[Federal Register: November 13, 2002 (Volume 67, Number 219)]
[Proposed Rules]
[Page 68785-68790]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13no02-16]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4


Commodity Pool Operators and Commodity Trading Advisors;
Exemption From Requirement To Register for CPOs of Certain Pools and
CTAs Advising Such Pools

AGENCY: Commodity Futures Trading Commission.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
has received two specific proposals that would provide additional
exemption from registration as a commodity pool operator (CPO). It also
has received a proposal that would provide additional exemption from
registration as a commodity trading advisor (CTA). The this Federal
Register release the Commission is publishing and seeking comment on
these proposals (Proposals) and is providing temporary CPO and CTA
registration relief (No-Action Relief). To be eligible for the No-
Action Relief, a CPO or CTA must meet the criteria specified in the
Supplementary Information section.

DATES: Comments must be received by January 13, 2002.

ADDRESSES: Comments on this advance notice of proposed rulemaking
should be sent to Jean A. Webb, Secretary, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Comments may be sent by facsimile transmission to (202) 418-
5528, or by e-mail to secretary@cftc.gov. Reference should be made to
"Advance Notice of Proposed Rulemaking on CPO and CTA Registration
Exemptions."

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,
or Christopher W. Cummings, Special Counsel, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, 1155 21st
Street, NW., Washington, DC 20581, telephone number: (202) 418-5450 or
(202) 418-5445, respectively; facsimile number: (202) 418-5536, or
(202) 418-5547, respectively; and electronic mail: bgold@cftc.gov or
ccummings@cftc.gov, respectively.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 1a(5) of the Commodity Exchange Act (Act) defines the term
"commodity pool operator" to mean--

    [A]ny person engaged in a business that is of the nature of an
investment trust, syndicate, or similar form of enterprise, and who,
in connection therewith, solicits, accepts, or receives from others,
funds, securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market or
derivatives transaction execution facility, * * * \1\

    \1\ 7 U.S.C. 1a(5) (2000). Section 1a(5) also provides the
Commission with authority to exclude persons from the CPO
definition.
    Commission Rule 4.10(d)(1) correspondingly defines the term
"pool" to mean "any investment trust, syndicate or similar form
of enterprise operated for the purpose of trading commodity
interests." Commission rules cited to herein are found at 17 CFR
Ch. I (2002).
    Both the Act and the Commission's rules issued thereunder can be
accessed through the Commission's Web site: http://www.cftc.gov/LawRegulation/index.htm.

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[[Page 68786]]

Section 4m(1) of the Act \2\ provides in relevant part that it is
unlawful for any CPO, "unless registered under [the] Act, to make use
of the mails or any means or instrumentality of interstate commerce"
in connection with its business as a CPO. Thus, except for several
narrow exceptions described below, the operator of a collect investment
vehicle that trades commodity interest contracts, whether for bona fide
hedging purposes or otherwise, must be registered with the CFTC as a
CPO.
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    \2\ 7 U.S.C. 6m(1) (2000).
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    The Commission has provided certain exceptions to the CPO
registration requirement. In 1979, the Commission adopted Rule 4.13,
which provides an exemption from CPO registration for the operators of
essentially " family, club or small pools," as those pools are
defined in the rule.\3\ In addition, the Commission adopted in Rule 4.5
an exclusion from the CPO definition for certain otherwise regulated
"eligible persons" with respect to their operation of "certain
qualifying entities," as those terms are defined in the rule, so long
as they restrict the extent of their non-bona fide hedge activity in
commodity interests as prescribed by the rule.\4\
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    \3\ See 44 FR 1918, 1919 (Jan. 8, 1979).
    \4\ See 50 FR 15868 (April 23, 1985). Rule 4.5 specifies
operating criteria that must be complied with to claim the relief
available under the rule. Commodity futures and option contracts may
be used without limitation for "bona fide hedging transactions and
positions," as that term is defined in Rule 1.3(z)(1). Rule 4.5
also permits up to 5 percent of the liquidation value of a
qualifying entity's portfolio to be committed to establish positions
that are non- bona fide hedging transactions and positions. On
October 28, 2002 the Commission published for comment a proposed
amendment to Rule 4.5 that would provide an alternative criterion
for such transactions and positions--i.e., where the notional value
of the transactions and positions does not exceed the liquidation
value of the entity's portfolio. 67 FR 65743.
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    When the Commission adopted Rule 4.13, there were fewer than a
dozen designated commodity interest contracts based on stock indices,
interest rates or other financial instruments. Since 1979, however, the
Commission has designated, and trading has commenced in, more than 180
commodity interest contracts based on various financial instruments.
These contracts frequently have attracted the interest of operators of
collective investment vehicles, some of whom have registered with the
Commission as CPOs so that they can use commodity interest contracts in
their investment and risk management strategies. Others, however, have
avoided participation in the commodity interest markets. While Rules
4.5 and 4.13 do provide CPO registration relief, their criteria are too
restrictive for many operators of collective investment vehicles to
meet.
    Section 1a(6)(A) of the Act \5\ defines the term "commodity
trading advisor" to mean any person who--
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    \5\ 7 U.S.C. 1a(6)(A)(2002).

