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2012-3388

  • Federal Register, Volume 77 Issue 37 (Friday, February 24, 2012)[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]

    [Proposed Rules]

    [Pages 11345-11352]

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

    [FR Doc No: 2012-3388]

    Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 /

    Proposed Rules

    [[Page 11345]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 4

    Harmonization of Compliance Obligations for Registered Investment

    Companies Required To Register as Commodity Pool Operators

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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    SUMMARY: The Commodity Futures Trading Commission is proposing

    amendments to its regulations regarding requirements applicable to

    investment companies registered under the Investment Company Act of

    1940 (``registered investment companies'') whose advisors will be

    subject to registration as commodity pool operators due to changes that

    the Commission is adopting.

    DATES: Comments should be received on or before April 24, 2012.

    ADDRESSES: Comments may be submitted by any of the following methods:

    Agency Web site, via its Comments Online Process: Comments

    may be submitted to http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx. Follow the instructions for submitting

    comments on the Web site.

    Mail: David A. Stawick, Secretary, 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.

    ``Regulation 4.5 Harmonization'' must be in the subject

    field of comments submitted electronically, and clearly indicated 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 www.cftc.gov. You should submit only information that you

    wish to make available publicly. If you wish the CFTC to consider

    information that may be exempt from disclosure under the Freedom of

    Information Act, a petition for confidential treatment of the exempt

    information may be submitted according to the established procedures in

    CFTC Regulation 145.9 (17 CFR 145.9).

    The CFTC reserves the right, but shall have no obligation,

    to: review, prescreen, 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 which 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: Kevin P. Walek, Assistant Director,

    Telephone: (202) 418-5463, Email: kwalek@cftc.gov, Amanda Lesher Olear,

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

    Michael Ehrstein, Attorney-Advisor, Telephone: 202-418-5957, Email:

    mehrstein@cftc.gov, Division of Swap Dealer and Intermediary Oversight,

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

    Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Statutory and Regulatory Background

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

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

    Commodity Trading Advisors (``CTAs''),\2\ to exclude any entity from

    registration as a CPO or CTA,\3\ and to require ``[e]very commodity

    trading advisor and commodity pool operator registered under [the CEA]

    to maintain books and records and file such reports in such form and

    manner as may be prescribed by the Commission.'' \4\ The Commission

    also has the 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].''\5\ 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 the Commission, there is no

    substantial public interest to be served by the registration.'' \6\ It

    is pursuant to this authority that the Commission has promulgated the

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

    4.5.\7\

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

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

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

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

    regulations, entities registered as CPOs have reporting obligations

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

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

    \6\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p. 20.

    \7\ 17 CFR 4.5. See 68 FR 47231 (Aug. 8, 2003).

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    B. Reinstatement of Trading and Marketing Criteria in Sec. 4.5

    In February 2011, the Commission proposed to revise the

    requirements for determining which persons should be required to

    register as a CPO under Sec. 4.5.\8\ The Commission is adopting the

    proposed changes to Sec. 4.5, with some minor modifications, and is

    proposing certain provisions to facilitate compliance by registered

    investment companies with the Commission's disclosure, reporting, and

    recordkeeping requirements. The proposed amendments that follow are

    based on the consideration of the comments that were submitted on the

    previously proposed amendments to Sec. 4.5, information provided

    during a staff roundtable on July 16, 2011 (``Roundtable''),\9\ and

    meetings with interested parties.\10\

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    \8\ 76 FR 7976 (Feb. 12, 2011).

    \9\ See Notice of CFTC Staff Roundtable Discussion on Proposed

    Changes to Registration and Compliance Regime for Commodity Pool

    Operators and Commodity Trading Advisors, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.

    \10\ See generally, http://comments.cftc.gov/PublicComments/CommentList.aspx?id=973.

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    C. Proposed Harmonization Provisions

    Many commenters noted that sponsors of registered investment

    companies which also would be required to register as CPOs would be

    subject to duplicative, inconsistent, and possibly conflicting

    disclosure and reporting requirements. In comment letters, meetings,

    and at the Roundtable, a number of suggestions were made regarding the

    manner in which the Securities and Exchange Commission (``SEC'') and

    CFTC requirements could be harmonized. Specific areas identified by the

    commenters as needing harmonization include: the timing of delivery of

    Disclosure Documents to prospective participants; the signed

    acknowledgement requirement for receipt of Disclosure Documents; the

    cycle for updating Disclosure Documents; The timing of financial

    reporting to participants; the requirement that a CPO maintain its

    books and records on site; the required disclosure of fees; the

    required disclosure of past performance; the inclusion of mandatory

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

    prospectus of open-ended registered investment companies.

    [[Page 11346]]

    Several commenters suggested that the Commission make available

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

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

    funds (``ETFs'').\11\ Other commenters suggested that where

    requirements are inconsistent, the Commission should defer to SEC

    requirements. A few commenters made recommendations about the treatment

    of specific disclosures, such as presenting both SEC and CFTC-required

    fee information and presenting certain performance information required

    by the CFTC in the Statement of Additional Information (``SAI''). At

    least one commenter noted that registered investment companies should

    be required to comply with all disclosure and other requirements

    applicable to registered CPOs.

