[Federal Register: March 2, 2000 (Volume 65, Number 42)]
[Proposed Rules]
[Page 11253-11269]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02mr00-16]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AB37
Exemption for Commodity Pool Operators With Respect to Offerings
to Qualified Eligible Participants; Exemption for Commodity Trading
Advisors With Respect to Advising Qualified Eligible Clients
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to revise Commission Rule 4.7 (``Proposal'').\1\ Rule 4.7
provides a simplified regulatory framework for commodity pool operators
(``CPOs'') operating commodity pools consisting of certain highly
accredited pool participants, termed ``qualified eligible
participants'' (``QEPs''), and for commodity trading advisors
(``CTAs'') directing or guiding the commodity interest trading accounts
of certain highly accredited clients, termed ``qualified eligible
clients'' (``QECs''). The Proposal would revise the rule both
substantively and technically.
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\1\Commission rules referred to herein are found at 17 CFR Ch.
I.
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The proposed substantive revisions are intended to make Rule 4.7
available to more CPOs and CTAs and under more situations, by bringing
within the scope of the rule those additional persons who the
Commission now believes should be included in the QEP and QEC
definitions. The Proposal would add, among others, the following
persons to the existing QEP and QEC definitions: Principals of the
registered investment professionals currently defined as QEPs and QECs;
certain registered securities investment advisers and their principals;
``qualified purchasers'' and ``knowledgeable employees'' as those terms
are defined under the federal securities laws; certain employees of
pools, CPOs and CTAs and certain of those employees' immediate family
members; and trusts whose advisors and settlors are QEPs or QECs. In
addition, the Proposal would make it easier for certain charitable
organizations, trusts and collective investment vehicles to be QEPs and
QECs, and, under certain circumstances, it would include persons who
are not ``United States persons'' in the QEC definition. Certain of the
proposed technical revisions, i.e., those which would reorganize the
rule, are intended
[[Page 11254]]
to facilitate a determination of whether a person is (or is not) a QEP
or a QEC. Other proposed technical revisions would conform various
references in the existing rule to those in the proposed rule.
In light of the breadth of the proposed revisions, the Commission
is publishing for comment in this release the entire text of Rule 4.7
as it would appear if the Commission's proposed amendments were
adopted. The Commission also is including in this release a chart that
compares the provisions of the proposed rule with the provisions of the
existing rule.
DATES: Comments must be received on or before May 1, 2000.
ADDRESSES: Comments on the proposed rule should be sent to Jean A.
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street NW, Washington, DC 20581. Comments may be sent
by facsimile transmission to (202) 418-5528, or by e-mail to
[email protected]. Reference should be made to ``Proposed Amendments
to Rule 4.7.''
FOR FURTHER INFORMATION CONTACT: Barbara Stern Gold, Assistant Chief
Counsel, or Helene D. Schroeder, Attorney-Advisor, Division of Trading
and Markets, Commodity Futures Trading Commission, 2033 K Street NW,
Washington, DC 20581. Telephone: (202) 418-5450.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Regulation of CPOs and CTAs Under the Commodity Exchange Act
B. Rule 4.7
C. Developments Subsequent to the Adoption of Rule 4.7
II. Proposed Technical Revisions
A. Organization of Existing Rule 4.7
B. Proposed Reorganization
III. Proposed Substantive Revisions
A. General Definitions
B. Persons Who Are QEPs and QECs Irrespective of the Portfolio
Requirement
1. Summary Overview of the Proposed Revisions
2. The Proposed Revisions
a. Principals of Certain Registered Investment Professionals
b. Registered Investment Advisers and Their Principals
c. Qualified Purchasers
d. Knowledgeable Employees
e. The CPO, CTA and Investment Adviser of the Exempt Pool and
Their Affiliates; Affiliates of the CTA of the Exempt Account
f. Principals, Employees and Family Members
i. Principals
ii. Employees Involved in Investment Management Activities
iii. Other Employees
iv. Family Members
g. Trusts
h. Section 501(c)(3) Organizations
i. Non-United States Persons as QECs
C. Persons Who Must Satisfy the Portfolio Requirement To Be QEPs
and QECs
IV. Comparison Chart
V. Related Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
I. Background
A. Regulation of CPOs and CTAs Under the Commodity Exchange Act
Section 4m(1) of Commodity Exchange Act (the ``Act'')\2\ requires
each person who comes within the definition of the term ``commodity
pool operator'' in Section 1a(4) of the Act\3\ or ``commodity trading
advisor'' in Section 1a(5) of the Act\4\ to register with the
Commission as a CPO or CTA, respectively, or to satisfy the
requirements for exemption from such registration.\5\ Part 4 of the
Commission regulations\6\ relates to the operations and activities of
CPOs and CTAs. Part 4 includes disclosure, reporting and recordkeeping
requirements for CPOs (Rules 4.21 through 4.26) and disclosure and
recordkeeping requirements for CTAs (Rules 4.31 through 4.36). In
addition, regardless of registration status, Rules 4.20 and 4.30
prohibit certain activities by CPOs and CTAs, respectively, and Rule
4.41 sets forth certain advertising requirements for CPOs, CTAs and the
principals thereof.
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\2\7 U.S.C. 6m(1) (1994).
\3\7 U.S.C. 1a(4) (1994).
\4\7 U.S.C. 1a(5) (1994).
\5\Rule 4.13 provides exemption from CPO registration for the
persons specified therein. Section 4m(1) of the Act, 7 U.S.C. 6m(1)
(1994), and Rule 4.14 provide exemption from CTA registration for
the persons specified therein.
\6\Part 4 includes Rules 4.1-4.41.
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The Commission has endeavored to construct a regulatory framework
for CPOs and CTAs that avoids unnecessary burdens while, at the same
time, maintains customer protection. From time to time the Commission
has refined that framework as appropriate to respond to changing market
conditions and to simplify and to streamline the regulatory structure
without creating regulatory gaps.\7\
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\7\See, e.g., Rules 4.5, 4.12(b) and 4.14(a)(8), which provide
exceptions from registration or particular Part 4 requirements based
upon, among other things, the applicability of another federal
regulatory framework to the CPO or CTA. Rule 4.5 was published at 50
FR 15868 (Apr. 23, 1985); Rules 4.12(b) and 4.14(a)(8) were
published at 52 FR 41975 (Nov. 2, 1987).
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B. Rule 4.7
In 1992, the Commission adopted Rule 4.7 as part of the
Commission's ongoing program for review of its rules.\8\ Rule 4.7(a)
provides an exemption from certain disclosure, reporting and
recordkeeping requirements for registered CPOs in connection with their
operation of commodity pools whose participants are QEPs. The exemption
provides relief from all of the specific disclosures required by Rules
4.21 and 4.24 through 4.26 and streamlines the reporting and
recordkeeping requirements of Rules 4.22 and 4.23, respectively. In
proposing Rule 4.7(a), the Commission stated that it had the dual
objective, consistent with its customer protection role, of:
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\8\57 FR 34853 (Aug. 7, 1992). The Commission made certain
technical, non-substantive amendments to Rule 4.7 in 1995. See 60 FR
38146, 38182 (July 25, 1995). These amendments were necessary to
conform certain of the references in Rule 4.7 to other Part 4 rules
the Commission had renumbered in connection with revising the
disclosure rules generally applicable to CPOs and CTAs.
(1) Reducing unnecessary regulatory prescriptions for CPOs
offering pool participations only to persons who, based upon the
qualifying criteria in the proposed rule, do not appear to need the
full protections offered by the part 4 framework; and (2)
coordinating its rules with those of the [Securities and Exchange
Commission] applicable to private offerings exempt from registration
pursuant to Section 4(2) of the Securities Act so that most
qualifying offerings may operate under an exemption from otherwise
applicable requirements of both the Commodity Exchange Act and the
securities laws.\9\
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\9\57 FR 3148, 3150-51 (Jan. 28, 1992).
Under Rule 4.7(a), however, a registered CPO operating a pool for
which it has claimed Rule 4.7 relief (``exempt pool'') remains subject
to all other applicable requirements of the Act and the Commission's
regulations issued thereunder with respect to the exempt pool and any
other pool the CPO operates or intends to operate.\10\ For example, it
remains subject to the antifraud provisions of Sections 4b and 4o of
the Act,\11\ the prohibited activities and advertising provisions
applicable to CPOs in Rules 4.20 and 4.41, respectively, and the
reporting requirements for traders set forth in Parts 15, 18 and 19 of
the Commission's regulations. Moreover, if a CPO distributes an
offering memorandum in connection with soliciting participations in an
exempt pool, the memorandum must include all disclosures necessary to
make the information contained therein, in the context in which it is
furnished, not misleading.\12\
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\10\Rule 4.7(a)(4).
\11\7 U.S.C. 6b and 6o (1994).
\12\Rule 4.7(a)(2)(i)(A).
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[[Page 11255]]
Rule 4.7(b) provides similar relief from the specific disclosure
requirements of Rules 4.31 and 4.34 through 4.36 and recordkeeping
requirements of Rule 4.33 to registered CTAs who direct or guide the
commodity interest trading accounts of QECs (``exempt accounts''). In
proposing Rule 4.7(b), the Commission stated that its rationale ``is
analogous to that for proposing relief for CPOs, i.e., that QEPs are
sophisticated investors who have the financial ability and experience
necessary to understand the risks of futures trading and to obtain the
information they require.''\13\
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\13\57 FR at 3151.
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Under Rule 4.7(b), a CTA that has claimed Rule 4.7 relief with
respect to a QEC likewise remains subject to all other applicable
requirements of the Act and the Commission's regulations with respect
to the QEC and any other client to which the CTA provides or intends to
provide commodity interest trading advice.\14\ Similarly, if a CTA
delivers a brochure or other disclosure statement to QECs, the brochure
or statement must include all disclosures necessary to make the
information contained therein, in the context in which it is furnished,
not misleading.\15\
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\14\Rule 4.7(b)(4).
\15\Rule 4.7(b)(2)(i)(A).
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C. Developments Subsequent to the Adoption of Rule 4.7
Subsequent to the adoption of Rule 4.7, and consistent with the
purposes of the rule, Commission staff has permitted a CPO to treat as
a QEP and a CTA to treat as a QEC certain persons who did not meet the
specified criteria of the rule. Various of these letters are cited
infra at Part III.
In addition, in 1996, Congress enacted the National Securities
Markets Improvement Act of 1996 (``NSMIA'').\16\ Many collective
investment vehicles trade both securities and commodity interests, and
absent an exemption, they are subject to registration as an investment
company under the Investment Company Act of 1940 (the ``ICA'') and
their operators are subject to registration as a CPO under the Act.\17\
Among other things, NSMIA added Section 3(c)(7) to the ICA\18\ thereby
providing an additional exemption from the definition of the term
``investment company'' under the ICA with respect to funds comprised
exclusively of qualified purchasers (``QPs''). NSMIA also directed the
Securities and Exchange Commission (``SEC'') to promulgate rules that
would permit ownership by knowledgeable employees of the securities of
the issuer (or affiliate) without loss of the issuer's definitional
exemption under Section 3(c)(1)\19\ or 3(c)(7) of the ICA. In 1997, the
SEC adopted Rule 3c-5 under the ICA,\20\ which defines the term
``knowledgeable employee.''\21\
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\16\Pub. L. No. 104-290, 110 Stat. 3416 (codified as amended in
scattered sections of 15 U.S.C. and 29 U.S.C.).
\17\See, e.g., Peavey Commodity Futures Funds I, II, III [1983-
1984 Transfer Binder], Fed. Sec. L. Rep. (CCH) para. 77,511 (June 2,
1983). In discussing certain recent amendments to the federal
securities laws concerning the jurisdiction of the SEC and the
Commission, staff of the SEC's Division of Investment Management
stated:
[A]n entity investing in [futures on certain securities or
options on such futures] is not subject to the jurisdiction of the
SEC under the Investment Company Act of 1940 unless such entity is
otherwise an investment company under the Investment Company Act of
1940. (Emphasis in original.)
Id. at 78,651.
\18\15 U.S.C. 80a-3(c)(7) (Supp. III 1997). Section 3(c)(7) is
further discussed infra at Part III. B.2.c.
\19\15 U.S.C. 80a-3(c)(1) (1994 & Supp. III 1997). Section
3(c)(1) of the ICA exempts from the definition of investment company
any issuer that is not making and does not propose to make a public
offering of its securities whose outstanding securities (other than
short-term paper) are owned by not more than 100 beneficial owners.
\20\17 CFR 270.3c-5 (1999).
\21\See 62 FR 17512 (Apr. 9, 1997). According to the SEC,
Congress' purpose in directing the SEC to adopt this provision
``appears to be to allow privately offered funds to offer persons
who participate in the funds' management the opportunity to invest
in the fund as a benefit of employment.'' Id. at 17514 n.22.
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Based upon staff's experience in administering Rule 4.7 and taking
into account these recent developments in the federal securities laws,
the Commission is proposing to expand the QEP and QEC definitions,
which would have the effect of permitting registered CPOs and CTAs to
claim relief in additional circumstances under Rule 4.7. In taking this
action, the Commission has been guided by the purposes of Rule 4.7. As
stated above, with respect to CPOs, these purposes are to: (1) Reduce
unnecessary regulatory burdens with respect to persons who appear not
to need the full protections of the Part 4 framework; and (2)
coordinate the Commission's rules with certain federal securities
laws.\22\ As for CTAs, the rationale for relief ``is analogous to that
for * * * CPOs, i.e., that QEPs are sophisticated investors who have
the financial ability and experience necessary to understand the risks
of futures trading and to obtain the information they require.''\23\
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\22\See 57 FR at 3150-51.