    (i) For compensation or profit, engages in the business of
advising others, either directly or through publications, writings
or electronic media, as to the value or the advisability of trading
in--
    (I) Any contract of sale of a commodity for future delivery made
or to be made on or subject to the rules of a contract market or
derivatives transaction execution facility;
    (II) Any commodity option authorized under section 4c; or
    (III) Any leverage transaction authorized under section 19; or
    (ii) For compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning any
of the activities referred to in clause (i).\6\
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    \6\ Section 1a(6) also excludes certain persons not at issue
here from the CTA definition, and provides the Commission with
authority to exclude other persons from that definition.

Section 4m(1) also requires CTAs to register as such with the
Commission, and each of that section, Section 4m(3) and Rule 4.14
provides exemption from CTA registration.
    Over time, persons who traditionally gave advice to collective
investment vehicles solely on securities trading have become interested
in providing trading advice to collective investment vehicles on
commodity interest contracts based on various financial instruments as
well. Absent the availability of an exemption, these persons have had
to either register with the Commission as CTAs or refrain from
providing any such commodity interest advice.
    In light of these market developments and changed circumstances,
the Commission is seeking comment on the Proposals. By this Federal
Register release, the Commission also is asking for input generally on
the subject of which CPOs and CTAs the Commission additionally should
exempt from registration and what criteria the Commission should use to
determine eligibility for exemption.

II. The Proposals

A. The National Futures Association (NFA) Proposal \7\
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    \7\ NFA is a futures association registered as such with the
Commission under section 17 of the Act.
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I. Introduction
    The NFA Proposal would add a CPO registration exemption as well as
a corresponding CTA registration exemption to the exemptions currently
set forth in Rules 4.13 and 4.14, respectively. The CPO exemption would
be available to pool operators that commit a limited amount of pool
assets (i.e., 5 percent of liquidation value) to establish commodity
interest trading positions, and that restrict participation in the pool
to "accredited investors" as defined in Rule 501(a) \8\ under the
Securities Act of 1933 (Securities Act).\9\ The exemption would be set
forth in a new paragraph (a)(3) of Rule 4.13, and would require a
conforming amendment to paragraph (d) of the rule. The CTA exemption
would apply to those persons that advise only pools operated by persons
that are eligible for, and have claimed exemption under, the CPO
provision described above. It would be set forth in a new paragraph
(a)(10) of Rule 4.14.
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    \8\ 17 CFR 230.501(a) (2002).
    \9\ 15 U.S.C. 77a et seq (2000).
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    2. The text of the NFA Proposal.
    a. The NFA CPO Registration Exemption Proposal reads as follows:


Sec.  4.13  Exemption from registration as a commodity pool operator.