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    \11\ 76 FR 28641 (May 18, 2011).

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    The Commission has carefully considered the comments regarding

    harmonization and has determined to propose the following exemptive

    provisions that would be available to advisors of registered investment

    companies who are required to register as CPOs.

    1. Delivery of Disclosure Documents and Periodic Reports

    Part 4 of the Commission's regulations impose certain risk

    disclosure, reporting, and recordkeeping obligations on registered

    CPOs. Section 4.21 \12\ of the Commission's regulations requires that

    each CPO registered or required to be registered with the Commission

    deliver a Disclosure Document prepared in accordance with Sec. Sec.

    4.24 and 4.25,\13\ which set forth the specific information required to

    be disclosed, including the past performance of the offered pool to

    each prospective participant in a pool that it operates or intends to

    operate. Section 4.21 further provides that the CPO may not accept or

    receive funds, securities, or other property from a prospective

    participant unless the CPO first receives from the prospective

    participant a signed and dated acknowledgment stating that the

    prospective participant received a Disclosure Document for the pool.

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    \12\ 17 CFR 4.21.

    \13\ 17 CFR 4.24 and 4.25.

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    With respect to a CPO's reporting obligations, Sec. 4.22 \14\

    requires that each CPO registered or required to be registered

    periodically distribute to each participant in each pool that it

    operates an Account Statement presented in the form of a Statement of

    Income (Loss) and a Statement of Changes in Net Asset Value for the

    prescribed period. The Account Statement must be distributed monthly

    for pools with net assets of more than $500,000, and otherwise at least

    quarterly.\15\ The financial statements must be presented in accordance

    with generally accepted accounting principles, consistently

    applied.\16\ With respect to a CPO's recordkeeping obligations, Sec.

    4.23 \17\ of the Commission's regulations requires, in relevant part,

    that each CPO who is registered or required to be registered must make

    and keep the books and records specified in the regulation ``at its

    main business office.''

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    \14\ 17 CFR 4.22.

    \15\ 17 CFR 4.22(b).

    \16\ 17 CFR 4.22(a).

    \17\ 17 CFR 4.23.

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    2. Comments Received Regarding Recently Adopted Exemptive Relief for

    Exchange Traded Funds

    In response to the Commission's proposal to amend Sec. 4.5,

    several commenters suggested that the Commission consider extending the

    exemptive relief that it recently adopted for CPO's operating ETFs

    under Sec. 4.12(c),\18\ which makes available to such CPOs specified

    relief from the Disclosure Document delivery and acknowledgment

    requirements of Sec. 4.21, the monthly Account Statement delivery

    requirement of Sec. 4.22, and the requirement to keep the CPO's books

    and records at its main business address in Sec. 4.23. The relief

    permits CPOs to comply with the Disclosure Document and account

    statement delivery requirements by making such documents available on

    their web sites, and to maintain their records with specified third

    parties, on the condition that certain information and representations

    are filed with the CPO's notice claiming relief.\19\ The criteria for

    claiming this relief are that: (1) The units of participation in the

    pool will be offered and sold pursuant to an effective registration

    statement under the Securities Act of 1933,\20\ and (2) the units will

    be listed for trading on a national securities exchange registered as

    such under the Securities Exchange Act of 1934.\21\ In its release

    proposing ETF relief, the Commission noted that historically, ETFs have

    been investment companies registered under the Investment Company Act

    of 1940 either as unit investment trusts or as open-end investment

    companies.\22\ The Commission did not, however, make such registration

    a condition of relief. Commenters noted that, like ETFs, the

    distribution and subscription mechanisms for registered investment

    companies would make it difficult for them to meet the Disclosure

    Document delivery and acknowledgment requirements under the

    Commission's regulations. Commenters and Roundtable panelists also

    noted that the records of registered investment companies often are

    maintained by third parties, such as administrators, making it

    difficult for registered investment companies to comply with the

    requirement of Sec. 4.23 that a pool's books and records be maintained

    at the CPO's main business office.\23\ To address these concerns, the

    Commission is proposing to add an alternative criterion under Sec.

    4.12(c) that will permit registered investment companies to claim the

    disclosure, reporting, and recordkeeping relief currently available to

    ETFs.

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    \18\ 17 CFR 4.12(c).

    \19\ Id.

    \20\ 15 U.S.C. 77a, et seq.

    \21\ 15 U.S.C. 78a, et seq.

    \22\ 75 FR 54794, 54795 (Sept. 9, 2010).

    \23\ 17 CFR 4.23.