\23\23 Id. at 3151.
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The Commission also is proposing to reorganize Rule 4.7. In light
of the breadth of the proposed actions, the Commission is publishing in
this release the entire text of Rule 4.7 as it would appear if the
proposed rule amendments were adopted. Moreover, to assist interested
persons in providing comments on the Proposal, the Commission is
including in this release a chart that compares the provisions of the
proposed rule with the provisions of the existing rule. This chart is
set forth below at Part IV.
II. Proposed Technical Revisions: Reorganization
A. Organization of Existing Rule 4.7
Commission staff's experience in administering Rule 4.7 has been
that, as the rule currently is organized, CPOs and CTAs frequently have
experienced difficulties in determining whether a particular person is
a QEP or a QEC. Accordingly, the Commission is proposing to reorganize
Rule 4.7 to facilitate these determinations.
Existing Rule 4.7 is divided into three paragraphs. Paragraph (a),
captioned ``Relief for commodity pool operators,'' contains provisions
relating to the definition of a QEP, the relief a CPO may claim under
Rule 4.7, the notice a CPO must file to claim exemption under Rule 4.7
and the effect the filing of the notice has on the CPO's other
obligations under the Act and other provisions of the Commission's
rules.\24\ Paragraph (b), captioned ``Relief for commodity trading
advisors,'' contains similar provisions for CTAs.\25\ Paragraph (c),
captioned ``Insignificant deviations from a term, condition or
requirement of Rule 4.7,'' contains provisions relating to a failure to
comply with Rule 4.7. Persons have found determining the availability
of relief under Rule 4.7 difficult at times because of, among other
things, the multiple definitional criteria and the manner in which the
text is subdivided under the existing organization.
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\24\Rules 4.7(a)(1), (2), (3) and (4), respectively.
\25\Rules 4.7(b)(1), (2), (3) and (4), respectively.
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B. Proposed Reorganization
Under the Proposal, Rule 4.7 would be reorganized into four
paragraphs. Proposed paragraph (a), which would be captioned
``Definitions,'' would contain all of the definitions under Rule 4.7,
including both the QEP and QEC definitions. Proposed paragraph (b),
which would be captioned ``Relief for commodity pool operators,'' would
contain the other existing provisions applicable to CPOs (relief,
notice and effect).\26\ Proposed paragraph (c), which would be
captioned ``Relief for
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commodity trading advisors,'' would contain the other existing
provisions applicable to CTAs.\27\ Proposed paragraph (d), which would
be captioned ``Insignificant deviations from a term, condition or
requirement of Rule 4.7,'' would contain the text of existing paragraph
(c).\28\
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\26\Existing paragraphs (a)(2), (a)(3) and (a)(4) would be
redesignated as paragraphs (b) and (b)(1), (b)(2) and (b)(3),
respectively, with references to existing paragraphs of Rule 4.7
being conformed to refer to the proposed paragraphs.
\27\Existing paragraphs (b)(2), (b)(3) and (b)(4) would be
redesignated as paragraphs (c) and (c)(1), (c)(2) and (c)(3),
respectively, also with conforming references.
\28\The text of proposed paragraph (d) similarly contains
conforming references.
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Proposed paragraph (a)(1) would contain the general definitions
that would be used throughout Rule 4.7. Proposed paragraphs (a)(2) and
(a)(3) would contain the QEP and QEC definitions, respectively, with
each of those paragraphs being divided into persons who are QEPs or
QECs irrespective of the Portfolio Requirement\29\ and persons who must
satisfy the Portfolio Requirement to be QEPs or QECs.
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\29\The term ``Portfolio Requirement,'' which is not separately
defined in existing Rule 4.7, would be defined in proposed
paragraphs (a)(1)(v)(A) for QEPs and (a)(1)(v)(B) for QECs. See
infra at Part III.A. These definitions would be taken from existing
text.
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The Commission believes that this proposed reorganization will be
of great assistance to CPOs and CTAs in determining the availability of
Rule 4.7 to them.
III. Proposed Substantive Revisions: Section-by-Section Analysis
As stated above, paragraph (a) would contain all of the definitions
employed in Rule 4.7. To assist CPOs and CTAs in their reading of this
paragraph, the introductory text of this paragraph would explain that
paragraph (a)(1) contains general definitions, paragraph (a)(2) defines
the term ``qualified eligible participant'' and paragraph (a)(3)
defines the term ``qualified eligible client.'' The proposed
introductory text also would make clear, as existing introductory text
now does, that these definitions are ``for the purposes of this
section,'' i.e., for the purposes of Rule 4.7 only.
A. General Definitions: Proposed Paragraphs (a)(1)(i) Through (vi)
Proposed paragraph (a)(1) would contain general definitions, i.e.,
those other than the QEP and QEC definitions, which would be set forth
alphabetically. Certain of the rules in this paragraph, those defining
``exempt account'' and ``exempt pool,''\30\ would be taken intact from
existing text,\31\ as would the rule defining ``United States.''\32\
Other rules in this paragraph also would be taken from existing text,
but they would have certain technical, non-substantive revisions made
to them. These rules would define the terms ``Non-United States
person''\33\ and ``Portfolio Requirement.''\34\
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\30\Proposed Paragraphs (a)(1)(ii) and (a)(1)(iii),
respectively.
\31\Existing paragraphs (b)(1)(i) and (a)(1)(i), respectively.
\32\Proposed Paragraph (a)(1)(vi), which would be taken from
existing paragraph (a)(1)(ii)(C).
\33\Proposed paragraph (a)(1)(iv). Existing paragraph
(a)(1)(ii)(C) defines as a QEP ``a person that is not a United
States person'' and lists those persons who are not considered to be
``United States persons.''
\34\Proposed paragraph (a)(1)(v). The portfolio requirements for
QEPs and QECs currently are set forth in existing paragraphs
(a)(1)(ii)(B)(1)(i) through (iii) and (b)(1)(ii)(B)(1)(i) through
(iii), respectively.
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The term ``Portfolio Requirement'' would be set forth in two parts
and would be taken intact from existing text, except that the
introductory text would contain certain technical revisions necessary
as a result of the proposed reorganization of Rule 4.7. The first part,
(A), would pertain to QEPs and the second part, (B), would pertain to
QECs. The need for, in effect, two separate definitions of ``Portfolio
Requirement'' is due to differences in activities between the two
categories of registrants for whom Rule 4.7 provides relief: CPOs
operate pools and sell participations therein, whereas CTAs provide
advice and open trading accounts for clients. In proposing the
portfolio requirement, the Commission explained that using the
``accredited investor'' definition in Rule 501 under the Securities Act
of 1933 (``Securities Act''), 17 CFR 230.501 (1999), as a foundation,
the Commission intended to define categories of QEPs and QECs based
upon objective indicia that persons--
possess either the investment expertise and experience necessary to
understand the risks involved, as evidenced by the registered status
of certain investment professionals [discussed at Part III.B.2.a,
infra, who need not satisfy the portfolio requirement to be defined
as a QEP or a QEC] or have an investment portfolio of a size
sufficient to indicate that the [person] has substantial investment
experience and thus a high degree of sophistication with regard to
investments as well as financial resources to withstand the risks of
their investments.\35\
\35\51 FR at 3151-52.
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The remaining provision in this paragraph would be entirely new. It
would be the definition of the term ``affiliate'' of a specified person
or a person ``affiliated'' with the specified person.\36\ This
definition is being proposed in furtherance of the Commission's goals
of providing relief under Rule 4.7 to appropriate persons and of
harmonizing its rules with those of the SEC. Specifically, the
Commission is proposing that for the purposes of Rule 4.7, an
``affiliate'' or a person ``affiliated'' with a specified person means
``a person that directly or indirectly through one or more persons,
controls, is controlled by, or is under common control with the
specified person.''\37\ The proposed definition is based upon the
``affiliate'' definition in Rule 501 of Regulation D under the
Securities Act of 1933 (``Securities Act'')\38\ and the ``affiliated
person'' definition in Section 2(a)(3)(C) of the ICA.\39\ As stated
above, when it adopted Rule 4.7 the Commission used the ``accredited
investor'' definition in Rule 501 under Regulation D as a foundation
for determining the persons who would come within the QEP and QEC
definitions. As also stated above, the Commission is now proposing
amendments to the QEP and QEC definitions based upon, among other
things, certain amendments to the ICA. Accordingly, the Commission
believes that these two sources provide appropriate criteria for the
purposes of this rule proposal.\40\
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\36\Proposed paragraph (a)(1)(i). As discussed infra at Part
III.B.2.e., the Proposal would provide that certain affiliates of
CPOs and CTAs are QEPs and QECs, respectively. See, e.g., CFTC Staff
Letter No. 98-35 [1996-1998 Transfer Binder], Comm. Fut. L. Rep.
(CCH) para.27,329 (May 12, 1998) (CPO permitted to treat as QEPs the
employees of its affiliate); CFTC Staff Letter No. 98-10, [1996-1998
Transfer Binder] Comm. Fut. L. Rep. (CCH) para.27,261 (Feb. 5, 1998)
(CPO permitted to treat as QEPs the principals of an affiliate of
the CPO).
\37\See, e.g., CFTC Staff Letter No. 98-10 at 46,144, n.2 (CPO
and its affiliate were related by common ownership in that they were
both owned by the same persons).
\38\17 CFR 230.501(b) (1999).
\39\15 USC 80a-2(a)(3)(C) (1994). See also infra at Part
III.B.2.d for the text of the definition of the term ``affiliated
person.''
\40\In making this proposal, the Commission considered the
alternative criteria included in the definition of ``affiliated
person'' in the ICA, i.e., in Sections 2(a)(3)(A), (B), (D) and (E),
and in particular, criteria such as percentage of ownership. It
decided that for the purposes of Rule 4.7, ``control'' is a better
gauge of affiliation and further, that an arbitrary ownership
threshold might be too restrictive for the purposes of the rule.
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B. Persons Who Are QEPs and QECs Irrespective of the Portfolio
Requirement: Proposed Paragraphs (a)(2)(i)(A) Through (L) for CPOs and
(a)(3)(i)(A) Through (F) for CTAs
1. Summary Overview of the Proposed Revisions
Proposed paragraphs (a)(2)(i) and (a)(3)(i) would include in the
QEP and QEC definitions, respectively, persons who qualify as QEPs and
QECs irrespective of whether they satisfy the Portfolio Requirement.
Some of these definitions would be based upon
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existing text and others would be entirely new. The introductory text
that would apply to these definitions would be taken from existing
text.\41\
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\41\Because of the proposed reorganization of Rule 4.7, the
introductory text of existing paragraphs (a)(1)(ii)(A) and
(b)(1)(ii)(A) would be set forth in proposed paragraphs (a)(2)(i)
and (a)(3)(i), respectively.
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With respect to QEPs in particular, the Proposal would retain the
four classes of investment professionals currently defined as QEPs, and
it also would include their principals as QEPs.\42\ Entirely new rules
would include in the QEP definition such persons as investment
advisers, qualified purchasers, knowledgeable employees, certain other
employees, family members of persons involved with the pool, certain
trusts, and certain organizations within the meaning of Section
501(c)(3) of the Internal Revenue Code (``Section 501(c)(3)
Organizations'').\43\
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\42\To make clear that the existing eligibility criteria of
registration and two years' activity are alternate to and
independent of the assets under management criterion, proposed
paragraphs (a)(2)(i)(C) and (D) each present these criteria as (1)
and (2). The Commission also is proposing to add a reference to
Section 4m of the Act in these paragraphs to clarify the
registration qualifications of CPOs and CTAs.
\43\26 U.S.C. 501(c)(3)(1994) provides an exemption from federal
income taxation for the following persons:
Corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable,
scientific, testing for public safety, literary, or educational
purposes, or to foster national or international amateur sports
competition (but only if no part of its activities involve the
provision of athletic facilities or equipment), or for the
prevention of cruelty to children or animals, no part of the net
earnings of which inures to the benefit of any private shareholder
or individual, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting, to influence
legislation (except as otherwise provided * * *), and which does not
participate in, or intervene in (including the publishing or
distributing of statements), any political campaign on behalf of (or
in opposition to) any candidate for public office.
Currently, the rule provides that Section 501(c)(3)
Organizations qualify as QEPs if they satisfy the Portfolio
Requirement (existing paragraph (a)(1)(ii)(B)(2)(vii)). This would
be retained, but redesignated (proposed paragraph (a)(2)(ii)(G)).
See infra at Part III.B.2.h.
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Other rules, which would include in the QEP definition Non-United
States persons and entities in which all of the unit owners or
participants are QEPs, would be based upon existing text. Currently,
the requirement that these persons be QEPs for a CPO to claim relief
under Rule 4.7 is not qualified by a ``who the commodity pool operator
reasonably believes'' standard.\44\ Due to the proposed reorganization
of Rule 4.7, however, a CPO who seeks to treat any of these persons as
QEPs would have to reasonably believe that the person is a Non-United
States person or that it is an entity comprised of QEPs. The Commission
does not believe that this proposed revision should impose any
additional burdens on CPOs, because it is a sound business practice
that they likely have been following, notwithstanding the absence of an
explicit requirement in existing text. Nonetheless, the Commission
specifically requests comment on this proposed revision.
