2018-22324
Federal Register, Volume 83 Issue 202 (Thursday, October 18, 2018)
[Federal Register Volume 83, Number 202 (Thursday, October 18, 2018)]
[Proposed Rules]
[Pages 52902-52929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22324]
[[Page 52901]]
Vol. 83
Thursday,
No. 202
October 18, 2018
Part III
Commodity Futures Trading Commission
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17 CFR Part 4
Registration and Compliance Requirements for Commodity Pool Operators
and Commodity Trading Advisors; Proposed Rule
Federal Register / Vol. 83 , No. 202 / Thursday, October 18, 2018 /
Proposed Rules
[[Page 52902]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AE76
Registration and Compliance Requirements for Commodity Pool
Operators and Commodity Trading Advisors
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
is proposing amendments to its regulations to permit commodity pool
operators (CPOs) that only solicit and/or accept funds from non-U.S.
persons for participation in offshore commodity pools to claim an
exemption from CPO registration and compliance requirements with
respect to such pools, while permitting the maintenance of registration
with respect to commodity pools for which CPO registration is required.
The Commission also is proposing to allow U.S.-based CPOs of offshore
commodity pools with U.S. participants to maintain the commodity pool's
original books and records in the offshore location of the pool, in
lieu of the CPO's main U.S. business location. Additionally, the
Commission is proposing to prohibit a person that would be statutorily
disqualified from registering with the Commission as a CPO from
claiming or affirming an exemption from CPO registration. The
Commission also is proposing registration relief for the CPOs and CTAs
of entities qualifying as ``family offices'' and investment advisers of
``business development companies,'' as defined in the proposed
regulations. The Commission is further proposing to permit qualifying
CPOs to engage in general solicitation in their pool offerings, as
contemplated by the Jumpstart Our Business Start-ups Act of 2012 (JOBS
Act). Finally, the Commission is proposing to relieve certain CPOs and
commodity trading advisors (CTAs) of the requirement to file Forms CPO-
PQR and CTA-PR.
DATES: Comments must be received on or before December 17, 2018.
ADDRESSES: You may submit comments, identified by RIN number 3038-AE76,
by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
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: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is 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 Sec. 145.9 of the Commission's
regulations.\1\
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\1\ 17 CFR 145.9.
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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 https://comments.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: For any of the proposed amendments:
Amanda Olear, Associate Director, at 202-418-5283 or [email protected];
for the proposed amendments to Sec. Sec. 4.7 and 4.13: Elizabeth
Groover, Special Counsel, at 202-418-5985, [email protected]; for the
proposed amendments related to family offices: Peter Sanchez, Special
Counsel, at 202-418-5237, [email protected]; for the proposed
amendments to Sec. 4.27: Michael Ehrstein, Special Counsel, at 202-
418-5957, [email protected], Division of Swap Dealer and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1151 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Statutory and Regulatory Background
B. Advisory 18-96
1. Introduction
2. The History of Advisory 18-96 and the Commission's Rationale
for Proposing Superseding Part 4 Amendments
3. Expanding the Prohibition on Statutory Disqualifications to
Exemptions Under Sec. 4.13 and Permitting Non-U.S. Person
Participants in De Minimis Commodity Pools
C. Proposed CPO and CTA Registration Exemptions for Qualifying
Family Offices
1. Defining Family Offices
2. Family Offices as Commodity Pools and the Rescission of Sec.
4.13(a)(4)
3. The SEC's Exclusion for Family Offices and CFTC Staff Letters
12-37 and 14-143
D. Proposed Amendments Permitting General Solicitation by CPOs
Pursuant to the JOBS Act of 2012
1. The JOBS Act of 2012, Regulation D, and Rule 144A
2. Impact of JOBS Act Amendments on CPOs and DSIO's 2014 JOBS
Act Relief Letter
E. Proposed Exclusionary Relief for BDCs
1. The CPO Exclusion in Sec. 4.5
2. BDCs: Exempt Investment Companies Restricted in Their Use of
Commodity Interests
3. CFTC Staff Letter 12-40 and the Proposed Amendments
F. Relief From Sec. 4.27
1. History
2. Reporting Person Definition
3. Current Commission Staff Letter Relief
4. Proposing Amendments Consistent With Current Staff Letter
Relief
5. Expanding Relief From Sec. 4.27 to Additional Categories of
CTAs
II. Proposed Regulations
A. Providing CPOs of Offshore Pools With Registration and
Recordkeeping Relief Consistent With Advisory 18-96
1. New Sec. 4.13(a)(4): The 18-96 Exemption
2. New Sec. 4.13(a)(6): The Proposed Prohibition on Statutory
Disqualifications
3. Amendments to Sec. 4.13: Claiming the Proposed 18-96
Exemption
4. Making the 18-96 Exemption Available on a Pool-by-Pool Basis
5. Other Amendments to Miscellaneous Provisions in Sec. 4.13
6. Preserving Advisory 18-96's Recordkeeping Location Relief
with Amendments to Sec. 4.23 and Certain Technical Amendments
B. Proposed Family Office Exemptions
C. Proposed Amendments Consistent With the JOBS Act Relief
Letter
D. Proposed BDC Exclusion
E. 4.27 Relief
III. Request for Comments
A. Advisory 18-96 and the Proposed 18-96 Exemption
B. Proposed Family Office Exemptions
C. Proposed Amendments Consistent With the JOBS Act Relief
Letter
D. Proposed Adoption and Expansion of Exemptive Letter Relief
From Sec. 4.27 Filings
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
[[Page 52903]]
1. Overview
2. Revisions to the Collections of Information
a. OMB Control Number 3038-0005
b. OMB Control Number 3038-0023
3. Request for Comments on Collection
C. Cost-Benefit Considerations
1. Consideration of the Costs and Benefits of the Commission's
Action
a. Summary of the Proposal
b. Benefits
i. Benefits Related to the Adoption of the 18-96 Exemption
ii. Benefits Related to the Proposed Family Office Exemptions
From CPO and CTA Registration
iii. Benefits Related to the Proposed JOBS Act Relief
iv. Benefits Related to the Exclusion of IAs of BDCs From the
CPO Definition
v. Benefits Related to Relief Under Sec. 4.27 for CPOs and CTAs
c. Costs
i. Costs Related to the Proposed 18-96 Exemption
ii. Costs Related to the Proposed Family Office Exemptions From
CPO and CTA Registration
iii. Costs Related to the Proposed Adoption of JOBS Act Relief
iv. Costs Related to the Proposed Exclusion of IAs of BDCs From
the CPO Definition
v. Costs Related to Relief Under Sec. 4.27 for CPOs and CTAs
2. Section 15(a) Considerations
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of
Markets
c. Price Discovery
d. Sound Risk Management
e. Other Public Interest Considerations
f. Request for Comment
D. Antitrust Laws
I. Background
A. Statutory and Regulatory Background
As amended by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),\2\ section 1a(11) of the Commodity
Exchange Act (CEA or Act) defines the term ``commodity pool operator,''
as any person \3\ engaged in a business that is of the nature of a
commodity pool, investment trust, syndicate, or similar form of
enterprise, and who, with respect to that commodity pool, 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
commodity interests.\4\ CEA section 1a(12) defines a ``commodity
trading advisor'' as any person who for compensation or profit engages
in the business of advising others, either directly or through
publications, writings, or electronic media, as to the value of or the
advisability of trading in commodity interests.\5\ CEA section 4m(1)
generally requires each person who satisfies the CPO or CTA definitions
to register as such with the Commission.\6\ With respect to CPOs, the
CEA also authorizes the Commission, acting by rule or regulation, to
include within, or exclude from, the term ``commodity pool operator''
any person engaged in the business of operating a commodity pool if the
Commission determines that the rule or regulation will effectuate the
purposes of the Act.\7\ CEA section 1a(12)(B) provides multiple
exclusions from the CTA definition, and similarly affords the
Commission the authority to exclude such other persons not within the
intent of that provision as the Commission may specify by rule,
regulation, or order.\8\
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\2\ Public Law 111-203, H.R. 4173 (2010).
\3\ Section 1.3 defines ``person'' as including individuals,
associations, partnerships, corporations, and trusts. 17 CFR 1.3.
\4\ 7 U.S.C. 1a(11). The CEA is found at 7 U.S.C. 1 et seq.
(2017). The Commission's regulations are found at 17 CFR Ch. I
(2017). Both the Act and the Commission's regulations are accessible
through the Commission's website, http://www.cftc.gov.
\5\ 7 U.S.C. 1a(12)(A)(i). The CTA definition also includes any
person who for compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning the
value of or advisability of trading in commodity interests, and any
person that is registered with the Commission as a CTA. 7 U.S.C.
1a(12)(A)(ii)-(iii).
\6\ 7 U.S.C. 6m(1).
\7\ 7 U.S.C. 1a(11)(B).
\8\ 7 U.S.C. 1a(12)(B)(vii). The Commission recently utilized
the authority in this provision in issuing an Order excluding Farm
Credit System institutions from that definition, due to their
similarities to banks, a type of entity that is already excluded by
CEA section 1a(12)(B)(i). See Order Excluding Farm Credit System
Institutions From the Commodity Exchange Act's Definition of
``Commodity Trading Advisor,'' 81 FR 89447 (Dec. 12, 2016). CEA
section 1a(12)(C) requires that the exclusions in the preceding
paragraph only apply if the furnishing of such excluded CTA services
is solely incidental to the conduct of their business or profession.
7 U.S.C. 1a(12)(C).
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The Commission also has the power to make and promulgate such rules
and regulations as, in the judgment of the Commission, are reasonably
necessary to effectuate the provisions or to accomplish any purposes of
the CEA.\9\ Part 4 of the Commission's regulations governs the
operations and activities of CPOs and CTAs.\10\ Those regulations
implement the statutory authority provided to the Commission by the CEA
and establish multiple registration exemptions and exclusions for CPOs
and CTAs. Part 4 also contains regulations that establish the ongoing
compliance requirements applicable to CPOs and CTAs registered or
required to be registered; these requirements pertain to the commodity
pools and separate accounts that the CPOs and CTAs operate and advise,
and provide customer protection, disclosure, and reporting to a
registrant's commodity pool participants or advisory clients.
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\9\ 7 U.S.C. 12a(5).
\10\ See 17 CFR part 4, generally.
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In March of 2017, Commission staff initiated an agency-wide
internal review of CFTC regulations and practices to identify those
areas that could be simplified to make them less burdensome.\11\ The
Commission subsequently published in the Federal Register on May 9,
2017, a Request for Information soliciting suggestions from the public
regarding how the Commission's existing rules, regulations, or
practices could be applied in a simpler, less burdensome manner.\12\
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\11\ See Remarks of Acting Chairman J. Christopher Giancarlo
before the 42nd Annual International Futures Industry Conference in
Boca Raton, FL (Mar. 15, 2017), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20 (last retrieved July 31,
2018).
\12\ Project KISS, 82 FR 21494 (May 9, 2017); amended by 82 FR
23765 (May 24, 2017). The Federal Register Request for Information
and the suggestion letters filed by the public are available at the
Commission's website: https://comments.cftc.gov/KISS/KissInitiative.aspx (last retrieved July 31, 2018).
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The Investment Advisers Association (IAA) submitted suggested
modifications for numerous rules in response to the Commission's
Request for Information.\13\ One area identified by the IAA that could
result in the reduction of regulatory burden would be the incorporation
into the Commission's regulations of registration and other types of
relief to members of the asset management industry that meet the
definitions of CPO and/or CTA that is currently provided in various
staff letters.
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\13\ See Letter from Monique Botkin, Associate General Counsel,
Investment Advisers Association, (Sept. 29, 2017) (IAA Letter),
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61480&SearchText (last retrieved July 31, 2018).
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In response to the information received as part of the Project KISS
initiative, as well as CFTC staff's internal review of the Commission's
regulatory regime, the Commission has today determined to propose
several amendments to part 4 (the Proposal or NPRM). Specifically, the
CFTC is proposing to amend Sec. 4.13 to permit CPOs that solicit and/
or accept funds from only non-U.S. persons for participation in
offshore commodity pools to claim an exemption from CPO registration
requirements with respect to such pools, while permitting the
maintenance of registration with respect to commodity pools for which
CPO registration is required. This proposed amendment would have the
effect of expanding relief currently available
[[Page 52904]]
under Staff Advisory 18-96 (the Advisory or Advisory 18-96),\14\ and
incorporate it into the Commission's existing regulatory framework in
17 CFR part 4. In conjunction with this NPRM, the Commission is also
proposing to adopt a prohibition on statutory disqualifications
applicable to most exemptions claimed under Sec. 4.13, and to amend
the de minimis exemption in Sec. 4.13(a)(3) to explicitly permit
persons located outside of the United States as exempt de minimis
commodity pool participants without consideration of their financial
sophistication. The Commission is further proposing to adopt under
Sec. Sec. 4.13 and 4.14 new CPO and CTA registration exemptions
consistent with existing Commission staff no-action letter relief
available to persons considered CPOs or CTAs in connection with the
operation and advising of qualifying family offices. Similarly, through
proposed revisions to the exclusion from the definition of CPO in Sec.
4.5 applicable to registered investment companies (RICs), the
Commission is proposing to provide relief to the investment advisers of
business development companies (BDCs) in a manner also consistent with
existing no-action letter relief.
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\14\ Advisory 18-96, ``Offshore Commodity Pools--Relief for
Certain Registered CPOs From Rules 4.21, 4.22 and 4.23(a)(10) and
(a)(11) and From the Location of Books and Records Requirement of
Rule 4.23,'' available at https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last retrieved July 31, 2018).
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Moreover, the Commission plans to continue its efforts to amend 17
CFR part 4 by proposing regulatory exemptions consistent with existing
CFTC staff exemptive relief letters available to qualifying CPOs. These
efforts include proposing to add exemptive relief consistent with that
provided by CFTC Staff Letter 14-116, which permits the use of general
solicitation by qualifying CPOs, as contemplated by the Jumpstart Our
Business Start-ups Act of 2012 (as defined above, the JOBS Act),
through targeted amendments to Sec. Sec. 4.7 and 4.13(a)(3) in a
manner consistent with that exemptive letter.\15\ Additionally, in its
Project KISS submission, the IAA recommended that the Commission adopt
regulatory amendments to incorporate in part 4 exemptive relief from
filing Form CPO-PQR, provided currently under CFTC Staff Letter 14-115
for CPOs that only operate commodity pools in accordance with
Sec. Sec. 4.5 and 4.13.\16\ The IAA also recommended that the
Commission amend part 4 to adopt the commensurate relief under CFTC
Staff Letter 15-47 for registered CTAs that do not direct trading of
any commodity interest accounts.\17\
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\15\ CFTC Staff Letter 14-116, available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/14-116.pdf (last retrieved July 31, 2018).
\16\ IAA Letter at 16.
\17\ Id.
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In response, the Commission is proposing to adopt amendments that
would provide relief from filing Form CPO-PQR to registered CPOs that
only operate commodity pools exempt or excluded under Sec. Sec. 4.5
and 4.13, consistent with CFTC Staff Letter 14-115,\18\ and from filing
Form CTA-PR to registered CTAs that do not direct trading of any
commodity interest accounts, consistent with CFTC Staff Letter 15-
47.\19\ Finally, the Commission further proposes to provide additional
relief from filing Form CTA-PR to registered CTAs that only advise
pools for which the CTA is also CPO. Although the Proposal includes
several potential regulatory amendments in a single notice, the CFTC
may, in the future, issue separate adopting releases for any aspect of
today's proposed rulemaking that is finalized.\20\
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\18\ CFTC Staff Letter 14-115, available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-115.pdf (last retrieved July 31, 2018).
\19\ CFTC Staff Letter 15-47, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/15-47.pdf (last retrieved July 31, 2018).
\20\ See Inv. Co. Institute v. CFTC, 720 F.3d 370, 379 (DC Cir.
2013) (``[A]s the Supreme Court has emphasized, `[n]othing prohibits
federal agencies from moving in an incremental manner.' '') (quoting
FCC v. Fox Television Stations, Inc., 556 U.S. 502, 522 (2009)).
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B. Advisory 18-96
1. Introduction
The Commission is aware that a number of CPOs only operate U.S.-
based commodity pools soliciting and accepting funds from persons
located in the U.S., whereas other CPOs solicit and accept funds from
participants, whether U.S. or non-U.S., for investment in commodity
pools in both domestic and international locales; still others solicit
and accept funds solely from persons located outside the United States
for investment in offshore pools. Based on communications with industry
and Commission registrants, the Commission preliminarily believes that
the variety of location in CPO business activities continues to grow,
and that CPOs today frequently participate in the markets of, solicit
and/or accept funds for investment from potential participants in, and
operate commodity pools simultaneously in multiple jurisdictions.
In promulgating relief from registration, through the adoption of
Sec. 3.10(c)(3),\21\ for firms located outside the U.S. engaged in
intermediating commodity interest transactions on U.S. designated
contract markets only on behalf of persons located outside the U.S.,
the Commission cited its own historic statements regarding its
jurisdictional scope: `` `[G]iven this agency's limited resources, it
is appropriate at this time to focus [the Commission's] customer
protection activities upon domestic firms and upon firms soliciting or
accepting orders from domestic users of the futures markets and that
the protection of foreign customers of firms confining their activities
to areas outside this country, its territories, and possessions may
best be for local authorities in such [jurisdictions].' '' \22\ The
Commission preliminarily believes that this rationale continues to be
true with respect to CPOs and commodity pools, notwithstanding the
expansion of CFTC jurisdiction after the passage of the Dodd-Frank Act.
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\21\ 17 CFR 3.10(c)(3).
\22\ Exemption From Registration for Certain Foreign Persons,
Final Rule, 72 FR 63976, 63976-77 (Nov. 14, 2007) (citing 48 FR
35248, 35261 (Aug. 3, 1983)).
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The Commission also preliminarily believes that the operation of
offshore pools by exempt CPOs, who may also register solely with
respect to the pools they operate that solicit and/or accept funds from
persons in the U.S., would pose limited risk to the participants in
those pools requiring registration due to the application of Sec.
4.20. Section 4.20(c), in particular, prohibits a CPO from commingling
the property of any commodity pool that it operates, or that it intends
to operate, with the property of any other person.\23\ This provision
thereby limits the potential for trading activity or losses experienced
in exempt offshore pools to negatively impact U.S. customers invested
in pools for which a CPO is so registered.
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\23\ 17 CFR 4.20(c).
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Consequently, the Commission preliminarily believes that providing
CPO registration relief beyond that currently provided by Sec.
3.10(c)(3)(i) and by the staff relief in Advisory 18-96 would be
beneficial and consistent with the Commission's past prioritization of
agency resources for the regulation of intermediary activities
affecting U.S. participants. The Commission is, therefore, proposing to
adopt, among other amendments, an exemption from CPO registration in
Sec. 4.13 that would permit a CPO that solicits,\24\ and/or
[[Page 52905]]
accepts funds from, solely persons located outside the U.S. for
participation in an offshore commodity pool operated by it to claim a
registration exemption with respect to such pool.\25\ The proposed
amendments are largely based upon the requirements of Advisory 18-96,
the conditions of which are presented and explained below.
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\24\ In adopting Sec. 3.10(c)(3)(i), the Commission emphasized
the significance of solicitation as a CPO activity, stating ``[a]ny
person seeking to act in accordance with any of the foregoing
exemptions from registration should note that the prohibition on
contact with U.S. customers applies to solicitation as well as
acceptance of orders. If a person located outside the U.S. were to
solicit prospective customers located in the U.S. as well as outside
of the U.S., these exemptions would not be available, even if the
only customers resulting from the efforts were located outside the
U.S.'' Id. at 63977-78 (emphasis in original) (footnote omitted).