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    Several commenters further requested that the Commission extend the

    same relief it made available to operators of ETFs for delivery of

    required disclosures and periodic reports to CPOs of publicly offered

    commodity pools, noting that such offerings are regulated by the CFTC,

    SEC, National Futures Association (``NFA''), Financial Industry

    Regulatory Authority (``FINRA''), and each state in which they are

    offered. The Commission agrees that for purposes of the exemption,

    there is no useful distinction between publicly offered pools whose

    units are listed for trading on a national securities exchange, and

    those which are not. Therefore, the Commission is proposing to amend

    Sec. 4.12(c) such that the CPO of any pool whose units of

    participation will be offered and sold pursuant to an effective

    registration statement under the Securities Act of 1933 may claim the

    relief from the delivery and acknowledgement requirements under Sec.

    4.21, certain periodic financial reporting obligations under Sec.

    4.22, and the requirement that records be maintained at the CPO's main

    office under Sec. 4.23, available under Sec. 4.12(c) with respect to

    that pool.

    3. Content and Timing of Disclosure Documents

    Many of the disclosures required by part 4 of the Commission's

    regulations are consistent with SEC-required disclosures. Where CFTC

    requirements differ slightly, the Commission believes that CFTC-

    required disclosures can be presented concomitant with SEC-required

    information in a registered investment company's prospectus. To

    [[Page 11347]]

    address the few instances where conflicts in disclosure have been

    identified, the Commission is proposing relief to harmonize these

    requirements. With respect to performance, Sec. 4.25(b) specifies that

    if the pool has traded commodity interests for three years or more,

    during which at least seventy-five percent of its contributions have

    been made by persons unaffiliated with the CPO, CTAs, or their

    principals, the only required performance is that of the offered

    pool.\24\ If a pool has not operated for at least three years, the CPO

    must present the performance of other pools and accounts enumerated in

    Sec. Sec. 4.25(c)(2)-(5).\25\ The Commission is proposing that the

    performance of other pools and accounts required to be disclosed by

    Sec. Sec. 4.25(c)(2)-(5) may be presented in the registered investment

    company's SAI. The Commission notes that SEC requirements may conflict

    with CFTC requirements with respect to reporting past performance and

    accordingly seeks comment below.\26\ In addition, the Commission is

    proposing that, in lieu of the standard cautionary statement prescribed

    by Sec. 4.24(a),\27\ the cover page of the registered investment

    company's prospectus may contain a statement that combines the language

    required by both Sec. 4.24(a) and Rule 481(b)(1) under the Securities

    Act of 1933.\28\ With respect to the break-even point\29\ required by

    Sec. 4.24(d)(5),\30\ the Commission will consider the forepart of the

    document to be the section immediately following all disclosures

    required by SEC Form N-1A \31\ to be included in the summary

    prospectus, or otherwise, for registered investment companies using

    Form N-2, in the forepart of the prospectus. Any other information

    required to be presented in the forepart of the document by Sec.

    4.24(d), but that is not included in the summary section of the

    prospectus for open-ended registered investment companies, may also be

    presented immediately following the summary section of the prospectus

    for open-ended funds, or otherwise, for registered investment companies

    using Form N-2, in the forepart of the prospectus. Finally, with

    respect to disclosure of fees and expenses required by Sec. 4.24(i),

    any such expenses that are not included in the fee table required by

    Item 3 of Form N-1A or Item 3 of Form N-2 would be disclosed in the

    prospectus, along with the tabular presentation of the calculation of

    the pool's break-even point required by Sec. 4.24(i)(6). The

    Commission continues to believe that the inclusion of the tabular

    presentation of the calculation of the break-even point consistent with

    the Commission's regulations is a necessary disclosure because, among

    other requirements, it mandates a greater level of detail regarding

    brokerage fees and does not assume a specific rate of return. The

    Commission believes that this results in meaningful disclosure through

    the break-even analysis and facilitates an investor's assessment of a

    registered investment company that uses derivatives.

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    \24\ 17 CFR 4.25(b).

    \25\ 17 CFR 4.25(c)(2)-(5).

    \26\ The Commission has had preliminary discussions with SEC

    staff on this issue. The SEC staff stated that it would consider

    requests for no-action relief regarding the performance

    presentations, if necessary and appropriate.

    \27\ Section 4.24(a) of the Commission's regulations requires

    that each disclosure document prepared and distributed by registered

    CPOs prominently display the following prescribed cautionary

    statement on its cover: THE COMMODITY FUTURES TRADING COMMISSION HAS

    NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE

    COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE

    DOCUMENT. 17 CFR 4.24(a).

    \28\ 17 CFR 230.481.

    \29\ Section 4.10(j) of the Commission's regulations defines the

    ``break-even point'' as ``the trading profit that a pool must

    realize in the first year of a participant's investment to equal all

    fees and expenses such that such participant will recoup its initial

    investment, as calculated pursuant to rules promulgated by a

    registered futures association pursuant to section 17(j) of the

    Act.'' 17 CFR 4.10(j)(1). The break-even point must be expressed in

    terms of dollars and as a percentage of the minimum unit of initial

    investment. 17 CFR 4.10(j)(2). It must also assume the redemption of

    the investment as of the close of the first year of investment. Id.