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\44\See existing paragraph (a)(1)(ii)(A).
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As for QECs, the text of the Proposal similarly would be taken from
the current text of Rule 4.7\45\ and would continue to incorporate by
reference persons who qualify as QEPs irrespective of whether they
satisfy the Portfolio Requirement. Because of the proposed addition of
several persons who would qualify as QEPs irrespective of the Portfolio
Requirement and because the rationale for providing relief to CTAs is
analogous to that for CPOs, the Commission is proposing generally to
include as QECs the same persons it is proposing to include as QEPs.
Entirely new rules also would include in the QEC definition such
persons as certain employees of the CTA, family members of those
employees, and certain trusts. As with CPOs, due to the proposed
reorganization of Rule 4.7, CTAs who seek to qualify such persons as
QECs would have to reasonably believe that these persons meet the QEC
criteria. Here too, and for the reasons provided above with respect to
CPOs, the Commission does not believe that this proposed revision
should impose any additional burdens on CTAs.
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\45\As discussed above, however, the introductory text would be
redesignated as paragraph (a)(3)(i).
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2. The Proposed Revisions
a. Principals of Certain Registered Investment Professionals--Proposed
Paragraphs (a)(2)(i)(A) Through (D) and (a)(3)(i)(A)
Rule 4.7 would continue to include in the QEP and QEC definitions
the four classes of registered investment professionals specified in
the existing rule,\46\ and it would be amended to include the
principals of such persons. For the purposes of Part 4, the term
``principal'' is defined in Rule 4.10(e) to mean:
\46\Existing paragraphs (a)(1)(ii)(A)(1) through (4).
(i) Any person including, but not limited to, a sole proprietor,
general partner, officer or director, or person occupying a similar
status or performing similar functions, having the power, directly
or indirectly, through agreement or otherwise, to exercise a
controlling influence over the activities of the entity;
(ii) Any holder or any beneficial owner of ten percent or more
of the outstanding shares of any class of stock of the entity; and
(iii) Any person who has contributed ten percent or more of the
capital of the entity.
When it proposed Rule 4.7, the Commission noted that these
registered investment professionals ``may be presumed to have
sufficient expertise to evaluate the risks and benefits of investing in
a commodity pool.''\47\ Commission staff's experience has been that
most of the persons comprising the classes of investment professionals
listed in Rules 4.7(a) and 4.7(b) have principals, inasmuch as these
persons typically are not natural persons. Commission staff further has
found that it is mainly the principals of these investment
professionals, and not the investment professionals themselves, who
seek to participate in an exempt pool or open an exempt account.\48\
Accordingly, the Commission is proposing to include the principals of
these investment professionals as QEPs and QECs.
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\47\57 FR at 3152.
\48\See, e.g., CFTC Staff Letter No. 98-65, [Current Transfer
Binder] Comm. Fut. L. Rep. (CCH) para.27,413 (Aug. 24, 1998) (two
CPOs permitted to treat as QEPs the principals of the CPOs); CFTC
Staff Letter No. 96-36 [1994-1996 Transfer Binder] Comm. Fut. L.
Rep. (CCH) para.26,686 (May 2, 1996) (CPO permitted to treat as a
QEP a vice president of the CPO who was the managing director and
principal of a broker-dealer subsidiary of the CPO).
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b. Registered Investment Advisers and Their Principals--Proposed
Paragraphs (a)(2)(i)(E) and (a)(3)(i)(A)
As stated above, the Commission included the investment
professionals specified in existing Rule 4.7 as QEPs and QECs because
they ``may be presumed to have sufficient expertise to evaluate the
risks and benefits of investing in a commodity pool'' (or opening a
managed account). Upon consideration, the Commission believes that
certain investment advisers also may be presumed to have such expertise
as to come within the purpose of the QEP and QEC definitions and that,
for the reasons provided above with respect to the Commission's
proposal to include as QEPs and QECs the principals of the investment
professionals defined as QEPs and QECs,\49\ the principals of these
investment advisers also should be included in the QEP and QEC
definitions.\50\
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\49\See supra at Part III.B.2.a.
\50\See, e.g., CFTC Staff Letter No. 94-63, [1992-1994 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para.26,152 (March 24, 1994) (CPO
permitted to treat the principal of an investment adviser as a QEP).
These proposed changes, and the proposed inclusion as QEPs and QECs
of, among other persons, qualified purchasers and knowledgeable
employees, would cause existing paragraph (a)(1)(ii)(A)(5) to be
redesignated as paragraph (a)(2)(i)(H)(1) and paragraph (a)(3)(i)(A)
to refer to ``[a] person described in paragraph (a)(2)(i)(A), (B),
(C), (D), (E), (F), (G), (J) or (K) of this section.''
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[[Page 11258]]
Specifically, these new rules would provide that, to be a QEP or a
QEC, an investment adviser must be registered as an investment adviser
under Section 203 of the Investment Advisers Act of 1940 (``IAA'')\51\
or pursuant to the laws of any state. Additionally, the investment
adviser: (1) Must have been registered and active as such for two
years; or (2) must provide securities investment advice to securities
accounts which, in the aggregate, have total assets in excess of $5
million on deposit with one or more registered securities brokers.
These criteria would be consistent with the current criteria applicable
to investment professionals in general\52\ and CTAs in particular.\53\
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\51\15 U.S.C. 80b-3 (1994 & Supp. III 1997).
\52\For example, brokers or dealers who are registered pursuant
to section 15 of the Securities Exchange Act of 1934 are defined as
QEPs and QECs under existing paragraphs (a)(1)(ii)(A)(2) and
(b)(1)(ii)(A), respectively.
\53\See existing paragraphs (a)(1)(ii)(A)(4) and (b)(1)(ii)(A).
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c. Qualified Purchasers--Proposed Paragraphs (a)(2)(i)(F) and
(a)(3)(i)(A)
As previously stated, NSMIA added Section 3(c)(7) to the ICA, which
provides an exemption from the definition of the term ``investment
company'' to issuers whose securities are held exclusively\54\ by
persons who come within the definition of the term ``qualified
purchaser'' set forth in Section 2(a)(51)(A)\55\ of the ICA. This
section defines a QP as:
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\54\But see supra at Part I.C. (knowledgeable employees may
acquire the securities of Section 3(c)(7) and 3(c)(1) funds).
\55\15 U.S.C. 80a-2(a)(51)(A) (Supp. III 1997).
(i) any natural person (including any person who holds a joint,
community property, or other similar shared ownership interest in an
issuer that is excepted under section 80a-3(c)(7) of this title with
that person's qualified purchaser spouse) who owns not less than
$5,000,000 in investments, as defined by the Commission;
(ii) any company that owns not less than $5,000,000 in
investments and that is owned directly or indirectly by or for 2 or
more natural persons who are related as siblings or spouse
(including former spouses), or direct lineal descendants by birth or
adoption, spouses of such persons, the estates of such persons, or
foundations, charitable organizations, or trusts established by or
for the benefit of such persons;
(iii) any trust that is not covered by clause (ii) and that was
not formed for the specific purpose of acquiring the securities
offered, as to which the trustee or other person authorized to make
decisions with respect to the trust, and each settlor or other
person who has contributed assets to the trust, is a person
described in clause (i), (ii) or (iv); or
(iv) any person, acting for its own account or the accounts of
other qualified purchasers, who in the aggregate owns and invests on
a discretionary basis, not less than $25,000,000 in investments.
Section 3(c)(7) was added to the ICA for the purposes of eliminating
certain regulatory impediments for private investment pools, such as
hedge funds and venture capital firms raising capital for new and
growing businesses.\56\
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\56\H.R. Rep. No. 622, 104th Cong., 2d Sess., at 16 (1996),
reprinted in 1996 U.S.C.C.A.N. 3877.
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The Commission is proposing to include QPs in the QEP and QEC
definitions for two reasons. First, the Commission believes that
persons defined as QPs, like those currently defined as QEPs and QECs,
are sophisticated investors who have the financial ability and
experience necessary to understand the risks of commodity interest
trading and to obtain the information they require. Second, treating
QPs as QEPs would further the Commission's objective in proposing Rule
4.7 to coordinate its rules with those of the SEC applicable to private
offerings exempt from registration under the Securities Act.\57\
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\57\A private placement under the Securities Act is a
prerequisite to eligibility under Sections 3(c)(1) and 3(c)(7) of
the ICA.
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d. Knowledgeable Employees--Proposed Paragraphs (a)(2)(i)(G) and
(a)(3)(i)(A)
As also previously stated, NSMIA directed the SEC to promulgate
rules that would permit the ownership by knowledgeable employees of the
securities of an issuer (or an affiliated person of the issuer) without
loss of the issuer's exemption from the investment company definition
under Section 3(c)(1) or 3(c)(7) of the ICA. In 1997, the SEC adopted
Rule 3c-5 under the ICA, which defines the term ``knowledgeable
employee'' as a natural person who is:
(i) An Executive Officer,\58\ director, trustee, general
partner, advisory board member, or person serving in a similar
capacity, of the Covered Company\59\ or an Affiliated Management
Person\60\ of the Covered Company; or
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\58\Rule 3c-(a)(3) further defines an ``Executive Officer'' as
``the president, any vice president in charge of a principal
business unit, division or function (such as sales, administration
or finance), any other officer who performs a policy-making
function, or any other person wo performs similar policy-making
functions, for a covered Company or for an Affiliated Management
Person of the Covered Company.''
\59\Rule 3c-5(a)(2) defines a ``Covered Company'' as a Section
3(c)(1) Company or a Section 3(c)(7) Company.
\60\Rule 3c-5(ak)(1) defines an ``Affiliated Management Person''
of the Covered Company as an ``an affiliated person, as such term is
defined in section 2(a)(3) of the Act [15 USC 80a-2(a)(3)], that
manages the investment activities of a Covered Company.'' Section
2(a)(3) of the ICA, 15 U.S.C. 80a-2(a)(3)(1994), defines an
``affiliated person'' of another person as:
(A) Any person directly or indirectly owning, controlling, or
holding with power to vote 5 per centum or more of the outstanding
voting securities of such other person; (B) any person 5 per centum
or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such
other person; (C) any person directly or indirectly controlling,
controlled by or under common control with, such other person. (D)
any officer, director, partner, copartner, or employee of such other
person; (E) if such other person is an unincorporated investment
company not having a board of directors, the depositor thereof.
Rule 3c-5(a)(1) further provides that ``[f]or purposes of this
definition, the term `investment company' as used in section 2(a)(3)
of the Act includes a Covered Company.''
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(ii) An employee of the Covered Company or an Affiliated
Management Person of the Covered Company (other than an employee
performing solely clerical, secretarial or administrative functions
with regard to such company or its investments) who, in connection
with his or her regular functions or duties, participates in the
investment activities of such Covered Company, other Covered
Companies, or investment companies the investment activities of
which are managed by such Affiliated Management Person of the
Covered Company, provided that such employee has been performing
such functions and duties for or on behalf of the Covered Company or
the Affiliated Management Person of the Covered Company, or
substantially similar functions or duties for or on behalf of
another company for at least 12 months.
In furtherance of the Commission's goal of providing relief under Rule
4.7 to appropriate persons and of harmonizing its rules with those of
the SEC, the Commission is proposing to include knowledgeable employees
in the QEP and QEC definitions.
In this regard, the Commission notes that in April of 1999, staff
of the SEC's Division of Investment Management responded to a series of
inquiries from the Subcommittee on Private Investment Entities of the
Federal Regulation of Securities Committee, Section of Business Law of
the American Bar Association (``ABA'') concerning the scope of both the
QP and knowledgeable employee definitions.\61\ With respect to
knowledgeable employees in particular, SEC staff, among other things,
clarified the criterion that a knowledgeable employee ``participate in
investment activities.'' In particular, SEC staff stated that ``[t]he
rule * * * is clearly intended to encompass persons who actively
participate in the management of a Fund's investments. The rule is not
intended to include employees who
[[Page 11259]]
merely obtain information regarding the investment activities of these
Funds.''\62\ SEC staff further stated that the following types of
employees described in the ABA Letter generally would not qualify as
knowledgeable employees within the meaning of the rule: marketing and
investor relations professionals; attorneys who participate in
preparing offering documents and negotiating related agreements, and
who provide advice concerning ongoing fund investments, operation and
compliance matters; registered brokers and traders for a related
broker-dealer; and financial, compliance, operational and accounting
officers who have management responsibilities. As for research
analysts, SEC staff stated that, as a general matter, unless the
research analyst ``researches all potential portfolio investments and
provides recommendations to the portfolio manager,'' the analyst would
not qualify as a knowledgeable employee.
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\61\American Bar Ass'n, [Current Transfer Binder] Fed. Sec. L.
Rep. (CCH) para. 7,548 (April 22, 1999) (the ``ABA Letter'').
\62\ABA Letter at 78,746 (footnote omitted).
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Further with respect to knowledgeable employees, in adopting Rule
3c-5 under the ICA the SEC clarified the criterion that a knowledgeable
employee must have been performing the requisite functions or duties
``for at least 12 months.'' The SEC stated:
The rule, as proposed, would have required employees who are
knowledgeable employees by virtue of their participation in
investment activities to have been engaged in these activities on
behalf of the fund or the Management Affiliate for a period of at
least 12 months. Several commenters suggested that the 12-month
period would unnecessarily limit the ability of new employees who
had equivalent experience with their previous employer to invest in
the fund. The Commission has concluded that it is not necessary to
require that an employee work for the particular fund or Management
Affiliate for the entire 12-month period as long as the employee has
the requisite experience to appreciate the risks of investing in the
fund. The rule, as adopted, therefore includes as knowledgeable
employees those employees who performed substantially similar
functions or duties for or on behalf of another person during the
preceding 12 months.\63\
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\63\62 FR at 17524-25.