\25\ The Commission intends by the proposed amendments to permit
CPOs to maintain registration with respect to the operation of
commodity pools soliciting, accepting, or managing assets sourced
from participants located in the U.S., while availing themselves of
an exemption from registration with respect to pools located
offshore for which participants located in the U.S. are solicited or
permitted as participants.
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2. The History of Advisory 18-96 and the Commission's Rationale for
Proposing Superseding Part 4 Amendments
On April 11, 1996, staff from the Commission's Division of Trading
and Markets (T&M), a predecessor of today's Division of Swap Dealer and
Intermediary Oversight (DSIO or Division), issued Advisory 18-96,\26\
under which two types of relief are currently available. Qualifying,
registered CPOs operating offshore commodity pools may claim exemptive
relief from the disclosure, reporting, and recordkeeping requirements
of Sec. Sec. 4.21, 4.22, and 4.23(a)(10) and (a)(11) with regard to
their offshore commodity pools.\27\ Alternatively, Advisory 18-96 also
permits qualifying, registered onshore CPOs to claim exemptive relief
from solely the books and records location requirement in Sec.
4.23,\28\ thereby allowing such CPOs to maintain their offshore pool's
original books and records at the pool's offshore location, rather than
at the CPO's main business address in the U.S.
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\26\ Advisory 18-96, ``Offshore Commodity Pools--Relief for
Certain Registered CPOs From Rules 4.21, 4.22 and 4.23(a)(10) and
(a)(11) and From the Location of Books and Records Requirement of
Rule 4.23,'' at p. 1, available at https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last retrieved July 31, 2018).
\27\ Section 4.21, subject to certain conditions, requires each
CPO registered or required to be registered under the CEA to deliver
or cause to be delivered to a prospective participant in a pool that
it operates or intends to operate a Disclosure Document for the pool
that complies with Sec. Sec. 4.24 and 4.25 by no later than the
time it delivers to the prospective participant a subscription
agreement for the pool. 17 CFR 4.21; see also 17 CFR 4.24-4.25.
Section 4.22 governs the periodic reporting required for
commodity pools and generally requires each CPO registered or
required to be registered to periodically distribute to each
participant in a pool it operates periodic Account Statements and
Annual Reports, which also must be filed with the Commission through
the National Futures Association. 17 CFR 4.22.
Section 4.23 requires each CPO registered or required to be
registered to make and keep certain books and records concerning
both the commodity pool(s) it operates and the CPO itself;
paragraphs (a)(10) and (a)(11) particularly require a CPO to make
and keep with respect to a commodity pool it operates a Statement of
Financial Condition on a monthly or quarterly basis dependent on the
amount of the net assets of the commodity pool, as well as a
corresponding Statement of Income (Loss). 17 CFR 4.23(a)(10) and
(a)(11).
At the time of its adoption in 1996, Advisory 18-96 provided
relief from the more robust compliance burdens then applicable to
CPOs, i.e., the disclosure and periodic reporting requirements.
\28\ 17 CFR 4.23.
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Generally, to qualify for the broadest relief available under
Advisory 18-96, a CPO must meet the following requirements:
1. The CPO claiming the relief is registered as such with the
Commission;
2. The commodity pool is, and will remain, organized and operated
outside of the United States;
3. The commodity pool will not hold meetings or conduct
administrative activities within the United States;
4. No shareholder of or other participant in the commodity pool is
or will be a United States person;
5. The commodity pool will not receive, hold or invest any capital
directly or indirectly contributed from sources within the United
States; and
6. The CPO, the commodity pool and any person affiliated therewith
will not undertake any marketing activity for the purpose, or that
could reasonably have the effect, of soliciting participation from
United States persons.\29\
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\29\ Advisory 18-96, at 1.
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To qualify for the recordkeeping location relief under the
Advisory, a registered CPO must represent the following:
1. The CPO will maintain the original books and records of the
commodity pool at the main business office of the commodity pool
located outside the United States;
2. The CPO desires to maintain such books and records outside the
United States in furtherance of compliance with the Internal Revenue
Service (IRS) requirements for relief from United States federal income
taxation;
3. The CPO will maintain duplicate books and records of the
commodity pool at a designated office in the United States; and
4. Within 72 hours after the request of a representative from the
Commission, the United States Department of Justice, or the National
Futures Association (NFA), the original books and records will be
provided to such representative at a place located in the United States
that is specified by the representative.\30\
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\30\ The Advisory states further, ``[f]iling a notice of a claim
for exemption under [this section] of the Advisory, however, does
not eliminate the requirement to comply with the location of the
CPO's own books and records under Rule 4.23(b) or, in the case of a
CPO of a Rule 4.7 exempt pool, the location requirement for the
CPO's own books and records under Rule 4.7(a)(2)(iv).'' Advisory 18-
96 at 2.
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The Advisory additionally requires all claimants of either type of
relief thereunder to represent that, ``neither the CPO nor any of its
principals is subject to any statutory disqualification under CEA
section 8a(2) or 8a(3) unless such disqualification arises from a
matter which (a) was previously disclosed in connection with a previous
application for registration if such registration was granted, or (b)
was disclosed to the Commission or the NFA more than thirty days prior
to the filing of this notice.'' \31\ Notices claiming relief under
Advisory 18-96 were originally required to be submitted in writing and
filed with both Commission staff and NFA, to provide basic business
location and contact information for the CPO, to specify which type of
relief the CPO sought to claim for its commodity pool(s), and to be
signed by a representative duly authorized to bind the CPO (``if a sole
proprietorship, by the sole proprietor; if a partnership, by a general
partner; and if a corporation, by the chief executive officer or chief
financial officer'').\32\
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\31\ Advisory 18-96, at 2; see also 7 U.S.C. 12a(2) and 12a(3).
\32\ Advisory 18-96, at 3. In 1997, the Commission authorized
the NFA to, among other things, accept and process Advisory 18-96
notices of claim for exemption from the part 4 requirements. See
Performance of Certain Functions by National Futures Association
with Respect to Commodity Pool Operators and Commodity Trading
Advisors, 62 FR 52088 (Nov. 1, 1997). Notably, ``[n]otwithstanding
any notice of a claim of exemption filed under this Advisory,
persons claiming such relief remain subject to all other applicable
requirements contained in the Act and the Commission's regulations
issued thereunder, including, without limitation, the antifraud
provisions of Sections 4b and 4o of the Act, the reporting
requirements for traders set forth in Parts 15, 18, and 19 of the
Commissions regulations, and all other provisions of [p]art 4.''
Advisory 18-96, at 3.
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Given the increase in the Commission's jurisdiction resulting from
the passage of the Dodd-Frank Act,\33\ as well as the adoption of
[[Page 52906]]
additional compliance requirements for which Advisory 18-96 currently
provides no relief,\34\ the Commission preliminarily believes that the
adoption of a CPO registration exemption based on the conditions of
Advisory 18-96 (18-96 Exemption) would benefit industry participants,
prioritize the use of Commission resources on the customer protection
of actual and potential commodity pool participants located in the
U.S., and provide relief to persons with respect to their commodity
pool operations that have a limited nexus with markets or participants
within the Commission's jurisdiction. Importantly, a CPO claiming the
18-96 Exemption, as proposed, would still be subject to the anti-
manipulation and anti-fraud provisions of the CEA, and by virtue of
Sec. 4.13(c), would be required to make and keep books and records for
the exempt pool, and to submit to such special calls as the Commission
may make to demonstrate eligibility for and compliance with the
criteria of the 18-96 Exemption.\35\
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\33\ For instance, the Dodd-Frank Act amended the CPO definition
in CEA section 1a(11) to include any person engaged in a business
that is of the nature of a commodity pool that trades in swap
transactions. See 7 U.S.C. 1a(11), as amended by the Dodd-Frank Act,
Public Law 111-203, sec. 721(a)(2).
\34\ See, e.g., 17 CFR 4.27 (imposing obligations on certain
CPOs to periodically file detailed information regarding pools and
other funds that the CPOs operate on Form CPO-PQR).
\35\ 17 CFR 4.13(c).
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The amendments proposed today would incorporate both types of
relief provided by Advisory 18-96 in their entirety in the Commission's
existing part 4 regulatory framework by providing registration and
compliance exemptions for qualifying persons operating offshore pools,
with respect to CPO registration and, in the case of those domestic,
registered CPOs operating offshore pools, with respect to the books and
records location requirement in Sec. 4.23.\36\ The Commission intends
that the 18-96 Exemption, if adopted as proposed, would replace the
exemptive relief currently provided to registered CPOs relying upon
Advisory 18-96 for their offshore pool operations. Similarly, the
Commission also intends that the proposed amendments to Sec. 4.23,
which would provide a qualifying, registered onshore CPO an exemption
from the requirement that the CPO maintain the original books and
records of its offshore commodity pool(s) at its main business office
in the U.S., would replace that aspect of the Advisory.\37\ The
Commission preliminarily believes that these proposed amendments, if
adopted, would ultimately provide more comprehensive relief from CPO
and pool regulation than the Advisory alone and more flexibility than
the terms of Sec. 3.10(c)(3)(i).
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\36\ In 2006-2007, based on a rulemaking petition from NFA, the
Commission previously considered and proposed to rescind Advisory
18-96, which was thought to be rendered superfluous or duplicative
by the 2003 adoption of the CPO registration exemptions in Sec.
4.13(a)(3) and (4). See Electronic Filing of Notices of Exemption
and Exclusion Under Part 4 of the Commission's Regulations, 71 FR
60454 (Oct. 13, 2006) (Proposing Release), and 72 FR 1658 (Jan. 16,
2007) (Adopting Release) (declining to supersede Advisory 18-96, in
light of the 2003 adoption of Sec. 4.13(a)(4)). Section 4.13(a)(4),
prior to its 2012 rescission, permitted a qualifying person to claim
an exemption from registration with the Commission as a CPO, where
the commodity pool it operates is exempt from registration under the
Securities Act of 1933 and the natural and non-natural person
participants meet certain levels of sophistication, e.g., qualified
eligible persons or accredited investors. Although Advisory 18-96
and Sec. 4.13(a)(4) overlapped significantly, the Commission
declined to alter Advisory 18-96, in an effort to preserve the
relief from the books and record location requirement in Sec. 4.23
for any registered, onshore CPOs utilizing the Advisory18-96 relief
with respect to their qualifying offshore commodity pools. See 72 FR
at 1661.
\37\ The Commission simultaneously proposes certain structural
amendments to Sec. 4.23 to increase that regulation's readability
and ease of application.
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3. Expanding the Prohibition on Statutory Disqualifications to
Exemptions Under Sec. 4.13 and Permitting Non-U.S. Person Participants
in De Minimis Commodity Pools
Currently, none of the CPO registration exemptions in Sec. 4.13
prohibits statutory disqualifications as a condition of relief. In
contrast, one of the requirements to obtain relief under Advisory 18-96
is that neither the registered CPO nor its principals is subject to any
statutory disqualification under sections 8a(2) or 8a(3) of the
Act,\38\ unless such disqualification arises from a matter which was
previously disclosed in connection with a previous application, if such
registration was granted, or which was disclosed more than thirty days
prior to the claim of this exemption. The Commission is considering,
therefore, whether there could be a substantial number of CPOs that
claimed a Sec. 4.13 exemption and are subject to statutory
disqualifications or that employ statutorily disqualified principals,
and whether those statutorily disqualified individuals should be
permitted to operate commodity pools as exempt CPOs.
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\38\ 7 U.S.C. 12a(2) and 12(a)(3). Under CEA section 8a(2), for
instance, the Commission may refuse to register a person who has
been temporarily or permanently enjoined by order not to act as a
Commission registrant, or to refrain from engaging in financially
criminal activities, or who, within ten years preceding the
application for registration with the Commission, has been convicted
of a felony for criminal activities involving commodity interests or
securities, or been found by the Commission or another governmental
body or agency to have violated the CEA, Commission regulations, or
securities laws. 7 U.S.C. 12a(2).
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The Commission is concerned that it poses undue risk from a
customer protection standpoint for its regulations in their current
form to permit statutorily disqualified persons or entities to legally
operate exempt commodity pools, especially when those same persons
would not be permitted to register with the Commission.\39\ The
Commission preliminarily believes that preserving the prohibition on
statutory disqualifications from Advisory 18-96 and applying it to
exemptions under Sec. 4.13 would provide a substantial customer
protection benefit by prohibiting statutorily disqualified persons from
operating and soliciting participants for investment in exempt
commodity pools.
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\39\ Commission staff previously became aware of a number of
statutorily disqualified CPOs operating commodity pools pursuant to
the registration exemption available in former Sec. 4.13(a)(4).
Because that exemption was rescinded in 2012, those particular CPOs
would have been required to modify their operations to comply with
another exemption under Sec. 4.13 that did not bar statutorily
disqualified CPOs, to cease participating in the commodity interest
markets, or to receive relief from the Commission to register and
continue operating.
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Consequently, the Commission is proposing to require any person
claiming a registration exemption under Sec. 4.13(a)(1), (2), (3), or
(5), or proposed Sec. 4.13(a)(4),\40\ to represent that neither the
claimant nor any of its principals is subject to statutory
disqualifications under sections 8a(2) or 8a(3) of the CEA. However,
the Commission also proposes to incorporate certain limited exceptions
already present in Advisory 18-96 that would permit statutory
disqualifications that were previously disclosed in registration
applications that were granted, or that were disclosed more than 30
days prior to the claim of exemption. The Commission preliminarily
believes this approach addresses customer protection concerns regarding
statutory disqualifications, while preserving flexibility in Commission
regulations applicable to CPOs. As proposed, the prohibition would
apply to current claimants under Sec. 4.13 as they renew their claims
on an annual basis--i.e., existing claimants would be required to
represent that
[[Page 52907]]
neither they nor their principals are subject to statutory
disqualifications under CEA sections 8a(2) or 8a(3), when they annually
affirm their continued reliance on a Sec. 4.13 exemption next year.
CPOs filing new claims of a Sec. 4.13 exemption, however, would be
required to comply with this prohibition upon filing, if and when the
amendments are adopted as proposed, and become effective.
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\40\ The Commission is not proposing to extend the prohibition
to the proposed exemption for qualifying family offices, discussed
infra as proposed Sec. 4.13(a)(8). By the terms of that proposed
exemption, such CPOs would be prohibited from soliciting non-family
members/clients to participate in their pool(s), necessarily
limiting their contact with prospective participants drawn from the
general public, and as a result, reducing the Commission's customer
protection concerns in that context.
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Additionally, the Commission is proposing to amend the de minimis
commodity pool exemption in Sec. 4.13(a)(3) to explicitly permit non-
U.S. person participants, regardless of their financial
sophistication.\41\ The Commission understands that, relying on CFTC
Staff Letter 04-13,\42\ for purposes of determining whether a person
qualifies for exemption from CPO registration under Sec. 4.13(a)(3),
market participants are generally not considering whether non-U.S.
person participants meet one of the investor sophistication criteria
listed in Sec. 4.13(a)(3)(iii).\43\
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\41\ 17 CFR 4.13(a)(3). Section 4.13(a)(3) provides an exemption
from CPO registration for any person who offers a pool that: (1) Is
exempt from registration under the Securities Act of 1933 and
offered and sold without marketing to the public in the U.S., (2) at
all times, is traded subject to de minimis trading thresholds, (3)
is limited to certain types of investors that the person believes to
be, at the time of investment or conversion to an exempt pool,
accredited investors and/or qualified eligible persons, and (4) is
not marketed as or in a vehicle for trading in commodity interests.
Id.
\42\ CFTC Staff Letter 04-13 (Apr. 14, 2004), available at
https://www.cftc.gov/sites/default/files/tm/letters/04letters/tm04-13.htm (last retrieved July 31, 2018).
\43\ In April 2004, the Division of Clearing and Intermediary
Oversight (DCIO), the most recent predecessor to DSIO, responded to
a request for clarification or interpretation of the de minimis
exemption from CPO registration in Sec. 4.13(a)(3). The requester
asked DCIO staff for confirmation that ``a [CPO] claiming exemption
from registration under new Rule 4.13(a)(3) may permit Non-United
States persons to participate in pools operated pursuant to such
exemptive relief, regardless of whether such Non-United States
persons meet the investor sophistication requirements of Rule
4.13(a)(3)(iii).'' CFTC Staff Letter 04-13, at 1. DCIO staff
concluded that because the exemption in Sec. 4.13(a)(4) permitted
non-U.S. person participants in pools exempt thereunder, regardless
of their financial sophistication, by virtue of the ``qualified
eligible person'' definition in Sec. 4.7(a)(2), then it would be
``consistent with the intent and purpose of Rule 4.13(a)(3)'' to
also generally permit non-U.S. person investors to participate in
Sec. 4.13(a)(3) pools. Id. at 2. In 2012, the Commission rescinded
the exemption originally provided by Sec. 4.13(a)(4), the features
of which comprise the legal underpinnings for the analysis in CFTC
Staff Letter 04-13. See Commodity Pool Operators and Commodity
Trading Advisors: Compliance Obligations, 77 FR 11252 (Feb. 24,
2012); correction notice published at 77 FR 17328 (Mar. 26, 2012)
(CPO CTA Final Rule).
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The Commission preliminarily believes that permitting non-U.S.
person participants, regardless of their financial sophistication, in
Sec. 4.13(a)(3) exempt pools would generally be consistent with the
Commission's policy approach in proposing to add the 18-96 Exemption to
the 17 CFR part 4 regulatory framework. With limited participation in
U.S. commodity interest markets subject to Commission jurisdiction,
commodity pools exempt under Sec. 4.13(a)(3) do not trigger the same
level of regulatory interest for the Commission as commodity pools
requiring CPO registration and compliance with all or part of the
requirements in 17 CFR part 4. Additionally, Sec. 4.7 already permits
non-U.S. persons,\44\ regardless of their ``qualified eligible person''
(QEP) status, to participate in commodity pools operated thereunder,
which are not subject to de minimis commodity interest trading
thresholds. The Commission also preliminarily believes that it would be
consistent with the Commission's other part 4 regulations, including
those amendments proposed today, to generally permit non-U.S. person
participants in Sec. 4.13(a)(3) exempt pools. Therefore, the
Commission proposes today to also amend Sec. 4.13(a)(3)(iii) to
specifically permit non-U.S. person participants.\45\
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\44\ 17 CFR 4.7(a)(1)(iv).
\45\ If adopted, the proposed rule would supersede prior staff
positions on this subject, including CFTC Staff Letter 04-13.
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C. Proposed CPO and CTA Registration Exemptions for Qualifying Family
Offices
The Commission is also proposing today amendments consistent with
two Commission staff no-action letters that currently provide relief
from CPO \46\ and CTA\47\ registration to qualifying family offices
(Family Offices) with respect to investment management and advisory
activities conducted on behalf of their family clients (Family
Clients).
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\46\ CFTC Staff Letter 12-37 (Nov. 29, 2012), available at
https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/12-37.pdf (last retrieved July 31, 2018) (CPO Family Office
No-Action Letter).
\47\ CFTC Staff Letter 14-143 (Nov. 5, 2014), available at
https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-143.pdf (last retrieved July 31, 2018) (CTA Family Office
No-Action Letter).
