2016-18400

Federal Register, Volume 81 Issue 151 (Friday, August 5, 2016)

[Federal Register Volume 81, Number 151 (Friday, August 5, 2016)]

[Proposed Rules]

[Pages 51828-51835]

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

[FR Doc No: 2016-18400]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AE47

Commodity Pool Operator Annual Report

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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

is proposing to amend certain of its regulations applicable to the

Annual Report that each person registered or required to be registered

as a commodity pool operator (CPO) must distribute for each commodity

pool that it operates (Proposal). Specifically, the Proposal addresses

the use of additional alternative generally accepted accounting

principles, standards or practices, and the Annual Report audit

requirement where the first fiscal year of a pool consists of a period

of three months or less from the date of formation of the pool.

DATES: Comments must be received on or before September 6, 2016.

ADDRESSES: You may submit comments, identified by RIN 3038-AE47 and

``Commodity Pool Operator Annual Report,'' by any of the following

methods:

CFTC Web site: http://comments.cftc.gov. Follow the

instructions for submitting comments through the Comments Online

process on the Web site.

Mail: Send to Christopher Kirkpatrick, Secretary of the

Commission, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street NW., Washington, DC 20581.

Hand Delivery/Courier: Same as Mail, above.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

Please submit your comments using only one of these methods.

All comments must be submitted in English, or if not, accompanied

by an English translation. Comments will be posted as received to

http://www.cftc.gov. You should submit only information that you wish

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

information that may be exempt from disclosure under the Freedom of

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

exempt information may be submitted according to the procedures

established in Commission Regulation 145.9.\1\

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\1\ 17 CFR 145.9 (2016). The Commission's regulations are found

at 17 CFR Ch. I (2016). They are accessible through the Commission's

Web site.

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The Commission reserves the right, but shall have no obligation, to

review, pre-screen, filter, redact, refuse or remove any or all of your

submission from www.cftc.gov that it may deem to be inappropriate for

publication, such as obscene language. All submissions that have been

redacted or removed that contain comments on the merits of the

rulemaking will be retained in the public comment file and will be

considered as required under the Administrative Procedure Act and other

applicable laws, and may be accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT: Christopher W. Cummings, Special

Counsel, 202-418-5445, [email protected] or Barbara S. Gold, Associate

Director, 202-418-5441, [email protected], Division of Swap Dealer and

Intermediary Oversight, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Part 4 of the Commission's Regulations

Part 4 of the Commission's regulations governs the operations and

activities of CPOs.\2\ It requires each CPO registered or required to

be registered with the Commission: To deliver to each participant in

its commodity pool a Disclosure Document for the pool containing

specified information (Regulations 4.21, 4.24, 4.25 and 4.26); to

distribute to each participant periodic unaudited Account Statements

for the pool (Regulation 4.22(a)) and an audited Annual Report for the

pool (Regulation 4.22(c)); and to make and keep specified books and

records (Regulation 4.23). Additionally, Part 4 prohibits certain

activities on the part of all CPOs (Regulations 4.20 and 4.41) and

provides for various CPO definitional exclusions (Regulation 4.5), CPO

registration exemptions (Regulation 4.13), and compliance exemptions

from otherwise applicable CPO requirements (Regulations 4.7, 4.12(b),

and 4.12(c)).\3\

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\2\ Section 1a(11) of the Commodity Exchange Act (Act or CEA), 7

U.S.C. 1a(11) (2012), defines the term ``commodity pool operator''

and CEA Section 4m(1) generally requires each person who comes

within the CPO definition to register as a CPO with the Commission.

The Act is found at 7 U.S.C. et seq. (2012). It similarly is

accessible through the Commission's Web site.

\3\ Part 4 contains many similar provisions applicable to

commodity trading advisors (CTAs). The Proposal does not pertain to

CTAs, however, because CTAs do not operate commodity pools (CPOs do)

and therefore there is no Annual Report requirement applicable to

them.

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Over the past years, and pursuant to authority delegated to it by

Regulation 140.93, Commission staff has provided exemptive relief from

specific Part 4 requirements on a case-by-case basis.\4\ By this

Federal Register release, the Commission is proposing to codify certain

of these exemptions as applicable to the Annual Report.

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\4\ These were issued by the Commission's Division of Swap

Dealer and Intermediary Oversight (``DSIO'') and its predecessors,

the Division of Clearing and Intermediary Oversight and the Division

of Trading and Markets.

Regulation 140.93 currently delegates to the Director of DSIO

``all functions reserved to the Commission'' in Regulation 4.12(a)--

which provides that the Commission ``may exempt any person or any

class or classes of persons from any provision of this Part 4 if it

finds that the exemption is not contrary to the public interest and

the purposes of the provisions from which the exemption is sought''

and, further, that the Commission ``may grant the exemption subject

to such terms and conditions as it may find appropriate.''