The Commission intends to follow interpretations issued by the SEC
and its staff of the QP and knowledgeable employee definitions.\64\ The
Commission has the right further to interpret or to amend Rule 4.7 to
exclude from the QEP and QEC definitions any person that the SEC or its
staff found to be a QP or knowledgeable employee or to include in the
QEP and QEC definitions any person the SEC or its staff excluded from
the QP or knowledgeable employee definition, if such action is found to
be necessary to effectuate the purposes of the Act and the Commission's
regulations. The Commission expects that it would exercise this right
infrequently.
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\64\In this regard, however, SEC staff has stated that whether
an employee ``actively participates in the investment activities of
a Fund is a factual determination that must be made on a case-by-
case basis by the Fund,'' and that consequently, SEC staff generally
will not entertain any requests on its views ``with respect to
whether a particular employee or type of employee meets this aspect
of the knowledgeable employee definition.'' ABA Letter at 78,746.
Proposed Paragraphs (a)(2)(i) and (a)(3)(i), which are based on
existing paragraphs (a)(1)(ii)(A) and (b)(1)(ii)(A), similarly
require CPOs and CTAs, respectively, to make a factual
determination, i.e., to ``reasonably believe'' that a person does in
fact satisfy the requisite QEP or QEC criteria.
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e. The CPO, CTA and Investment Adviser of the Exempt Pool and Their
Affiliates; Affiliates of the CTA of the Exempt Account--Proposed
Paragraphs (a)(2)(i)(H)(1) and (a)(3)(i)(B)(1)
Rule 4.7 currently defines as a QEP the CPO or the CTA of ``the
exempt pool offered or sold.''\65\ The Proposal would incorporate this
text and it also would include in the QEP definition an investment
adviser of the exempt pool and an affiliate of the CPO, CTA or
investment adviser.\66\
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\65\Existing paragraph (a)(1)(ii)(A)(5).
\66\The term ``affiliate'' is discussed supra at Part III.A.
---------------------------------------------------------------------------
When it included CTAs of exempt pools in the QEC definition the
Commission explained that:
[s]ince CTAs as well as CPOs may take an interest in a pool being
offered, absent [inclusion of CTAs in the QEP definition], this may
result in the pool losing its qualified status as a CTA client by
virtue of such participation. The inclusion of this provision avoids
the discrepancy that would otherwise exist.\67\
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\67\57 FR at 34855.
Commission staff has found that Rule 4.7(a) exempt pools typically
trade both commodity interests and securities, and thus may have CPOs,
CTAs and securities investment advisers associated with them. Since the
investment adviser and affiliates of the CTA, CPO and investment
adviser likewise may take an interest in the pool, the Commission is
---------------------------------------------------------------------------
proposing to include each of these persons in the QEP definition.
An affiliate of a CTA similarly may have an account traded by the
CTA. Accordingly, the Commission also is proposing to include in the
QEC definition an affiliate of the CTA of the exempt account.
f. Principals, Employees and Family Members--Proposed Paragraphs
(a)(2)(i)(H)(2) through (5) and (a)(3)(i)(B)(2) through (5)
The Proposal would include in the QEP and QEC definitions persons
such as the principals and employees of CPOs and CTAs, along with
certain of their family members. Each of these proposed rules is
discussed separately below. Preliminarily, however, it should be noted
that because certain of these rules\68\ would be based upon the
``knowledgeable employee'' definition, the ``12 months'' and ``24
months'' referred to therein would refer to the preceding 12 months and
24 months, as the case may be. Thus, an employee would be a QEP or QEC
under these rules if it has worked the requisite time period for a
relevant employer, discussed below--who need not be the CPO or CTA
seeking to treat the employee as a QEP or QEC.
---------------------------------------------------------------------------
\68\Proposed paragraphs (a)(2)(i)(H)(3) and (4) and
(a)(3)(i)(B)(3) and (4).
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i. Principals--Proposed Paragraphs (a)(2)(i)(H)(2) and (a)(3)(i)(B)(2)
The Proposal would include in the QEP definition a principal of the
exempt pool, the CPO, the CTA or the investment adviser of the exempt
pool, or a principal of an affiliate of the pool, CPO, CTA or
investment adviser.\69\ It similarly would include in the QEC
definition a principal of the CTA of the exempt account or of an
affiliate of the CTA.\70\ These rules would be parallel to, and would
be based upon the same rationale underlying, the rules to include in
the QEP and QEC definitions the principals of those persons comprising
the classes of investment professionals who currently are, and under
the Proposal would continue to be, QEPs and QECs.\71\
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\69\Because many collective investment vehicles trade both
commodity interests and securities, and they would have both CTAs
and investment advisers providing trading advice to them.
\70\See supra at Part III.B.2.a. for a discussion of the term
``principal.''
\71\See, e.g., CFTC Staff Letter No. 98-69, [Current Transfer
Binder] Comm. Fut. L. Rep. (CCH) para.27,438 (Sept. 24, 1998) (CPO
permitted to treat as QEPs the principals of the CPO).
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ii. Employees Involved in Investment Management Activities--
Proposed Paragraphs (a)(2)(i)(H)(3) and (a)(3)(i)(B)(3)
The Proposal would include in the QEP definition an employee of the
exempt pool, the CPO, the CTA or the investment adviser of the exempt
pool, or of an affiliate of the pool, CPO, CTA or investment adviser,
provided that the employee: (1) In connection with his or her regular
functions or duties participates in the investment activities of the
exempt pool or other commodity pools operated by the CPO of the exempt
pool or other accounts advised by the CTA or the investment adviser of
the exempt pool, or by an affiliate; and (2) has been performing such
functions
[[Page 11260]]
or duties for the employer, or substantially similar functions or
duties for another person engaged in providing commodity interest,
securities or other financial services, for at least 12 months. This
rule specifically would exclude employees who perform solely clerical,
secretarial or administrative functions.
In proposing this rule, the Commission is seeking to harmonize its
rules with those of the SEC. Thus, the employee that would qualify
under this rule must, for example, ``actively participate'' in the
management of the pool's investments. The rule would not include as
QEPs employees such as financial, compliance and operational
professionals, brokers, traders, or attorneys who merely obtain
information regarding the investments, nor would it include research
analysts, unless such persons research all potential investments for
the pool and provide their recommendations to the person who makes the
investment decisions for the pool. The foregoing is intended to ensure
that if the employee of a person specified under the rule would qualify
as a knowledgeable employee but for the fact that the employee is an
employee of a commodity pool, its operator, advisor or affiliate and is
not an employee of a Covered Company or an Affiliated Management
Person, then the employee may be considered a QEP.
Similarly, the Proposal would include in the QEC definition an
employee of the CTA of the exempt account or of an affiliate of the CTA
provided that the employee: (1) In connection with his or her regular
functions and duties participates in the management of the investment
activities of the CTA or the affiliate; and (2) has been performing
such functions and duties for the employer or substantially similar
functions or duties for another person engaged in providing commodity
interest, securities or other financial services for at least 12
months.\72\ Here, too, the rule specifically would exclude employees
who perform solely clerical, secretarial or administrative functions.
The Commission intends that this rule would be applicable under the
same types of situations as discussed above with respect to certain
employees as QEPs and thus, an employee who merely obtains information
about the investment activities of a CTA or an affiliate, but does not
``actively participate'' in such investment activities, would not
qualify as a QEC under this rule.\73\
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\72\The courts generally have held that an account that trades
solely commodity interests is not a ``security'' within the meaning
of the federal securities laws. See, e.g., Salcer v. Merrill Lynch,
Pierce, Fenner and Smith Inc., 682 F.2d 459 (3d Cir. 1982); Hirk v.
Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977).
Accordingly, such an account would not have an investment adviser.
For this reason, proposed paragraphs (a)(3)(i)(B)(1) through (5) do
not refer to an investment adviser of the exempt account (or to a
principal, affiliate or employee of an investment adviser of the
exempt account).
\73\Here, too, the Commission intends that a determination of
whether an employee is a QEP or a QEC under proposed paragraph
(a)(2)(i)(H)(3) or (a)(3)(i)(B)(3), respectively, would be made on a
case-by-case basis by the CPO of the exempt pool or the CTA of the
exempt account-based on the ``reasonably believes'' standard set
forth in proposed paragraphs (a)(2)(i) and (a)(3)(i), respectively.
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iii. Other Employees-Proposed Paragraphs (a)(2)(i)(H)(4) and
(a)(3)(i)(B)(4)
The Proposal also would include in the QEP definition any other
employee of the exempt pool, CPO, CTA or investment adviser of the
exempt pool, or of an affiliate of the pool, CPO, CTA or investment
adviser, provided the employee: (1) Is an accredited investor as
defined in Rule 501(a)(5)\74\ or 501(a)(6)\75\ under the Securities Act
(``Accredited Investor''); and (2) has been employed by such person, or
by another person engaged in providing commodity interest, securities
or other financial services, for at least 24 months. Employees who
perform solely clerical, secretarial or administrative functions would
be expressly excluded from this rule. Thus, the financial, compliance
and operational professionals, brokers, traders and attorneys who would
not qualify as QEPs because they do not ``actively participate'' in
investment management activities would qualify as QEPs under this rule
if they are Accredited Investors and have two years of relevant
experience. A research analyst responsible for performing research with
respect to one commodity or one market also would qualify under this
provision, if the employee otherwise meets the requirements of the
proposed rule, i.e., that he or she has two years of relevant
experience and is an Accredited Investor.
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\74\Rule 501(a)(5) under the Securities Act defines an
accredited investor as:
Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his purchase [of
securities exempt from registration under the Securities Act]
exceeds $1,000,000.
\75\Rule 501(a)(6) under the Securities Act defines an
accredited investor as:
Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years
and has a reasonable expectation of reaching the same income level
in the current year.
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Similarly, the Proposal would include in the QEC definition any
other employee of the CTA of the exempt account or of an affiliate of
the CTA (other than employees performing solely clerical, secretarial
or administrative functions), provided that the employee: (1) Is an
Accredited Investor; and (2) has been employed by such person, or by
another person engaged in providing commodity interest, securities or
other financial services, for at least 24 months.
The Commission is proposing these new rules because it believes
that defining as QEPs and QECs persons who satisfy the foregoing
criteria would be consistent with the intent of Rule 4.7 of reducing
unnecessary regulatory prescriptions for CPOs and CTAs with respect to
persons who do not appear to need the full protections offered by the
Part 4 framework.\76\
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\76\See 57 FR at 3150. See also CFTC Staff Letter No. 98-14,
[1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.27,265
(Feb. 27, 1998) (CPO permitted to treat as QEPs certain employees of
the CPO).
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iv. Family Members--Proposed Paragraphs (a)(2)(i)(H)(5) and
(a)(3)(i)(B)(5)
The Proposal further would include in the QEP definition the
spouse, child, sibling or parent of a person who is associated with the
exempt pool in which the family member seeks to invest,\77\ provided
that an investment in the exempt pool by any such family member is made
with the knowledge and at the direction of the person. Similarly, the
Proposal would include in the QEC definition the spouse, child, sibling
or parent of the CTA of the exempt account or of a person who is
associated with the CTA, provided that the establishment of an exempt
account by any such family member is made with the knowledge and at the
direction of the trading advisor or person. Given the very limited
scope of these definitions, the Commission further is proposing that
the family member would be a QEP or a QEC solely for the purposes of
the applicable paragraph. Thus, for example, the sibling of a person
who is associated with the exempt pool (e.g., the person is the sole
owner of the pool's CPO) would not be a QEP for the purposes of any
other provision under Rule 4.7.\78\
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\77\See, e.g., CFTC Staff Letter No. 98-47, [1996-1998 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para.27,383 (July 22, 1998) (CPO
permitted to treat as QEPs the parents of the sole owner, managing
member and principal of a CPO).
\78\For example, the sibling would not be a QEP under proposed
paragraph (a)(2)(ii)(L), which would require, among other things,
that for a pool to be a QEP, the pool's participation in the exempt
pool must be directed by a QEP.
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[[Page 11261]]
g. Trusts--Proposed Paragraphs (a)(2)(i)(I) and (a)(3)(i)(C)
The Proposal would provide alternate criteria for trusts to qualify
as QEPs and QECs. Rule 4.7 currently provides that trusts qualify as
QEPs and QECs if, among other things, they meet a portfolio requirement
and have total assets in excess of $5 million.\79\ In the course of
administering Rule 4.7, Commission staff has become aware of situations
where a trust cannot meet the existing QEP criteria for trusts, but the
person who makes the investment decisions for the trust and the person
who has contributed assets to the trust is a QEP. Because the decision-
maker and settlor of a trust are critically integral to the trust,
staff has permitted CPOs to treat trusts as QEPs in these
situations.\80\ The proposed rules would include these trusts as QEPs
and QECs, provided they were not formed for the purpose of
participating in an exempt pool or opening an exempt account.
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\79\Existing paragraphs (a)(1)(ii)(B)(2)(xi) and
(b)(1)(ii)(B)(2)(xi), respectively. Under proposed paragraphs
(a)(2)(ii)(L) and (a)(3)(ii)(L), trusts would continue to qualify as
QEPs and QECs, respectively, subject to meeting the Portfolio
Requirement and certain other criteria.