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1. Defining Family Offices
A Family Office is generally understood to be a professional
organization that is wholly-owned by clients in a family, including
members of a family and/or entities controlled by a family or family
member, e.g., charitable trusts, and that is operated as a wealth
management tool for their benefit.\48\ In granting no-action relief
from CPO registration to qualifying Family Offices, Commission staff
has previously stated that, ``[t]ypically, a family office structure is
employed when one or more direct members of a family create substantial
wealth, and share that wealth in whole or in part with other members of
that family, either through direct transfer, inheritance, or similar
means.'' \49\ The Division noted further that, ``[t]he family office is
then used to provide personalized services to that family, including
advice regarding issues of tax, estate planning, investment, and
charitable giving.'' \50\ According to the Private Investors Coalition,
which frequently comments on regulatory efforts impacting Family
Offices and which requested the relief from CTA registration granted by
DSIO in 2014 via CFTC Staff Letter 14-143, ``single family offices have
existed for over 100 years . . . [and] were formed to implement very
important and complex objectives, including investment management,
corporate succession, estate, gift, and income tax planning and
charitable giving issues that are important to members of the family.''
\51\
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\48\ See, e.g., Letter from the Vlasic Investments, L.L.C., an
entity formed to manage the wealth of the Vlasic Family, to the
Securities and Exchange Commission, at 1 (Nov. 17, 2010), available
at https://www.sec.gov/comments/s7-25-10/s72510-83.pdf (last
retrieved July 31, 2018), submitted as a comment to Family Offices,
Investment Advisers Act Release No. 3098, 75 FR 63753 (Oct. 18,
2010).
\49\ CPO Family Office No-Action Letter, at 1.
\50\ Id.
\51\ Letter from the Private Investors Coalition to the SEC, at
2 (Nov. 11, 2010), available at https://www.sec.gov/comments/s7-25-10/s72510-11.pdf (last retrieved July 31, 2018), submitted as a
comment to Family Offices, Investment Advisers Act Release No. 3098,
75 FR 63753 (Oct. 18, 2010). The Private Investors Coalition also
emphasized that although Family Offices may be formed by a single
family member who created the wealth to be managed, they are also
commonly formed by one or more lineal descendants of such family
members. Id.
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2. Family Offices as Commodity Pools and the Rescission of Sec.
4.13(a)(4)
As discussed above, the operations of a Family Office frequently
involve the collective management of pooled assets from a variety of
sources, notwithstanding that those sources may all be members of a
single family, or organizations, trusts, or foundations for the benefit
of those family members. If such pooled assets are invested in
commodity interests,\52\ then it is highly likely that the managing
member of the Family Office, or similarly situated persons providing
services to the Family Office, is engaging in activities that would
otherwise require registration with the Commission as a CPO or CTA.
Consequently, absent an exemption,
[[Page 52908]]
exclusion, or other Commission staff letter relief, registration and
compliance requirements under the CEA and Commission regulations would
be triggered, requiring such Family Offices or members of their staff
to register with the Commission as CPOs and/or CTAs with respect to
those activities.
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\52\ 17 CFR 1.3.
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In the 1990s and early 2000s, Commission staff frequently responded
to individual requests from Family Offices for relief from CPO and CTA
regulation with one-off relief letters determining the Family Office
not to be a commodity pool or providing no-action relief from such
registration to certain family members or staff.\53\ In 2003, the
Commission adopted former Sec. 4.13(a)(4), which provided an exemption
from CPO registration for a person operating a commodity pool: (1)
Whose interests are exempt from registration under the Securities Act
of 1933,\54\ and are offered and sold without marketing to the public
in the U.S.; and (2) whose participants are reasonably believed, at the
time of investment or conversion of the pool to an exempt pool, to be
QEPs as defined in Sec. 4.7(a)(2) \55\ if natural persons, or QEPs or
``accredited investors,'' in the case of non-natural person
participants.\56\
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\53\ See, e.g., CFTC Staff Letter 00-100 (Nov. 1, 2000) (finding
that a limited partnership consisting of immediate family members
that invests family assets in commodity futures is not a pool),
available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/00-100.pdf (last retrieved July
31, 2018); CFTC Staff Letter 97-78 (Sept. 24, 1997) (finding that a
partnership consisting of family members, former family members, and
trusts for the benefit of family members is not a commodity pool
within the meaning and intent of Sec. 4.10(d)), available at
https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/97-78.pdf (last retrieved July 31, 2018).
\54\ 15 U.S.C. 77a et seq.
\55\ 17 CFR 4.7(a)(2).
\56\ 17 CFR 4.13(a)(4) (2010).
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Prior to the exemption's rescission in 2012, many Family Offices
claimed former Sec. 4.13(a)(4) to legally operate their investment
vehicles, invest in commodity interests, and provide commodity trading
advice to Family Clients, without being required to register with the
Commission in any capacity.\57\ In 2011, the Commission proposed to
rescind Sec. 4.13(a)(4) \58\ and the potential impact on Family
Offices was immediately noted; the Commission received comments
suggesting that the Commission allow Family Offices already in
existence and then relying on the exemption in Sec. 4.13(a)(4) to be
grandfathered, such that they could continue to operate without
registration even after the exemption's rescission.\59\ In declining to
do so, the Commission stated in the 2012 Adopting Release:
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\57\ Further, as CPOs exempt pursuant to Sec. 4.13(a)(4), such
Family Offices also routinely relied upon the self-executing
exemption in Sec. 4.14(a)(5), which provides an exemption from CTA
registration to a person that is exempt from registration as a CPO
and the person's commodity trading advice is directed solely to, and
for the sole use of, the pool or pools for which it is so exempt.
See 17 CFR 4.14(a)(5).
\58\ Commodity Pool Operators and Commodity Trading Advisors:
Amendments to Compliance Obligations, 76 FR 7976 (Feb. 11, 2011).
\59\ See comment letters from New York State Bar Association
(Apr. 12, 2011); Alternative Investment Management Association, Ltd.
(Apr. 12, 2011); Schulte Roth & Zabel LLP (Apr. 12, 2011); Fulbright
& Jaworski L.L.P. (Apr. 12, 2011); Securities Industry and Financial
Markets Association (Apr. 12, 2011); Seward & Kissel, LLP (Apr. 12,
2011); Katten, Muchin, Rosenman LLP (Apr. 12, 2011); all available
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=973
(last retrieved July 31, 2018).
The Commission does not believe that ``grandfathering'' is
appropriate in this context. As the Commission stated in its
Proposal, part of the purpose of rescinding Sec. 4.13(a)(4) is to
ensure that entities that are engaged in derivatives trading are
subject to substantively identical registration and compliance
obligations and oversight by the Commission. Grandfathering is not
consistent with the stated goals of the Commission's rescission and
would result in disparate treatment of similarly situated entities.
Therefore, the Commission will implement the rescission of Sec.
4.13(a)(4) for all entities currently claiming exemptive relief
thereunder.\60\
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\60\ See CPO CTA Final Rule, 77 FR at 11263.
Alternatively, other commenters requested that ``the Commission adopt
an exemption from registration for family offices that is consistent
with the exemption adopted by the [Securities and Exchange Commission
(SEC)],'' discussed infra.\61\ The Commission declined, however, to
adopt the SEC's relief for Family Offices in 2012, because:
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\61\ Id. (citing the SEC's Family Office exclusion from the
investment adviser definition at 17 CFR 250.202(a)(11)(G)-1).
The Commission, therefore, believes that it is prudent to
withhold consideration of a family offices exemption until the
Commission has developed a comprehensive view regarding such firms
to enable the Commission to better assess the universe of firms that
may be appropriate to include within the exemption, should the
Commission decide to adopt one. Therefore, the Commission is
directing its staff to look into the possibility of adopting a
family offices exemption in the future.\62\
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\62\ Id. (citing 17 CFR 140.99(a)(3) and a variety of historic
Family Office relief letters).
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Finally, the Commission stated that Family Offices would ``continue
to be permitted to write in on a firm by firm basis to request
interpretative relief from the registration and compliance obligations
under the Commission's rules and to rely on those interpretative
letters already issued to the extent permissible under the Commission's
regulations.'' \63\ Thus, pursuant to the amendments to 17 CFR part 4
adopted in 2012, among which was the rescission of Sec. 4.13(a)(4),
many Family Offices were required to register with the Commission as
CPOs, if they could not qualify for an alternative exemption or
otherwise obtain relief from Commission staff.\64\
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\63\ Id. (concluding that ``an exemption for family offices is
not necessary at this time'').
\64\ The Commission noted then that ``family offices previously
relying on the exemption under Regulation Sec. 4.13(a)(3) will not
be affected by the rules adopted herein, as the Commission is not
rescinding the Sec. 4.13(a)(3) exemption and it will remain
available to entities meeting its criteria.'' CPO CTA Final Rule, 77
FR at 11263.
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3. The SEC's Exclusion for Family Offices and CFTC Staff Letters 12-37
and 14-143
In 2011, the SEC adopted an exclusion from the term ``investment
adviser,'' (IA) as defined by the Investment Advisers Act of 1940, as
amended (IA Act),\65\ for Family Offices (SEC Family Office Exclusion),
thus excluding Family Offices from regulation under the IA Act.\66\
Specifically, Sec. 275.202(a)(11)(G)-1(a) provides that a family
office, as defined in that section, shall not be considered to be an
investment adviser for purpose of the IA Act, and Sec.
275.202(a)(11)(G)-1(b) defines ``family office'' as a company
(including its directors, partners, members, managers, trustees, and
employees acting within the scope of their position or employment)
that: Has no clients other than family clients, is wholly owned by
family clients and is exclusively controlled (directly or indirectly)
by one or more family members and/or family entities; and does not hold
itself out to the public as an investment adviser.\67\
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\65\ 15 U.S.C. 80b-1, et seq.
\66\ Family Offices; Final Rule, 76 FR 37983 (Jun. 29, 2011)
(SEC Family Office Final Rule).
\67\ 17 CFR 275.202(a)(11)(G)-1(a) and 275.202(a)(11)(G)-1(b).
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Because Family Offices, as such term is commonly understood, are
not intended to be marketed as an option for investing by the general
public, Family Offices are restricted, by definition and in practice,
to accepting assets for management from or providing services to solely
``family clients.'' As a result, the SEC Family Office Exclusion
defines a Family Client as including family members, including non-
blood relatives such as spouses and adopted children, former family
members, key employees of the Family Office, former key employees
(under certain conditions), as
[[Page 52909]]
well as certain organizations, like non-profit organizations,
charitable foundations, charitable trusts or other charitable
organizations for which all the funding of such foundation, trust or
organization came exclusively from one or more other Family
Clients.\68\ Family Clients also may include the estate of a family
member, former family member, key employee, or subject to certain
conditions, former key employees.\69\ Additionally, investment and
estate planning vehicles, such as irrevocable trusts, in which one or
more other Family Clients are the only current beneficiaries, are also
permitted Family Clients.\70\
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\68\ 17 CFR 275.202(a)(11)(G)-1(d)(4) (extensively defining
``Family Client'').
\69\ Id.
\70\ Id. See Staff Responses to Questions About the Family
Office Rule, available at https://www.sec.gov/divisions/investment/guidance/familyofficefaq.htm.
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Pursuant to the Commission's instructions in the CPO CTA Final
Rule, many Family Offices sought relief from DSIO staff following the
2012 rescission of Sec. 4.13(a)(4). Certain representatives of the
Family Office industry requested relief that would be available to
Family Offices on a global basis and would be based upon the SEC Family
Office Exclusion. In the request for relief, industry representatives
asserted that Family Offices are not operations of the type and nature
that warrant regulatory oversight by the Commission, because, by
definition, a Family Office is not a vehicle in which non-Family
Clients would be solicited or permitted to invest. Because a Family
Office is comprised of participants with close relationships, and there
is a direct relationship between the clients and the CPO or advisor, it
was argued that such relationships greatly reduce the need for the
customer protections available pursuant to the regulations in 17 CFR
part 4.\71\
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\71\ CPO Family Office No-Action Letter, at 1-2. This rationale
is also noted in the adopting release of the SEC Family Office
Exclusion. See also SEC Family Office Final Rule, 76 FR at 37984.
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Having met with Family Office industry representatives and observed
the SEC's experience after adopting the SEC Family Office Exclusion,
Commission staff thoroughly considered the issue and ultimately
determined to grant registration relief for Family Offices meeting the
requirements of the SEC Family Office Exclusion. On November 29, 2012,
DSIO issued CFTC Staff Letter 12-37, a no-action letter permitting
Family Offices complying with the SEC Family Office Exclusion to
operate and manage the assets of Family Clients without having to
register with the Commission as a CPO.\72\ Subsequently, in responding
to a request for relief from the Private Investors Coalition, DSIO
issued another no-action letter permitting Family Offices to provide
their Family Clients with commodity trading advice, without CTA
registration, provided that the Family Office did not hold itself out
to the public as a CTA and restricted any commodity trading advice
given to the Family Office itself and/or Family Clients.\73\
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\72\ CPO Family Office No-Action Letter.
\73\ CTA Family Office No-Action Letter.
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In granting the no-action relief from CPO registration, DSIO staff
considered the requesters' assertion that, ``this issue has similarly
been addressed by the [SEC], which resulted in an exclusion for family
offices that would otherwise be required to register as an investment
adviser[,]'' and that ``SEC staff ha[d] devoted substantial time and
resources to addressing this issue.'' \74\ In determining to issue
relief, the Division reasoned that ``the fundamental issue of the
appropriate application of investor protection standards as required by
each respective agency's regulations is substantially similar.'' \75\
Further, the Division concluded that granting the relief would place
``both agencies on equal footing with respect to the application of
investor protections relevant to this issue [and] will facilitate
compliance with both regulatory regimes.'' \76\ Consequently, through
CFTC Staff Letters 12-37 and 14-143, the Division provided no-action
relief with respect to CPO registration for any person filing a claim
that operates a Family Office, as that term is defined in 17 CFR
275.202(a)(11)(G)-1(b), and with respect to CTA registration, for any
person filing a claim whose advisory services are limited to a Family
Office and/or Family Clients, as defined in 17 CFR 275.202(a)(11)(G)-
1(d)(4).\77\ Under each letter, the claimant is required to remain in
compliance with the SEC Family Office Exclusion, regardless of whether
the Family Office actually seeks such exclusion.\78\
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\74\ CPO Family Office No-Action Letter, at 2.
\75\ CPO Family Office No-Action Letter, at 2.
\76\ Id.
\77\ CPO Family Office No-Action Letter, at 2; CTA Family Office
No-Action Letter, at 3.
\78\ Id.
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In the six years since the rescission of Sec. 4.13(a)(4) and the
issuance of the CPO Family Office No-Action Letter, Commission staff
has gained additional familiarity with the Family Office industry. This
experience was gained through the continued availability of the CPO
Family Office No-Action Letter and the subsequent issuance and
utilization by industry of the CTA Family Office No-Action Letter, as
well as through the consideration of and response to the few additional
requests received by DSIO from Family Offices unable to meet the
criteria of either of the global no-action letters.\79\ The Commission
notes that DSIO has received a total of more than 500 claims of the no-
action relief provided by the CPO Family Office No-Action Letter and
the CTA Family Office No-Action Letter.
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\79\ See, e.g., CFTC Staff Letter 14-104 (Jun. 20, 2014),
available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-104.pdf (last retrieved July
31, 2018) (granting no-action relief to an entity providing advisory
services to two families with longstanding and extensive financial
and personal relationships).
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Based on this experience, and pursuant to the Commission's
instructions to its staff in 2012 to consider the future adoption of
registration exemptions for Family Offices, the Commission is proposing
to adopt for qualifying Family Offices CPO and CTA registration
exemptions with terms similar to those in the CPO Family Office No-
Action Letter and the CTA Family Office No-Action Letter by amending
Sec. Sec. 4.13 and 4.14. The Commission preliminarily believes that
the familial relationships inherent in Family Offices provide a
reasonable mechanism for protecting the interests of Family Clients and
resolving disputes amongst them, and that the regulatory interest is
lower than in typical, arms-length transactions where the CPO and the
pool participants, or the CTA and its advisory clients, do not have
close relationships and/or long-standing family history between them.
The Commission also preliminarily believes that these characteristics
are a reasonable substitute for the benefits and protections afforded
by the Commission's regulatory regime for CPOs and CTAs.
Consistent with its statements in prior rulemakings impacting
Family Offices, the Commission notes that Family Offices unable to meet
the requirements of the exemptions proposed herein today may still
avail themselves of the relief provided in Sec. 4.13(a)(3), if they so
qualify, or they may continue to seek relief on an individual, firm-by-
firm basis through requests submitted to Commission staff.
D. Proposed Amendments Permitting General Solicitation by CPOs Pursuant
to the JOBS Act of 2012.
1. The JOBS Act of 2012, Regulation D, and Rule 144A
On April 5, 2012, Congress enacted the JOBS Act for the stated
purpose of increasing American job creation and
[[Page 52910]]
economic growth by improving access to the public capital markets for
emerging growth companies.\80\ Among other things, the JOBS Act amended
various sections of the Securities Act of 1933 (``33 Act'') and
required the SEC to revise its regulations to implement certain of the
new JOBS Act provisions. Certain provisions of the JOBS Act expanded
the availability and marketability of privately offered securities by
loosening restrictions otherwise applicable to such offerings.
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\80\ Public Law 112-106, 126 Stat. 306 (Apr. 5, 2012).
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Section 5 of the 33 Act requires the registration of securities
offerings with the SEC and compliance with prospectus delivery
requirements, unless an exemption is available.\81\ Section 4(a)(2)
(formerly section 4(2)) of the 33 Act provides a statutory exemption
from these requirements for ``transactions by an issuer not involving
any public offering.'' \82\ Rule 506 of the SEC's Regulation D, ``Rules
Governing the Limited Offer and Sale of Securities Without Registration
Under the Securities Act,'' (Regulation D) was adopted to provide a
regulatory analog to the statutory exemption.\83\ Rule 506(b) of
Regulation D \84\ was originally adopted by the SEC as a non-exclusive
safe harbor under the 33 Act section 4(a)(2) exemption for securities
offerings by an issuer, without regard to dollar amount, to an
unlimited number of ``accredited investors,'' as defined in Sec.
230.501(a),\85\ and to no more than 35 non-accredited investors who
meet certain sophistication requirements.\86\ Offerings under Sec.
230.506(b) are subject to the terms and conditions of Sec. Sec.
230.501 and 230.502, including Sec. 230.502(c), which states that
neither the issuer nor any person acting on its behalf shall offer or
sell the securities by any form of general solicitation (General
Marketing Restriction).\87\
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\81\ 15 U.S.C. 77e.
\82\ 15 U.S.C. 77d(a)(2).
\83\ Proposed Revision of Certain Exemptions from the
Registration Provisions of the Securities Act of 1933 for
Transactions involving Limited Offers and Sales, 33 Act Rel. No.
6339 (Aug. 7, 1981).
\84\ 17 CFR 230.506(b).
\85\ 17 CFR 230.501(a).
\86\ 17 CFR 230.506(b).
\87\ 17 CFR 230.501, 230.502; 230.502(c).