    \30\ 17 CFR 4.24(d)(5).

    \31\ 17 CFR 274.11a.

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    Commenters noted that the CFTC's and SEC's timing requirements for

    Disclosure Document updates were inconsistent. Section 4.26 of the

    Commission's regulations specifies that a Disclosure Document may be

    used for nine months from the date of the document before a new

    Disclosure Document must be prepared and filed. Conversely, provisions

    of the securities laws effectively require an annual prospectus update.

    Section 10(a)(3) of the Securities Act of 1933 specifies that ``when a

    prospectus is used more than nine months after the effective date of

    the registration statement, the information contained therein shall be

    as of a date not more than sixteen months prior to such use * * *.''

    \32\ Because financial statements are prepared annually as of the end

    of the investment company's fiscal year, and information from the

    financial statements is included in the prospectus, the operation of

    Section 10(a)(3) results in an annual prospectus updating cycle. To

    address this inconsistency, the Commission is proposing to require that

    CPOs and CTAs file updates of all Disclosure Documents twelve months

    from the date of the document.

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    \32\ 15 U.S.C. 77j.

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    Some commenters, including NFA, raised an operational issue in

    connection with Disclosure Document amendments filed pursuant to Sec.

    4.26(c).\33\ NFA noted that CPOs filing amended Disclosure Documents

    cannot distribute the document until NFA accepts the disclosure

    document. NFA suggested that the Commission consider whether it may be

    appropriate to allow CPOs of pools that provide for daily liquidity to

    post the Disclosure Document with the highlighted changes on their

    internet web sites for pool participants at the same time the CPO files

    with NFA, with the final document posted upon completion of the NFA

    review process. The Commission notes that Sec. 4.26(d)(2) currently

    permits CPOs to provide Disclosure Document updates to participants at

    the same time such updates are filed with NFA. Therefore, if the

    proposed relief is adopted by the Commission, CPOs claiming such relief

    may follow the procedure recommended by NFA with no additional action

    by the Commission.

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    \33\ 17 CFR 4.26.

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    4. Reports--Timing and Certification

    Section 4.22(a) requires CPOs to provide periodic reports,

    generally monthly, to participants in the pools that they operate. SEC

    regulations require that registered investment companies provide

    semiannual reports to shareholders. Regulations of both commissions

    require provision of annual financial statements to commodity pool

    participants and investment company shareholders, respectively.\34\

    Some commenters noted that the requirement to prepare and provide

    monthly account statements would be burdensome because registered

    investment companies are not required to do so under SEC regulations,

    and suggested that the Commission accept the reporting required under

    securities laws. The Commission has carefully considered these comments

    and determined not to propose relief regarding the content or timing of

    the monthly account statement, as the information required to prepare

    the account statement should be readily available to the operator of an

    investment vehicle maintaining records of its trading activity and

    other operations in accordance with recordkeeping requirements under

    the CEA and applicable securities laws. Registered investment companies

    will

    [[Page 11348]]

    be able to satisfy the requirement to deliver account statements to

    participants by making such statements available on their internet Web

    sites, thereby substantially reducing any burden under Sec. 4.22(a).

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    \34\ 17 CFR 4.22 and 270.30e-1.

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    One commenter noted that the language required by the CFTC and the

    SEC in their respective periodic and annual report certifications is

    not identical, and encouraged the Commission to work with the SEC

    either to accept one language in lieu of the other or to develop agreed

    upon language for these certifications. Section 4.22(h) requires the

    individual making the oath or affirmation on behalf of the CPO to

    affirm that, to the best of his or her knowledge and belief, the

    information contained in the document is accurate and complete. The

    first item in the certification required by SEC Form N-CSR is: ``Based

    on my knowledge, this report does not contain any untrue statement of a

    material fact or omit to state a material fact necessary to make the

    statements made, in light of the circumstances under which such

    statements were made, not misleading with respect to the period covered

    by this report.'' The certification under Sec. 4.22(h) must be

    included with the periodic and annual reports provided to participants

    and with the annual report filed with NFA. The certification required

    by SEC Form N-CSR is made available through EDGAR, but does not have to

    be provided to shareholders. Because the Form N-CSR certification

    includes language that is substantively consistent with the

    certification required under Sec. 4.22(h), the Commission will accept

    the SEC's certification as meeting the requirement under Sec. 4.22(h),

    as long as such certification is part of the Form N-CSR filed with the

    SEC.