    (a) A person is not required to register under the Act as a
commodity pool operator if:
    * * *
    (3)(i) It operates only commodity pools that use commodity
futures or commodity options contracts solely for bona fide hedging
purposes within the meaning and intent of Sec.  1.3(z)(1); Provided,
however. That in addition, with respect to positions in commodity
futures and commodity option contracts which do not come within the
meaning and intent of 1.3(z)(1), the aggregate initial margin and
premiums required to establish such positions for any pool does not
exceed five percent of the liquidation value of that pool's
portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into and such
trading is solely incidental to its other trading activity; And
Provided further, That in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount as defined in Sec.
190.01(x) may be excluded in computing such five percent;
    (ii) It has not and does not market participations to the public
as or in a commodity pool or otherwise as or in a vehicle for
trading in the commodity futures or commodity options markets;
    (iii) It limits the participants in its pools to accredited
investors as defined in Securities Exchange Commission Rule 501;
    (iv) It discloses in writing to each prospective participant the
purpose of and the limitations on the scope of the commodity futures
and commodity options trading in which it will engage;
    (v) It submits to such special calls as the Commission may make
to require it to demonstrate compliance with the provisions of this
Sec.  4.13(a)(3) including but not limited to information on its
pools' financial status and position holdings; and

[[Page 68787]]

    (vi) It maintains all books and records prepared in connection
with its activities as a commodity pool operator for a period of
five years from the date of preparation and keeps such books and
records readily accessible during the first two years of the five
year period. All such books and records shall be open to inspection
by any representative of the Commission or the United States
Department of Justice.
    (b)(1) No person who is exempt from registration as a commodity
pool operator under paragraph (a)(1), (a)(2), or (a)(3) of this
section and who is not registered as such pursuant to that exemption
may, directly or indirectly, solicit, accept or receive funds,
securities or other property from any prospective participant in a
pool that it operates or that it intends to operate unless, on or
before the date it engages in that activity, the person delivers or
causes to be delivered to the prospective participant a written
statement that must disclose this fact as follows: "The commodity
pool operator of this pool is not required to register, and has not
registered, with the Commodity Futures Trading Commission.
Therefore, unlike a registered commodity pool operator, this
commodity pool operator is not required by the Commission to furnish
a Disclosure Document, periodic Account Statements, and an Annual
Report to participants in the pool." The person must:
    (i) Describe in the statement the exemption pursuant to which it
is not registered as a commodity pool operator;
    (ii) Provide its name, main business address and main business
telephone number on the statement;
    (iii) Manually sign the statement as follows: if such person is
a corporation, by the chief executive officer, chief financial
officer or counterpart thereto; if a partnership, by a general
partner; and if a sole proprietorship, by the sole proprietor; and
    (iv) By the earlier of seven business days after the date the
statement is first delivered to a prospective participant and the
date upon which the pool commences trading in commodity interests:
    (A) File two copies of the statement with the Commission at the
address specified in Sec.  4.2; and
    (B) File one copy of the statement with the National Futures
Association at its headquarters office (Attn: Director of
Compliance, Compliance Department).
* * * * *
    (d) If a person exempt from registration under the Act as a
commodity pool operator under paragraph (a)(1), (a)(2), or (a)(3) of
this section registers as a commodity pool operator, that person
must comply with this Part 4 as if such person were not exempt from
registration as a commodity pool operator.

    2. The NFA CTA Registration Exemption Proposal reads as follows:


Sec.  4.14  Exemption from registration as a commodity trading advisor.