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Through JOBS Act Section 201, Congress directed the SEC to amend 17
CFR 230.506 of Regulation D, to provide that the prohibition against
general solicitation or general advertising in section 230.502(c) of
title 17 shall not apply to offers and sales of securities made
pursuant to section 230.506, provided that all purchasers are
accredited investors.\88\ In 2012-2013, the SEC proposed and adopted
amendments to Sec. 230.506 consistent with the congressional
directives of the JOBS Act.\89\ By adding Sec. 230.506(c), the SEC
adopted an exemption that permits issuers to engage in general
solicitation or advertising to offer and sell securities under
Regulation D, provided that the issuer meets the terms and conditions
of Sec. Sec. 230.501 and 230.502(a) and (d), that all purchasers of
the offered securities are accredited investors, and that the issuer
takes reasonable steps to verify the accredited investor status of each
purchaser.\90\ In other words, the General Marketing Restriction in
Sec. 230.502(c) is not applicable to securities offerings made
pursuant to Sec. 230.506(c).
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\88\ JOBS Act, Public Law 112-206, sec. 201(a)(1), 126 Stat.
306, 313. Further, the JOBS Act amendments made clear that offers
and sales exempt under Rule 506 (as revised pursuant to JOBS Act
Section 201) shall not be deemed public offerings under the Federal
securities laws as a result of general advertising or solicitation.
Id. at 201(b) (adding 33 Act Section 4(b), 15 U.S.C. 77d(b)).
\89\ Eliminating the Prohibition Against General Solicitation
and General Advertising in Rule 506 and Rule 144A Offerings, 77 FR
54464 (Sept. 5, 2012) and 78 FR 44771 (Jul. 24, 2013) (JOBS Act
Adopting Release).
\90\ 17 CFR 230.506(c)(1)-(2). In the JOBS Act Adopting Release,
the SEC stated that, ``because the issuer has the burden of
demonstrating that its offering is entitled to an exemption from the
registration requirements of the [33 Act], it will be important for
issuers and their verification service providers to retain adequate
records regarding the steps taken to verify that a purchaser was an
accredited investor.'' 78 FR at 44779.
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The SEC explained that it was retaining the exemption for
traditional Regulation D offerings in Sec. 230.506(b), ``for those
issuers that either do not wish to engage in general solicitation in
their Rule 506 offerings . . . or wish to sell privately to non-
accredited investors who meet Rule 506(b)'s sophistication
requirements.'' \91\ Further, the SEC emphasized that the ``mandate [in
JOBS Act Section 201(a)(1)] affects only [Sec. 230.506], and not
Section 4(a)(2) offerings in general, which means that . . . an issuer
relying on Section 4(a)(2) outside of the Rule 506(c) exemption will be
restricted in its ability to make public communications to solicit
investors for its offering because public advertising will continue to
be incompatible with a claim of exemption under Section 4(a)(2).'' \92\
The SEC also adopted substantively similar amendments to Rule 144A \93\
eliminating offering and marketing restrictions in the resale of
certain securities sold to qualified institutional buyers (QIBs).\94\
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\91\ Id. at 44776.
\92\ 78 FR at 44774.
\93\ 17 CFR 230.144A.
\94\ Rule 144A is a non-exclusive safe harbor exemption from the
registration and prospectus delivery requirements under the 33 Act
for resales of certain securities to QIBs, as defined in Sec.
230.144A(a)(1), provided that certain conditions are met. Through
the JOBS Act, Congress directed the SEC to also adopt amendments to
Sec. 230.144A in order to permit general solicitation. JOBS Act,
Pub. L. 112-206, sec. 201(a)(2), 126 Stat. 306, 313. In the JOBS Act
Adopting Release, the SEC eliminated references to ``offer'' and
``offeree'' in Rule 144A, such that, today, the provision only
requires that such resold securities ``be sold to a QIB or to a
purchaser that the seller and any person acting on behalf of the
seller reasonably believe is a QIB.'' 78 FR at 44786.
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2. Impact of JOBS Act Amendments on CPOs and DSIO's 2014 JOBS Act
Relief Letter
Under certain circumstances, persons relying on the new exemption
in Sec. 230.506(c) (506(c) Issuers) or reselling securities pursuant
to Rule 144A (144A Resellers) may also be issuing interests in a
commodity pool, the CPOs of which are subject to Commission regulation.
Certain of the Commission's regulations applicable to CPOs currently
contain restrictions on marketing and solicitation that conflict with
the statutory and regulatory amendments effected and prompted by the
passing of the JOBS Act. Specifically, certain persons who offer,
market, or sell securities from 506(c) Issuers or 144A Resellers may be
subject to Commission regulation under Sec. Sec. 4.7 or 4.13(a)(3),
both of which currently prohibit the general marketing and solicitation
that is now permitted by the JOBS Act.
Section 4.7 provides relief from certain of the disclosure,
periodic and annual reporting, and recordkeeping requirements in Part 4
of the Commission's regulations to registrants who file claims pursuant
to Sec. 4.7(d).\95\ The relief in Sec. 4.7(b) is available to: (1) A
registered CPO who offers or sells pool participations solely to QEPs
in an offering that qualifies for an exemption from the registration
requirements of the 33 Act pursuant to section 4(2) (now section
4(a)(2)) of that Act or pursuant to Regulation S, or (2) any bank
registered as a CPO in connection with a pool that is a collective
trust fund whose securities are exempt from registration under the 33
Act pursuant to section 3(a)(2) of that Act and are offered or sold,
without marketing to the public, solely to QEPs.\96\ Section 4.13(a)(3)
provides a registration exemption for CPOs that operate pools meeting
the conditions enumerated in that regulation. One of those conditions,
Sec. 4.13(a)(3)(i), requires that interests in
[[Page 52911]]
each pool for which the CPO claims the exemption be exempt from
registration under the 33 Act and ``offered and sold without marketing
to the public.'' \97\ Additionally, Sec. 4.13(a)(3)(iii) requires that
the CPO reasonably believes, at the time of purchase, that each person
who participates in the exempt pool is, among other things, an
accredited investor or QEP.\98\
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\95\ 17 CFR 4.7; 17 CFR 4.7(d).
\96\ 17 CFR 4.7(b).
\97\ 17 CFR 4.13(a)(3)(i).
\98\ 17 CFR 4.13(a)(3)(iii).
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Generally, all commodity pools relying on the exemption in 33 Act
section 4(a)(2), including pursuant to Sec. 230.506(b), remain subject
to prohibitions on general solicitation and general advertising, and
such pools' CPOs may continue to claim relief under Sec. Sec. 4.7(b)
or 4.13(a)(3) in their current states. However, as noted above,
amendments to securities regulations prompted by the JOBS Act and the
requirements for exemptive relief under Sec. Sec. 4.7(b) or 4.13(a)(3)
are incompatible. In response to the SEC's amendments, the Division
issued CFTC Staff Letter 14-116, an exemptive letter clarifying how
securities issuers and resellers, and their CPOs, could avail
themselves of relief both in the securities and commodity interest
sectors.\99\
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\99\ CFTC Staff Letter 14-116 (Sept. 9, 2014) (JOBS Act Relief
Letter), available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-116.pdf (last retrieved July
31, 2018) (JOBS Act Relief Letter).
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Subject to certain conditions, the JOBS Act Relief Letter provides
exemptive relief to claimants from the specific provisions of
Sec. Sec. 4.7(b) or 4.13(a)(3) outlined above, to make the relief
provided by those regulations compatible with amended Regulation D and
Rule 144A. Specifically, the CPOs of 506(c) Issuers and 144A Resellers
that filed a notice with DSIO staff received exemptive relief from the
requirements in Sec. 4.7(b) that an offering be exempt pursuant to
section 4(a)(2) of the 33 Act and offered solely to QEPs, and from the
requirement in Sec. 4.13(a)(3)(i) that the securities ``be offered and
sold without marketing to the public.'' \100\
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\100\ JOBS Act Relief Letter, p. 6. The Commission notes that
Sec. 4.13(a)(3) requires only that interests in an exempt pool be
``exempt from registration'' under the 33 Act, whereas Sec. 4.7(b)
has a more restrictive requirement that the pools qualify for
exemption specifically under 33 Act section 4(a)(2). As noted above,
the SEC emphasized, while amending Regulation D, that issuers
claiming a 33 Act section 4(a)(2) exemption or Sec. 230.506(b)
would still be restricted in marketing or advertising to the public,
based on the format of the congressional directive in the JOBS Act.
78 FR at 44774.
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In an effort to harmonize the impact of the JOBS Act on, and to
provide legal certainty with respect to the transactions engaged in by,
dually-regulated CFTC and SEC entities, the Commission is proposing to
adopt tailored amendments to Sec. Sec. 4.7(b) and 4.13(a)(3) that
would generally be consistent with the JOBS Act Relief Letter, as
explained further below.
E. Proposed Exclusionary Relief for BDCs
1. The CPO Exclusion in Sec. 4.5
Section 4.5 provides an exclusion for certain otherwise regulated
persons from the CPO definition with respect to the operation of a
``qualifying entity'' specified in that regulation.\101\ Examples of
excluded persons include insurance companies regulated by any State
\102\ with respect to the offering of a separate account; \103\ a bank
regulated by a State or the United States \104\ with respect to the
assets of any trust, custodial account, or other separate unit of
investment for which it is acting as a fiduciary and for which it has
investment authority; \105\ the trustee of a plan subject to title I of
the Employee Retirement Income Security Act of 1974 (ERISA) \106\ with
respect to the operations of that plan; \107\ and most relevant to the
discussion herein, the operator of an investment company registered as
such under the Investment Company Act of 1940, as amended (ICA),\108\
with respect to the operated RIC.\109\
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\101\ 17 CFR 4.5(a) and (b).
\102\ 17 CFR 4.5(a)(2).
\103\ 17 CFR 4.5(b)(2).
\104\ 17 CFR 4.5(a)(3).
\105\ 17 CFR 4.5(b)(3).
\106\ 17 CFR 4.5(a)(4).
\107\ 17 CFR 4.5(b)(4).
\108\ 15 U.S.C. 80a-1, et seq.
\109\ 17 CFR 4.5(a)(1) and (b)(1). As discussed, infra, Sec.
4.5 lists the RIC as both the excluded person and the qualifying
entity. Given that the Commission has previously determined that the
RIC's investment adviser is the appropriate person to serve as the
CPO of a RIC for regulatory purposes, the Commission is proposing
herein to amend Sec. 4.5(a)(1) to designate the investment adviser
as the excluded entity. See CPO CTA Final Rule, 77 FR at 11259.
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2. BDCs: Exempt Investment Companies Restricted in Their Use of
Commodity Interests
BDCs are closed-end companies subject to regulation by the SEC
under the ICA. Although BDCs meet the definition of an ``investment
company'' under ICA section 3,\110\ they are exempt from investment
company registration by virtue of the filing of an election under
section 54 of the ICA to be subject to various provisions of that
act.\111\ Despite not being registered as such, BDCs do operate in a
manner similar to closed-end RICs and are subject to many of the same
operational requirements of the ICA.\112\ Most BDCs have external
advisers, which generally must be registered with the SEC as investment
advisers under the IA Act.\113\ BDCs, like RICs, are subject to
periodic examination by the SEC. Further, BDCs must either have a class
of equity securities that is registered under, or filed a registration
statement for a class of equity securities pursuant to, the Securities
Exchange Act of 1934, as amended,\114\ which, in turn, requires filing
with the SEC: Annual reports on Form 10-K,\115\ quarterly reports on
Form 10-Q,\116\ current reports on Form 8-K,\117\ and proxy
solicitation statements in connection with annual stockholder
meetings.\118\ Additionally, almost all BDCs are listed for trading on
national securities exchanges, and thus, are subject to exchange rules
governing listed companies.\119\ BDCs are also subject to certain
regulations and corporate governance guidelines under the Sarbanes-
Oxley Act of 2002.\120\
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\110\ 15 U.S.C. 80a-3.
\111\ Id. at 80a-53. See id. at 80a-6(f).
\112\ See, e.g., 15 U.S.C. 80a-18 (providing asset coverage
requirements among others subject to certain limitations); 15 U.S.C.
80a-61 (making section 18 of the ICA applicable to BDCs with certain
modifications).
\113\ 15 U.S.C. 80b-1, et seq.
\114\ 15 U.S.C. 78a et seq.
\115\ 17 CFR 249.310.
\116\ 17 CFR 249.308a.
\117\ 17 CFR 249.308.
\118\ 17 CFR 240.14a-4.
\119\ See, e.g., NYSE Listed Company Manual, available at http://wallstreet.cch.com/LCM/ (last retrieved Apr. 25, 2018).
\120\ Public Law 107-204, 116 Stat. 745 (July 30, 2002)
(codified in U.S.C. Titles 15, 18, 28, and 29).
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BDCs are primarily engaged in investing in, and providing
managerial assistance to, operating companies.\121\ Specifically, BDCs
are required to invest at least 70% of their assets in ``eligible
portfolio companies,'' \122\ which are generally defined as small- or
mid-sized U.S. companies that have no outstanding listed
securities.\123\ BDCs typically limit their use of commodity interests
to interest rate and currency swaps, with some limited use of credit
default swaps and other commodity interests.\124\ Because BDCs
primarily
[[Page 52912]]
invest in private companies to which they are required to offer
managerial assistance, BDCs generally use commodity interests for
purposes of hedging, reducing, or otherwise managing investment and
commercial risks of the operating companies in which they invest.
Section 61 of the ICA \125\ applies, among other things, the
limitations on the issuance of ``senior securities'' of section 18 of
the ICA to BDCs,\126\ subject to certain modifications to the
limitation on multiple classes on senior security indebtedness and to
the asset coverage requirements. BDCs, like registered closed-end
funds, may issue senior securities that either represent indebtedness
or stock (e.g., preferred stock), subject to the limitations of ICA
section 61.\127\
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\121\ 15 U.S.C. 80a-2(a)(48).
\122\ Id. See also 15 U.S.C. 80a-54(a).
\123\ 15 U.S.C. 80a-2(a)(46) (defining ``eligible portfolio
company''). See 17 CFR 270.2a-46 (providing additional criteria
regarding ``eligible portfolio companies'').
\124\ See Use of Derivatives by Registered Investment Companies,
U.S. Securities and Exchange Commission, Division of Economic Risk
and Analysis, available at https://www.sec.gov/files/derivatives12-2015.pdf (last retrieved July 31, 2018). Staff in the SEC's Division
of Economic Risk and Analysis pulled a random sample of investment
companies, including BDCs, to examine the use of derivatives by such
companies. Within the sampled BDCs, none used derivatives, which
appears to be consistent with assertions from members of industry
that the usage of derivatives by BDCs is generally very limited. Id.
\125\ 15 U.S.C. 80a-60.
\126\ Id. at 80a-18.
\127\ Id. at 80a-18(a)(2), 80a-60.
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3. CFTC Staff Letter 12-40 and the Proposed Amendments
In 2012, DSIO staff received correspondence requesting
interpretative guidance from the Division regarding BDCs \128\ and the
availability of the exclusion from the CPO definition in Sec.
4.5.\129\ DSIO understood that the request was prompted generally by
the inclusion of swaps within the jurisdiction of the Commission
pursuant to the Dodd-Frank Act, as well as the specific addition of
``swaps'' to the list of commodity interests referenced within the
CEA's definitions of ``commodity pool'' and CPO.\130\
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\128\ BDCs are subject to regulation under the ICA, but are not
RICs.
\129\ 17 CFR 4.5.
\130\ 7 U.S.C. 1a(10) and 1a(11).
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Following internal deliberations and further discussions with the
requester, the Division determined to issue no-action relief, rather
than interpretative guidance, which was accomplished on December 4,
2012, through the publication of CFTC Staff Letter 12-40 (BDC No-Action
Letter).\131\ In the BDC No-Action Letter, DSIO recited numerous ways
in which BDCs are regulated in a manner similar to RICs under the
ICA.\132\ Pursuant to the terms of that letter, an entity claiming
relief thereunder is subject to the following criteria: (1) The entity
must have elected to be treated as a BDC under section 54 of the ICA
\133\ and will remain regulated as such, and (2) the entity has not
marketed and will not market participations in the BDC to the public as
investment in a commodity pool, or otherwise as an investment in a
vehicle for the trading of commodity interests.\134\ Additionally, the
claimant must represent that it limits its use of commodity interests
in the BDC consistent with the trading thresholds in Sec.
4.5(c)(2)(iii)(A)-(B).\135\ Finally, to claim the relief provided, an
entity must file via email to DSIO the requisite notice, which is then
electronically forwarded by CFTC staff to the NFA for inclusion in its
public database, the Background Affiliation Status Information Center
(BASIC).\136\
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\131\ CFTC Staff Letter 12-40, available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/12-40.pdf (Dec. 4, 2012) (last retrieved July 31, 2018).
\132\ Id.
\133\ 15 U.S.C. 80a-53.
\134\ BDC No-Action Letter, at 3.
\135\ Specifically, the BDC must represent that it uses
commodity interests solely for bona fide hedging purposes within the
meaning and intent of Sec. Sec. 1.3(z)(1) and 151.5 (17 CFR 1.3 and
151.5) (2012)); provided, however, that in addition, with respect to
positions in commodity futures or commodity option contracts, or
swaps which do not come within the meaning and intent of Sec. Sec.
1.3(z)(1) and 151.5, as those provisions existed in 2012, the
aggregate initial margin and premiums required to establish such
positions does not exceed five percent of the liquidation value of
the BDC's portfolio, after taking into account unrealized profits
and unrealized losses on any such contracts it has entered into;
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 may be
excluded in computing such five percent; or the aggregate net
notional value of commodity futures, commodity options contracts, or
swaps positions not used solely for bona fide hedging purposes
within the meaning and intent of Sec. Sec. 1.3 and 151.5 (17 CFR
1.3 and 151.5 (2012)), determined at the time the most recent
position was established, does not exceed 100 percent of the
liquidation value of the BDC's portfolio, after taking into account
unrealized profits and losses on any such position it has entered
into.
On September 28, 2012, the U.S. District Court for the District
of Columbia vacated Sec. Sec. 1.3(z)(1) and 151.5 as part of the
total vacation of the Commission's position limits rule. See Int'l
Swaps & Derivatives Ass'n v. CFTC, 887 F.Supp.2d 259 (D.D.C. Sept.
28, 2012). This created some legal uncertainty as to the effect of
the incorporation of those regulations in the CFTC's amendments to
Sec. 4.5. On October 12, 2012, DSIO issued interpretative guidance
providing that Sec. 4.5(c)(2)(iii)(A) and (B) continue to
incorporate the substance of vacated Sec. Sec. 1.3(z)(1) and 151.5
for purposes of those provisions only. See CFTC Staff Letter 12-19
(Oct. 12, 2012), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/12-19.pdf (last retrieved
July 31, 2018). The Commission is not proposing to remove the cross-
references to Sec. Sec. 1.3(z)(1) and 151.5 (2012) at this time,
but instead, intends to consider amendments to the ``bona fide
hedging'' definition in Sec. 4.5, when it adopts final rules
replacing the vacated regulatory provisions.
\136\ NFA's BASIC website can be accessed at https://www.nfa.futures.org/basicnet.
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Since the issuance of CFTC Staff Letter 12-40, the Commission has
received 55 claims of relief. Division staff issued the BDC No-Action
Letter because BDCs are subject to oversight by the SEC that is
comparable to the regulation of RICs, and because BDCs use commodity
interests primarily for bona fide hedging purposes. For these same
reasons, the Commission has determined to exercise its authority to
propose to amend Sec. 4.5 to provide IAs of BDCs with comparable
exclusionary relief.