\80\See, e.g., CFTC Staff Letter No. 98-48, [1996-1998 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 27,384 (June 22, 1998) (CPO
permitted to treat a trust that was established for estate-planning
purposes and had total assets of approximately $77,000 as a QEP
where the decision-maker and the settlor of the trust was himself a
QEP).
---------------------------------------------------------------------------
These proposed rules are modeled after Section 2(a)(51)(A)(iii) of
the ICA, which, as stated above, defines as QPs trusts that meet
similar criteria, except that a trust qualifies as a QP under Section
2(a)(51)(A)(iii) if it was not formed for the specific purpose of
``acquiring the securities of the exempt issuer.'' Neither the Act nor
the Commission's regulations, however, contain provisions directly
relating to the acquisition of securities, or the ``securities of an
exempt issuer.'' Accordingly, the Proposal would provide that trusts
not formed for the specific purpose of ``participating in the exempt
pool'' or ``opening an exempt account'' would be QEPs or QECs,
respectively.
h. Section 501(c)(3) Organizations--Proposed Paragraphs (a)(2)(i)(J)
and (a)(3)(i)(A)
The Proposal would provide alternate criteria for Section 501(c)(3)
Organizations to qualify as QEPs and QECs. Rule 4.7 currently provides
that such organizations qualify as QEPs and QECs if they meet a
portfolio requirement and have total assets in excess of
$5,000,000.\81\ Here, too, Commission staff has become aware of
situations where a Section 501(c)(3) Organization itself cannot meet
the requisite QEP criteria, but the person who makes the investment
decisions for the organization and the person who established the
organization is a QEP. Because the decision-maker and person who has
established the organization are critically integral to the
organization, staff has permitted CPOs to treat Section 501(c)(3)
Organizations as QEPs in these situations.\82\ The proposed rules would
include these organizations as QEPs and QECs.
---------------------------------------------------------------------------
\81\Existing paragraphs (a)(1)(ii)(B)(2)(vii) and
(b)(1)(ii)(B)(2)(vii), respectively. Under proposed paragraphs
(a)(2)(ii)(G) and (a)(3)(ii)(G), Section 501(c)(3) Organizations
would continue to qualify as QEPs and QECs, respectively, subject to
meeting the criteria of the existing rules.
\82\See e.g., CFTC Staff Letter No. 97-16, [1996-1998 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 27,008 (March 21, 1997) (CPO
permitted to treat a Section 501(c)(3) charitable organization as a
QEP where the investment decisions were made by an individual who
was a QEP and that individual also established the charitable
organization).
---------------------------------------------------------------------------
i. Non-United States Persons as QECs--Proposed Paragraph
(a)(3)(i)(A)(2)
The Proposal would include, under certain circumstances, a Non-
United States person in the QEC definition.\83\ Specifically, a Non-
United States person would come within the QEC definition where the CTA
who seeks to direct or guide the commodity interest trading account of
the person: (1) Provides commodity interest trading advice solely to
persons who are QECs (including persons who are Non-United States
persons); and (2) has filed a notice of claim for exemption pursuant to
proposed Rule 4.7(c).
---------------------------------------------------------------------------
\83\As discussed supra at Part III.A., the term ``Non-United
States person'' would be defined in proposed paragraph (a)(1)(iv),
and it would be based on the text of existing paragraph
(a)(1)(ii)(C).
Proposed paragraph (a)(3)(i)(A) would include Non-United States
persons as QECs through incorporation by reference to the fact that
they would be QEPs under proposed paragraph (a)(2)(i)(K).
---------------------------------------------------------------------------
Currently, persons who are not United States persons are QEPs,\84\
but they are not also QECs. In adopting Rule 4.7 the Commission stated
that it had defined persons who are not United States persons as QEPs
with the objective of facilitating multijurisdictional offerings,\85\
an objective that is not applicable in the context of CTAs and
individual managed accounts. In this regard, the Commission noted that
Rule 4.7 would provide relief to CTAs that would not be generally
available to investment advisers under the securities laws and that
therefore investment advisers advising QECs would be obligated to
deliver a brochure to such clients. On this basis, the Commission
determined not to include persons who were not United States persons as
QECs. The Commission further stated that inclusion of these persons as
QECs without regard to qualifying criteria should await further
experience with the QEC concept.\86\
---------------------------------------------------------------------------
\84\Existing paragraph (a)(1)(ii)(C).
\85\See 57 FR at 34856.
\86\See Id. at n.21.
---------------------------------------------------------------------------
Currently, then, a CTA is ineligible for relief under Rule 4.7 with
respect to those of its advisory clients who are Non-United States
persons (and who are not otherwise QECs). In the past, Commission staff
has provided exemptive relief from the specific Disclosure Document
requirements of Rules 4.31, 4.34, 4.35 and 4.36 where a CTA directs or
guides exclusively the accounts of Non-United States persons.\87\ The
Proposal would codify this practice. It also would incorporate
Commission staff's belief that where the clients for which a CTA
directs or guides accounts are a mix of Non-United States persons and
persons who are QECs, Rule 4.7 should be available to the CTA.
---------------------------------------------------------------------------
\87\See, e.g., CFTC Staff Letter No. 97-09, [1996-1998 Transfer
Binder] Comm. Fut. L. Rep. para. 26, 976 (Feb. 6, 1997); CFTC Staff
Letter No. 95-73, [1994-1996 Transfer Binder] Comm. Fut. L. Rep.
para. 26, 503 (Aug. 24, 1995).
---------------------------------------------------------------------------
If a CTA additionally directs or guides the accounts of United
States persons who are not QECs, however, under the Proposal, Rule 4.7
relief would remain unavailable to the CTA with respect to its clients
who are Non-United States persons. This is because in such case (i.e.,
where the CTA directs or guides the accounts of persons who are QECs
and persons who are not QECs), the CTA is subject to the Disclosure
Document requirements of Rules 4.31, 4.34, 4.35 and 4.36 and the
recordkeeping requirements of Rule 4.33 with respect to its clients who
are not QECs. Requiring the CTA also to comply with these Disclosure
Document and recordkeeping requirements with respect to its clients who
are Non-United States persons should not impose any additional burden
on the CTA, since these are requirements with which it already is
subject to compliance.
The Commission believes that the limitations of the proposed rule
are consistent both with prior staff practice and the purposes of Rule
4.7. The Commission nonetheless specifically requests comments on this
proposed rule.
C. Persons Who Must Satisfy the Portfolio Requirement To Be QEPs and
QECs--Proposed Paragraphs (a)(2)(ii)(A) Through (L) and (a)(3)(ii)(A)
and (L)
The text of this portion of the Proposal would be based upon
existing
[[Page 11262]]
text, and it would continue to include in the QEP and QEC definitions
those persons who must satisfy a portfolio requirement\88\ in order to
qualify as QEPs or QECs.
---------------------------------------------------------------------------
\88\As discussed supra at Part III.A, the portfolio requirement
would be set forth in the definitional section of the rule. See
Proposed paragraph (a)(1)(v).
---------------------------------------------------------------------------
With respect to QEPs in particular, all but one of the proposed
rules\89\ would be taken from existing text,\90\ with various technical
revisions made to them.\91\ The remaining proposed rule would be taken
from existing text but would be amended, as discussed below, to make it
easier for pools, trusts, insurance company separate accounts and bank
collective trusts to qualify as QEPs.
---------------------------------------------------------------------------
\89\Proposed paragraphs (a)(2)(ii)(A) through (K).
\90\See existing paragraphs (a)(1)(ii)(B)(2)(i) through (x) and
(xii).
\91\Compare existing paragraph (a)(1)(ii)(B)(2)(i), which uses a
full citation to the ICA, with proposed paragraph (a)(2)(ii)(A),
which would use a short form citation to the ICA.
---------------------------------------------------------------------------
With respect to these collective investment vehicles, Rule 4.7
currently provides that a QEP is:
A pool, trust, insurance company separate account or bank collective
trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of participating in the exempt pool, and whose
participation in the exempt pool is directed by a qualified eligible
participant; Provided, That except where the pool, trust, insurance
company separate account or bank collective trust would constitute a
qualified eligible participant under paragraph (a)(1)(ii)(D) of this
section, no more than 10 percent of the fair market value of the
assets of such entity are used to purchase units in exempt
pools.\92\
---------------------------------------------------------------------------
\92\Existing paragraph (a)(1)(ii)(B)(2)(xi).
The foregoing proviso is sometimes referred to as the ``Ten Percent
Restriction.'' The Commission stated that it proposed this restriction
``because participants in these entities may not be QEPs and thus could
not invest in a qualified eligible pool based on their own financial
qualifications and investment sophistication.''\93\ Based upon staff's
experience with the Ten Percent Restriction, the Commission has come to
the view that the other criteria of the rule--i.e. that the collective
investment vehicle must satisfy a portfolio requirement, must have
total assets in excess of $5 million, may not be formed for the
specific purpose of participating in the exempt pool and must have its
participation in the exempt pool directed by a QEP--are sufficient to
satisfy the Commission's concerns.\94\ Accordingly, the Commission is
proposing to eliminate the Ten Percent Restriction.\95\
---------------------------------------------------------------------------
\93\57 FR at 3152. In light of the differences between an exempt
pool, which is owned by two or more pool participants, and an exempt
account, which as a non-pooled investment vehicle may only be owned
by one client, existing paragraph (b)(1)(ii)(B)(2)(xi) does not
contain a proviso corresponding to the Ten Percent Restriction.
\94\See, e.g., CFTC Staff Letter No. 98-37 [1996-1998 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 27,360 (June 5, 1998) (CPO
granted relief from the Ten Percent Restriction with respect to a
trust that was comprised of a QEP and his non-QEP wife, where the
trust met the portfolio requirement, had total assets in excess of
$5 million, was not formed for the specific purposes of
participating in the exempt pool and had its participation in the
exempt pool directed by a QEP).
\95\Proposed paragraph (a)(2)(ii)(L).
As for QECs, the Proposal would continue to include in the QEC
definition those persons who, subject to satisfying a portfolio
requirement, would be QECs.\96\ The Proposal also would continue to
include certain trusts, insurance company separate accounts and bank
collective trusts in the QEC definition.\97\ To parallel the action
proposing to eliminate the Ten Percent Restriction, and for the reasons
stated above in support of that action, the Commission also is
proposing to eliminate the current requirement that these trading
vehicles are vehicles ``in which all of the unit owners or
participants, other than the commodity trading advisor claiming relief
under this section, are qualified eligible participants.''
---------------------------------------------------------------------------
\96\Proposed paragraph (a)(3)(ii)(A) through (L). Thus, the
Proposal would continue to include within the QEC definition those
persons who are defined as QECs under existing paragraphs
(b)(1)(ii)(B)(2)(i) through (x) and (xii).
\97\Proposed paragraph (a)(3)(ii)(L). These collective
investment vehicles currently are included as QECs under existing
paragraph (b)(1)(ii)(B)(2)(xi).
---------------------------------------------------------------------------
IV. Comparison Chart
The following chart compares proposed Rule 4.7 with existing Rule
4.7. For each proposed paragraph, the chart indicates the corresponding
existing paragraph, with any substantive revision (``SR'') or technical
revision (``TR'') to the existing paragraph noted. The chart also
indicates by ``--'' any proposed paragraph that does not correspond to
an existing paragraph. To avoid what otherwise would be a very lengthy
presentation, as appropriate the chart groups together certain
paragraphs.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed rule 4.7 Existing rule 4.7 Proposed rule 4.7 Existing rule 4.7 Proposed rule 4.7 Existing rule 4.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
(a)................................ (a)(1), SR............ (a)(2)(i)(K)-(L)...... (a)(1)(ii)(C)-(D), (b)(1)(iv)........... (a)(2)(iv),TR
SR, TR.
(a)(1)............................. ...................... (a)(2)(ii)............ (a)(1)(ii)(B)(1)-(2), (b)(2)............... (a)(3)
TR.
(a)(1)(i).......................... ...................... (a)(2)(ii)(A)......... (a)(1)(ii)(B)(2)(i), (b)(2)(i)............ (a)(3)(i)
TR.
(a)(1)(ii)......................... (b)(1)(i), TR......... (a)(2)(ii)(B)-(D)..... (a)(1)(ii)(B)(2)(ii)- (b)(2)(i)(A)-(C)..... (a)(3)(i)(A)-(C)
(iv).
(a)(1)(iii)........................ (a)(1)(i), TR......... (a)(2)(ii)(E)-(G)..... (a)(1)(ii)(B)(2)(v)-( (b)(2)(i)(D)......... (a)(3)(i)(D), TR
vii), TR.
(a)(1)(iv)......................... (a)(1)(ii)(C), TR..... (a)(2)(ii)(H)-(J)..... (a)(1)(ii)(B)(2)(viii (b)(2)(i)(E)-(H)..... (a)(3)(i)(E)-(H)
)-(x).
(a)(1)(iv)(A)-(C).................. (a)(1)(ii)(C)(1)-(3).. (a)(2)(ii)(K)......... (a)(1)(ii)(B)(2)(xii) (b)(2)(i)(I)(1)...... (a)(3)(i)(I)(1), TR
, TR.
(a)(1)(iv)(D)...................... (a)(1)(ii)(C)(4), TR.. (a)(2)(ii)(L)......... (a)(1)(ii)(B)(2)(xi), (b)(2)(i)(I)(2)...... (a)(3)(i)(I)(2), TR
SR.