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B. Regulation 4.22: The Annual Report Requirement

Regulation 4.22 requires, in general, that each CPO registered or

required to be registered with the Commission to distribute to each

participant in each commodity pool it operates, and to submit to the

National Futures Association (NFA),\5\ an Annual Report for the pool

within 90 calendar days after the end of the pool's fiscal year.\6\

[[Page 51829]]

The regulation: Specifies the financial statements and related

information that the Annual Report must contain (Regulation 4.22(c));

requires that the financial statements must be presented and computed

in accordance with generally accepted accounting principles

consistently applied (U.S. GAAP) and that they must be audited by an

independent public accountant (Regulation 4.22(d)); includes specific

provisions applicable to the Statement of Operations (Regulation

4.22(e)); provides for an extension of an otherwise applicable

distribution deadline (Regulation 4.22(f)); governs fiscal year

election (Regulation 4.22(g)); mandates that the Annual Report be

accompanied by a prescribed oath or affirmation of the CPO (Regulation

4.22(h)); and permits electronic distribution of the Annual Report to a

participant if the participant consents to that method of distribution

(Regulation 4.22(i)).

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\5\ NFA is registered as a futures association in accordance

with CEA Section 17. It is the only futures association registered

as such.

\6\ Regulation 4.22(c) further requires the CPO to submit to NFA

certain key financial balances from the Annual Report.

As noted above, Regulation 4.22 also requires each CPO

registered or required to be registered to distribute to each

participant in each commodity pool it operates an unaudited periodic

Account Statement for the pool. Specifically, Regulation 4.22(a)

prescribes the financial information the Account Statement must

contain, and Regulation 4.22(b) prescribes the frequency of

distribution of the Account Statement (quarterly or monthly,

depending on the size of the pool).

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In connection with the adoption of the Annual Report requirement,

the Commission explained that the purpose of the Annual Report is to

provide pool participants ``with the information necessary to assess

the overall trading performance and financial condition of the pool''

and that the purpose of the requirement that the Annual Report be

audited is to ``promote greater accuracy in financial statements and

provide an independent review of the pool's activities.'' \7\ The

Commission believes that the amendments it is proposing today to

Regulation 4.22 are consistent with these purposes.

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\7\ 44 FR 1918, 1922 (Jan. 8, 1979).

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II. The Proposal

A. Proposed Amendment to Regulation 4.22(d)(2): Use of Additional

Alternative Generally Accepted Accounting Principles, Practices or

Standards

Regulation 4.22(d) specifies how the financial statements in the

Annual Report must be presented and computed. Currently, paragraph

(d)(1) of the regulation requires that these financial statements must

be presented and computed in accordance with generally accepted

accounting principles consistently applied, and paragraph (d)(2) of the

regulation makes available an exception to this requirement by

permitting the use of International Financial Reporting Standards

(IFRS) where certain criteria are met. A CPO seeking to avail itself of

Regulation 4.22(d)(2) must claim the relief by filing a signed notice

with NFA representing that: (1) The pool is organized under the laws of

a foreign jurisdiction; (2) the Annual Report will include a schedule

of investments (condensed unless a full schedule is required under

IFRS); (3) the use of IFRS to prepare the Annual Report is not

inconsistent with representations set forth in the pool's disclosures

to participants; (4) any special allocations of ownership equity will

be reported in accordance with Regulation 4.22(e); and (5) in the event

that IFRS requires consolidated financial statements for the pool

(e.g., in a master-feeder fund structure), all applicable disclosures

required by U.S. GAAP will be provided.

At the time that the Commission proposed to amend Regulation

4.22(d) to permit the use of IFRS, it acknowledged that its staff had

also been granting relief on a case-by-case basis to allow CPOs

operating commodity pools located outside the United States to use

accounting standards established in certain other jurisdictions, and it

invited such CPOs if they otherwise met the criteria of Regulation

4.22(d)(2) to continue requesting such relief from staff on a case-by-

case basis.\8\ The Commission now believes that staff's experience with

providing relief to use the accounting principles, standards or

practices followed in the U.K., Ireland, Luxembourg, and Canada

warrants extending relief comparable to that which Regulation 4.22(d)

provides for the use of IFRS. Accordingly, the Commission is proposing

to amend Regulation 4.22(d)(2) so that it would also permit the use of

generally accepted accounting principles, standards or practices

followed in the U.K., Ireland, Luxembourg, or Canada.\9\ A CPO desiring

to avail itself of any of these additional alternative accounting

principles, standards or practices would be required to claim this

relief by filing a notice with NFA containing the same representations

required for CPOs desiring to use IFRS.

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\8\ See 74 FR 8220, 8224 (Feb. 24, 2009). Subsequent to the

Commission amending Regulation 4.22(d) to permit the use of IFRS,

Commission staff has granted relief to use accounting principles,

standards or practices established in the United Kingdom (U.K.),

Ireland, Luxembourg and Canada. See, e.g., CFTC Staff Letter 09-42

(U.K.) and CFTC Staff Letters 15-57 and 14-10 (Luxembourg). Staff

Letters are accessible through the Commission's Web site.

\9\ In order to clarify the existing text, the Commission is

also proposing to specify in Regulation 4.22(d)(1) that the

regulatory norm is that ``[t]he financial statements in the Annual

Report must be presented and computed in accordance with United

States generally accepted accounting principles. . . .'' (Emphasis

supplied.)