F. Relief From Sec. 4.27
1. History
The Commission adopted Sec. 4.27 on November 16, 2011,\137\ and
subsequently amended it to implement Forms CPO-PQR and CTA-PR on
February 24, 2012.\138\ Section 4.27 generally requires each CPO that
is registered or required to be registered as such to provide
information regarding its operations as a CPO and each commodity pool
that it operates.\139\ It also requires each CTA that is registered or
required to be registered as such to provide information, including
financial information, regarding its operations and the pool assets
that it directs.\140\ The data collected is intended to, among other
things, facilitate monitoring of systemically important impacts to the
financial markets, as required by the Commission's obligations as part
of the Financial Stability Oversight Council (FSOC).\141\
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\137\ Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128 (Nov. 16, 2011).
\138\ CPO CTA Final Rule, 77 FR at 11252.
\139\ 17 CFR part 4, appendix A.
\140\ 17 CFR part 4, appendix C.
\141\ CPO CTA Final Rule, 77 FR at 11267.
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2. Reporting Person Definition
The entities required to file a Form CPO-PQR for CPOs, or a Form
CTA-PR for CTAs, are identified by the ``reporting person'' definition
(Reporting Person) contained in Sec. 4.27(b).\142\ Pursuant to that
definition, Reporting Persons include CPOs and CTAs that are registered
or required to be registered under the CEA and the Commission's
regulations thereunder.\143\ After several filing cycles for both
forms, the data revealed a substantial number of Reporting Persons that
were filing Forms CPO-PQR and CTA-PR, but that had no other obligations
under part 4 of the Commission's regulations. Specifically, the CPOs
were operating pursuant to an exclusion or exemption from registration
for all pools and accounts that they operated and/or directed, and the
CTAs did not direct any client accounts, yet these CPOs and CTAs
elected to maintain an active
[[Page 52913]]
registration with the Commission. This registration was sufficient to
qualify the entity as a Reporting Person under Sec. 4.27(b), and
consequently, it required these entities to file either a Form CPO-PQR
or Form CTA-PR, as applicable. However, because these Reporting Persons
did not operate pools or direct any accounts, or operated only exempt
pools that are not subject to reporting requirements under Sec. 4.27,
their Form CPO-PQR and Form CTA-PR filings did not contain meaningful
information to assess systemic risk.
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\142\ 17 CFR 4.27(b).
\143\ Id.
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3. Current Commission Staff Letter Relief
To address this issue, DSIO issued several staff letters that
provided exemptive relief from the requirement to file either a Form
CPO-PQR or CTA-PR, for CPOs \144\ and CTAs \145\ that do not otherwise
have reporting obligations under part 4 of the Commission's
regulations. In so doing, DSIO believed that the data eliminated from
the dataset ``provide limited additional information . . . beyond that
already available to the Commission as part of the registration process
and the [person's] ongoing obligations as a registrant.'' \146\
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\144\ CFTC Staff Letter 14-115 (Sept. 8, 2014), available at
https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-115.pdf (last retrieved July 31, 2018) (providing relief
from filing a Form CPO-PQR to CPOs that optionally registered as
such with the Commission, but operated only pools for which they
were excluded from the definition of ``commodity pool operator,''
and/or pursuant to a claim of exemption for registration with
respect to the operated pools).
\145\ CFTC Staff Letter 15-47 (July 21, 2015), available at
https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/15-47.pdf (last retrieved July 31. 2018) (providing similar
relief from filing a Form CTA-PR to CTAs who are registered as such
with the Commission, but do not direct trading for any commodity
interest accounts).
\146\ CFTC Staff Letter 14-115 at 2. See also CFTC Staff Letter
15-47 at 2 (``The same rationale applies in the instant scenario--
requiring a registered CTA that does not direct any trading of
commodity interest accounts to file a Form CTA-PR would similarly
provide limited additional information regarding that CTA.'').
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4. Proposing Amendments Consistent With Current Staff Letter Relief
The Commission is proposing today to amend Sec. 4.27 in a manner
consistent with the exemptive relief currently made available in CFTC
Staff Letters 14-115 and 15-47, such that CPOs that operate only pools
for which they are otherwise excluded from the CPO definition or exempt
from CPO registration are not required to file a Form CPO-PQR, and CTAs
that do not direct client accounts are not required to file a Form CTA-
PR.\147\ As such, the Commission proposes to exclude these CPOs and
CTAs from the Reporting Person definition in Sec. 4.27(b).
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\147\ It should be noted that similar to a discussion in CFTC
Staff Letter 14-115, where a CPO is registered, but operates no
pools, it is not required to file a Form CPO-PQR, as the terms of
that form only require completion if the CPO also operates at least
one pool. See CFTC Staff Letter 14-115, at 2.
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5. Expanding Relief From Sec. 4.27 to Additional Categories of CTAs
Section 4.14(a)(4) provides that a person is exempt from
registering as a CTA, if that person is registered under the CEA and
the Commission's regulations as a CPO, and the person's commodity
trading advice is directed solely to the commodity pool or pools for
which it is registered as a CPO.\148\ Under Sec. 4.14(a)(4), the
person in question is registered as the CPO of a pool, and therefore,
already has an obligation to file a Form CPO-PQR with respect to that
pool, which requires the reporting of more information when compared to
Form CTA-PR.\149\ As such, the value of any data that would be
collected by requiring that same Reporting Person to also file a Form
CTA-PR is significantly outweighed by the burden to that entity of an
extra filing, as well as any inefficiency resulting from the collecting
and processing of duplicative data by NFA and Commission staff. As
such, the Commission today also proposes to exclude from the Reporting
Person definition under Sec. 4.27(b) those CTAs who comply with the
terms of the exemption from registration set forth in Sec. 4.14(a)(4),
and who limit their activities to those described by that exemption,
but nevertheless elect to register as CTAs.
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\148\ 17 CFR 4.14(a)(4).
\149\ See 17 CFR part 4, appendix A and appendix C.
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Further, consistent with the foregoing, the Commission also
proposes to exclude from the Reporting Person definition any CTA that
directs only the accounts of a pool that it operates as an exempt CPO.
Specifically, Sec. 4.14(a)(5) exempts from CTA registration any person
that is exempt from CPO registration, if that person's commodity
trading advice is directed solely to the pool for which it is exempt
from CPO registration.\150\ Consistent with the relief provided in CFTC
Staff Letter 14-115, the exempt CPO of the pool would not be required
to report on a Form CPO-PQR.\151\ It is therefore incongruent to
require the same person to report on Form CTA-PR with respect to the
operation of a pool for which it is not required to file a Form CPO-
PQR. Accordingly, the Commission proposes to remove the Sec. 4.27
filing obligation for such CTAs by excluding from the Reporting Person
definition any CTA that directs only the accounts of a pool for which
it is exempt from registration as a CPO, and for which the CTA complies
with the terms of a registration exemption under Sec. 4.14(a)(5), but
nevertheless elects to register as a CTA.
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\150\ 17 CFR 4.14(a)(5).
\151\ See CFTC Staff Letter 14-115 at 2.
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II. Proposed Regulations
A. Providing CPOs of Offshore Pools With Registration and Recordkeeping
Relief Consistent With Advisory 18-96
1. New Sec. 4.13(a)(4): The 18-96 Exemption
The Commission is proposing to amend Sec. 4.13 by adding a new
exemption from CPO registration in the currently reserved paragraph
(a)(4) for qualifying persons operating commodity pools outside of the
United States. The 18-96 Exemption would incorporate the vast majority
of the requirements in the Advisory (with the exception of requiring
CPO registration) and would be limited in application to each pool for
which the person claims exemption from registration under paragraph
(a)(4).
Proposed Sec. 4.13(a)(4)(i) through (vi) explain the substantive
conditions that must be met to be eligible for the exemption. Because
the 18-96 Exemption is based on the location of the pool and/or its
participants, the exemption requirements, much like the Advisory, would
focus on the location or base of activities for the pool, including the
location and source of any capital invested in the exempt offshore
pool. The 18-96 Exemption would include the following parameters: (i)
The pool is, and will remain, organized and operated outside of the
United States; (ii) the pool will not hold meetings or conduct
administrative activities within the United States; (iii) no
shareholder of or other participant in the pool is or will be a U.S.
person; (iv) the pool will not receive, hold or invest any capital
directly or indirectly contributed from sources within the United
States; and (v) the person, the pool, and any person affiliated
therewith will not undertake any marketing activity for the purpose, or
that could reasonably be expected to have the effect, of soliciting
participation in the pool from U.S. persons.
Consistent with its past prioritization of resources, the
Commission intends that the requirements of the 18-96 Exemption would
limit that exemption's availability to those persons operating
commodity pools offshore, soliciting, accepting funds from, and
managing assets from solely persons located
[[Page 52914]]
outside the United States, and otherwise having a very limited nexus
with the Commission's jurisdiction and regulated markets. By virtue of
providing a CPO registration exemption, the 18-96 Exemption, once
claimed by a qualifying CPO for its offshore pool(s),would result in
the claiming CPO receiving relief from the vast majority of significant
compliance requirements in part 4, including Sec. 4.27, which requires
the filing of Form CPO-PQR with respect to the directed assets of each
commodity pool under the advisement of any CPO that is registered or
required to be registered, including any CPO currently claiming
Advisory 18-96.
2. New Sec. 4.13(a)(6): The Proposed Prohibition on Statutory
Disqualifications
The Commission also proposes to amend Sec. 4.13(a) by adding a new
paragraph (a)(6). Proposed Sec. 4.13(a)(6) would require any person
claiming an exemption under paragraphs (a)(1) through (a)(5) of Sec.
4.13 to represent that neither the person nor any of its principals is
subject to any statutory disqualification under sections 8a(2) or 8a(3)
of the Act, unless such disqualification arises from a matter which was
previously disclosed in connection with a previous application, if such
registration was granted, or which was disclosed more than thirty days
prior to the claim of this exemption. As discussed above, the
Commission believes preliminarily that this proposed amendment would
provide additional customer protection because statutorily
disqualified, unregisterable persons would no longer be permitted to
claim the CPO exemptions under Sec. 4.13(a)(1) through (a)(5).
3. Amendments to Sec. 4.13: Claiming the Proposed 18-96 Exemption
The Commission is proposing to amend Sec. 4.13(b) to incorporate
the 18-96 Exemption into the existing timing and claims process for
other CPO exemptions, which the Commission preliminarily believes
establishes a reasonable timing requirement for such claims. Once
adopted, this provision would apply to persons claiming the 18-96
Exemption for newly established offshore commodity pools. If this
rulemaking is adopted, the Commission intends to permit all existing
claimants under Advisory 18-96 to claim the 18-96 Exemption.
As proposed, Sec. 4.13(b)(2)(i) would require a person claiming
the 18-96 Exemption to do so within 30 days of engaging in CPO
activities that would make relief under Sec. 3.10(c)(3)(i) unavailable
to that person. Until that point in time, the person could freely rely
on Sec. 3.10(c)(3)(i), which is self-executing; such reliance would no
longer be permitted, however, once the person is required to register
or claim a CPO exemption with respect to a commodity pool that is
marketed to U.S. persons, that contains funds belonging to U.S.
persons, or that is otherwise operated in the U.S., its territories, or
possessions. Therefore, proposed Sec. 4.13(b)(2)(i) would require a
person to claim the 18-96 Exemption within 30 days of such an
occurrence, which the Commission preliminarily believes is sufficient
time for a person to achieve compliance with the terms of the 18-96
Exemption.
4. Making the 18-96 Exemption Available on a Pool-by-Pool Basis
It is crucial to the proper functioning of the 18-96 Exemption that
it be available on a pool-by-pool basis. This feature would permit
claiming CPOs to be exempt with respect to their qualifying offshore
commodity pools, while permitting them to maintain CPO registration for
any commodity pools engaged in activities requiring such registration,
i.e., the CPO has solicited or accepted funds from U.S. persons for
investment in the commodity pool. This characteristic would effectively
differentiate the 18-96 Exemption from the relief currently provided
under both Advisory 18-96 and Sec. 3.10(c)(3)(i). Therefore, the
Commission proposes to adopt in Sec. 4.13 a new paragraph (e)(3),
which would establish the 18-96 Exemption as clearly available on a
pool-by-pool basis. Specifically, the Commission proposes to add Sec.
4.13(e)(3), which would permit a CPO to claim the 18-96 Exemption with
respect to qualifying offshore pools and to simultaneously register as
a CPO with respect to other pools that require registration or are
otherwise not exempt pools, and also to amend Sec. 4.13(e)(1) to note
the addition of new Sec. 4.13(e)(3).
5. Other Amendments to Miscellaneous Provisions in Sec. 4.13
Without any additional amendment, current Sec. 4.13(a)(6)
(proposed to be renumbered as paragraph (a)(7)) contains a reference to
Sec. 4.13(a)(4), where the 18-96 Exemption is proposed to be housed.
That reference is a holdover from the original exemption in Sec.
4.13(a)(4) rescinded by the Commission in 2012, and would require any
person claiming the 18-96 Exemption to furnish in written communication
physically delivered or delivered through electronic transmission to
each prospective participant in the pool: (A) A statement that the
person is exempt from registration with the Commission as a commodity
pool operator, and that therefore, unlike a registered commodity pool
operator, it is not required to deliver a Disclosure Document and a
certified annual report to participants in the pool; and (B) a
description of the criteria pursuant to which it qualifies for such
exemption from registration.\152\ Section 4.13(a)(6)(ii) (proposed
paragraph (a)(7)(ii)) would also require a person claiming any
exemption thereunder to make these disclosures by no later than the
time it delivers a subscription agreement for the pool to a prospective
participant in the pool.
---------------------------------------------------------------------------
\152\ 17 CFR 4.13(a)(6).
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Because disclosure documents and certified annual reports are two
of the most significant compliance burdens in part 4 of the
Commission's regulations, it is critical that prospective participants
be informed as to which, if any, customer protections apply to them and
their investment, and as to what information they are entitled to
receive from the CPO of their pool. Nonetheless, the Commission
understands that currently, as proposed, only non-U.S. persons would be
the participants in qualifying pools operated by persons claiming the
18-96 Exemption. The Commission notes that such disclosures generally
would be more informative or helpful to U.S. person investors in exempt
pools, but inquires whether non-U.S. persons would expect or otherwise
benefit from such disclosures, such that the reference to Sec.
4.13(a)(4) should be retained.\153\ The Commission specifically
requests comment on this issue below.
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\153\ Indeed, one of several comments received on the
Commission's 2006 proposal to rescind Advisory 18-96 stated that,
``it is unnecessary and confusing to the non-U.S. domiciled
investors to explain why the sponsor is not registered with a U.S.
futures regulator, and recommended that Advisory 18-96 be retained
as an option for CPOs,'' because of the required disclosures in
Sec. 4.13. See 72 FR at 1661.
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The Commission is also amending Sec. 4.13(a)(3)(iii)(E) to remove
a cross-reference to rescinded Sec. 4.13(a)(4) and replace it with
``non-U.S. persons.'' This amendment would effectively adopt the
interpretation in CFTC Staff Letter 04-13, discussed supra, by
permitting non-U.S. person participants, regardless of their financial
sophistication, to invest in Sec. 4.13(a)(3) exempt pools.
[[Page 52915]]
6. Preserving Advisory 18-96's Recordkeeping Location Relief With
Amendments to Sec. 4.23 and Certain Technical Amendments
As discussed above, the Commission has also determined to preserve
Advisory 18-96's relief from the generally applicable recordkeeping
location requirement in Sec. 4.23. Specifically, the Commission is
proposing to amend Sec. 4.23 by adding a new paragraph (c), such that
registered onshore CPOs operating offshore commodity pools may seek
relief from the requirement in that regulation that all books and
records concerning the pool and CPO be kept at the CPO's main business
office, provided that the person meets the requirements thereunder
incorporated from the Advisory. Proposed Sec. 4.23(c) contains
exemptive relief for this specific type of CPO with regard to the
offshore commodity pool(s) it operates, and contains the vast majority
of the requirements for claiming the equivalent relief under Advisory
18-96. Because Sec. 4.23 applies to CPOs registered or required to be
registered, the Commission preliminarily believes it is not necessary
to incorporate the prohibition on statutory disqualifications in the
requirements for claiming this proposed exemptive relief.
The Commission is also proposing a series of organizational, non-
substantive amendments to Sec. 4.23, which the Commission
preliminarily believes would clarify the existing recordkeeping
location requirement applicable to all CPOs registered or required to
be registered, would retain current exemptive relief provided by that
regulation, and overall, would make the regulation easier to read and
understand, even with the addition of the exemptive relief also being
proposed today. The Commission requests comment on whether these
proposed amendments effectively incorporate in Sec. 4.23 the
recordkeeping location requirement relief currently found in Advisory
18-96, and whether the proposed technical amendments improve or
otherwise alter that regulation or its application in any way.
B. Proposed Family Office Exemptions
Consistent with the CPO Family Office No-Action Letter, the
Commission proposes to adopt for qualifying Family Offices a new
regulatory exemption in Sec. 4.13(a)(8). New Sec. 4.13(a)(8) would
provide relief from registration equivalent to the CPO Family Office
No-Action letter, and the exemption's availability would be contingent
on the Family Office: (1) Meeting the requirements for being deemed a
Family Office pursuant to the SEC Family Office Exclusion in 17 CFR
275.202(a)(11)G-1; (2) restricting its investing and advisory
activities solely to Family Clients, as defined in the SEC Family
Office Exclusion; and (3) not engaging in the solicitation of persons
other than Family Clients permitted under the SEC Family Office
Exclusion. The prohibition against solicitation of non-Family Clients
ensures that the exempt CPO is limiting its activities to those
associated with the operation of a Family Office, as contemplated by
the SEC Family Office Exclusion, which the Commission preliminarily
believes would reduce its regulatory interest in such investment
vehicles, when compared to other commodity pools.
As part of claiming exemptive relief under Sec. 4.13, each person
must file an annual notice under Sec. 4.13(b)(4) confirming that the
person remains exempt from registration. The Commission proposes to
maintain the annual notice filing for all persons claiming relief under
Sec. 4.13, including persons claiming the new proposed exemption for
Family Offices. The Commission believes that the notice requirement
should ensure at least an annual assessment of whether the CPO of the
Family Office remains eligible to rely upon the proposed exemption.
With respect to the CTA Family Office No-Action Letter, the
Commission also proposes adding a new CTA registration exemption at
Sec. 4.14(a)(11) consistent with that relief. The Commission
preliminarily believes that Family Offices that are also claiming
relief from CPO registration under proposed Sec. 4.13(a)(8) would
already be eligible for relief from CTA registration by virtue of the
existing exemption in Sec. 4.14(a)(5), which provides an exemption
from CTA registration for persons exempt from CPO registration that
only advise a pool or pools for which the person is so exempt.\154\
Therefore, the Commission is proposing to limit the new exemption in
Sec. 4.14(a)(11) to the advice provided to individual Family Clients.
Consistent with most exemptions available under Sec. 4.14, the
Commission is also proposing that the new exemption for qualifying CTAs
of Family Offices and Family Clients be self-executing, and is,
therefore, not proposing to require a notice filing from claimants
thereunder.
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\154\ 17 CFR 4.14(a)(5).