    (a) A person is not required to register under the Act as a
commodity trading advisor if:
* * * * *
    (10)(i) The person's commodity interest trading advice:
    (A) Is directed solely to and for the use of commodity pools that
meet the requirements of and are operated by a person exempt from
registration under Sec.  4.13(a)(3) or are operated by a person
excluded from the definition of commodity pool operator under Sec.
4.5;
    (B) Is solely incidental to its business of providing investment
advice to such pools in instruments that are either exempt from
regulation pursuant to the Commission's regulations or excluded from
Commission regulation under the Act; and
    (C) Employs only such strategies as are consistent with eligibility
status under Sec.  4.13(a)(3).
    (ii) The person is not otherwise holding itself out as a commodity
trading advisor;
    (iii) The person submits to such special calls as the Commission
may make to provide information on its position holdings; and
    (iv) Prior to the date upon which such person intends to engage in
business as a commodity trading advisor, the person files a notice of
exemption with the Commission.
    (A) The notice must provide the name, main business address and
main business telephone number of the person filing the notice.
    (B) The notice must represent that the person qualifies for
exemption under this Sec.  4.14(a)(10) and that it will comply with the
criteria of this section.
    (C) The notice shall be effective upon filing, Provided, however,
That an exemption claimed hereunder shall cease to be effective upon
any change which would render the representations made pursuant to
paragraph (a)(10)(iii)(B) of this section inaccurate or the
continuation of such representations false or misleading.
    (v) In the event a person who has filed a notice of exemption under
this Sec.  4.14(a)(10) subsequently becomes registered as a commodity
trading advisor, the person must file a supplemental notice of that
fact.
    (vi) Any notice required to be filed hereunder must be:
    (A) In writing;
    (B) Signed by a duly authorized representative; and
    (C) Filed, along with a copy, with the Commission at the address
specified in Sec.  4.2.
    (D) A copy also must be filed with the National Futures Association
at its headquarters office (ATTN: Director of Compliance, Compliance
Department).

B. The Managed Funds Association (MFA) Proposal \10\
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    \10\ MFA is a non-profit membership organization for investment
professionals in the hedge fund, futures and alternative investments
industries.
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1. Introduction

    The MFA Proposal would provide an additional CPO registration
exemption pursuant to a new Rule 4.9. The exemption would be
available to pool operators that restrict participation in their
pools to "qualified eligible persons" (QEPs) as defined in Rule
4.7 and certain "accredited investors" as defined in Rule 501(a)
under the Securities Act. As is set forth below, the MFA Proposal
would distinguish between the qualifications that natural persons
would be required to meet and the qualifications that non-natural
persons would be required to meet.

2. The text of the MFA Proposal
    The MFA Proposal reads as follows:


Sec.  4.9.  Exemption From Commodity Pool Operator Registration For
Certain Persons Operating Privately Offered Pools.

    (a) Subject to compliance with all of the provisions of this
section, a person is exempt from registration as a commodity pool
operator but remains otherwise subject to the jurisdiction of the
Commission under the Act, provided that:
    (i) interests in all pools that it operates are exempt from
registration under the Securities Act of 1933, and such interests
are offered and sold without marketing to the public in the United
States;
    (ii) it reasonably believes that at the time of investment (or,
in the case of an existing pool, conversion to an eligible pool as
defined herein), all individual investors (and any self-directed
employee-benefit plans for such individuals) in all pools that it
operates are qualified eligible persons as defined in Sec.  4.7;
    (iii) it reasonably believes that at the time of investment (or,
in the case of an existing pool, conversion to an eligible pool as
defined herein), all entity investors in all pools that it operates
are (x) "accredited investors" as defined in 17 CFR 230.501(a)(1)-
(3), (7) and (8) or (y) qualified eligible persons as defined in
Sec.  4.7; and
    (iv) neither the commodity pool operator nor any of its
principals is subject to any statutory disqualifications set forth
in section 8a(2) or 8a(3) of the Act unless such disqualification
arises from a matter which was previously disclosed in connection
with an application for registration if such registration was
granted or was disclosed more than 30 days prior to the filing of
this notice; provided, however, that the commodity pool operator may
request that the Commission waive this provision, which waiver may
be granted upon a showing of good cause.
    (b) Notwithstanding the exemption in (a) above:

[[Page 68788]]

