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: [email protected], Amanda Lesher Olear,
Special Counsel, Telephone: (202) 418-5283, Email: [email protected], or
Michael Ehrstein, Attorney-Advisor, Telephone: 202-418-5957, Email:
[email protected], Division of Swap Dealer and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
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.
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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
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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.
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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.
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\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/.
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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
[email protected]. 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.
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\48\ 7 U.S.C. 19(a).
\49\ 7 U.S.C. 19(a).
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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.
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\50\ 44 U.S.C. 3501 et seq.
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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