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B. Proposed Amendment to Regulation 4.22(g)(2): Audit Requirement Where

the First Fiscal Year Is a Period of Three Months or Less From the Date

of Formation of the Pool

As stated above, Regulation 4.22(g) governs the election of a

fiscal year by a CPO. It: Permits the CPO to initially elect any fiscal

year for its pool, provided that the pool's first fiscal year does not

end more than one year after the pool's formation; \10\ requires notice

to participants and NFA if the CPO elects other than a calendar year

for the pool's fiscal year; and requires notice to participants and NFA

prior to changing the previously-elected fiscal year (paragraphs

(g)(1), (g)(2), and (g)(3), respectively).

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\10\ Regulation 4.22(g)(1) provides that for these purposes, a

pool is deemed to be formed as of the date the pool operator first

receives funds, securities or other property for the purchase of an

interest in the pool.

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Because Regulation 4.22(c) requires that an Annual Report be

distributed to pool participants and submitted to NFA within 90

calendar days after the end of the pool's fiscal year, and because

Regulation 4.22(d) requires that the Annual Report be audited by an

independent public accountant, the CPO of a pool that was formed, for

example, two months before the end of the pool's first fiscal year

would be required to distribute and submit an audited Annual Report for

that two-month fiscal year, regardless of particular circumstances--for

example, where there are a limited number of participants in the pool

and a limited amount of funds have been contributed to the pool. In

those circumstances, the cost of an audit for the short period of time

of the pool's operation would likely be unduly burdensome relative to

the size of the pool.\11\ Over the past years, in circumstances such as

the foregoing, Commission staff has issued exemptions from the

requirement that a separate audited Annual Report be distributed and

submitted for the pool's first fiscal year.\12\

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\11\ See CFTC Staff Letter 01-13.

\12\ See, e.g., CFTC Staff Letters 16-50 and 15-10.

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The Commission is now proposing to amend Regulation 4.22(g)(2) to

provide for an exemption from the audit requirement applicable to the

Annual Report for a pool's first fiscal year when the period from

formation of the pool to the end of the pool's first fiscal year is

[[Page 51830]]

a short period of time.\13\ The existing text of the regulation would

be found in new paragraph (g)(2)(i) of Regulation 4.22 and the proposed

exemption would be contained in new paragraph (g)(2)(ii) of Regulation

4.22. As discussed below, the proposed exemption would specify the

criteria for eligibility and the procedure to be followed to claim the

exemption. It would also be subject to compliance with the condition

that the next Annual Report the CPO distributes and submits is audited

and covers the time period from the formation of the pool to the end of

the pool's first 12-month fiscal year. Under the Proposal, a CPO could

claim this relief where: (1) The time period from the formation of the

pool to the end of the pool's first fiscal year is three months or

less; (2) from the formation of the pool to the end of the pool's first

fiscal year the pool had no more than fifteen participants; and (3)

from the formation of the pool to the end of the pool's first fiscal

year the total gross capital contributions received by the CPO for

units of participation in the pool did not exceed $1,500,000. The

Commission is proposing to use the formation of the pool as the

starting point of the stub period, and thus the point for determining

eligibility for relief, to ensure that all CPOs and their pool

participants are on a level playing field with respect to both what

information the Annual Report must contain for the pool's first fiscal

year, and the requirement that such information be audited.

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\13\ In addition to the substantive changes described below,

because the Proposal would add another exception to the general

Annual Report audit requirement, the introductory text of Regulation

4.22(d)(1) would be revised to read ``Subject to the provisions of

paragraphs (d)(2) and (g)(2) of this section.''

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For the purpose of determining eligibility for relief, the

following persons and their capital contributions would not be counted:

(1) The pool's CPO, its CTA, and any of their principals; (2) a child,

sibling, or parent of the participants described in category (1); (3)

the spouse of any of the participants described in category (1) or (2);

(4) any relative of one of the participants described in categories (1)

through (3); and (5) an entity that is wholly-owned by one or more of

the participants described in categories (1) through (4). In this

regard, the Commission notes that the CPO could count a non-natural

person as a single participant. But if that non-natural person was also

a commodity pool, its CPO would have to separately qualify for relief

under (proposed) Regulation 4.22(g)(2)(ii) in order for that (second)

CPO to claim the relief. The 15-participant limit and the categories of

participants and respective contributions that need not be counted are

taken from Regulation 4.13(a)(2), which makes available a CPO

registration exemption for the operator of a family, club or small

pool.\14\ The Commission believes that structuring the proposed

exemption in this way would avoid unnecessary burdens while maintaining

customer protections.

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\14\ Briefly stated, Regulation 4.13(a)(2) provides that a

person is not required to register as a CPO if: (1) None of the

commodity pools operated by it has more than 15 participants; and

(2) the total gross capital contributions it receives from

participants in all of its pools does not in the aggregate exceed

$400,000. The regulation further provides that for the purpose of

determining eligibility for the exemption, the person may exclude,

among others, the following participants and their contributions:

The pool's CPO, the pool's CTA, and the principals thereof.

The Commission explained that it had adopted this registration

exemption ``because the costs of compliance with the Part 4 rules

outweighs the benefits to be gained from regulating family, club and

small pools.'' 44 FR 1918, 1919 (Jan. 8, 1979).