    (i) the commodity pool operator shall remain subject to the
anti-fraud and anti-manipulation provisions of the Act; and
    (ii) the commodity pool operator shall, within 180 days of the
end of its fiscal year, deliver to the pool participants for each
pool it operates under this exemption year-end financial statements
certified by an independent public accountant and prepared in
accordance with generally accepted accounting principles. In
addition, the commodity pool operator shall file two (2) copies of
the year-end financial statements with the Commission.
    (c) Any person who desires to claim the exemption provided by
this section shall file with the Commission a notice of eligibility:
    (i) The notice of eligibility must contain the name, main
business address and main telephone number of the person claiming
the exemption and the name of the pool or pools for which exemption
is claimed (an "eligible pool").
    (ii) The notice of eligibility must contain representations that
the pool or pools, in order to be eligible pools, will be operated
in accordance with the requirements set forth in (a) and (b) of the
section.
    (iii) The notice of eligibility must contain a representation
that the commodity pool operator will submit to such special calls
as the Commission may make to require the commodity pool operator to
demonstrate compliance with the provisions of Sec.  4.9(a)(i)-(iv)
and (b)(ii) with respect to the eligible pool. Failure to comply
with a special call as described in this paragraph will render the
claimed exemption void.
    (iv) The notice of eligibility must be filed with the Commission
prior to the date upon which the commodity pool operator intends to
operate the eligible pool. In the case of a commodity pool operator
operating one or more pools that would qualify as eligible pools but
with respect to which no notice has been filed, a notice of
eligibility may be filed with the Commission prior to the date upon
which the commodity pool operator intends to commence operating the
pool as an eligible pool, provided that the commodity pool operator
has provided prior notice to pool participants that it intends to
convert the pool to an eligible pool under this Sec.  4.9 by filing
a notice of eligibility with respect to the pool and has given such
participants the right to redeem from the pool prior to such filing.
    (v) The notice of eligibility shall be effective upon filing,
provided that the filing is materially complete.
    (d)(i) A commodity pool operator who has claimed exemption
hereunder must, in the event that any of the information contained
or representations made in the notice of eligibility becomes
inaccurate or incomplete, file a supplemental notice with the
Commission to that effect which, if applicable, includes such
amendments as may be necessary to render the notice of eligibility
accurate and complete.
    (ii) The supplemental notice required by paragraph (d)(i) of
this section shall be filed within fifteen business days after the
commodity pool operator becomes aware of the occurrence of such
event.
    (iii) An exemption claimed hereunder shall cease to be effective
60 days after the commodity pool operator becomes aware of any
change which would render inaccurate any of the representations
required by subparagraph (c)(ii) or (iii) of this section. During
such 60 day period, the commodity pool operator may cure the defects
or prepare and file an application to register as a commodity pool
operator with the Commission. The filing of an application by the
commodity pool operator with the Commission will toll the running of
the 60 day period.
    (e) A commodity pool operator that operates one or more pools
that are not eligible pools under this Sec.  4.9 in addition to one
or more pools that are eligible pools under Sec.  4.9 is, with
respect to the eligible pools, exempt from all of the other
requirements imposed on a commodity pool operator under the Act,
provided that the commodity pool operator complies with this Sec.
4.9.

III. The No-Action Relief

A. The Relief

    During the rulemaking process commenced by the publication of
this advance notice of proposed rulemaking, the Commission has
determined to provide relief through the issuance of No-Action
Relief, set forth below. As with other registration relief available
to CPOs and CTAs under CFTC rules, the No-Action Relief must be
claimed through the filing of a notice with the NFA and the CFTC,
and one-way disclosure of the claim must be made.\11\