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C. Proposed Amendments Consistent With the JOBS Act Relief Letter
The Commission proposes today to add to part 4 regulatory
harmonization consistent with the JOBS Act Relief Letter, through
specific amendments to Sec. Sec. 4.7(b) and 4.13(a)(3). In Sec. 4.7,
the paragraph (b) introductory text currently sets forth the
eligibility requirements for CPOs claiming relief thereunder with
respect to certain pools they operate. The Commission proposes to
remove the reference to ``section 4(2) of [the 33] Act,'' to remove
references to the act of ``offering'' the Sec. 4.7 exempt pool, and to
delete the text, ``without marketing to the public.'' The Commission
intends that these amendments would permit CPOs claiming the exemptive
relief in Sec. 4.7(b) to engage in general solicitation or marketing,
if eligible to do so under their securities law exemptions.\155\
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\155\ The Commission notes that the amendments effectively give
claiming CPOs the option to rely on the JOBS Act relief. CPOs
continuing to offer traditional Regulation D issuances will still be
able to rely on Sec. 4.7(b) for relief as well.
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Additionally, the Commission is proposing to break out the eligible
claimants of the relief in Sec. 4.7(b) into two new paragraphs,
paragraphs (b)(1)(i) and (b)(1)(ii), and to renumber the remaining
subparagraphs of Sec. 4.7(b). These changes are intended to improve
the readability and clarity of that regulation. With today's proposed
amendments, the operative requirements remaining in Sec. 4.7(b) for
non-bank CPOs claiming relief thereunder are that: (1) The CPO must be
registered with respect to the exempt pool/offering; (2) participations
in the exempt pool must be exempt from the Securities Act and/or
offered and sold pursuant to Regulation D (under either Sec.
230.506(b) or 230.506(c)) or resold pursuant to Rule 144A, 17 CFR
230.144A, or offered pursuant to Regulation S; \156\ (3) the
participations must be sold solely to QEPs; and (4) the registered CPO
must file the required notice and otherwise comply with the
requirements in Sec. 4.7(d) \157\ in operating the exempt pool. The
Commission preliminarily believes that the amendments, as proposed,
would achieve its goal of permitting commodity pools operated by CPOs
claiming relief under Sec. 4.7(b) to avail themselves of the JOBS Act
relief adopted by the SEC, while retaining the other requirements
currently set forth in that regulation.
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\156\ 17 CFR 230.901-230.904.
\157\ 17 CFR 4.7(d).
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The Commission is also proposing similar amendments to the
registration exemption provided to eligible CPOs in Sec. 4.13(a)(3).
In Sec. 4.13(a)(3)(i), the Commission proposes to delete the language,
``such interests are offered and sold without marketing to the public
in the United States,'' and to replace it with a conditional statement
[[Page 52916]]
incorporating Regulation D and Rule 144A by reference. Consequently,
the proposed amendments to Sec. 4.13(a)(3)(i) would require the
interests to be exempt from registration under the 33 Act, and to the
extent those interests are marketed and advertised in the U.S., the
amendments would also require those interests only be so marketed or
advertised in compliance with the provisions of Regulation D or of Rule
144A, as amended by the JOBS Act. Consistent with the proposed
amendments to Sec. 4.7(b) discussed above, the Commission
preliminarily believes that the amendments, as proposed, would achieve
its goal of permitting CPOs claiming relief under Sec. 4.13(a)(3) to
avail themselves of the JOBS Act relief adopted by the SEC with respect
to those exempt commodity pools, while retaining the other requirements
currently set forth under that section.
D. Proposed BDC Exclusion
The Commission proposes to amend Sec. 4.5 to include investment
advisers (as defined above, IAs) of BDCs under paragraph (a) as a type
of entity that shall be excluded from the CPO definition with respect
to the operation of a ``qualifying entity,'' \158\ and to include BDCs
as a type of ``qualifying entity'' under paragraph (b), for which an
exclusion may be so claimed.\159\ Because BDCs are similarly situated
to RICs, the Commission preliminarily believes that IAs of BDCs should
be subject to the same operational requirements as CPOs of RICs, an
approach consistent with that taken by Commission staff through the BDC
No-Action Letter. Because the CPOs of both RICs and BDCs would be their
IAs, the Commission also proposes revising Sec. 4.5(a)(1) \160\ to
refer to the registered IA, rather than the investment company itself,
as the entity claiming the CPO exclusion. Because of the similarities
between BDCs and RICs, the Commission preliminarily believes IAs of
BDCs should be required to reaffirm their Sec. 4.5 exclusion claim on
an annual basis, which is consistent with the existing requirements for
IAs of RICs under Sec. 4.5(c)(5).\161\ Finally, the Commission
concludes that the existing language in Sec. 4.6 should be sufficient
to provide exclusionary relief for IAs of BDCs with respect to the CTA
definition without additional proposed amendments.\162\
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\158\ 17 CFR 4.5(a).
\159\ 17 CFR 4.5(b).
\160\ 17 CFR 4.5(a)(1).
\161\ 17 CFR 4.5(c)(5).
\162\ 17 CFR 4.6. Section 4.6 provides an exclusion from the CTA
definition to, among others, a person excluded from the CPO
definition by Sec. 4.5, whose commodity interest advisory
activities are solely incidental to its operation of those trading
vehicles for which Sec. 4.5 provides relief, i.e., in this case, an
IA of a BDC. Id.
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E. Sec. 4.27 Relief
The Commission proposes to amend Sec. 4.27 to exclude certain
registered CPOs and CTAs from the definition of ``reporting person'' in
Sec. 4.27(b). Specifically, the Commission proposes to place the
definition of ``reporting person'' in a new paragraph (b)(1) and to add
a new paragraph Sec. 4.27(b)(2) that would limit the application of
the ``reporting person'' definition, such that the registered CPOs and
CTAs discussed above would no longer be required to report on Forms
CPO-PQR and CTA-PR, as applicable. The Commission is also proposing to
revise the title of Sec. 4.27 to more accurately reflect the substance
of the section.
III. Request for Comments
The Commission requests comment on all aspects of the Proposal.
Additionally, the Commission would appreciate consideration of the
following specific questions.
A. Advisory 18-96 and the Proposed 18-96 Exemption
1. Should CPOs claiming the 18-96 Exemption be required to disclose
the exemption to participants in their offshore commodity pools? Would
such disclosure be meaningful to offshore investors? If the Commission
were to require such disclosure, what timing requirement should be
established? Should it be identical to, or different from, the timing
requirement proposed in the NPRM for claiming the 18-96 Exemption?
2. Do the proposed amendments to Sec. 4.13(e) clearly establish
that the 18-96 Exemption is available to CPOs for each individual
commodity pool meeting the terms therein, without regard to the
claimant's registration status? If not, how could the amendments be
improved?
3. The Commission also requests comment on the prohibition on
statutory disqualifications proposed in Sec. 4.13 generally, the
impact of adopting this provision on industry participants and
currently exempt CPOs, and also, on what, if any, other statutory
disqualifications should be permissible for exempt CPOs and their
principals. In particular, comments should address any or all of the
following questions: What are the concerns and benefits associated with
the expansion of the prohibition on statutory disqualifications to the
CPO registration exemptions set forth in Sec. 4.13(a)(1), (a)(2),
(a)(3), and (a)(5), or proposed to be set forth in Sec. 4.13(a)(4)? Do
the limited exceptions that would permit certain statutory
disqualifications successfully address any unintended consequences of
adding the prohibition to Sec. 4.13, while still providing a base
level of customer protection by preventing statutorily disqualified
individuals from legally operating exempt commodity pools? Generally,
how should the Commission handle the implementation of the statutory
disqualification prohibition? Specifically, how should the prohibition
apply to current claimants under Sec. 4.13? How much time should the
Commission allow for filing updated exemption claims subject to the
prohibition? How much time should the Commission allow for an exempt
CPO to replace statutorily disqualified principals, in order to
maintain eligibility for a Sec. 4.13 exemption?
4. When a qualifying CPO is transitioning from reliance upon Sec.
3.10(c)(3)(i) to the 18-96 Exemption, is 30 days sufficient time in
which to claim the 18-96 Exemption for qualifying offshore pools?
Generally, please provide comment on whether the interaction between
Sec. 3.10(c)(3)(i) and the 18-96 Exemption, as proposed, is
understood.
5. Is the language in proposed Sec. 4.13(e)(3) effective to make
the 18-96 Exemption available on a pool-by-pool basis, such that a
claim for the 18-96 Exemption would be able to co-exist with a
simultaneous CPO registration or even other exemption claims? If not,
why not?
6. Should the Commission adopt all of the proposed requirements for
the relief under proposed Sec. 4.23(c)? Which requirements could be
dropped? Why? Are there additional or different conditions to this
relief that the Commission should consider adopting?
B. Proposed Family Office Exemptions
7. Should CPOs of Family Offices organized as commodity pools be
required to annually recertify their eligibility for the proposed
exemption under Sec. 4.13(a)(8)? What are the costs and burdens that
an annual notice requirement would impose?
8. Information on BASIC is provided to the public as a means of
ensuring that basic information regarding a person's registration
status with the Commission is readily available. Given that the persons
claiming the proposed CPO exemption for the operation of Family Offices
are proposed to be prohibited from soliciting non-Family Client
participants, should notices filed by
[[Page 52917]]
Family Offices claiming the proposed CPO exemption in Sec. 4.13(a)(8)
be included in NFA's public BASIC database?
9. Does the proposed bifurcation of the CTA relief provided to (a)
CTAs of Family Offices organized as commodity pools, and (b) CTAs of
individual Family Clients clearly and effectively provide relief from
registration for CTAs that advise Family Offices in their capacity as
an exempt CPO and/or as a CTA to individual Family Clients? Is there a
clearer or more advantageous way to effectuate such relief?
10. Should a notice be required in order to claim the proposed
exemption in Sec. 4.14(a)(11) for CTAs of Family Clients? If so,
should such CTAs be required to recertify eligibility for such
exemption on an annual, or longer term, basis? What are the costs and
burdens that such an annual notice requirement would impose on those
CTAs?
C. Proposed Amendments Consistent With the JOBS Act Relief Letter
11. Do the amendments to Sec. Sec. 4.7(b) and 4.13(a)(3)
effectively incorporate in 17 CFR part 4 the general marketing and
solicitation permitted by the JOBS Act, consistent with the JOBS Act
Relief Letter? Are there additional amendments the Commission should
consider that would ensure this relief is completely added to the part
4 regulatory regime?
D. Proposed Adoption and Expansion of Exemptive Letter Relief From
Sec. 4.27 Filings
12. Are there any additional classes of registered CPOs or CTAs
that should be excluded from the definition of ``Reporting Person'' in
Sec. 4.27(b)? If yes, please identify the class or classes, and
explain why they should be so excluded.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires Federal agencies, in
promulgating regulations, 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 economic impact on those entities. Each Federal agency is
required to conduct an initial and final regulatory flexibility
analysis for each rule of general applicability for which the agency
issues a general notice of proposed rulemaking.\163\
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\163\ 5 U.S.C. 601 et seq.
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The regulatory amendments proposed by the Commission in this
release would affect only persons registered or required to be
registered as CPOs and CTAs, persons claiming exemptions from
registration as such, and certain persons excluded from the CPO
definition. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on such entities in accordance with
the requirements of the RFA.\164\ With respect to CPOs, the Commission
previously has determined that a CPO is a small entity for purposes of
the RFA, if it meets the criteria for an exemption from registration
under Sec. 4.13(a)(2).\165\ Because these proposed regulations
generally apply to persons registered or required to be registered as
CPOs with the Commission, and/or provide relief to qualifying persons
from registration as such, as well as from related compliance burdens,
the RFA is not applicable to this Proposal with respect to CPOs.
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\164\ See, e.g., Policy Statement and Establishment of
Definitions of ``Small Entities'' for Purposes of the Regulatory
Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982).
\165\ Id. at 18619-20. Section 4.13(a)(2) exempts a person from
registration as a CPO when: (1) None of the pools operated by that
person has more than 15 participants at any time, and (2) when
excluding certain sources of funding, the total gross capital
contributions the person receives for units of participation in all
of the pools it operates or intends to operate do not, in the
aggregate, exceed $400,000. See 17 CFR 4.13(a)(2).
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Regarding CTAs, the Commission has previously considered whether
such registrants should be deemed small entities for purposes of the
RFA on a case-by-case basis, in the context of the particular
Commission regulation at issue.\166\ As certain of these registrants
may be small entities for purposes of the RFA, the Commission
considered whether this rulemaking would have a significant economic
impact on such registrants.
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\166\ See id. at 18620.
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The portions of this Proposal directly impacting CTAs propose a
registration exemption consistent with DSIO's CTA Family Office No-
Action Letter, as well as expanded exemptive relief from the Form CTA-
PR filing requirement in Sec. 4.27 for certain categories of CTAs.
These proposed amendments are not expected to impose any new burdens on
market participants or Commission registrants. Rather, to the extent
that this Proposal provides an exemption from the requirement to
register as a CTA or from the Form CTA-PR filing requirement in Sec.
4.27, the Commission preliminarily believes it is reasonable to infer
that such exemptions would be much less burdensome to those persons
than either CTA registration or the preparation and filing of Form CTA-
PR. In fact, the Commission has not proposed herein to require a notice
filing for either the proposed exemption for CTAs of Family Offices and
Family Clients, or the expanded relief proposed for certain CTAs under
Sec. 4.27.\167\ Consequently, the Commission does not expect small
entities to incur any additional costs as a result of the Proposal, as
applicable to CTAs.
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\167\ The Commission notes that it requests comment on whether
the Commission should adopt regulations requiring CPOs of Family
Offices to file a notice to claim the proposed exemption under Sec.
4.13(a)(8) and to annually affirm that claim, and/or requiring CTAs
of Family Offices to file a notice to claim the proposed exemption
in Sec. 4.14(a)(11). See supra pt. III, Request for Comments.
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Similarly, the Commission preliminarily does not believe that the
benefits associated with the exemption from CTA registration for CTAs
of Family Offices and Family Clients, or the expanded relief from the
requirement to prepare and file Form CTA-PR, will result in a
significant economic impact on small CTAs. The regulatory obligations
associated with CTA registration and compliance are not significantly
burdensome, being limited to the completion of a registration
application, the preparation and distribution of a disclosure document
(if required), the maintenance of certain books and records, and the
annual completion of Form CTA-PR, which consists of two questions with
several subparts. Although relief from these obligations is beneficial
to small CTAs, the Commission preliminarily believes that this does not
rise to the level of significant economic impact.
Therefore, the Commission has preliminarily determined that, to the
extent that the Proposal affects CTAs, it will not create a significant
economic impact on a substantial number of small entities. Accordingly,
the Chairman, on behalf of the Commission, hereby certifies pursuant to
5 U.S.C. 605(b) that these proposed amendments, 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 (PRA) imposes certain requirements on
Federal agencies in connection with their conducting or sponsoring any
collection of information as defined by the PRA.\168\ Under the PRA, an
agency may not conduct or sponsor, and a person is not required to
respond to, a
[[Page 52918]]
collection of information unless it displays a currently valid control
number from the Office of Management and Budget (OMB). This Proposal,
if adopted, would result in a collection of information within the
meaning of the PRA, as discussed below. The Commission is therefore
submitting this NPRM to OMB for review.
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\168\ See 44 U.S.C. 3501 et seq.
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The Proposal amends two collections of information for which the
Commission has previously received control numbers from OMB. The first
collection of information is, ``Rules Relating to the Operations and
Activities of Commodity Pool Operators and Commodity Trading Advisors
and to Monthly Reporting by Futures Commission Merchants, OMB control
number 3038-0005'' (Collection 3038-0005). Collection 3038-0005
primarily accounts for the burden associated with part 4 of the
Commission's regulations that concern compliance obligations generally
applicable to CPOs and CTAs, as well as certain enumerated exemptions
from registration as such and exclusions from those definitions, and
available relief from compliance with certain regulatory requirements.
The Commission is proposing to amend this collection to reflect the
notices proposed to be required to claim certain of the registration
exemptions and the CPO exclusion proposed herein, as well as the
expected reduction in the number of registered CPOs and CTAs filing
Forms CPO-PQR and CTA-PR, pursuant to the proposed revisions to Sec.
4.27.
The Commission also proposes to amend a second collection entitled,
``Part 3--Registration, OMB control number 3038-0023'' (Collection
3038-0023), which pertains to the registration of intermediaries
generally, to reduce the number of persons registering as CPOs and CTAs
as a result of the regulatory amendments proposed herein. Therefore,
the Commission is proposing adjustments to each of these collections
accordingly. The responses to these collections of information are
mandatory.
The collections of information in the Proposal would make available
to eligible persons: (1) The 18-96 Exemption in proposed Sec.
4.13(a)(4), which incorporates the majority of the relief provided by
Advisory 18-96, and which would exempt from CPO registration qualifying
CPOs with regard to their offshore pools; (2) the Advisory 18-96
recordkeeping location relief for qualifying, registered CPOs, which is
proposed to be added to Sec. 4.23; (3) the exemptions from CPO and CTA
registration for qualifying Family Offices in proposed Sec. Sec.
4.13(a)(8) and 4.14(a)(11); (4) the proposed expansion of the exclusion
in Sec. 4.5 for IAs of BDCs; and (5) the proposed exemptive relief
made available through amendments to the Reporting Person definition in
Sec. 4.27(b), such that qualifying CPOs and CTAs no longer have to
file Forms CPO-PQR or CTA-PR.
In each instance, eligible persons have the option to elect the
proposed registration or compliance exemption or exclusion if they are
so qualified, but have no obligation to do so. For this reason, except
to the extent that the Commission is amending Collection 3038-0005 for
PRA purposes to reflect these alternatives, and Collection 3038-0023 to
reduce the number of persons registering as CPOs or CTAs, today's
Proposal is not expected to impose any significant new burdens on CPOs
or CTAs. Rather, to the extent that the proposed amendments provide
registration exemptions or definitional exclusions, and/or alternatives
to comprehensive compliance with Commission regulations, through the
adoption of amendments consistent with existing exemptive and no-action
letter relief, it is reasonable for the Commission to infer that the
proposed amendments will generally prove to be less burdensome for
persons eligible to claim the proposed alternative relief.
2. Revisions to the Collections of Information
a. OMB Control Number 3038-0005
Collection 3038-0005 is currently in force with its control number
having been provided by OMB, and it was renewed recently on March 14,
2017.\169\ As stated above, Collection 3038-0005 governs responses made
pursuant to part 4 of the Commission's regulations, pertaining to the
operations of CPOs and CTAs. Generally, under Collection 3038-0005, the
estimated average time spent per response will not be altered; however,
the Commission has made adjustments, discussed below, to the collection
to account for new and/or lessened burdens expected under the NPRM due
to persons claiming the proposed registration exemptions or exclusion
and proposed relief.
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\169\ See Notice of Office of Management and Budget Action, OMB
Control No. 3038-0005, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201701-3038-005 (last retrieved July 31,
2018).
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For example, the Commission estimates that the number of persons
responding to the portion of the collection associated with Sec.
4.13(b)(1) (the requirement to file a claim for an exemption under that
section) will increase by at least the number of persons currently
claiming the CPO Family Office No-Action Letter, i.e., 200 CPOs.\170\
The Commission also preliminarily believes that there may be increased
notice filings under Sec. 4.13(b)(1), if the 18-96 Exemption is
adopted as proposed. Due to the flexibility of the proposed 18-96
Exemption as compared to Sec. 3.10(c)(3)(i), its adoption may cause
more CPOs to claim relief from registration on a pool-by-pool basis
through the 18-96 Exemption with respect to their offshore pools,
rather than with respect to their operations as a whole.