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To avail itself of the relief, a CPO would be required to obtain,

prior to the date on which the Annual Report for the pool's first

fiscal year is due, a specified written waiver of the right to receive

an audited Annual Report for that fiscal year from each person who has

been a participant in the pool during the first fiscal year. The CPO

would be required to retain the waiver in accordance with Regulation

4.23. Then, on or before the date on which the Annual Report for the

pool's first fiscal year is due, the CPO would be required to file a

notice of claim with NFA, along with a certification that the CPO had

received the specified written waiver from each of the pool's

participants. This notice would be based on the notice required to

claim relief to present and compute an Annual Report in accordance with

IFRS, under existing Regulation 4.22(d)(2)(ii). Finally, the CPO would

be required to include on the cover of each Annual Report for which

relief had been claimed under Regulation 4.22(g)(2) a prescribed

statement that provided information on whether the Annual Report was

unaudited or audited and the period of time that the Annual Report

covered.

C. Proposed Amendment to Regulation 4.22(c)(7): Unavailability of Audit

Requirement Exception

Regulation 4.22(c)(7) makes available various exceptions to Annual

Report requirements to the CPO of a pool that ceases operation prior

to, or at the end of, the pool's fiscal year. In particular, paragraph

(c)(7)(iii) provides that a report distributed and submitted pursuant

to Regulation 4.22(c)(7) is not required to be audited if the CPO

complies with the conditions stated in the regulation. To ensure that

an audit is conducted at least once in the life of a commodity pool,

the Commission is proposing an amendment to paragraph (c)(7)(iii) of

Regulation 4.22 that would make the audit requirement relief under that

paragraph unavailable where a CPO has not previously distributed an

audited Annual Report to pool participants or submitted the audited

Annual Report to NFA--e.g., where the CPO has claimed relief pursuant

to (proposed) Regulation 4.22(g)(2) and the pool has ceased operations

before the end of its first twelve-month fiscal year.

III. Request for Comments

The Commission requests comment generally on all aspects of the

Proposal. In particular, the Commission requests comment on the

following:

1. Is there any information required to be included in an Annual

Report prepared in accordance with U.S. GAAP that would not be included

under generally accepted accounting principles, standards or practices

in the U.K., Ireland, Luxembourg or Canada? If so, what is that

information and should the Commission require that such information be

separately presented in an Annual Report prepared under any such

alternative accounting principles, standards or practices? Are there,

for example, any specific line items where treatment under one of the

referenced sets of accounting principles, standards or practices (or

under IFRS) differs from the treatment under U.S. GAAP and for which

reconciliation to U.S. GAAP should be required?

2. Should the Commission adopt a provision whereby a CPO could

claim relief from the Annual Report audit requirement for a pool in

which the only participants were the CPO and one or more other

``insiders'' (i.e., the persons identified in proposed Regulation

4.22(g)(2)(ii)), regardless of the amount of capital contributed to the

pool? What other criteria, if any, should be required?

3. Are there any other issues relevant to the Proposal that the

Commission should consider?

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) requires Federal agencies to

consider whether the rules they propose will have a significant

economic impact on a substantial number of small entities and, if so,

to provide a regulatory flexibility analysis regarding the

[[Page 51831]]

economic impact on those entities. The Commission previously has

established certain definitions of ``small entities'' to be used by the

Commission in evaluating the impact of its rules on such entities in

accordance with the requirements of the RFA.\15\ With respect to CPOs,

the Commission previously has determined that a CPO is a small entity

for the purpose of the RFA if it meets the criteria for an exemption

from registration under Regulation 4.13(a)(2).\16\ Thus, because the

Proposal applies to persons registered or required to be registered as

a CPO with the Commission, the RFA is not applicable to it.

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\15\ See, e.g., 47 FR 18618 (Apr. 30, 1982).

\16\ Id. at 18619-20.

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Accordingly, the Chairman, on behalf of the Commission, hereby

certifies pursuant to 5 U.S.C. 6065(b) that the Proposal, if adopted,

will not have a significant economic impact on a substantial number of

small entities.

B. Paperwork Reduction Act

1. Overview

The Paperwork Reduction Act of 1995 (PRA) \17\ imposes certain

requirements on Federal agencies (including the Commission) in

connection with conducting or sponsoring any collection of information

as defined by the PRA. If adopted, the Proposal would result in a

collection of information within the meaning of the PRA, as discussed

below. The Commission therefore is submitting the Proposal to the

Office of Management and Budget (OMB) for review.

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\17\ 44 U.S.C. 3501 et seq.

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The Proposal contains collections of information for which the

Commission has previously received control numbers from OMB. The title

for these collections of information is ``Registration under the

Commodity Exchange Act, OMB control number 3038-0005.''

The responses to these collections of information are mandatory. An

agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless it displays a currently

valid control number issued by OMB.

The collections of information in this Proposal would provide to

eligible CPOs: (1) An optional alternative to complying with the

requirement to compute and present the financial statements in a pool

Annual Report in accordance with U.S. GAAP (or in accordance with

IFRS); and (2) an optional alternative to complying with the audit

requirement for the Annual Report for a pool's first fiscal year, all

as described above. In each case, eligible persons would have the

option to elect the alternative, but no obligation to do so. For this

reason, except to the extent that the Commission is amending the

subject OMB control number for PRA purposes to reflect these

alternatives, the Proposal is not expected to impose any new burdens on

CPOs. Rather, to the extent that the Proposal provides alternative

means to comply with existing requirements, and an alternative is

elected by a CPO, it is reasonable for the Commission to infer that the

alternative is less burdensome to such CPO.