    \11\ See, e.g., Rules 4.5 and 4.13.
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    1. CPO Registration No-Action Relief
    The Commission will not commence any enforcement action against a
CPO based upon the failure of the CPO to register as such under Section
4m(1) of the Act, where each pool for which the CPO claims relief under
the No-Action Relief meets and remains in compliance with the following
criteria:

    a. Participation in the pool is restricted to: "accredited
investors" as defined in Rule 501(a) under the Securities Act;
"knowledgeable employees" as defined in Rule 3c-5 under the
Investment Company Act of 1940,\12\ Non-United States persons as
defined in CFTC Rule 4.7(a)(1)(iv); and the persons described in
CFTC Rule 4.7(a)(2)(viii)(A); and
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    \12\ 17 CFR 270.3c-5 (2002).
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    b. The aggregate national value \13\ of each such pool's
commodity interest positions, whether entered into for bona fide
hedging purposes or otherwise,\14\ does not exceed fifty percent of
the liquidation value of the pool's portfolio, after taking into
account unrealized profits and unrealized losses on any such
positions it has entered into.\15\

    \13\ For this purpose, a CPO should calculate "notional value"
for each such futures position by multiplying the size of the
futures contract, in contract units, by the current market price per
unit, and for each such option position by multiplying the size of
the option contract, in contact units, by the strike price. This
criterion is patterned on the Commission's proposed alternative non-
hedge operating criterion for Rule 4.5, as discussed above.
    The following two examples show the effect of this notional
value criterion using two different futures contracts. In each
example, the CPO desires to establish the maximum number of
contracts permissible under the No-Action Relief. In both examples
it is assumed that one-half of the pool's liquidation value is $5
million and that the settlement level of the contract is as of
September 25, 2002.
    With respect to the S&P 500 Stock Price Index futures contract
traded on the Chicago Mercantile Exchange, the settlement level was
819.29 and the contract value was $204,822.50 (819.29 x $250). This
means that the pool could establish 24 S&P 500 Stock Price Index
futures contracts ($5,000,000 / 204,822.50 = 24.4).
    With respect to the 10-Year U.S. Treasury Note futures contract
traded on the Chicago Board of Trade, the settlement level was
114,160 points and the contract value was $114,160 (114,160 x 100%).
This means that the pool could establish 43 10-Year Treasury Note
futures contracts ($5,000,000 / $114,160 = 43.8).
    \14\ See Rule 1.3(z)(1).
    \15\ The operator of a "fund of funds" (an Investor Fund) that
indirectly trade commodity interests through participation in one or
more funds that directly trades commodity interests (each an
Investee Fund) could claim exemption from registration under the No-
Action Relief where that Investor Fund trades commodity interests
solely through participation in one or more Investee Funds, and the
CPO of each such Investee Fund has itself claimed the No-Action
Relief. The operator of an Investor Fund that additionally directly
trades commodity interests could also claim the No-Action Relief, so
long as the portion of the Investor Fund that directly trades
commodity interests does not exceed the limit referred to above.
    For example, assume that the Investor Fund has a liquidation
value of $1 million, four-fifths of which is invested in four
Investee Funds whose operators have claimed the No-Action Relief.
With the remaining one-fifth of liquidation value, or $200,000, the
operator of the Investor Fund may have the Fund directly trade
commodity interests, provided that the notional value of the Fund's
commodity interest positions does not exceed fifty percent of the
Fund's liquidation value, adjusted for unrealized profits and
unrealized losses on positions directly entered into by the Fund.
    If, however, the notional value of those positions exceeded
fifty percent of the liquidation value of $200,000, the operator
would only be able to claim the No-Action Relief if the operator
knew that the notional value of all of the Investor Fund's commodity
interest positions (i.e., those held outright and those held through
investment in the four Investee Funds) was fifty percent of the
Investor Fund's liquidation value. To be in possession of such
information, the operator would need to have direct knowledge of,
and immediate access to, the notional value of the commodity
interest positions of each Investee Fund. The operator of the
Investor Fund could have this knowledge and access where, for
example, it was the same person as, or an affiliate of, the CPOs of
the Investee Funds.
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    2. CTA Registration No-Action Relief.
    The Commission will not commence enforcement action against a CTA
based upon the failure of the CTA to register as such under Section
4m(1) of the Act, where the CTA meets and remains in compliance with
the following criteria:

    a. It claims relief from CPO registration under the No-Action
Relief and its commodity interest trading advice is directed solely
to, and for the sole use of, the pool or pools that it operates;
\16\ or
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    \16\ This provision is patterned after Rule 4.14(a)(5).

