washington, DC, on February 24, 2011, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Amendments to Commodity Pool Operator and Commodity

    Trading Advisor Regulations Resulting from the Dodd-Frank Act--

    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, 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 rule that will amend certain provisions

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

    and activities of commodity pool operators (CPOs) and commodity

    trading advisors (CTAs). The proposed amendments would ensure that

    CFTC regulations with regard to CPOs and CTAs reflect changes made

    to the Commodity Exchange Act by the Dodd-Frank Act. Consistent with

    the Dodd-Frank Act revisions to the definitions of CPOs and CTAs to

    include pools involved in swaps and advising on swaps, the proposed

    amendments will enhance current customer protections by increasing

    the transparency of swap activities by CPOs and CTAs to their pool

    participants and clients. The proposed rule would require that this

    information be included in the disclosure, reporting and

    recordkeeping scheme that currently exists for CPOs and CTAs under

    Part 4.

    [FR Doc. 2011-4657 Filed 3-2-11; 8:45 am]

    BILLING CODE P

    Last Updated: March 3, 2011



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