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\170\ No adjustments are proposed to be made to account for the
CTA Family Office No-Action Letter claims (100 claims received)
because the Commission has not proposed a filing requirement for
that new exemption. Rather, like the majority of the exemptions in
Sec. 4.14, the Commission has proposed to add that relief as a
self-executing exemption in Sec. 4.14, though it has requested
comment on this feature of the Proposal.
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Conversely, no adjustments need to be made to Collection 3038-0005
to account for the proposed JOBS Act amendments because persons relying
on the exemptive relief therein are, as a condition of relief,
currently required to claim an exemption under Sec. Sec. 4.7 or 4.13,
as applicable to them, and therefore, are already counted in this
collection. The Commission further proposes an increase to the number
of respondents under Sec. 4.5, which will account for new claims the
Commission anticipates receiving from IAs of BDCs seeking to claim the
expanded exclusion from the CPO definition.
With regard to Sec. 4.27, the Commission is proposing to reduce
the number of persons filing all schedules of Forms CPO-PQR and CTA-PR
to reflect the categories of registered CPOs and CTAs that are proposed
to be considered outside the Reporting Person definition in Sec.
4.27(b). Because there is no notice filing required for this relief,
there is no new burden associated with the actual claiming of the
relief provided under the revisions to Sec. 4.27 proposed herein.
The currently approved total burden associated with Collection
3038-0005, in the aggregate, is as follows:
Estimated number of respondents: 45,270.
Annual responses for all respondents: 129,042.
Estimated average hours per response: 2.83.\171\
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\171\ The Commission rounded the average hours per response to
the second decimal place for ease of presentation.
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Annual reporting burden: 365,764.
The Commission estimates that the proposed amendments to Sec. 4.23
will add the following burden:
Estimated number of respondents: 50.
[[Page 52919]]
Annual responses by each respondent: 3.
Estimated average hours per response: 0.5.
Annual reporting burden: 75.
The Commission estimates that the proposed CPO registration
exemptions under Sec. 4.13(a)(4) and 4.13(a)(8) will result in 250
additional notice filings under Sec. 4.13(b)(1). Therefore, the
Commission proposes to increase the burden associated with Sec.
4.13(b)(1) to be as follows:
Estimated number of respondents: 3,872.
Annual responses by each respondent: 3.
Estimated average hours per response: 0.5.
Annual reporting burden: 1,936.
The Commission estimates that the proposed exclusion for IAs of
BDCs under Sec. 4.5 will result in 50 additional notice filings under
Sec. 4.5. Therefore, the Commission proposes to increase the burden
associated with Sec. 4.5 to be as follows:
Estimated number of respondents: 7,940.
Annual responses by each respondent: 1.
Estimated average hours per response: 0.5.
Annual reporting burden: 3,970.
With respect to the burden associated with the proposed amendments
to Sec. 4.27, the Commission is updating the number of respondents.
Specifically, the Commission is modifying the number of respondents to
better reflect the average number of CPOs registered with the
Commission, less those CPOs that will be eligible for the relief
provided by the proposed amendments to the Reporting Person definition
in Sec. 4.27. The Commission has historically averaged approximately
1,800 registered CPOs. Based on the number of exemptions filed by CPOs
pursuant to Sec. Sec. 4.5 and 4.13, and filed under Advisory 18-96,
the Commission estimates that approximately 100 of those CPOs would be
eligible for relief from filing Form CPO-PQR under the proposed
amendments to Sec. 4.27. Therefore, the Commission is proposing to set
the number of respondents filing Schedule A of Form CPO-PQR on an
annual basis at 1,700. The total respondents for this revised
collection is further broken out below into two categories, based on
the size of the CPO and whether the CPO files Form PF: 1,450
respondents on Schedule A of Form CPO-PQR for non-large CPOs and CPOs
filing Form PF, and 250 respondents on Schedule A of Form CPO-PQR for
Large CPOs not filing Form PF.
The Commission is similarly considering the number of registered
CTAs with respect to the filing of Form CTA-PR, and then reducing the
number of filers by the number of CTAs the Commission anticipates will
be eligible for the relief proposed herein. Specifically, the
Commission has historically averaged approximately 1,600 registered
CTAs. Based on the information collected on Form CTA-PR, the Commission
estimates that 720 registered CTAs would be eligible for the relief
proposed herein, resulting in the difference of 880 CTAs being required
to file Form CTA-PR. Therefore, the Commission estimates that the total
burden associated with the proposed amendments to Sec. 4.27,
reflecting the revised average number of CPOs and CTAs registered with
the Commission, to be as follows:
For Schedule A of Form CPO-PQR for non-Large CPOs and Large CPOs
filing Form PF:
Estimated number of respondents: 1,450.
Annual responses by each respondent: 1.
Estimated average hours per response: 6.
Annual reporting burden: 8,700.
For Schedule A of Form CPO-PQR for Large CPOs not filing Form PF:
Estimated number of respondents: 250.
Annual responses by each respondent: 4.
Estimated average hours per response: 6.
Annual reporting burden: 6,000.
For Schedule B of Form CPO-PQR for Mid-size CPOs:
Estimated number of respondents: 400.
Annual responses by each respondent: 1.
Estimated average hours per response: 4.
Annual reporting burden: 1,600.
For Schedule B of Form CPO-PQR for Large CPOs not filing Form PF:
Estimated number of respondents: 250.
Annual responses by each respondent: 4.
Estimated average hours per response: 4.
Annual reporting burden: 4,000.
For Schedule C of Form CPO-PQR for Large CPOs not filing Form PF:
Estimated number of respondents: 250.
Annual responses by each respondent: 4.
Estimated average hours per response: 18.
Annual reporting burden: 18,000.
For Form CTA-PR:
Estimated number of respondents: 880.
Annual responses by each respondent: 1.
Estimated average hours per response: 0.5.
Annual reporting burden: 440.
The total new burden associated with Collection 3038-0005, in the
aggregate, reflecting the reduction in burden associated with Sec.
4.27 and the new burden associated with the other amendments proposed
by the NPRM, is as follows:
Estimated number of respondents: 43,912.
Annual responses for all respondents: 112,715.
Estimated average hours per response: 3.13.
Annual reporting burden: 352,279.
b. OMB Control Number 3038-0023
The Commission expects that persons that are currently counted
among the estimates for Collection 3038-0023 with respect to CPO and
CTA registration with the Commission will deregister as such, due to
the availability of the additional registration exemptions and
exclusion proposed herein. Therefore, the Commission proposes to deduct
the expected claimants of that relief from the total number of persons
required to register with the Commission as CPOs and CTAs.
The currently approved total burden associated with Collection
3038-0023, in the aggregate, excluding the burden associated with Sec.
3.21(e), is as follows:
Respondents/Affected Entities: 77,857.
Estimated number of responses: 78,109.
Estimated average hours per response: 0.09.
Estimated total annual burden on respondents: 7,029.8.
Frequency of collection: Periodically.
The currently approved total burden associated with Sec. 3.21(e)
under Collection 3038-0023, which remains unchanged under the Proposal,
is as follows:
Respondents/Affected Entities: 396.
Estimated number of responses: 396.
Estimated average hours per response: 1.25.
Estimated total annual burden on respondents: 495.
Frequency of collection: Annually.
The Commission is proposing to reduce the number of registrants by
the estimated number of claimants with respect to each of the
registration exemptions and exclusion proposed today. Specifically, the
Commission estimates 50 persons will claim relief from CPO registration
under the 18-96
[[Page 52920]]
Exemption, 200 persons will claim relief from registration as the CPO
of a qualifying Family Office, 100 persons will claim relief from
registration as the CTA of a qualifying Family Office or Family
Clients, and 50 persons will claim relief from registration associated
with the operation of a BDC pursuant to the expanded exclusion in Sec.
4.5. Therefore, the Commission proposes to reduce the burden associated
with Collection 3038-0023, such that the total burden associated with
the collection, excluding the burden associated with Sec. 3.21(e),
will be as follows:
Respondents/Affected Entities: 77,457.
Estimated number of responses: 77,689.
Estimated average hours per response: 0.09.
Estimated total annual burden on respondents: 6,992 hours.
3. Request for Comments on Collection
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 (i) evaluate whether the
proposed collections of information are necessary for the proper
performance of the functions of the Commission, including whether the
information will have practical utility; (ii) evaluate the accuracy of
the Commission's estimate of the burden of the proposed collections of
information; (iii) determine whether there are ways to enhance the
quality, utility, and clarity of the information proposed to be
collected; and (iv) minimize the burden of the proposed collections of
information on those who are to respond, including through the use of
appropriate automated collection techniques or other forms of
information technology.
Those desiring to submit comments on the proposed information
collection requirements should submit them directly to the Office of
Information and Regulatory Affairs, OMB, by fax at (202) 395-6566, or
by email at [email protected]. Please provide the Commission
with a copy of submitted documents, so that all comments can be
summarized and addressed in the final rule preamble. Refer to the
ADDRESSES section of this NPRM for comment submission instructions to
the Commission. A copy of the supporting statements for the collections
of information discussed above may be obtained by visiting http://www.RegInfo.gov. OMB is required to make a decision concerning the
collections 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 CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA.\172\ Section 15(a) further specifies that the costs and
benefits shall be evaluated in light of the following five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the CEA section 15(a) considerations.
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\172\ 7 U.S.C. 19(a).
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The Commission notes that the consideration of costs and benefits
below is based on the understanding that the markets function
internationally, with many transactions involving U.S. firms taking
place across international boundaries; with some Commission registrants
being organized outside of the United States; with some leading
industry members typically conducting operations both within and
outside the United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
discussion of costs and benefits below refers to the effects of this
NPRM on all activity subject to the proposed regulations, whether by
virtue of the activity's physical location in the United States or by
virtue of the activity's connection with or effect on U.S. commerce
under CEA section 2(i).\173\ In particular, the Commission notes that
some CPOs and CTAs are located outside of the United States.
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\173\ 7 U.S.C. 2(i).
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1. Consideration of the Costs and Benefits of the Commission's Action
The baseline for the Commission's consideration of the costs and
benefits of the Proposal is the regulatory status quo, as determined by
the CEA and the Commission's existing regulations in 17 CFR part 4. The
Commission recognizes, however, that to the extent that market
participants have relied on relevant Commission staff action, the
actual costs and benefits of the proposed rulemaking, as realized in
the market, may not be as significant. Because each proposed amendment
addresses a discrete issue, which may impact a unique subgroup within
the universe of entities captured by the CPO and CTA statutory
definitions, the Commission has determined to analyze the costs and
benefits associated with each proposed change separately, as presented
below. The Commission has endeavored to assess the expected costs and
benefits of the proposed amendments in quantitative terms wherever
possible. Where estimation or quantification is not feasible, however,
the Commission has provided its assessment in qualitative terms.
a. Summary of the Proposal
As discussed in greater detail below, and in the foregoing
preamble, the Commission preliminarily believes that the amendments
proposed herein enable the Commission to discharge its regulatory
oversight function with respect to the commodity interest markets,
while reducing the potential burden on persons whose commodity interest
activities are subject to the Commission's regulations applicable to
CPOs and CTAs. Specifically, the CFTC is proposing to amend Sec. Sec.
4.13 and 4.23 by adopting new exemptions that would permit a CPO that
solicits and/or accepts funds from solely non-U.S. persons to
participate in offshore commodity pools it operates to claim a
registration exemption with respect to such pools, and to permit an
onshore, registered CPO of an offshore commodity pool to keep the
pool's original books and records at the pool's offshore location,
rather than with the onshore CPO.
Importantly, a CPO claiming the 18-96 Exemption, as proposed in new
Sec. 4.13(a)(4), would still be subject to the anti-manipulation and
anti-fraud provisions of the CEA (just like Advisory 18-96 claimants
currently), and by virtue of Sec. 4.13(c), would be required to make
and keep books and records for an exempt pool, and to submit to such
special calls as the Commission may make to demonstrate eligibility for
and compliance with the criteria of the 18-96 Exemption. In conjunction
with the proposed 18-96 Exemption, the Commission is also proposing to
adopt a prohibition on statutory disqualifications applicable to any
exemption claimed under Sec. 4.13, and to amend the de minimis
exemption in Sec. 4.13(a)(3) to explicitly permit non-
[[Page 52921]]
U.S. persons as exempt commodity pool participants.
The Commission is also proposing to amend existing 17 CFR part 4
regulations in a manner consistent with DSIO's CPO Family Office Letter
and CTA Family Office Letter by adopting new CPO and CTA registration
exemptions under Sec. Sec. 4.13 and 4.14. The Commission further
proposes regulatory amendments consistent with current letter relief
available to BDCs, through certain revisions to the exclusion from the
definition of CPO for IAs of RICs in Sec. 4.5. Additionally, the
Commission is proposing to amend 17 CFR part 4 to incorporate the
relief in CFTC Staff Letter 14-115 \174\ from Sec. 4.27 filings
provided to CPOs that only operate commodity pools in accordance with
Sec. Sec. 4.5 and 4.13, as well as the relief provided under CFTC
Staff Letter 15-47 \175\ to CTAs that do not direct trading of any
commodity interest accounts. The Commission further proposes to extend
this relief to registered CTAs that only advise commodity pools for
which the CTA is also the commodity pool's CPO.
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\174\ CFTC Staff Letter 14-115, available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-115.pdf (last retrieved July 31, 2018).
\175\ CFTC Staff Letter 15-47, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/15-47.pdf (last retrieved July 31, 2018).
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b. Benefits
i. Benefits Related to the Adoption of the 18-96 Exemption
The Commission intends that the 18-96 Exemption, as proposed, will
ultimately provide more comprehensive relief from CPO and pool
regulation. As stated above, the Commission preliminarily believes that
providing CPO registration relief beyond that currently provided by
Sec. 3.10(c)(3)(i) or available in Advisory 18-96 would be beneficial
and consistent with the Commission's past prioritization of agency
resources for the regulation of intermediary activities affecting U.S.
participants in commodity interest markets. Consequently, the
Commission also preliminarily believes that eligible persons will
receive several benefits from the adoption of the proposed 18-96
Exemption. Because the relief available under the proposed 18-96
Exemption would primarily be an exemption from CPO registration with
respect to the operated offshore pools, a claiming CPO would no longer
be required to include such offshore pools on Form CPO-PQR filings,
relief which is currently not provided by the terms of Advisory 18-96.
This will result in a meaningful, significant reduction in the burdens
imposed by the Commission's regulations on CPOs of commodity pools,
whose only connections with the U.S. are the location of the CPO and
participation in the U.S. commodity interest markets.
Moreover, by enabling the 18-96 exemption to be claimed on a pool-
by-pool basis, the Commission is providing additional flexibility to
CPOs that operate and offer to participants a mix of onshore and
offshore pools. Under Sec. 3.10(c)(3)(i), an offshore CPO that wished
to operate pools offered to U.S. persons would be required to choose
between the potentially more costly options of having such pools
operated by an affiliate registered with the Commission or otherwise
eligible for other relief, operating all pools (regardless of location)
consistent with another registration exemption, or registering as a CPO
and listing all operated pools with the Commission. In contrast, the
proposed 18-96 Exemption would enable the CPO to register, or claim an
alternative registration exemption such as Sec. 4.13(a)(3), with
respect to its commodity pools offered to U.S. persons, but remain
exempt from CPO registration, pursuant to proposed Sec. 4.13(a)(4),
with respect to its qualifying offshore pools. This would permit the
CPO to utilize the operational efficiencies inherent in being able to
deploy the same institutional resources across all pools it operates,
rather than bifurcating staff and assets across affiliates for purposes
of minimizing regulatory costs.
The Commission is aware of some offshore CPOs that are currently
limiting their CPO activities solely to offshore pools with offshore
participants precisely to remain eligible for the exemption provided by
Sec. 3.10(c)(3)(i). By making proposed Sec. 4.13(a)(4) available on a
pool-by-pool basis, the Commission preliminarily believes it likely
that more offshore CPOs may choose to create pools available to U.S.
participants because such CPOs would no longer be required to bear the
costs of compliance for offshore pools qualifying for the proposed 18-
96 Exemption. Therefore, such CPOs may provide additional investment
choices to domestic participants and additional competition for CPOs
already operating onshore.
Furthermore, by proposing new exemptions with respect to both the
CPO registration of an offshore pool's operator, and the recordkeeping
location of an offshore pool's books and records, the Commission
intends to confirm the continued availability of Advisory 18-96 relief
in the form of amendments to 17 CFR part 4. The Commission is hopeful
that the adoption of these new regulatory exemptions will eliminate the
need for persons to search for a Commission staff advisory that is over
20 years old, and which, even in 2018, may only be claimed by eligible
persons through a paper filing with the Commission. Rather, under the
Proposal, a person would now be able to utilize NFA's Online
Registration System (ORS) to submit claims of relief electronically,
consistent with the mechanism used to claim all other regulatory
registration and compliance exemptions available to CPOs and CTAs. This
amendment would modernize the effort needed to effectuate such claims
and eliminate the costs and expenses to claimants associated with paper
filings, e.g., drafting, faxing and/or mailing the requisite notice to
both the Commission and NFA.
The proposed amendments also would require persons claiming new
Sec. 4.13(a)(4) to annually affirm their claims of exemption for
qualifying exempt pools. The Commission preliminarily believes that
this requirement promotes transparency regarding the number of entities
that would be exempt from CPO registration pursuant to the 18-96
Exemption as proposed, and would also enable the Commission to reassess
the exemption's efficacy over time by collecting data on its usage by
industry. Consistent with the annual notice requirement for the other
exemptions in Sec. 4.13, the Commission proposes to mandate the filing
of these notices within 60 days of the calendar year end; the
Commission preliminarily believes this to be the most operationally
efficient time for filing such an annual notice.
Additionally, the Commission preliminarily believes that there are
significant benefits to adopting the prohibition on statutory
disqualifications from the terms of Advisory 18-96, as a criteria for
all exemptions under Sec. 4.13(a)(1) through (a)(5). The Commission
also preliminarily believes that currently, pool participants may be
exposed to risk posed by regulations permitting the operation of an
offered pool by a person who, generally, would not otherwise be
permitted to register with the Commission. Even if the activities of a
CPO do not rise to a level warranting Commission oversight through
registration, a prospective participant should be able to be confident
that a collective investment vehicle using commodity interests is not
operated by a person who, for example, is enjoined from engaging in
fraud or
[[Page 52922]]
embezzlement.\176\ As noted above,\177\ prior to the rescission of
Sec. 4.13(a)(4), Commission staff became aware that a number of
persons who were statutorily disqualified from CPO registration were
operating commodity pools pursuant to that exemption, and thereby, were
continuing to participate in the commodity interest markets with funds
solicited and accepted from members of the American public,
notwithstanding those disqualifications. The proposed adoption of this
prohibition should eliminate the unintended loophole that currently
exists, and would permit participants in commodity pools exempt under
Sec. 4.13(a)(1)-(a)(5) to be assured that the CPO managing their
assets is, at least not statutorily disqualified.
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\176\ 7 U.S.C. 12a(2)(C)(ii).
\177\ See, supra, section 1.B.3.
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Finally, consistent with prioritizing the application of 17 CFR
part 4 requirements to CPOs with respect to pools offered and operated
on behalf of U.S. person participants, the 18-96 Exemption, as
proposed, would permit a claiming CPO thereunder to remain registered
with respect to its operation of commodity pools onshore and/or on
behalf of U.S. persons. The Commission would retain all of its
authority associated with oversight of its registrants and could still
take corrective action, should the CPO engage in wrongdoing in the U.S.
commodity interest markets.
ii. Benefits Related to the Proposed Family Office Exemptions From CPO
and CTA Registration
The Commission expects that the addition of CPO and CTA
registration exemptions for qualifying Family Offices will result in
two main benefits. First, qualifying Family Offices will not be subject
to the costs associated with registration, NFA membership, or
compliance with part 4 of the Commission's regulations. The elimination
of these costs should result in a reduction of the costs associated
with the establishment and operation of a Family Office, which should
ultimately benefit the Family Clients.