2. Revisions to Collection 3038-0005

Collection 3038-0005 is currently in force with its control number

having been provided by OMB. As discussed above, the Proposal would add

a new exemption to permit a CPO to use accounting principles, standards

or practices established in the U.K., Ireland, Luxembourg or Canada. In

order to qualify for this exemption, an eligible CPO would be required

to take the steps stated in the Proposal, including providing

appropriate notification in the pool's Disclosure Document and

submitting the required notice to NFA. The Proposal would further add a

new exemption to permit a CPO to distribute and submit an unaudited

Annual Report for its pool's first (partial) fiscal year and an audited

Annual Report for the combined period covered by the pool's first

(partial) fiscal year plus the pool's first twelve-month fiscal year.

In order to qualify for this exemption, an eligible CPO would be

required to take the steps stated in the Proposal, including obtaining

waivers from pool participants, submitting the required notice and

certification to NFA, providing appropriate notification in the Annual

Report, and maintaining the waivers as records. Requiring such actions

on the part of an eligible CPO would result in revisions to collection

3038-0005. Therefore, the Commission proposes to revise collection

3038-0005.

Commission staff has received approximately 8 requests in each of

2014 and 2015 from CPOs asking for relief from the requirement to

prepare the pool's financial statements in accordance with U.S. GAAP.

If the same relief can be claimed with a notice filing (without

submitting a request for an individual exemptive letter) additional

CPOs are likely to apply. Therefore, the Commission estimates that CPOs

will submit 10 notices per year to take advantage of the alternative

provided in this Proposal. Similarly, because staff has received

approximately 10 requests in each of 2014 and 2015 from CPOs asking for

relief from the requirement to distribute and submit an audited Annual

Report for a pool's first fiscal year, the Commission estimates that

CPOs will submit 12 notices per year to take advantage of the

alternative provided in this Proposal.

Collection 3038-0005 relates to collections of information from

CPOs and other Commission registrants. Based on the above, the

estimated additional hour burden for collection 3038-0005 of 34 hours

is calculated as follows:

a. Estimated Additional Hour Burden for Collection 3038-0005 Due to

Proposed Alternative to Complying With Requirement To Present and

Compute a Pool's Financial Statements According to U.S. GAAP

Anticipated number of claimants: 10.

Frequency of collection: As needed (initial filing and subsequent

compliance).

Estimated annual responses per claimant: 1.

Estimated aggregate number of annual responses: 10.

Estimated annual hour burden per registrant: 1 hr.

Estimated aggregate annual hour burden: 10 (10 claimants x 1 hour

per claimant).

b. Estimated Additional Hour Burden for Collection 3038-0005 Due to

Proposed Alternative to Complying With Requirement To Distribute and

Submit an Audited Annual Report for a Pool's First Fiscal Year

Number of claimants: 12.

Frequency of collection: As needed (initial filing and subsequent

compliance and recordkeeping).

Estimated annual responses per claimant: 1.

Estimated aggregate number of annual responses: 12.

Estimated annual hour burden per claimant: 2.\18\

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\18\ This figure for annual hour burden per claimant includes

one hour for reporting and one hour for recordkeeping.

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Estimated aggregate annual hour burden: 24 (12 claimants x 2 hours

per claimant).

3. Information Collection Comments

The Commission invites the public and other Federal agencies to

comment on any aspect of the proposed information collection

requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the

Commission solicits comments in order to: (1) Evaluate whether the

proposed collection of information is necessary for the proper

[[Page 51832]]

performance of the functions of the Commission, including whether the

information will have practical utility; (2) evaluate the accuracy of

the Commission's estimate of the burden of the proposed collection of

information; (3) determine whether there are ways to enhance the

quality, utility, and clarity of the information to be collected; and

(4) minimize the burden of the collection of information on those who

are to respond, including through the use of automated collection

techniques or other forms of information technology.

Comments may be submitted directly to the Office of Information and

Regulatory Affairs, by fax at (202) 395-6566, or by email at

[email protected] Please provide the Commission with a copy

of submitted comments so that all comments can be summarized and

addressed in the preamble of the adopting Federal Register release.

Refer to the ADDRESSES section of this notice of proposed rulemaking

for instructions on submitting comments to the Commission. A copy of

the supporting statements for the collection of information discussed

above may be obtained by visiting http://RegInfo.gov. OMB is required

to make a decision concerning the collection of information between 30

and 60 days after publication of this document in the Federal Register.

Therefore, a comment is best assured of having its full effect if OMB

receives it within 30 days of publication.

C. Cost-Benefit Considerations

Section 15(a) of the Act \19\ requires the Commission to consider

the costs and benefits of its actions before promulgating a regulation

or issuing certain orders under the Act. Section 15(a) further requires

the Commission to evaluate the costs and benefits of any such proposed

action in light of five specified areas of consideration, discussed

below. The baseline against which the Proposal is compared is the

status quo, i.e., current Regulations 4.22(c)(7), 4.22(d)(2) and

4.22(g).