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[[Page 68789]]

    b. It is registered as an investment adviser under the
Investment Advisers Act of 1940 \17\ or with the applicable
securities regulatory agency of any State, or it is exempt from such
registration, or it is excluded from the definition of the term
"investment adviser" pursuant to section 202(a)(2) or 202(a)(11)
of the Investment Advisers Act of 1940, provided that:
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    \17\ 15 U.S.C. 80b-1 et seq. (2000).
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    (i) The person's commodity interest trading advice:
    (A) Is directed solely to, and for the sole use of, pools
operated by CPOs who claim relief from CPO registration under the
No-Action Relief;
    (B) Is solely incidental to its business of providing securities
advice to each such pool;
    (C) Employs only such strategies as are consistent with the
"notional test" under the No-Action Relief; and
    (ii) The person otherwise holding itself out as a CTA.

B. Claim of No-Action Relief

    As stated above, the No-Action Relief is not self-executing.
Rather, a CPO or CTA eligible for the No-Action Relief must file a
Claim to perfect the relief and msut make a one-way disclosure to its
participants and clients, respectively, whether prospective or
existing. A Claim of No-Action Relief will be effective upon filing, so
long as the Claim is materially complete.
    Specifically, the Claim of No-Action Relief must:
    1. State the name, main business address, and main business
telephone number of the CPO or CTA claiming the relief;
    2. State the capacity (i.e., CPO, CTA or both) and, where
applicable, the name of the pool(s), for which the Claim is being
filed;
    3. Represent that the CPO and CTA qualified for the No-Action
Relief, that it will comply with the criteria of the No-Action Relief,
and that it will provide the CFTC-specified disclosure, set forth
below;
    4. Be signed by the CPO or CTA; and
    5. Be filed with the NFA at its headquarters office in Chicago,
Illinois (ATTN: Director of Compliance), with a copy to the Commission
at its headquarters office in Washington, D.C. (ATTN: Division of
Clearing and Intermediary Oversight, Audit and Financial Review
(Section), prior to the date upon which the CPO or CTA first engages in
business that otherwise would require registration as such.

C. One-Way Disclosure

    1. For CPOs.
    To comply with the terms of a Claim of No-Action Relief that it has
filed, a CPO must provide the following disclosure to prospective and
existing participants in each pool it operates or intends to operate
prior to engaging in activities that otherwise would require it to
register as a CPO:

    "Pursuant to No-Action Relief issued by the Commodity Future
Trading Commission, [Name of CPO] is not required to register, and
is not registered, with the Commission as a CPO. Among other things,
the No-Action Relief requires this CPO to file a Claim of No-Action
Relief with the National Futures Association and the Commission. It
also requires that the aggregate notional value of this pool's
commodity interest positions does not exceed fifty percent of the
liquidation value of the Pool's Portfolio.
    You should also know that this registration No-Action Relief is
temporary. In the event the Commission ultimately adopts a
Registration exemption rule that differs from the No-Action Relief,
[Name of CPO] must comply with that rule to be exempt from CPO
registratin. If [Name of CPO] determines not to comply with that
rule, it must either register with the Commission or cease having
this Pool Trade Commodity Interests."

    2. For CTAs
    To comply with the terms of a Claim of No-Action Relief that it has
filed, a CTA must provide the following disclosure to each pool it
advises or intends to advise prior to engaging in activities that
otherwise would require it to register as a CTA:

    "Pursuant to No-Action Relief issued by the Commodity Futures
Trading Commission, [Name of CTA] is not required to register, and
is not registered, with the Commission as a CTA. Among other things,
the No-Action Relief requires this CTA to file a claim of No-Action
Relief with the National Futures Association and the Commission. It
also requires that this CTA provide advice solely to pools whose
CPOs have filed a corresponding claim of No-Action Relief.
    You should also know that this registration No-Action Relief is
temporary. In the event the Commission ultimately adopts a
registration exemption rule that differs from the No-Action Relief,
[Name of CTA] must comply with that rule to be exempt from CTA
registration. If [Name of CTA] determines not to comply with that
rule, it must either register with the Commission or cease providing
commodity interest trading advice to this pool."