    The Commission seeks comment on the proposed harmonization

    provisions. In particular, do any provisions of part 4 in addition to

    those identified in the proposal need to be harmonized? For instance,

    as noted in the Commission's final rulemaking, Commodity Pool Operators

    and Commodity Trading Advisors: Amendments to Compliance

    Obligations,\35\ the Commission is considering adopting a family

    offices exemption from CPO registration akin to the exemption adopted

    by the SEC.\36\ What are the factors that weigh in favor or against

    such an exemption? Do the proposed harmonization provisions for break-

    even analysis and performance disclosure strike the appropriate balance

    between achieving the Commission's objective of providing material

    information to pool participants, and reducing duplicative or

    conflicting disclosure? Should the Commission consider harmonizing its

    account statement reporting requirement with the SEC's semiannual

    reporting requirement? Should the Commission consider harmonizing its

    past performance reporting requirements with the SEC requirements? Are

    there other approaches to harmonizing these requirements that the

    Commission should consider? Should the Commission consider applying any

    of the harmonization provisions to operators of pools that are not

    registered investment companies?

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    \35\ Published elsewhere in this issue of the Federal Register.

    \36\ See 17 CFR 250.202(a)(11)(G)-1.

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    II. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \37\ requires that agencies,

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

    businesses. The Commission has previously established certain

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

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

    the RFA.\38\

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    \37\ See 5 U.S.C. 601, et seq.

    \38\ 47 FR 18618 (Apr. 30, 1982).

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    CPOs: The Commission has previously determined that registered CPOs

    are not small entities for the purpose of the RFA.\39\ With respect to

    CPOs exempt from registration, the Commission has determined that a CPO

    is a small entity if it meets the criteria for exemption from

    registration under current Rule 4.13(a)(2).\40\ Based on the requisite

    level of sophistication needed to comply with the SEC's regulatory

    regime for registered investment companies and the fact that registered

    investment companies are generally intended to serve as retail

    investment vehicles and do not qualify for exemption under Sec.

    4.13(a)(2), the Commission believes that registered investment

    companies are generally not small entities for purposes of the RFA

    analysis. Moreover, the proposals herein will reduce the burden of

    complying with part 4 for CPOs of registered investment companies. The

    Commission has determined that the proposed regulation will not create

    a significant economic impact on a substantial number of small

    entities.

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    \39\ See 47 FR 18618, 18619 (Apr. 30, 1982).

    \40\ See 47 FR at 18619-20.

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

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

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

    impact on them of any such rule.\41\ The sole aspect of the proposal

    that affects CTAs would allow disclosure documents to be used for 12

    months rather than nine months, thereby reducing the frequency with

    which updates must be prepared. Therefore, the Commission has

    determined that the proposal will not create a significant economic

    impact on a substantial number of small entities. Accordingly, the

    Chairman, on behalf of the Commission hereby certifies pursuant to 5

    U.S.C. 605(b) that the proposed rules, will not have a significant

    impact on a substantial number of small entities.

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    \41\ See 47 FR at 18620.

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    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.\42\ 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'').

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    \42\ See 44 U.S.C. 3501 et seq.

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    The Commission is amending Collection 3038-0023 to allow for an

    increase in response hours for the rulemaking resulting from the

    amendments to Sec. 4.5 that the Commission adopted in a concurrent

    release.\43\ In the context of that rulemaking, the Commission received

    comments asserting that, absent harmonization of the Commission's

    compliance regime for CPOs with that of the SEC for registered

    investment companies, entities operating registered investment

    companies that would be required to register with the Commission would

    not be able to comply with the Commission's regulations and would have

    to discontinue their activities involving commodity interests. Because

    the Commission is proposing provisions to harmonize its compliance

    regime for sponsors or advisors to registered investment companies

    required to register as CPOs, the Commission believes that such

    entities will be able to register with the Commission and comply with

    the applicable compliance obligations.

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    \43\ CITE to FR for Non-Joint Rulemaking.

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    The Commission also is amending Collection 3038-0005 to allow for

    an increase in response hours for the rulemaking associated with

    modified

    [[Page 11349]]

    compliance obligations under part 4 of the Commission's regulations

    resulting from these revisions. 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 will be

    mandatory.

    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.'' \44\ The

    Commission is also required to protect certain information contained in

    a government system of records according to the Privacy Act of

    1974.\45\

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    \44\ See 7 U.S.C. 12.

    \45\ See 5 U.S.C. 552a.

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

    In the Commission's February proposal, the Commission estimated

    that the burden of Sec. 4.5 compliance would be 16.68 hours for an

    estimated 416 CPOs and CTAs that would be obligated to comply.\46\

    There currently is no source of reliable information regarding the

    general use of derivatives by registered investment companies. Because

    of this lack of information, the Commission has derived the estimated

    entities affected and the number of burden hours associated with this

    proposal through the use of statistical analysis. According to the one

    source of data available to the Commission, in 2010, there were 669

    sponsors of 9,719 registered investment companies, including mutual

    funds, closed end funds, exchange traded funds, and unit investment

    trusts.\47\ In the comment letter submitted by the Investment Company

    Institute (``ICI'') with respect to the Commission's February proposal

    the ICI stated that it surveyed its membership and 13 sponsors

    responded representing 2,111 registered investment companies. Of those

    2,111 registered investment companies, the 13 sponsors estimated that

    485 would trigger registration and compliance obligations under Sec.