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

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1. Summary of the Proposal

The Proposal would require a CPO to make a notice filing in order

to be able either to use alternative accounting principles, standards

or practices other than U.S. GAAP or IFRS, or to distribute and submit

an unaudited Annual Report for its pool's first (partial-year) fiscal

year and an audited Annual Report that combines information for the

pool's first (partial-year) fiscal year with information for the

following, first twelve-month fiscal year. In either case, the required

filing is patterned after that required by existing Regulation

4.22(d)(2) that a CPO must submit in order to use IFRS. Thus, the

notice would contain such information as the CPO's name, address and

telephone number, the NFA identification numbers of the CPO and the

pool, and representations that the CPO complies with the requisite

criteria. Additionally, in the second case, the notice would include a

certification that the CPO had obtained written waivers from pool

participants of their right to receive an audited Annual Report for the

pool's first (partial-year) fiscal year. Finally, the Proposal makes

unavailable the audit requirement exemption in Regulation 4.22(c)(7),

such that the CPO of a pool that is opened and closed in the same

fiscal year must distribute and submit audited financial statements.

2. Costs

The Commission believes that the differences in the costs of

compliance between the Proposal and existing Regulations 4.22(d)(2) and

4.22(g) would be small because the notice filing is designed to mimic

the relevant features of existing Regulation 4.22(d)(2). Nevertheless,

the Commission believes that the Proposal will lower costs to CPOs

relative to a case-by-case staff-issued exemption, because the Proposal

is more standardized. In addition, due to the unavailability of the

audit requirement exemption, there is a small cost to the CPO of a pool

that is opened and closed in the same fiscal year, because the CPO

would now have to distribute and submit audited financial statements

for the pool.

There may also be some cost savings if the conditions of the

exemption are met, because a CPO who operated a pool that met those

conditions would be allowed to distribute to shareholders and submit to

NFA an unaudited Annual Report for its pool's first (partial-year)

fiscal year and an audited Annual Report that combines information for

the pool's first (partial-year) fiscal year with information for the

following, first twelve-month fiscal year. The Commission believes that

the envisioned costs savings would be due to the independent public

accountant only needing to conduct an audit of the pool once and only

issuing one opinion on the pool's financial statements. The Commission

seeks comment concerning whether or not the Proposal will reduce costs

for CPOs relative to existing Regulations 4.22(d)(2) and 4.22(g).

3. Benefits

An advantage of a notice filing over a Commission staff-processed

exemption is timeliness. For instance, a CPO that filed a notice under

the Proposal would not have to wait for Commission staff to process a

request for an individual exemption letter. There is also the benefit

that pool participants would receive financial statements for the

pool's first fiscal year.

The Commission believes there will be no net benefit from the

Proposal as compared to existing Regulations 4.22(d)(2) and 4.22(g)

with respect to financial disclosures. By codifying exemptions

previously provided by Commission staff on a case-by-case basis, the

Proposal would continue to assist pool participants by providing them

the information necessary to assess the overall trading performance and

financial condition of their pool, but with a lower overall burden to

certain CPOs. The Commission believes that pool participants are

knowledgeable enough to evaluate financial statements prepared under

principles, standards or practices established in the U.K., Ireland,

Luxembourg or Canada, provided that the relevant accounting principles,

standards or practices are properly disclosed to them. The Commission

seeks public comment concerning whether or not use of the specified

different systems of accounting principles, standards and practices

might lead to material differences in financial statements that pool

participants might not be able to understand. For example, should the

Commission require CPOs to disclose in the footnotes to the pool's

financial statements when material difference exist between U.S. GAAP

and alternative accounting principles, standards or practices?

Additionally, the Commission believes that there will be minimal loss

in the level of confidence of pool participants in their pool's

financial statements, because an independent public accountant will

still have to issue an opinion on an audited Annual Report that

combines information for the pool's first (partial-year) fiscal year

with information for the following, first twelve-month fiscal year. The

Commission seeks public comment concerning whether this belief is

correct or not.

4. Section 15(a) Factors

As noted above, Section 15(a) of the Commodity Exchange Act (CEA or

Act) requires the Commission to consider the costs and benefits of its

actions before promulgating a regulation or issuing

[[Page 51833]]

certain orders. As also noted above, CEA Section 15(a) further

specifies that the Commission shall evaluate the costs and benefits of

its actions in light of five specific concerns. Those concerns relate

to: (i) Protection of market participants and the public; (ii)

efficiency, competitiveness, and financial integrity of futures

markets; (iii) price discovery; (iv) sound risk management practices;

and (v) other public interest considerations.

i. Protection of Market Participants and the Public

The Commission believes that the Proposal will provide the same

level of protection to commodity pool participants through the

disclosure of financial statements as do existing Regulations

4.22(d)(2) and 4.22(g). The Commission believes that pool participants

are knowledgeable enough to evaluate financial statements prepared

under accounting principles, standards and practices established in the

U.K., Ireland, Luxembourg or Canada, provided that the relevant

accounting principles, standards and practices are properly disclosed

to them. By codifying exemptions previously provided by Commission

staff on a case-by-case basis, the Proposal would continue to assist

pool participants by providing them the information necessary to assess

the overall trading performance and financial condition of their pool,

but with a lower overall burden to certain CPOs. Additionally, the

Commission believes that there will be minimal loss in the level of

confidence of pool participants in their pool's financial statements,

because an independent public accountant will still have to issue an

opinion on the financial statements included in an Annual Report that

combines information for the pool's first (partial-year) fiscal year

with information for the following, first twelve-month fiscal year.