D. Other Matters

1. Effect of Filing a Claim of No-Action Relief
    Persons that have filed a Claim of No-Action Relief will be exempt
from Commission registration requirements under section 4m(1) of the
Act. Such persons will remain subject, however, to prohibitions in the
Act and the Commission's rules against fraud which apply to all CPOs
and CTAs regardless of registration status. They also will remain
subject to all other relevant provisions of the Act and the
Commission's rules which apply to all commodity interest market
participants, such as the prohibitions on manipulation and the trade
reporting requirements.
2. Effect of Final Rulemaking on a Claim of No-Action Relief
    Any final action taken by the Commission as a result of this
advance notice of proposed rulemaking will supersede the No-Action
Relief. In the event the final action differs from the requirements of
the No-Action Relief, the Commission will provide CPOs and CTAs with
sufficient time within which to comply with such requirements, or, in
the event a CPO or CTA is unable or unwilling to so comply, with
sufficient time to register with the Commission or to withdraw a
previously filed Claim of No-Action Relief and to cease engaging in
business as a CPO or CTA.
3. Continued Availability of Registration No-Action Relief From
Commission Staff
    The Commission is aware that there may be existing or subsequently
organized CPOs and CTAs that do not meet the criteria of the No-Action
Relief, but that nonetheless, under their particular facts or
circumstances, merit relief from registration. The Commission also is
aware that, in the past, its staff has provided CPO and CTA
registration no-action relief on a case-by-case basis. Consistent with
that practice, the Commission directs its staff to continue to issue
such relief where appropriate facts or circumstances are present.

IV. Request for Comment

    The Commission requests public comment on the exemption criteria of
the NFA Proposal, the MFA Proposal, the No-Action Relief, and the
following issues:
    1. What are the appropriate investor qualifications for
participation in collective investment vehicles operated or advised by
persons eligible for any new CPO or CTA registration exemption? Should
these qualifications vary with the extent of non-hedge commodity
interest trading activity? Should these qualifications be the same as
those employed in the federal securities laws and the rules of the
Securities and Exchange Commission to define financially sophisticated
or knowledgeable persons--e.g., "accredited investors," "qualified
purchasers," and "knowledgeable employees"? Are there any situations
where either investor qualifications or the level or type of trading
activity

[[Page 68790]]

should be the sole criterion for exemption?
    2. Should persons that qualify for any new CPO or CTA registration
exemption be subject to a limit on non-hedge commodity interest trading
activity that is higher or lower than the limit in the NFA Proposal?
Should there be any limit at all on non-hedge activity by such persons?
    3. Should persons that quality for any new CPO or CTA registration
exemption be subject to compliance with the special call,
recordkeeping, and NFA notice requirements in the NFA Proposal and/or
the special call, financial reporting, and CFTC notice and supplemental
notice requirements of the MFA Proposal? Should these persons be
subject to compliance with any other requirements and, if so, what
should they be?
    4. Is there any other form of registration relief that the
Commission should propose for CPOs or CTAs and, if so, what is it?
    5. How should the Commission's proposal address relief for the
operator and/or the advisor of an Investor Fund \18\?
---------------------------------------------------------------------------

    \18\ Staff has received numerous informal inquiries regarding
the fund of funds issue. The Commission intends to address this
issue in a separate context as it applies more broadly to the
managed funds industry. However, it is important to recognize the
implications for funds of funds in this release, as discussed above.

    Issued in Washington, DC on November 6th, 2002, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-28820 Filed 11-12-02; 8:45 am]
BILLING CODE 6351-01-M