    4.5 as amended. This constitutes approximately 23% of the reported

    registered investment companies.

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

    \46\ The Commission notes that the PRA burden proposes that it

    be considered in light of the costs entities may have incurred under

    the part 4 regulations as proposed in the Commodity Pool Operators

    and Commodity Trading Advisors: Amendments to Compliance Obligations

    rulemaking. In that rulemaking, the Commission estimated that

    entities would incur 9.58 burden hours in filing an annual report,

    3.85 burden hours in compiling and distributing periodic account

    statements, and 3.25 burden hours in compiling and distributing

    disclosure documents; in sum, the Commission estimated that these

    provisions would incur a burden in total of 16.68 hours. By

    operation of this proposal, registered investment companies

    regulated by the SEC will be able to use similar documents required

    under SEC regulations to satisfy their CFTC registration and

    compliance requirements under part 4 of the Commission's

    regulations.

    \47\ See 2011 Investment Company Fact Book, Chap. 1 and Data

    Tables, Investment Company Institute (2011), available at http://www.icifactbook.org/.

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

    The Commission then deducted the 2,111 registered investment

    companies discussed in the ICI comment letter from the 9,719 entities

    comprising the universe of registered investment companies, and

    deducted the 13 sponsors surveyed by the ICI from the universe of 669

    fund sponsors to arrive at 656 fund sponsors operating 7,608 registered

    investment companies. This resulted in an average of 11.6 registered

    investment companies being offered per sponsor.

    The Commission then calculated 23% of the 7,608 registered

    investment companies not covered by the ICI survey, which equals 1,750

    registered investment companies that the Commission would expect to

    trigger registration under amended Sec. 4.5. Then, the Commission

    divided this number by the average number of registered investment

    companies operated per sponsor and added the 13 sponsors from the ICI

    survey to reach 164 sponsors expected to be required to register under

    amended Sec. 4.5. Because the Commission cannot state with absolute

    certainty that only 164 entities would be required to register, due to

    the uncertainty inherent in the use of averages, the Commission

    believes that the number of sponsors or advisors required to register

    to be somewhere between 164 and 669 entities. For PRA purposes, the

    Commission believes that it is appropriate to use the midpoint between

    the outer bounds of the range, which is 416 entities. The Commission

    estimates that there will still be some burden associated with Sec.

    4.5 compliance under the proposed rule, as there are some

    incompatibilities between SEC and Commission regulations (as discussed

    above). The Commission estimated this burden at approximately 2 hours

    annually. Thus, the Commission estimates that this new proposal will

    reduce the information collection burden associated with Sec. 4.5

    compliance for the estimated 416 entities by 14.68 hours per entity.

    1. Additional Information Provided by CPOs and CTAs

    a. OMB Control Number 3038-0023

    Part 3 of the Commission's regulations concern registration

    requirements. The Commission is amending existing Collection 3038-0023

    to reflect the obligations associated with the registration of new

    entrants, i.e., CPOs that were previously exempt from registration

    under Sec. 4.5 that had not previously been required to register.

    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: 75,841.

    Annual responses by each respondent: 76,350.

    Annual reporting burden: 6,871.6.

    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

    or excluded 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

    the new burden expected under the proposed rulemaking. The total burden

    associated with Collection 3038-0005 is expected to be:

    Estimated number of respondents: 44,142.

    Annual responses by each respondent: 62,121.

    Estimated average hours per response: 4.22.

    Annual reporting burden: 262,347.8.

    The proposed harmonization specifically will add the following

    burden with respect to compliance obligations other than Form CPO-PQR:

    Estimated number of respondents: 416.

    Annual responses by each respondent: 5.

    Estimated average hours per response: 2.

    Annual reporting burden: 4160.

    The proposed harmonization will add the following burden with

    respect to the burden associated with Form CPO-PQR:

    Schedule A:

    Estimated number of respondents: 586.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 6.

    [[Page 11350]]

    Annual reporting burden: 14,064.

    Schedule B:

    Estimated number of respondents: 586.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 4.

    Annual reporting burden: 9,376.

    Schedule C:

    Estimated number of respondents: 586.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 18.

    Annual reporting burden: 42,192.

    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 required 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 email 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. Considerations of Costs and Benefits

    Section 15(a) of the Act requires the Commission, before

    promulgating a regulation under the Act or issuing an order, to

    consider the costs and benefits of its action.\48\ Section 15(a)

    specifies that costs and benefits shall be evaluated in light of the

    following considerations: (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.\49\ The

    Commission can, in its discretion, give greater weight to any of the

    five considerations and determine that, notwithstanding its costs, a

    particular regulation was necessary or appropriate to protect the

    public interest, or to effectuate any of the provisions, or to

    accomplish any of the purposes, of the Act.