ii. Efficiency, Competitiveness, and Financial Integrity of Markets

The Commission has not identified any impact that the Proposal

would have on efficiency, competitiveness, and financial integrity of

markets.

iii. Price Discovery

The Commission has not identified any impact that the Proposal

would have on price discovery.

iv. Sound Risk Management Practices

The Commission has not identified any impact that the Proposal

would have on sound risk management practices.

v. Other Public Interest Considerations

The Commission has not identified any impact on any other public

interest considerations that the Proposal would have, but seeks public

comment on any public interest the Commission should consider in this

rulemaking.

5. Request for Comments

The Commission invites public comment on its cost-benefit

considerations, including the Section 15(a) factors described above.

Commenters are invited to submit with their comment letters any data or

other information that they may have that quantifies or qualifies the

costs and benefits of the Proposal.

List of Subjects in 17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Consumer protection, Reporting and

recordkeeping requirements.

For the reasons set forth in the preamble, the Commodity Futures

Trading Commission proposes to amend 17 CFR part 4 as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0

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

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

and 23.

0

2. Amend Sec. 4.22 as follows:

0

a. Revise paragraphs (c)(7)(iii) and (d);

0

b. Redesignate paragraph (g)(2) as paragraph (g)(2)(i); and

0

c. Add paragraph (g)(2)(ii).

The revisions and addition to read as follows:

Sec. 4.22 Reporting to pool participants.

* * * * *

(c) * * *

(7) * * *

(iii) A report filed pursuant to paragraph (c)(7) of this section

that would otherwise be required by paragraph (c) of this section is

not required to be audited in accordance with paragraph (d) of this

section if the commodity pool operator obtains from all participants

written waivers of their rights to receive an audited Annual Report,

and at the time of filing the Annual Report with the National Futures

Association, certifies that it has received waivers from all

participants. The commodity pool operator must maintain the waivers in

accordance with Sec. 1.31 of this chapter and must make the waivers

available to the Commission or National Futures Association upon

request. Notwithstanding the provisions of paragraph (g)(2)(ii) of this

section, the relief made available by this paragraph (c)(7)(iii) shall

not be available where the commodity pool operator has not previously

distributed an audited Annual Report to pool participants and submitted

an audited Annual Report to the National Futures Association.

* * * * *

(d)(1) Subject to the provisions of paragraphs (d)(2) and (g)(2) of

this section, the financial statements in the Annual Report required by

this section or by Sec. 4.7(b)(3) must be presented and computed in

accordance with United States generally accepted accounting principles

consistently applied and must be audited by an independent public

accountant. The requirements of Sec. 1.16(g) of this chapter shall

apply with respect to the engagement of such independent public

accountants, except that any related notifications to be made may be

made solely to the National Futures Association, and the certification

must be in accordance with Sec. 1.16 of this chapter, except that the

following requirements of that section shall not apply:

* * * * *

(2)(i) Where a commodity pool is organized in a jurisdiction other

than the United States, the financial statements in the Annual Report

required by this section or by Sec. 4.7(b)(3) may be presented and

computed in accordance with the generally accepted accounting

principles, standards or practices followed in such other jurisdiction;

Provided, That:

(A) The other jurisdiction follows accounting principles, standards

or practices set forth in paragraph (d)(2)(ii) of this section and the

Annual Report presents and computes the financial statements of the

pool in accordance with the applicable accounting principles, standards

or practices followed by such other jurisdiction;

(B) The Annual Report includes a condensed schedule of investments,

or, if required by the applicable accounting principles, standards or

practices followed by such other jurisdiction, a full schedule of

investments;

(C) The Annual Report reports special allocations of ownership

equity in accordance with paragraph (e)(2) of this section;

(D) The Disclosure Document or offering memorandum for the pool

identifies the accounting principles, standards or practices of the

other jurisdiction pursuant to which the Annual Report presents and

computes the financial statements of the pool; and

[[Page 51834]]

(E) Where the accounting principles, standards or practices of the

other jurisdiction require consolidated financial statements for the

pool, such as a feeder fund consolidating with its master fund, all

applicable disclosures required by United States generally accepted

accounting principles for the feeder fund must be presented with the

reporting pool's consolidated financial statements.

(ii) For purposes of paragraph (d)(2)(i) of this section, the

following alternative accounting principles, standards or practices may

be employed in the preparation and computation of the financial

statements in the Annual Report of the commodity pool; Provided, That

any such alternative accounting principles, standards or practices so

employed are those followed by the jurisdiction other than the United

States in which the commodity pool is organized:

(A) International Financial Reporting Standards;

(B) Generally Accepted Accounting Practice in the United Kingdom;

(C) New Irish Generally Accepted Accounting Practice;

(D) Luxembourg Generally Accepted Accounting Principles; or

(E) Canadian Generally Accepted Accounting Principles.