(a)(1)(iv)(E)...................... (a)(1)(ii)(C)(5)...... (b)(2)(ii)-(iii)..... (a)(3)(ii)-(iii)
(a)(1)(v).......................... ...................... (a)(3)................ (b)(1)(ii), TR.......
(a)(1)(v)(A)....................... (a)(1)(ii)(B), SR, TR. (a)(3)(i)............. (b)(1)(ii)(A), TR.... (b)(3)............... (a)(4)
(a)(1)(v)(A)(1)-(2)................ (a)(1)(ii)(B)(1)(i)-(i (a)(3)(i)(A).......... (b)(1)(ii)(A), SR, TR
i).
(a)(1)(v)(A)(3).................... (a)(1)(ii)(B)(1)(iii), (a)(3)(i)(B)-(C)...... ..................... (c).................. (b)(2), TR
TR.
(a)(1)(v)(B)....................... (b)(1)(ii)(B), SR, TR. (a)(3)(i)(D).......... (b)(1)(ii)(C), SR, TR (c)(1)............... .....................
(a)(1)(v)(B)(1)-(2)................ (b)(1)(ii)(B)(1)(i)-(i (a)(3)(i)(E).......... (b)(1)(ii)(D), SR, TR (c)(1)(i)-(ii)....... (b)(2)(i)-(ii)
i).
(a)(1)(v)(B)(3).................... (b)(1)(ii)(B)(1)(iii), (a)(3)(i)(F).......... (b)(1)(ii)(E), SR, TR
TR.
(a)(1)(vi)......................... (a)(1)(ii)(C)......... (a)(3)(ii)............ (b)(1)(ii)(B)(1)-(2), (c)(2)............... (b)(3)
TR.
(a)(3)(ii)(A)-(B)..... (b)(1)(ii)(B)(2)(i)-( (c)(2)(i)-(iii)...... (b)(3)(i)-(iii)
ii), TR.
(a)(2)............................. (a)(1)(ii), TR........ (a)(3)(ii)(C)-(D)..... (b)(1)(ii)(B)(2)(iii)
-(iv).
(a)(2)(i).......................... (a)(1)(ii)(A), TR..... (a)(3)(ii)(E)-(G)..... (b)(1)(ii)(B)(2)(v)-( (c)(3)............... (b)(4)
vii),TR.
(a)(2)(i)(A)-(B)................... (a)(1)(ii)(A)(1)-(2), (a)(3)(ii)(H)-(J)..... (b)(1)(ii)(B)(2)(viii
SR. )-(x).
(a)(2)(i)(C)(1)-(2)................ (a)(1)(ii)(A)(3), TR.. (a)(3)(ii)(K)......... (b)(1)(ii)(B)(2)(xii) (d).................. (c)
,TR.
[[Page 11263]]
(a)(2)(i)(D)....................... (a)(1)(ii)(A)(4), SR, (a)(3)(ii)(L)......... (b)(1)(ii)(B)(2)(xi), (d)(1)............... (c)(1)
TR. SR.
(a)(2)(i)(E)-(G)................... ...................... (d)(1)(i)-(iii)...... (c)(1)(i)-(iii)
(a)(2)(i)(H)(1).................... (a)(1)(ii)(A)(5), SR.. (b)................... (a)(2), TR...........
(a)(2)(i)(H)(2)-(5)................ ...................... (b)(1)................ ..................... (d)(2)............... (c)(2), TR
(a)(2)(i)(I)-(J)................... ...................... (b)(1)(i)-(iii)....... (a)(2)(i)-(iii)......
--------------------------------------------------------------------------------------------------------------------------------------------------------
V. Related Matters
A. Paperwork Reduction Act
Rule 4.7 affects information collection requirements. As required
by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the
Commission has submitted a copy of this section to the Office of
Management and Budget for its review.
Collection of Information
Rules Relating to the Operations and Activities of Commodity Pool
Operators and Commodity Trading Advisors and to Monthly Reporting by
Futures Commission Merchants, OMB Control Number 3038-0005.
The expected effect of the proposed amended rule will be to reduce
the burden previously approved by OMB for this collection of
information by 1,644 hours because, while it will result in an increase
in the number of filings under Rule 4.7, it will result in a larger
decrease in the information collection requirements under the
disclosure, reporting and recordkeeping rules.
Specifically:
The burden associated with Commission Rule 4.7, as applied to CPOs
and CTAs, is expected to be increased by 30 hours:
Estimated number of respondents (after proposed exemption): 660.
Annual responses by each respondent: 1.
Estimated average hours per response: 0.50.
Annual reporting burden: 330 hours.
This annual reporting burden of 330 hours represents an increase of
30 hours as a result of the proposed amendments to Rule 4.7.
The burden associated with Commission Rule 4.21, as applied to CPOs
is expected to be decreased by 73.84 hours:
Estimated number of respondents (after proposed exemption): 565.
Annual responses by each respondent: 0.88.
Estimated average hours per response: 2.80.
Annual reporting burden: 1,392.16.
While the estimated burden figure of 1,392.16 for Rule 4.21 is
higher than the burden figure previously reported to OMB, the
Commission believes that the previously reported burden figure was
based on an incorrect figure for the number of CPOs and the burden
figure should have been reported at 1,466. This annual reporting burden
of 1,392.16 hours represents a decrease of 73.84 hours as a result of
the proposed amendments to Rule 4.7.
The burden associated with Commission Rule 4.22(a), as applied to
CPOs, is expected to be decreased by 548.63 hours:
Estimated number of respondents (after proposed exemption): 420.
Annual responses by each respondent: 4.75.
Estimated average hours per response: 3.85.
Annual reporting burden: 7,680.75.
This annual reporting burden of 7,680.75 hours represents a
decrease of 548.63 hours as a result of the proposed amendments to Rule
4.7.
The burden associated with Commission Rule 4.22(c) is expected to
be reduced by 270 hours:
Estimated number of respondents (after proposed exemption): 480.
Annual responses by each respondent: 1.
Estimated average hours per response: 9.
Annual reporting burden: 4,320.
This annual reporting burden of 4,320 hours represents a decrease
of 270 hours as a result of the proposed amendments to Rule 4.7.
The burden associated with Commission Rule 4.23 is expected to be
reduced by 1,260 hours:
Estimated number of respondents (after proposed exemption): 472.
Annual responses by each respondent: 1.
Estimated average hours per response: 42.
Annual reporting burden: 19,824
This annual reporting burden of 19,824 hours represents a decrease
of 1,260 hours as a result of the proposed amendments to Rule 4.7.
The burden associated with Commission Rule 4.31 is expected to be
reduced by 55.86 hours:
Estimated number of respondents (after proposed exemption): 620.
Annual responses by each respondent: 1.33.
Estimated average hours per response: 1.40.
Annual reporting burden: 1,154.44.
This annual reporting burden of 1,154.44 hours represents a
decrease of 55.86 hours as a result of the proposed amendments to Rule
4.7.
The burden associated with Commission Rule 4.33 is expected to be
reduced by 780 hours:
Estimated number of respondents (after proposed exemption): 1,970.
Annual responses by each respondent: 1.
Estimated average hours per response: 26.
Annual reporting burden: 51,220.
This annual reporting burden of 51,220 hours represents a decrease
of 780 hours as a result of the proposed amendments to Rule 4.7.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Commodity Futures Trading Commission.
The Commission considers comments by the public on this proposed
collection of information in--
· Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
· Evaluating the accuracy of the Commission's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
· Enhancing the quality, usefulness, and clarity of the
information to be collected; and
· Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the
[[Page 11264]]
Federal Register. Therefore, a comment to OMB is best assured of having
its full effect if OMB receives it within 30 days of publication. This
does not affect the deadline for the public to comment to the
Commission on the proposed regulations.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street N.W.,
Washington, DC 20581, (202) 418-5160.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'')\98\ requires each federal
agency to consider in the course of proposing substantive rules the
effect of those rules on small entities. The proposed amendments to
Rule 4.7 would affect registered CPOs and CTAs. The Commission
previously has established certain definitions of ``small entities'' to
be used by the Commission in evaluating the impact of its rules on such
small entities in accordance with the RFA.\99\ The Commission
determined that registered CPOs are not small entities for the purposes
of the RFA.@\ With respect to CTAs, the Commission stated that it
would evaluate within the context of a particular rule proposal whether
all or some affected CTAs should be considered to be small entities
and, if so, that it would analyze the economic impact on them of any
rule.A\
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\98\5 USC 601 et seq. (1994 & Supp. II 1996).
\99\47 FR 18618 (April 30, 1982).
@\Id. at 18619-20.
A\Id. at 18620.
---------------------------------------------------------------------------
Existing Rule 4.7 provides exemptive relief from the disclosure,
reporting and recordkeeping requirements applicable to registered CPOs
and CTAs with respect to pools and accounts owned solely by QEPs and
QECs, respectively. The relief that is provided reduces rather than
increases the regulatory requirements that apply to registered CPOs and
CTAs. The proposed amendments to Rule 4.7 would expand this relief by
bringing within the QEP and QEC definitions persons not included in the
existing rules. Further, this expanded relief would be available to all
registered CPOs and CTAs, regardless of size. The Commission thus
believes that the proposed amendments, if adopted, would further reduce
the regulatory burdens on registered CPOs and CTAs.
Accordingly, pursuant to 5 U.S.C. Sec. 605(b), the Chairman, on
behalf of the Commission, certifies that the action proposed to be
taken herein will not have a significant economic impact on a
substantial number of small entities.
List of Subjects in 17 CFR Part 4
Advertising, Commodity futures, Commodity pool operators, Commodity
trading advisors, Consumer protection, Reporting and recordkeeping
requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and in particular, sections
1a(4), 1a(5), 4b, 4l, 4m, 4n, 4o and 8a, 7 U.S.C. 1a, 6b, 6l, 6m, 6n,
6o and 12a, the Commission hereby proposes to amend Part 4 of Chapter I
of Title 17 of the Code of Federal Regulations as follows:
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
1. The authority citation for part 4 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a, and
23.
2. Section 4.7 is proposed to be revised to read as follows:
Sec. 4.7 Exemption from certain part 4 requirements with respect to
pools whose participants are limited to qualified eligible participants
and with respect to commodity trading advisors' accounts for clients
that are qualified eligible clients.
(a) Definitions. Paragraph (a)(1) of this section contains general
definitions, paragraph (a)(2) of this section contains the definition
of the term ``qualified eligible participant'' and paragraph (a)(3) of
this section contains the definition of the term ``qualified eligible
client.'' For the purposes of this section:
(1) In general. (i) Affiliate of, or a person affiliated with, a
specified person means a person that directly or indirectly through one
or more persons, controls, is controlled by, or is under common control
with the specified person.
(ii) Exempt account means the account of a qualified eligible
client that is directed or guided by a commodity trading advisor
pursuant to an effective claim for exemption under Sec. 4.7.
(iii) Exempt pool means a pool that is operated pursuant to an
effective claim for exemption under Sec. 4.7.
(iv) Non-United States person means:
(A) A natural person who is not a resident of the United States;
(B) A partnership, corporation or other entity, other than an
entity organized principally for passive investment, organized under
the laws of a foreign jurisdiction and which has its principal place of
business in a foreign jurisdiction;
(C) An estate or trust, the income of which is not subject to
United States income tax regardless of source;
(D) An entity organized principally for passive investment such as
a pool, investment company or other similar entity; Provided, That
units of participation in the entity held by persons who do not qualify
as Non-United States persons represent in the aggregate less than 10%
of the beneficial interest in the entity, and that such entity was not
formed principally for the purpose of facilitating investment by
persons who do not qualify as Non-United States persons in a pool with
respect to which the operator is exempt from certain requirements of
Part 4 of the Commission's regulations by virtue of its participants
being Non-United States persons; and
(E) A pension plan for the employees, officers or principals of an
entity organized and with its principal place of business outside the
United States.
(v) Portfolio Requirement means:
(A) With respect to a qualified eligible participant, that the
person:
(1) Owns securities (including pool participations) of issuers not
affiliated with such participant and other investments with an
aggregate market value of at least $2,000,000;
(2) Has had on deposit with a futures commission merchant, for its
own account at any time during the six-month period preceding the date
of sale to that person of a pool participation in the exempt pool, at
least $200,000 in exchange-specified initial margin and option premiums
for commodity interest transactions; or
(3) Owns a portfolio comprised of a combination of the funds or
property specified in paragraphs (a)(1)(v)(A)(1) and (2) of this
section in which the sum of the funds or property includable under
paragraph (a)(1)(v)(A)(1), expressed as a percentage of the minimum
amount required thereunder, and the amount of futures margin and option
premiums includable under paragraph (a)(1)(v)(A)(2), expressed as a
percentage of the minimum amount required thereunder, equals at least
one hundred percent. An example of a composite portfolio acceptable
under this paragraph (a)(1)(v)(A)(3) would consist of $1,000,000 in
securities and other property (50% of paragraph (a)(1)(v)(A)(1)) and
$100,000 in exchange-specified initial margin and option premiums (50%
of paragraph (a)(1)(v)(A)(2)).