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

    \48\ 7 U.S.C. 19(a).

    \49\ 7 U.S.C. 19(a).

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

    In February 2011, the Commission proposed to revise the

    requirements for determining which persons should be required to

    register as a CPO under Sec. 4.5. The Commission received numerous

    comments that sponsors of registered investment companies that also

    would be required to register as CPOs would be subject to duplicative,

    inconsistent, and possibly conflicting disclosure and reporting

    requirements. The purpose of this proposal is to harmonize certain CFTC

    and SEC registration requirements in an effort to reduce the costs to

    dual registrants of complying with two regulatory regimes. To address

    the commenters' concerns about the content and timing of disclosure

    documents, account statement delivery and certification, and

    recordkeeping requirements, the Commission is proposing to harmonize

    its regulatory requirements with those of the SEC to reduce the costs

    for dual registrants. Each of these harmonizing provisions involves

    recordkeeping and reporting obligations that would be a collection of

    information under the PRA.

    The Commission is obligated to estimate the burden of and provide

    supporting statements for any collections of information it seeks to

    establish under considerations contained in the PRA,\50\ and to seek

    approval of those requirements from the OMB. Therefore, the estimated

    burden costs and support for the collections of information is provided

    for in the PRA section of this notice of proposed rulemaking and the

    information collection requests that will be filed with OMB

    contemporaneously with this rulemaking as required by that statute.

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

    \50\ 44 U.S.C. 3501 et seq.

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

    1. Section 15(a) Considerations

    As stated above, section 15(a) of the CEA requires the CFTC to

    consider the costs and benefits of its actions 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.

    a. Protection of Market Participants and the Public

    The Commission believes that these regulations protect market

    participants and the public by achieving the same regulatory objectives

    of its proposed part 4 registration and reporting requirements but at

    reduced costs.

    b. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    The Commission believes that harmonization and its concomitant

    reduction in regulatory burden promotes the efficiency of futures

    markets in an indirect way; by lessening the costs that entities must

    bear to operate within markets, participants can pass along such

    savings to their customers or devote more resources to serving those

    customers. Moreover, as registered participants are relieved of some

    burdens, the incentive to remain unregistered may diminish.

    c. Price Discovery

    The Commission has not identified a specific effect on price

    discovery as a result of these harmonizing regulations.

    d. Sound Risk Management

    The Commission has not identified a specific effect on sound risk

    management as a result of these harmonizing regulations.

    e. Other Public Interest Considerations

    The CFTC has not identified other public interest considerations

    related to the costs and benefits of these regulations.

    2. Conclusion

    The Commission believes these regulations will lower burdens for

    many market participants who are also registered with other regulatory

    agencies as a result of doing business in multiple markets. The

    Commission welcomes all public comments on its cost and benefit

    considerations, including its analysis of the regulations in light of

    the five factors enumerated in Sec. 15(a). Specifically, are

    [[Page 11351]]

    there potential costs associated with these harmonizing rules that the

    Commission has not considered? Are there benefits to market

    participants, the public, or futures markets that the Commission should

    consider?

    List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Consumer protection, Reporting and recordkeeping requirements.

    Accordingly, the CFTC proposes to amend 17 CFR part 4 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. Amend Sec. 4.12 by revising paragraph (c) to read as follows:

    Sec. 4.12 Exemption from provisions of part 4.

    * * * * *

    (c) Exemption from Subpart B for certain commodity pool operators

    based on registration under the Securities Act of 1933 or the

    Investment Company Act of 1940. (1) Eligibility. Subject to compliance

    with the provisions of paragraph (d) of this section, any person who is

    registered as a commodity pool operator, or has applied for such

    registration, may claim any or all of the relief available under

    paragraph (c)(2) of this section if, with respect to the pool for which

    it makes such claim:

    (i) The units of participation will be offered and sold pursuant to

    an effective registration statement under the Securities Act of 1933;

    or

    (ii) The pool is registered under the Investment Company Act of

    1940.

    (2) Relief available to pool operator. The commodity pool operator

    of a pool whose units of participation meet the criteria of paragraph

    (c)(1) of this section may claim the following relief:

    (i) In the case of Sec. 4.21, exemption from the Disclosure

    Document delivery and acknowledgment requirements of that section,

    Provided, however, that the pool operator:

    (A) Causes the pool's Disclosure Document to be readily accessible

    on an Internet Web site maintained by the pool operator;

    (B) Causes the Disclosure Document to be kept current in accordance

    with the requirements of Sec. 4.26(a);

    (C) Clearly informs prospective pool participants with whom it has

    contact of the Internet address of such Web site and directs any

    broker, dealer or other selling agent to whom the pool operator sells

    units of participation in the pool to so inform prospective pool

    participants; and

    (D)(1) If claiming relief under paragraph (c)(1)(i) of this

    section, comply with all other requirements applicable to pool

    Disclosure Documents under part 4. The pool operator may satisfy the

    requirement of Sec. 4.26(b) to attach to the Disclosure Document a

    copy of the pool's most current Account Statement and Annual Report if

    the pool operator makes such Account Statement and Annual Report

    readily accessible on an Internet Web site maintained by the pool

    operator.