(iii) To claim the relief available under this paragraph (d)(2), a

commodity pool operator must file a notice with the National Futures

Association within 90 calendar days after the end of the pool's first

fiscal year.

(A) The notice must contain: The name, main business address, main

telephone number and National Futures Association registration

identification number of the commodity pool operator; the name and

identification number of the commodity pool for which the pool operator

is claiming relief; and the alternative accounting principles,

standards or practices pursuant to which the financial statements in

the Annual Report will be presented and computed;

(B) The notice must include a representation that the commodity

pool operator complies with each of the conditions specified in

paragraphs (d)(2)(i)(A) through (D) of this section and, if applicable,

paragraph (d)(2)(i)(E) of this section; and

(C) The notice must be signed by the commodity pool operator in

accordance with paragraph (h) of this section.

* * * * *

(g) * * *

(2)(i) If a commodity pool operator elects a fiscal year other than

the calendar year, it must give written notice of the election to all

participants and must file the notice with the National Futures

Association within 90 calendar days after the date of the pool's

formation. If this notice is not given, the pool operator will be

deemed to have elected the calendar year as the pool's fiscal year.

(ii) If the time period from the formation of the pool to the end

of the pool's first fiscal year is three months or less, the first

Annual Report for the pool may be unaudited; Provided, That:

(A) Throughout the period of formation through the end of the

pool's first fiscal year, the pool had no more than fifteen

participants and no more than $1,500,000 in aggregate gross capital

contributions. For the purpose of satisfying these criteria, the

commodity pool operator may exclude the following persons and their

contributions:

(1) The pool operator, the pool's commodity trading advisor, and

any principal thereof;

(2) A child, sibling, or parent of any of these participants;

(3) The spouse of any participant specified in paragraph

(g)(2)(i)(A)(1) or (2) of this section;

(4) Any relative of a participant specified in paragraph

(g)(2)(i)(A)(1), (2) or (3) of this section, its spouse or a relative

of its spouse, who has the same principal residence as such

participant; and

(5) An entity that is wholly-owned by one or more participants

specified in paragraph (g)(2)(ii)(A)(1), (2), (3) or (4) of this

section; and

(B) The next Annual Report for the pool is audited and covers the

time period from the formation of the pool to the end of the pool's

first 12-month fiscal year.

(C) To claim the relief available under paragraph (g)(2)(ii) of

this section, a commodity pool operator must:

(1) Prior to the date upon which it is required to distribute and

submit an audited Annual Report for the pool's first fiscal year,

obtain from each pool participant who otherwise would have been

entitled to such an Annual Report a written waiver of the participant's

right to receive an audited Annual Report for the pool's first fiscal

year. The waiver must be signed by the pool participant and must state

as follows: ``[Name of participant], a participant in [Name of pool],

voluntarily waives the right under CFTC Regulation 4.22(d) to receive

an audited Annual Report for the fiscal year ended [end date of the

pool's first fiscal year] and will accept in lieu thereof an unaudited

Annual Report covering the period [date of formation of the pool]

through [end of the pool's first fiscal year] and an audited Annual

Report covering the period [date of formation of the pool] through [end

date of the pool's first twelve-month fiscal year].''; and

(2) On or before the date upon which it is required to distribute

and submit the Annual Report for the pool's first fiscal year, file a

notice with the National Futures Association, along with a

certification that it has received the required written waiver from

each person who has been a participant in the pool for its first fiscal

year.

(i) The notice must contain: The name, main business address, main

telephone number and National Futures Association registration

identification number of the commodity pool operator; the name and

identification number of the commodity pool for which the pool operator

is claiming relief; and the dates of formation of the pool and the

first fiscal year end of the pool;

(ii) The notice must include a representation that the commodity

pool operator meets the criteria of paragraph (g)(2)(ii)(A) of this

section and that it will comply with the condition of paragraph

(g)(2)(ii)(B) of this section; and

(iii) The notice must be signed by the commodity pool operator in

accordance with paragraph (h) of this section.

(D)(1) Each unaudited Annual Report for which the relief available

under paragraph (g)(2)(ii) of this section has been claimed must

prominently disclose on the cover page thereof: ``Pursuant to an

exemption from the Commodity Futures Trading Commission, this unaudited

Annual Report covers the period from the date of formation of the pool

to the end of the pool's first fiscal year, a period of [number]

months.''

(2) The next Annual Report for the pool must prominently disclose

on the cover page thereof: ``Pursuant to an exemption from the

Commodity Futures Trading Commission, this audited Annual Report covers

the period from the date of formation of the pool to the end of the

pool's first 12-month fiscal year, a period of [number] months.''

(E) The commodity pool operator must maintain in accordance with

Sec. 4.23 of this chapter each waiver it has obtained to claim the

relief available under paragraph (g)(2)(ii) of this section.

* * * * *

Issued in Washington, DC, on July 29, 2016, by the Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

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

Federal Regulations.

[[Page 51835]]

Appendix to Commodity Pool Operator Annual Report--Commission Voting

Summary

On this matter, Chairman Massad and Commissioners Bowen and

Giancarlo voted in the affirmative. No Commissioner voted in the

negative.

[FR Doc. 2016-18400 Filed 8-4-16; 8:45 am]

BILLING CODE 6351-01-P

 

Last Updated: August 5, 2016