(B) With respect to a qualified eligible client, that the person:
(1) Owns securities (including pool participations) of issuers not
affiliated with such client and other investments with an aggregate
market value of at least $2,000,000;
[[Page 11265]]
(2) Has had on deposit with a futures commission merchant, for its
own account at any time during the six-month period preceding the date
that person opens an exempt account with the commodity trading advisor,
at least $200,000 in exchange-specified initial margin and option
premiums for commodity interest transactions; or
(3) Owns a portfolio comprised of a combination of the funds or
property specified in paragraphs (a)(1)(v)(B)(1) and (2) of this
section in which the sum of the funds or property includable under
paragraph (a)(1)(v)(B)(1), expressed as a percentage of the minimum
amount required thereunder, and the amount of futures margin and option
premiums includable in paragraph (a)(1)(v)(B)(2), expressed as a
percentage of the minimum amount required thereunder, equals at least
one hundred percent. An example of a composite portfolio acceptable
under this paragraph (a)(1)(v)(B)(3) would consist of $1,000,000 in
securities and other property (50% of paragraph (a)(1)(v)(B)(1)) and
$100,000 in exchange-specified initial margin and option premiums (50%
of paragraph (a)(1)(v)(B)(2)).
(vi) United States means the United States, its states, territories
or possessions, or an enclave of the United States government, its
agencies or instrumentalities.
(2) Qualified eligible participants--(i) Persons who are qualified
eligible participants irrespective of the Portfolio Requirement.
Qualified eligible participant means any person, acting for its own
account or for the account of a qualified eligible participant, who the
commodity pool operator reasonably believes, at the time of the sale to
that person of a pool participation in the exempt pool, is:
(A) A futures commission merchant registered pursuant to section 4d
of the Act, or a principal thereof;
(B) A broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934, or a principal thereof;
(C) A commodity pool operator registered pursuant to section 4m of
the Act, or a principal thereof; Provided, That the commodity pool
operator:
(1) Has been registered and active as such for two years; or
(2) Operates pools which, in the aggregate, have total assets in
excess of $5,000,000;
(D) A commodity trading advisor registered pursuant to section 4m
of the Act, or a principal thereof; Provided, That the commodity
trading advisor:
(1) Has been registered and active as such for two years; or
(2) Provides commodity interest trading advice to commodity
accounts which, in the aggregate, have total assets in excess of
$5,000,000 deposited at one or more futures commission merchants;
(E) An investment adviser registered pursuant to section 203 of the
Investment Advisers Act of 1940 (the ``Investment Advisers Act'') or
pursuant to the laws of any state, or a principal thereof; Provided,
That the investment adviser:
(1) Has been registered and active as such for two years; or
(2) Provides securities investment advice to securities accounts
which, in the aggregate, have total assets in excess of $5,000,000
deposited at one or more registered securities brokers;
(F) A ``qualified purchaser'' as defined in section 2(51)(A) of the
Investment Company Act of 1940 (the ``Investment Company Act'');
(G) A ``knowledgeable employee'' as defined in Sec. 270.3c-5 of
this title;
(H)(1) The commodity pool operator, commodity trading advisor or
investment adviser of the exempt pool offered or sold, or an affiliate
of any of the foregoing;
(2) A principal of the exempt pool or the commodity pool operator,
commodity trading advisor or investment adviser of the exempt pool, or
of an affiliate of any of the foregoing;
(3) An employee of the exempt pool, commodity pool operator,
commodity trading advisor or investment adviser of the exempt pool, or
of an affiliate of any of the foregoing (other than an employee
performing solely clerical, secretarial or administrative functions
with regard to such person or its investments) who, in connection with
his or her regular functions or duties, participates in the investment
activities of the exempt pool, other commodity pools operated by the
commodity pool operator of the exempt pool or other accounts advised by
the commodity trading advisor or the investment adviser of the exempt
pool, or by the affiliate; Provided, That such employee has been
performing such functions and duties for or on behalf of the exempt
pool, commodity pool operator, commodity trading advisor, investment
adviser or affiliate, or substantially similar functions or duties for
or on behalf of another person engaged in providing commodity interest,
securities or other financial services, for at least 12 months;
(4) Any other employee of the exempt pool, commodity pool operator,
commodity trading advisor or investment adviser of the exempt pool, or
of an affiliate of any of the foregoing (other than an employee
performing solely clerical, secretarial or administrative functions
with regard to such person or its investments); Provided, That such
employee:
(i) Is an accredited investor as defined in Sec. 230.501(a)(5) or
(6) of this title; and
(ii) Has been employed by the exempt pool, commodity pool operator,
commodity trading advisor, investment adviser or affiliate, or by
another person engaged in providing commodity interest, securities or
other financial services, for at least 24 months; or
(5) The spouse, child, sibling or parent of a person who satisfies
the criteria of paragraph (a)(2)(i)(H)(1), (2), (3) or (4) of this
section; Provided, That:
(i) An investment in the exempt pool by any such family member is
made with the knowledge and at the direction of the person; and
(ii) The family member is a qualified eligible participant only for
the purposes of this paragraph (a)(2)(i)(H)(5);
(I) A trust; Provided, That:
(1) The trust was not formed for the specific purpose of
participating in the exempt pool; and
(2) The trustee or other person authorized to make investment
decisions with respect to the trust, and each settlor or other person
who has contributed assets to the trust, is a qualified eligible
participant;
(J) An organization described in section 501(c)(3) of the Internal
Revenue Code (the ``IRC''); Provided, That the trustee or other person
authorized to make investment decisions with respect to the
organization, and the person who has established the organization, is a
qualified eligible participant;
(K) A Non-United States person; or
(L) An entity in which all of the unit owners or participants are
persons listed in paragraphs (a)(2)(i) and (a)(2)(ii) of this section.
(ii) Persons who must satisfy the Portfolio Requirement to be
qualified eligible participants. Qualified eligible participant means
any person who the commodity pool operator reasonably believes, at the
time of the sale to that person of a pool participation in the exempt
pool, satisfies the Portfolio Requirement and is:
(A) An investment company registered under the Investment Company
Act or a business development company as defined in section 2(a)(48) of
such Act not formed for the specific purpose of investing in the exempt
pool;
(B) A bank as defined in section 3(a)(2) of the Securities Act of
1933 (the ``Securities Act'') or any savings and loan association or
other institution as defined in section 3(a)(5)(A) of the Securities
Act acting for its own account
[[Page 11266]]
or for the account of a qualified eligible participant;
(C) An insurance company as defined in section 2(13) of the
Securities Act acting for its own account or for the account of a
qualified eligible participant;
(D) A plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan
has total assets in excess of $5,000,000;
(E) An employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974 (``ERISA''); Provided, That the
investment decision is made by a plan fiduciary, as defined in section
3(21) of such Act, which is a bank, savings and loan association,
insurance company, or registered investment adviser; or that the
employee benefit plan has total assets in excess of $5,000,000; or, if
the plan is self-directed, that investment decisions are made solely by
persons that are qualified eligible participants;
(F) A private business development company as defined in section
202(a)(22) of the Investment Advisers Act;
(G) An organization described in section 501(c)(3) of the IRC, with
total assets in excess of $5,000,000;
(H) A corporation, Massachusetts or similar business trust, or
partnership, other than a pool, which has total assets in excess of
$5,000,000, and is not formed for the specific purpose of participating
in the exempt pool;
(I) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase in the exempt
pool exceeds $1,000,000;
(J) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year;
(K) Except as provided for the governmental entities referenced in
paragraph (a)(2)(ii)(D) of this section, if otherwise authorized by law
to engage in such transactions, a governmental entity (including the
United States, a state, or a foreign government) or political
subdivision thereof, or a multinational or supranational entity or an
instrumentality, agency, or department of any of the foregoing; or
(L) A pool, trust, insurance company separate account or bank
collective trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of participating in the exempt pool, and whose
participation in the exempt pool is directed by a qualified eligible
participant.
(3) Qualified eligible clients--(i) Persons who are qualified
eligible clients irrespective of the Portfolio Requirement. Qualified
eligible client means any person, acting for its own account or for the
account of a qualified eligible client, who the commodity trading
advisor reasonably believes, at the time that person opens an exempt
account with the commodity trading advisor, is:
(A)(1) A person described in paragraph (a)(2)(i)(A), (B), (C), (D),
(E), (F), (G) or (J) of this section;
(2) A person described in paragraph (a)(2)(i)(K) of this section;
Provided, however, that the CTA who seeks to direct or guide the
commodity interest trading account of the person:
(i) Provides commodity interest trading advice exclusively to
persons who are qualified eligible clients, including persons described
in paragraph (a)(2)(i)(K) of this section; and
(ii) Has filed a notice of claim for exemption pursuant to
paragraph (c) of this section;
(B)(1) An affiliate of the commodity trading advisor of the exempt
account;
(2) A principal of the commodity trading advisor of the exempt
account or of an affiliate of the trading advisor;
(3) An employee of the commodity trading advisor of the exempt
account or of an affiliate of the trading advisor (other than an
employee performing solely clerical, secretarial or administrative
functions with regard to such person or its investments) who, in
connection with his or her regular functions or duties, participates in
the investment activities of the commodity trading advisor or the
affiliate; Provided, That such employee has been performing such
functions and duties for or on behalf of the commodity trading advisor
or the affiliate, or substantially similar functions or duties for or
on behalf of another person engaged in providing commodity interest,
securities or other financial services, for at least 12 months;
(4) Any other employee of the commodity trading advisor of the
exempt account or of an affiliate of the trading advisor (other than an
employee performing solely clerical, secretarial or administrative
functions with regard to such person or its investments); Provided,
That such employee:
(i) Is an accredited investor as defined in Sec. 230.501(a)(5) or
(6) of this title; and
(ii) Has been employed by the commodity trading advisor or the
affiliate, or by another person engaged in providing commodity
interest, securities or other financial services, for at least 24
months; or
(5) The spouse, child, sibling or parent of the commodity trading
advisor of the exempt account or of a person who satisfies the criteria
of paragraph (a)(3)(i)(B)(1), (2), (3) or (4) of this section;
Provided, That:
(i) The establishment of an exempt account by any such family
member is made with the knowledge and at the direction of the trading
advisor or person; and
(ii) The family member is a qualified eligible client only for the
purposes of this paragraph (a)(3)(i)(B)(5);
(C) A Trust; Provided, That:
(1) The trust was not formed for the specific purpose of opening an
exempt account with the commodity trading advisor; and
(2) The trustee or other person authorized to make investment
decisions with respect to the trust, and each settlor or other person
who has contributed assets to the trust, is a qualified eligible
client;
(D) An exempt pool; or
(E) An entity in which all of the unit owners or participants,
other than the commodity trading advisor claiming relief under this
section, are persons listed in paragraphs (a)(3)(i)(A) through (D) and
(a)(3)(ii) of this section.
(F) Notwithstanding paragraph (a)(3)(ii) of this section, an entity
as to which a notice of eligibility has been filed pursuant to Sec. 4.5
which is operated in accordance with such rule and in which all unit
owners or participants, other than the commodity trading advisor
claiming relief under this section, are qualified eligible
participants.
(ii) Persons who must satisfy the Portfolio Requirement to be
qualified eligible clients. Qualified eligible client means any person
who the commodity trading advisor reasonably believes, at the time that
person opens an exempt account with the commodity trading advisor,
satisfies the Portfolio Requirement and is:
(A) An investment company registered under the Investment Company
Act or a business development company as defined in section 2(a)(48) of
that Act not formed for the specific purpose of opening an exempt
account with the commodity trading advisor;
(B) A bank as defined in section 3(a)(2) of the Securities Act, or
any savings and loan association or other institution as defined in
section 3(a)(5)(A) of the Securities Act acting for its own account or
for the account of a qualified eligible client;
[[Page 11267]]
(C) An insurance company as defined in section 2(13) of the
Securities Act acting for its own account or for the account of a
qualified eligible client;
(D) A plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan
has total assets in excess of $5,000,000;
(E) An employee benefit plan within the meaning of ERISA; Provided,
That the investment decision is made by a plan fiduciary, as defined in
section 3(21) of such Act, which is a bank, savings and loan
association, insurance company, or registered investment adviser; or
that the employee benefit plan has total assets in excess of
$5,000,000; or if the plan is self-directed, that investment decisions
are made solely by persons that are qualified eligible clients;
(F) A private business development company as defined in section
202(a)(22) of the Investment Advisers Act;
(G) An organization described in section 501(c)(3) of the IRC, with
total assets in excess of $5,000,000;
(H) A corporation, Massachusetts or similar business trust, or
partnership, other than a pool, which has total assets in excess of
$5,000,000, and is not formed for the specific purpose of opening an
exempt account with the commodity trading advisor;
(I) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time that person opens an exempt
account exceeds $1,000,000;
(J) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has
reasonable expectation of reaching the same income level in the current
year;
(K) Except as otherwise provided in paragraph (a)(3)(ii)(D) of this
section, if otherwise authorized by law to engage in such transactions,
a governmental entity (including the United States, a state, or a
foreign government) or political subdivision thereof, or a
multinational or supranational entity or an instrumentality, agency, or
department of any of the foregoing;
(L) A trust, insurance company separate account or bank collective
trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of opening an exempt account with the commodity
trading advisor, whose investment in the exempt account is directed by
a qualified eligible client or participant.
(b) Relief for commodity pool operators. Subject to the conditions
specified in paragraph (b)(2) of this section, any registered commodity
pool operator who offers or sells participations in a pool solely to
qualified eligible participants in an offering which qualifies for
exemption from the registration requirements of the Securities Act
pursuant to section 4(2) of that Act or pursuant to Regulation S, 17
CFR 230.901 et seq., and any bank registered as a commodity pool
operator in connection with a pool that is a collective trust fund
whose securities are exempt from registration under the Securities Act
pursuant to section 3(a)(2) of that Act and are offered or sold,
without marketing to the public, solely to qualified eligible
participants, may claim any or all of the following relief with respect
to such pool by filing the notice required by paragraph (b)(2) of this
section.