    (2) If claiming relief under paragraph (c)(1)(ii) of this section,

    comply with all other requirements applicable to pool Disclosure

    Documents under part 4, except that, with respect to the specific

    requirements listed below, comply as follows:

    (i) With respect to the legend required by Sec. 4.24(a), include a

    legend that indicates that the Commodity Futures Trading Commission and

    the Securities and Exchange Commission have not approved or disapproved

    of the securities or passed upon the merits of participating in the

    pool, nor has either agency passed upon the accuracy or adequacy of the

    disclosure in the prospectus, and that any contrary representation is a

    criminal offense. The legend may be in one of the following or other

    clear and concise language:

    Example A: The Securities and Exchange Commission and the

    Commodity Futures Trading Commission have not approved or

    disapproved these securities or this pool, or passed upon the

    adequacy or accuracy of this prospectus. Any representation to the

    contrary is a criminal offense.

    Example B: The Securities and Exchange Commission and the

    Commodity Futures Trading Commission have not approved or

    disapproved these securities or this pool, or determined if this

    prospectus is truthful or complete. Any representation to the

    contrary is a criminal offense.

    (ii) With respect to performance that is required under Sec.

    4.25(c)(2), (3), (4) or (5), present such information in the Statement

    of Additional Information.

    (ii) In the case of Sec. 4.22, exemption from the Account

    Statement distribution requirement of that section; Provided, however,

    that the pool operator:

    (A) Causes the pool's Account Statements, including the

    certification required by Sec. 4.22(h) to be readily accessible on an

    Internet Web site maintained by the pool operator within 30 calendar

    days after the last day of the applicable reporting period and

    continuing for a period of not less than 30 calendar days. The

    commodity pool operator may meet the requirement of Sec. 4.22(h) by

    including the certification required by Rule 30e-1 under the Investment

    Company Act of 1940 (17 CFR 270.30e-1) with its posting of the pool's

    Account Statements; and

    (B) Causes the Disclosure Document for the pool to clearly

    indicate:

    (1) That the information required to be included in the Account

    Statements will be readily accessible on an Internet Web site

    maintained by the pool operator; and

    (2) The Internet address of such Web site.

    * * * * *

    3. Amend Sec. 4.26 by revising paragraph (a)(2) to read as

    follows:

    Sec. 4.26 Use, amendment and filing of Disclosure Document.

    (a) * * *

    (2) No commodity pool operator may use a Disclosure Document or

    profile document dated more than twelve months prior to the date of its

    use.

    * * * * *

    4. Amend Sec. 4.36 by revising paragraph (b) to read as follows:

    Sec. 4.36 Use, amendment and filing of Disclosure Document.

    * * * * *

    (b) No commodity trading advisor may use a Disclosure Document

    dated more than twelve months prior to the date of its use.

    * * * * *

    Issued in Washington, DC, on February 8, 2012, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following appendices will not appear in the Code of

    Federal Regulations: Appendices to Harmonization of Compliance

    Obligations for Registered Investment Companies Required to Register

    as Commodity Pool Operators--Commission Voting Summary and

    Statements of Commissioners.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers,

    Chilton, O'Malia and Wetjen voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    The Commodity Futures Trading Commission's (CFTC) part 4 rules

    require recordkeeping, reporting and disclosures from Commodity Pool

    Operators. I support the proposed rule that would harmonize such

    requirements with those of the Securities and Exchange Commission

    (SEC) for investment companies registered with both the CFTC and

    SEC. The Commission is committed to

    [[Page 11352]]

    ensuring that customers of registered investment companies receive

    basic protections while also seeking to balance the compliance

    requirements for the operators of these funds. I look forward to

    comments from the public to further build on this harmonization

    effort.

    Appendix 3--Statement of Commissioner Jill E. Sommers

    The final rules amending the Commission's Part 4 regulations

    adopted today will require, among other things, that investment

    advisors of certain registered investment companies register as CPOs

    and operate under a dual SEC/CFTC regulatory regime. As explained in

    my dissent to the final rules, I could have supported a version of

    the rules that would have achieved the regulatory objectives

    outlined by the NFA in its August 18, 2010 petition to amend Rule

    4.5. While I opposed the version of the rules the Commission

    ultimately adopted, having finalized them I support the Commission's

    effort to harmonize the resulting compliance obligations. Dually

    registered entities should not be subject to duplicative,

    inconsistent, or conflicting requirements. The proposed rules, if

    finalized in their current form, would not achieve true

    harmonization. I urge those affected by the rules to submit detailed

    comment letters, with a focus on the costs and benefits of the rules

    as proposed and any suggested alternatives.

    [FR Doc. 2012-3388 Filed 2-23-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: February 24, 2012



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