(1) Relief--(i) Disclosure. (A) Exemption from the specific
requirements of Secs. 4.21, 4.24, 4.25 and 4.26 with respect to each
exempt pool; Provided, That if an offering memorandum is distributed in
connection with soliciting prospective participants in the exempt pool,
such offering memorandum must include all disclosures necessary to make
the information contained therein, in the context in which it is
furnished, not misleading; and that the following statement is
prominently disclosed on the cover page of the offering memorandum, or,
if none is provided, immediately above the signature line on the
subscription agreement or other document that the prospective
participant must execute to become a participant in the pool:
``PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING
COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO
QUALIFIED ELIGIBLE PARTICIPANTS, AN OFFERING MEMORANDUM FOR THIS POOL
IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE
COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF
PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING
MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS
NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR
THIS POOL.''
(B) Exemption from disclosing the past performance of exempt pools
in the Disclosure Document of non-exempt pools except to the extent
that such past performance is material to the non-exempt pool being
offered; Provided, however, That a pool operator that has claimed
exemption hereunder and elects not to disclose any such performance in
the Disclosure Document of non-exempt pools shall state in a footnote
to the performance disclosure therein that the operator is operating or
has operated exempt pools whose performance is not disclosed in this
Disclosure Document.
(ii) Periodic reporting. Exemption from the specific requirements
of Secs. 4.22(a) and (b); Provided, That a statement signed and
affirmed in accordance with Sec. 4.22(h) is prepared and distributed to
pool participants no less frequently than quarterly within 30 calendar
days after the end of the reporting period. This statement must
indicate:
(A) The net asset value of the exempt pool as of the end of the
reporting period;
(B) The change in net asset value from the end of the previous
reporting period; and
(C) The net asset value per outstanding unit of participation in
the exempt pool as of the end of the reporting period.
(iii) Annual report. (A) Exemption from the specific requirements
of Secs. 4.22(c) and (d); Provided, That within 90 calendar days after
the end of the exempt pool's fiscal year, the commodity pool operator
files with the Commission and with the National Futures Association and
distributes to each participant in lieu of the financial information
and statements specified by those sections, an annual report for the
exempt pool, signed and affirmed in accordance with Sec. 4.22(h) which
contains, at a minimum:
(1) A Statement of Financial Condition as of the close of the
exempt pool's fiscal year (elected in accordance with Sec. 4.22(g));
(2) A Statement of Income (Loss) for that year; and
(3) Appropriate footnote disclosure and any other material
information.
(B) Such annual report must be presented and computed in accordance
with generally accepted accounting principles consistently applied and,
if certified by an independent public accountant, so certified in
accordance with Sec. 1.16 as applicable.
(C) Legend. (1) If a claim for exemption has been made pursuant to
this section, the commodity pool operator must make a statement to that
[[Page 11268]]
effect on the cover page of each annual report.
(2) If the annual report is not certified in accordance with
Sec. 1.16, the pool operator must make a statement to that effect on
the cover page of each annual report and state that a certified audit
will be provided upon the request of the holders of a majority of the
units of participation in the pool who are unaffiliated with the
commodity pool operator.
(iv) Recordkeeping. Exemption from the specific requirements of
Sec. 4.23; Provided, That the commodity pool operator must maintain the
reports referred to in paragraphs (b)(1)(ii) and (b)(1)(iii) of this
section and all books and records prepared in connection with his
activities as the pool operator of the exempt pool (including, without
limitation, records relating to the qualifications of qualified
eligible participants and substantiating any performance
representations) at his main business address and must make such
reports and records available to any representative of the Commission,
the National Futures Association and the United States Department of
Justice in accordance with the provisions of Sec. 1.31.
(2) Notice of claim for exemption. (i) The notice of a claim for
exemption under this section must:
(A) Be in writing;
(B) Provide the name, main business address, main business
telephone number and the National Futures Association commodity pool
operator identification number of the person claiming the exemption;
(C) Provide the name(s) of the pool(s) for which the request is
made; Provided, That a single notice representing that the commodity
pool operator anticipates operating single-investor pools may be filed
to claim exemption for single-investor pools and such notice need not
name each such pool;
(D) Contain representations that:
(1) Neither the commodity pool operator nor any of his principals
is subject to any statutory disqualification under section 8a(2) or
8a(3) of the Act unless such disqualification arises from a matter
which was previously disclosed in connection with a previous
application for registration if such registration was granted or which
was disclosed more than thirty days prior to the filing of the notice
under this paragraph (b)(2)(i)(D);
(2) The commodity pool operator will comply with the applicable
requirements of Sec. 4.7; and
(3) The exempt pool will be offered and operated in compliance with
the applicable requirements of Sec. 4.7;
(E) Specify the relief claimed under Sec. 4.7;
(F) State the closing date of the offering or that the offering
will be continuous;
(G) Be signed by the pool operator, as follows:
If the pool operator is a sole proprietorship, by the sole
proprietor; if a partnership, by a general partner; and if a
corporation, by the chief executive officer or chief financial officer;
(H) Be filed in duplicate with the Commission at the address
specified in Sec. 4.2 and with the National Futures Association at its
headquarters office (Attn: Director of Compliance, Compliance
Department); and
(I)(1) Except as provided in paragraph (b)(2)(i)(C) of this section
with respect to single-investor pools and in paragraph (b)(2)(i)(I)(2)
of this section, be received by the Commission:
(i) Before the date the pool first enters into a commodity interest
transaction, if the relief claimed is limited to that provided under
paragraphs (b)(1)(ii), (iii) and (iv) of this section; or
(ii) Prior to any offer or sale of any participation in the exempt
pool if the claimed relief includes that provided under paragraph
(b)(1)(i) of this section.
(2) Where participations in a pool have been offered or sold in
full compliance with this part 4, the notice of a claim for exemption
may be filed with the Commission at any time; Provided, That the claim
for exemption is otherwise consistent with the duties of the commodity
pool operator and the rights of pool participants and that the
commodity pool operator notifies the pool participants of his
intention, absent objection by the holders of a majority of the units
of participation in the pool who are unaffiliated with the commodity
pool operator within twenty-one days after the date of the
notification, to file a notice of claim for exemption under Sec. 4.7
and such holders have not objected within such period. A commodity pool
operator filing a notice under this paragraph (b)(2)(i)(I)(2) shall
either provide disclosure and reporting in accordance with the
requirements of this part 4 to those participants objecting to the
filing of such notice or allow such participants to redeem their units
of participation in the pool within three months of the filing of such
notice.
(ii) The notice will be effective upon receipt by the Commission
with respect to each pool for which it was made; Provided, That any
notice which does not include all the required information shall not be
effective, and that if at the time the Commission receives the notice,
an enforcement proceeding brought by the Commission under the Act or
the regulations is pending against the commodity pool operator or any
of its principals, the exemption will not be effective until twenty-one
calendar days after receipt of the notice by the Commission and that in
such case an exemption may be denied by the Commission or made subject
to such conditions as the Commission may impose.
(iii) Any exemption claimed hereunder shall cease to be effective
with respect to a particular pool upon any change which would cause the
commodity pool operator for the pool to be ineligible for the relief
claimed with respect to such pool. The commodity pool operator must
promptly file a notice advising the Commission of such change.
(3) Any exemption from the requirements of Sec. 4.21, 4.22, 4.23,
4.24, 4.25 or 4.26 with respect to a pool shall not affect the
obligation of the commodity pool operator to comply with all other
applicable provisions of Part 4, the Act and the Commission's rules and
regulations, with respect to the pool and with respect to any other
pool such pool operator operates or intends to operate.
(c) Relief for commodity trading advisors. Subject to the
conditions specified in paragraph (c)(2) of this section and upon
filing the notice required by paragraph (c)(2) of this section, any
registered commodity trading advisor who anticipates directing or
guiding the commodity interest accounts of qualified eligible clients
will be exempt as follows with respect to the accounts of qualified
eligible clients who have given due consent to their account being an
exempt account under Sec. 4.7.
(1) Relief--(i) Disclosure. (A) Exemption from the specific
requirements of Secs. 4.31, 4.34, 4.35 and 4.36; Provided, That if the
commodity trading advisor delivers a brochure or other disclosure
statement to such qualified eligible clients, such brochure or
statement shall include all additional disclosures necessary to make
the information contained therein, in the context in which it is
furnished, not misleading; and that the following statement is
prominently displayed on the cover page of the brochure or statement
or, if none is provided, immediately above the signature line of the
agreement that the client must execute before it opens an account with
the commodity trading advisor: ``PURSUANT TO AN EXEMPTION FROM THE
COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF
QUALIFIED ELIGIBLE CLIENTS, THIS
[[Page 11269]]
BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN,
FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION
DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR
UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE.
CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED
OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT
DOCUMENT.''
(B) Exemption from disclosing the past performance of exempt
accounts in the Disclosure Document for non-exempt accounts except to
the extent that such past performance is material to the non-exempt
account being offered; Provided, however, That a commodity trading
advisor that has claimed exemption hereunder and elects not to disclose
any such performance in the Disclosure Document for non-exempt accounts
shall state in a footnote to the performance disclosure therein that
the advisor is advising or has advised exempt accounts for qualified
eligible clients whose performance is not disclosed in this Disclosure
Document.
(ii) Recordkeeping. Exemption from the specific requirements of
Sec. 4.33; Provided, That the commodity trading advisor must maintain,
at its main business office, all books and records prepared in
connection with his activities as the commodity trading advisor of the
qualified eligible clients (including, without limitation, records
relating to the qualifications of such qualified eligible clients and
substantiating any performance representations) and must make such
records available to any representative of the Commission, the National
Futures Association and the United States Department of Justice in
accordance with the provisions of Sec. 1.31.
(2) Notice of claim for exemption. (i) The notice of a claim for
exemption under this section must:
(A) Be in writing;
(B) Provide the name, main business address, main business
telephone number and the National Futures Association commodity trading
advisor identification number of the person claiming the exemption;
(C) Contain a representation that the commodity trading advisor
anticipates providing commodity interest trading advice to qualified
eligible clients and that it will comply with the applicable
requirements of Sec. 4.7 with respect to accounts of such clients;
(D) Contain a representation that neither the commodity trading
advisor nor any of its principals is subject to any statutory
disqualification under section 8a(2) or 8a(3) of the Act unless such
disqualification arises from a matter which was previously disclosed in
connection with a previous application for registration if such
registration was granted or which was disclosed more than thirty days
prior to the filing of the notice under this paragraph;
(E) Specify the relief claimed under Sec. 4.7;
(F) Be signed by the commodity trading advisor, as follows: If the
commodity trading advisor is a sole proprietorship, by the sole
proprietor; if a partnership, by a general partner; and if a
corporation, by the chief executive officer or chief financial officer;
(G) Be filed in duplicate with the Commission at the address
specified in Sec. 4.2 and with the National Futures Association at its
headquarters office (Attn: Director of Compliance, Compliance
Department); and
(H) Be received by the Commission before the date the commodity
trading advisor first enters into an agreement to direct or guide the
commodity interest account of a qualified eligible client pursuant to
Sec. 4.7.
(ii) The notice will be effective upon receipt by the Commission;
Provided, That any notice which does not include all of the required
information shall not be effective, and that if at the time the
Commission receives the notice, an enforcement proceeding brought by
the Commission under the Act or the regulations is pending against the
commodity trading advisor or any of its principals, the exemption will
not be effective until twenty-one calendar days after receipt of the
notice by the Commission and that in such case an exemption may be
denied by the Commission or made subject to such conditions as the
Commission may impose.
(iii) Any exemption claimed hereunder shall cease to be effective
upon any change which would cause the commodity trading advisor to be
ineligible for the relief claimed. The commodity trading advisor must
promptly file a notice advising the Commission of such change.
(3) Any exemption from the requirements of Sec. 4.31, 4.33, 4.34,
4.35 or 4.36 made hereunder shall not affect the obligation of the
commodity trading advisor to comply with all other applicable
provisions of part 4, the Act and the Commission's rules and
regulations, with respect to any qualified eligible client and with
respect to any other client to which the commodity trading advisor
provides or intends to provide commodity interest trading advice.
(d) Insignificant deviations from a term, condition or requirement
of Sec. 4.7. (1) A failure to comply with a term or condition of
Sec. 4.7 will not result in the loss of the exemption with respect to a
particular pool or client if the commodity pool operator or the
commodity trading advisor relying on the exemption shows that:
(i) The failure to comply did not pertain to a term, condition or
requirement directly intended to protect that particular qualified
eligible participant or client;
(ii) The failure to comply was insignificant with respect to the
exempt pool as a whole or to the particular qualified eligible client
of the commodity trading advisor; and
(iii) A good faith and reasonable attempt was made to comply with
all applicable terms, conditions and requirements of Sec. 4.7.
(2) A transaction made in reliance on Sec. 4.7 must comply with all
applicable terms, conditions and requirements of Sec. 4.7. Where an
exemption is established only through reliance upon paragraph (d)(1) of
this section, the failure to comply shall nonetheless be actionable by
the Commission.
Issued in Washington, D.C. on February 17, 2000, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-4746 Filed 3-1-00; 8:45 am]
BILLING CODE 6351-01-P
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