Second, because the proposed exemptions harmonize the Commission's
treatment of Family Offices with that of the SEC, Family Offices will
generally only be required to comply with one standard to determine
their registration and compliance obligations with respect to both
their securities and commodity interest transactions. Although DSIO had
previously issued no-action relief letters for both CPO and CTA
registration, Family Offices wishing to avail themselves of this relief
were required to prepare a notice making specific representations and
to submit the document electronically to a specific email inbox. It is
anticipated that, upon finalization of the Proposal, Family Offices
would be able to claim the proposed exemption under new Sec.
4.13(a)(8) through NFA's ORS without having to create and submit their
own document to claim the exemption. Moreover, for Family Offices
claiming relief from CTA registration, the Commission is proposing to
make that exemption available without a notice filing, consistent with
the majority of the existing exemptions available to CTAs under Sec.
4.14.
Like the other exemptions available under Sec. 4.13, the
Commission is proposing to require Family Offices claiming relief from
CPO registration to file an annual notice affirming their eligibility.
The Commission preliminarily believes that this annual assessment of
eligibility would promote transparency regarding the number of entities
exempt from registration pursuant to the proposed Family Office
exemption and would enable the Commission to assess its efficacy over
time. Consistent with the notices required to annually affirm
compliance with other exemptions in Sec. 4.13, the notices would be
required to be filed within 60 days of the end of the calendar year.
The Commission preliminarily believes proposing a timeframe consistent
with that already required for annual notices of other existing CPO
registration exemptions would reduce complexity in the regulation, and
would employ a requirement to which claiming CPOs have already grown
accustomed.
iii. Benefits Related to the Proposed JOBS Act Relief
The Commission preliminarily believes that the proposed alignment
of Sec. Sec. 4.7(b) and 4.13(a)(3) with the SEC's JOBS Act amendments
to Regulation D and Rule 144A would result in several benefits. By
harmonizing Commission regulations that specifically reference the
statutory and regulatory provisions governing unregistered, exempt
securities offerings, the proposed amendments would facilitate full
implementation of the JOBS Act by making the relief from the
prohibition on general solicitation more widely available. Moreover,
the Proposal would eliminate the distinction between private offerings
of commodity pools and other privately offered collective investment
vehicles that do not transact in commodity interests, thereby treating
similarly situated offerors in a consistent manner.
The Commission notes that persons complying with the terms of Rule
506(c) or Rule 144A and claiming relief under either Sec. 4.7 or Sec.
4.13(a)(3), as proposed to be amended, would still generally be
required to limit participants in the offered pool to QEPs. As such,
the Commission preliminarily believes that adopting these proposed
amendments would neither result in an erosion of the customer
protections provided to non-sophisticated pool participants under 17
CFR part 4, nor would it cause an expansion of the relief available
under Sec. Sec. 4.7 and 4.13(a)(3), beyond the discrete issue of
solicitation with respect to an exempt securities offering. Thus, the
Commission preliminarily believes that there would be a substantial
benefit in aligning its regulations with those of its sister regulator,
in the interest of fostering cooperation and comity, especially where
there is limited customer protection risk for the retail public.
iv. Benefits Related to the Exclusion of IAs of BDCs From the CPO
Definition
The Commission preliminarily believes that there would be several
benefits arising from the proposed exclusion of IAs of BDCs \178\ from
the definition of CPO in Sec. 4.5. First, the proposed exclusion would
enable IAs of BDCs to continue to use commodity interests, consistent
with the no-action relief currently in place, as an economical option
for reducing the risks related to BDCs' investments in eligible
portfolio companies. The proposed exclusion would permit this without
subjecting BDCs to the costs associated with having its IA registered
as a CPO, and without requiring BDCs and their IAs to comply with the
applicable provisions of part 4 of the Commission's regulations. This
should enable BDCs and their IAs to deploy more of their resources in
furtherance of their statutory purpose, investing in and providing
managerial assistance to small- and mid-sized U.S. companies, which
would thereby also further one of the statutory goals of the Investment
[[Page 52923]]
Company Act of 1940 (as defined above, ICA).
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\178\ The Commission has previously determined that a RIC's IA
is the appropriate person to serve as the CPO of a RIC for
regulatory purposes, and consequently, the Commission is proposing
herein to amend Sec. 4.5(a)(1) to designate the IA as the person
excluded from the CPO definition. See CPO CTA Final Rule, 77 FR at
11259. Due to the similarities between BDCs and RICs, the amendments
proposed by the Commission today are based on the conclusion that
the registered IA is also an appropriate selection as the excluded
entity in the BDC context.
---------------------------------------------------------------------------
As described more fully above, BDCs are subject to oversight by the
SEC that is comparable to that agency's regulation of RICs, and BDCs
use commodity interests primarily for bona fide hedging purposes.
Because of this similarity to a type of investment vehicle that is
already included within the universe of ``qualifying entities'' under
Sec. 4.5, the proposed amendments would treat substantively comparable
entities in a consistent manner, thereby enabling members of the public
and industry to better predict their regulatory obligations when
establishing new investment vehicles. Absent these amendments, IAs of
BDCs wishing to avail themselves of the no-action relief from CPO
registration are required to prepare a notice filing containing
specific representations and to submit the document electronically to a
specific email inbox. The Commission anticipates that, upon
finalization of this NPRM, registered IAs operating and advising BDCs
would be able to claim the proposed exclusion under Sec. 4.5 through
NFA's ORS without having to create their own document to claim the
proposed exclusion.
v. Benefits Related to Relief Under Section 4.27 for CPOs and CTAs
The Commission preliminarily believes that there would be several
benefits associated with providing relief from the filings required by
Sec. 4.27 to registered CPOs only operating pools pursuant to claimed
exclusions under Sec. 4.5 or exemptions under Sec. 4.13, and to
registered CTAs that, during the Reporting Period, either only advised
pools of which they were also the registered or exempt CPO, or did not
direct the trading of any commodity interest accounts whatsoever.
Removing the Sec. 4.27 reporting requirement for these persons would
eliminate the costs associated with the preparation and filing of Forms
CPO-PQR or CTA-PR. The Commission preliminarily believes that this
could provide a significant cost savings for these persons, and
ultimately, for their participants or clients.
c. Costs
i. Costs Related to the Proposed 18-96 Exemption
The Commission preliminarily believes there would be some costs
associated with the 18-96 Exemption, as proposed. For instance, persons
claiming the proposed exemption under new Sec. 4.13(a)(4) would be
required to file an annual notice affirming their eligibility for the
exemption, consistent with the requirement applicable to persons
claiming all other exemptions available under Sec. 4.13. For purposes
of calculating costs of this proposed amendment, the Commission has
estimated that a CPO may require 0.5 hours per pool to complete and
electronically file the notice with NFA, at an average salary cost of
$57 per hour.\179\ The Commission further estimates that 50 CPOs may be
affected,\180\ each with an average of 3 pools subject to the notice
requirement. On this basis, the Commission anticipates an annual cost
per entity of approximately $86.\181\ Across all affected entities, the
Commission estimates a total annual cost of approximately $4,300.\182\
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\179\ The Commission notes that the salary estimates are based
upon the May 2017 Findings of National Occupational Employment and
Wage Estimates from the Bureau of Labor Statistics. See Occupational
Employment Statistics, Bureau of Labor Statistics, available at
https://www.bls.gov/oes/ (last visited July 23, 2018). The
Commission's estimate incorporates the mean hourly wage of persons
employed in the ``Securities, Commodity Contracts and Other
Financial Investments and Related Activities'' Industry, under the
following occupation codes: Compliance Officers (13-1041) at $43.27,
Lawyers (23-1011) at $94.20, and Paralegals and Legal Assistants
(23-2011) at $33.53. The Commission chose these occupational
categories in recognition of the types of staff the Commission
preliminarily believes would most commonly be responsible for
evaluating eligibility and filing claims for the registration
exemptions and exclusion proposed herein. The $57 per hour wage
estimate is derived from a weighted average, rounded to the nearest
dollar, with the salaries attributable to each of the three
occupation codes given equal weight.
\180\ This number is based on the number of claims filed under
Advisory 18-96 for the relief for offshore pools as of June 4, 2018.
\181\ The Commission calculates this amount as follows: (3 pools
per CPO) x (0.5 hours per pool) x ($57 per hour) = $86.
\182\ The Commission calculates this amount as follows: ($86 per
CPO) x (50 CPOs) = $4,300.
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With respect to the expansion of the statutory disqualification
prohibition to exemption claimants under Sec. 4.13(a)(1) through
(a)(5), the Commission lacks data sufficient to determine how many CPOs
might be required to cease operating commodity pools pursuant to the
exemptions available thereunder, due to the presence of statutorily
disqualified principals. There are certainly costs associated with
either divesting from commodity interests held within a collective
investment vehicle, or in completely winding up a commodity pool's
operations, some of which may be experienced by pool participants as
opportunity costs and possibly realized losses. The Commission
preliminarily believes, however, that these costs would be limited to
the first year following adoption of the Proposal, and that, in
subsequent years, participants would benefit from the assurance that
any CPO that is soliciting them or accepting their funds for investment
in an exempt pool operated pursuant to Sec. 4.13(a)(1)-(a)(5) is, at a
minimum, registerable.
With respect to the new exemption under Sec. 4.23, which proposes
relief consistent with Advisory 18-96 permitting a domestic, registered
CPO to keep its pool's original books and records at the office of the
operated offshore pool, the Commission has estimated, for purposes of
calculating the costs of this proposed amendment, that a CPO may
require 0.5 hours per pool to complete and file the notice with NFA at
an average salary cost of $57 per hour. The Commission further
estimates that 50 CPOs may be affected,\183\ each with an average of 3
pools subject to the notice requirement. On this basis, the Commission
anticipates a one-time cost per entity of approximately $86.\184\
Across all affected entities, the Commission estimates a total annual
cost of approximately $4,300.\185\ The Commission preliminarily
believes that this would be the extent of the costs associated with the
proposed incorporation in 17 CFR part 4 of the recordkeeping relief in
Advisory 18-96.
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\183\ This number is based on the number of claims filed under
Advisory 18-96 for the relief for offshore pools as of June 4, 2018.
\184\ The Commission calculates this amount as follows: (3 pools
per sponsor) x (0.5 hours per pool) x ($57 per hour) = $86.
\185\ The Commission calculates this amount as follows: ($86 per
CPO) x (50 CPOs) = $4,300.
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ii. Costs Related to the Proposed Family Office Exemptions From CPO and
CTA Registration
The Commission preliminarily believes there would be some costs
associated with the proposed exemptions from CPO and CTA registration
for Family Offices. As proposed herein, persons claiming relief under
proposed Sec. 4.13(a)(8) would be required to file an annual notice
affirming their eligibility, consistent with the requirement applicable
to persons claiming most other exemptions available under Sec. 4.13.
For purposes of calculating costs of the Proposal, the Commission has
estimated that a CPO may require 0.5 hours per pool to complete and
electronically file the notice with NFA at an average salary cost of
$57 per hour. The Commission further estimates that 200 CPOs may be
affected,\186\ each with an average of 3 pools subject to the notice
requirement. On this basis, the Commission
[[Page 52924]]
anticipates an annual cost per entity of approximately $86.\187\ Across
all affected entities, the Commission estimates a total annual cost of
approximately $17,200.\188\ Family Offices would also be required to
incur expenses associated with the initial determination as to their
eligibility for the proposed exemptions. The Commission currently does
not have the necessary data to estimate the amount of this expense. The
Commission seeks comment as to the amount of such expenses and how this
expenditure compares to the costs associated with registration as a CPO
and compliance with 17 CFR part 4.
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\186\ This number is based on the number of claims received
pursuant to the CPO Family Office No-Action Letter, as of July 17,
2018.
\187\ The Commission calculates this amount as follows: (3 pools
per CPO) x (0.5 hours per pool) x ($57 per hour) = $86.
\188\ The Commission calculates this amount as follows: ($86 per
CPO) x (200 CPOs) = $17,200.
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With respect to persons claiming relief under proposed Sec.
4.14(a)(11), because the Commission is not proposing to require a
notice filing to claim the relief, the Commission expects that the
costs associated with the exemption would be limited to the expenses
associated with making the determination as to the person's initial and
ongoing eligibility for the proposed exemption. The Commission
currently does not have the necessary data to estimate the magnitude of
that expense, but would encourage commenters to submit information as
to the costs and benefits associated with the exemption from CTA
registration, and how such expenses would compare to those required to
register as a CTA and to generally comply with 17 CFR part 4.
iii. Costs Related to the Proposed Adoption of JOBS Act Relief
The Commission does not anticipate any costs associated with this
proposed rulemaking beyond those already identified and analyzed by the
SEC when it finalized its amendments to Regulation D and Rule 144A
pursuant to the JOBS Act.
iv. Costs Related to the Proposed Exclusion of IAs of BDCs From the CPO
Definition
The Commission preliminarily believes there would be some costs
associated with the exclusion from the definition of CPO for registered
IAs of BDCs proposed today. As proposed herein, persons claiming the
new exclusion from the definition of CPO with respect to the operation
of BDCs under Sec. 4.5 would be required to file an annual notice
affirming eligibility, consistent with that required of the registered
IAs of RICs. For purposes of calculating costs of the proposed
amendment, the Commission has estimated that a person may require 0.5
hours per pool to complete and electronically file the notice with NFA
at an average salary cost of $57 per hour. The Commission further
estimates that 50 persons may be affected,\189\ each with an average of
1 BDC subject to the notice requirement. On this basis, the Commission
anticipates an annual cost per entity of approximately $29.\190\ Across
all affected entities, the Commission estimates a total annual cost of
approximately $1,450.\191\
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\189\ This number is based on the number of claims received
pursuant to CFTC Staff Letter 12-40, as of July 17, 2018.
\190\ The Commission calculates this amount as follows: (1 pool
per CPO) x (0.5 hours per pool) x ($57 per hour) = $29.
\191\ The Commission calculates this amount as follows: ($29 per
CPO) x (50 CPOs) = $1,450.
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Registered IAs of BDCs that claim the proposed exclusion under
Sec. 4.5 would also have to expend resources to monitor compliance
with the applicable trading thresholds in proposed Sec.
4.5(c)(2)(iii). The Commission preliminarily believes that the initial
year of compliance with those thresholds would likely be the most
costly, as the IAs would possibly need to increase compliance staff
and/or provide training for existing compliance staff to ensure
effective monitoring of ongoing compliance with the exclusion's terms.
The Commission anticipates that certain aspects of this compliance
program might be automated to lower substantially the annual costs in
subsequent years.
v. Costs Related to Relief Under Section 4.27 for CPOs and CTAs
The Commission does not anticipate any costs associated with this
proposed amendment, as it is not requiring any action to be taken by
CPOs and CTAs that qualify for the proposed exemptions from the
Reporting Person definition in Sec. 4.27 to claim that relief.
2. Section 15(a) Considerations
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
The Commission preliminarily believes that the amendments proposed
in this release maintain the efficacy of the customer protections of
the Commission's regulatory regime while reducing costs. Specifically,
with respect to the 18-96 Exemption, as proposed, the Commission would
maintain its oversight with respect to commodity pools with U.S. person
participants, while providing relief with respect to the operation of
offshore pools, the potential and actual participants of which are
generally located outside of the U.S. Moreover, by extending the
prohibition on statutory disqualifications to CPOs claiming exemptive
relief under Sec. 4.13(a)(1) through (a)(5), the Commission
preliminarily believes that it would be providing additional protection
to members of the public by reducing the possibility of fraud and other
illegal conduct in exempt pools offered by such persons.
The Commission preliminarily believes that the proposed exemptions
for Family Offices would also have a limited impact on the protections
provided to market participants and the public--because Family Offices,
by definition, are not offered to persons other than Family Clients,
the general public would not be negatively affected by their failure to
register as CPOs and CTAs with the Commission. Moreover, as discussed
above, the Commission preliminarily believes that the familial
relationships inherent in Family Offices would provide a reasonable
alternative mechanism to protect the interests of Family Clients. The
Commission preliminarily believes that its regulatory interest in
Family Offices is distinct from and much lower than in the case of
arms-length transactions between CPOs and pool participants, or CTAs
and advisory clients.
With respect to the proposed alignment with the SEC's revisions to
Regulation D and Rule 144A pursuant to the JOBS Act, the Commission
does not believe that its proposed amendments to Sec. Sec. 4.7 and
4.13(a)(3) would alter the protections currently available to market
participants and the public. Pools offered pursuant to claims of relief
under either Sec. 4.7 or Sec. 4.13(a)(3) would still be limited in
their permitted participants to QEPs, and the relief provided by those
regulations would otherwise remain unchanged. As such, less
sophisticated members of the American public would not be able to
purchase interests in pools that would not be subject to the full
panoply of the compliance obligations under 17 CFR part 4. Therefore,
there would be no reduction in the protections in place now by virtue
of the proposed JOBS Act amendments.
The Commission preliminarily believes that the proposed exclusion
for registered IAs of BDCs would not negatively impact the protection
of market participants or the public. BDCs, as well as their registered
IAs, continue to be regulated by the SEC under the
[[Page 52925]]
ICA, and pursuant to the terms of the proposed exclusion, BDCs operated
thereunder will be limited in the extent to which they can use
commodity interests by the trading thresholds discussed above.
With respect to the relief provided to certain CPOs and CTAs from
the reporting requirements of Sec. 4.27, the Commission does not
believe, preliminarily, that eliminating reporting from those persons
described herein would have a deleterious impact on the Commission's
protection of market participants and the public because of such
persons' extremely limited activity in the commodity interest markets.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
Section 15(a)(2)(B) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of efficiency,
competitiveness, and financial integrity considerations. The Commission
has not identified a specific effect on the efficiency,
competitiveness, and financial integrity of markets as a result of the
proposed regulations.
c. Price Discovery
Section 15(a)(2)(C) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of price
discovery considerations. The Commission preliminarily believes that
the proposed amendments will not have a significant impact on price
discovery.
d. Sound Risk Management
Section 15(a)(2)(D) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of sound risk
management practices. The proposed amendments to the regulations
reflect the Commission's preliminary determination that such amendments
should harmonize Commission regulations with other federal laws to
exempt and reduce the regulatory burden on certain entities.
e. Other Public Interest Considerations
Section 15(a)(2)(E) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of other
public interest considerations. The Commission has not identified other
public interest considerations relevant to the costs and benefits of
the proposed regulations.
f. Request for Comment
The Commission invites comment on its preliminary consideration of
the costs and benefits associated with the various changes to 17 CFR
part 4 proposed herein, especially with respect to the five factors
that the Commission is required to consider under section 15(a) of the
CEA. In addressing these areas and any other aspect of the Commission's
preliminary cost-benefit considerations, the Commission encourages
commenters to submit any data or other information they may have
quantifying and/or qualifying the costs and benefits of the Proposal.
The Commission specifically requests comment on the following
questions, in addition to those posed above:
13. Has the Commission accurately identified the benefits of the
Proposal? Are there other benefits to market participants or the public
that may result from the adoption of this NPRM that the Commission
should consider? Please provide specific examples and explanations of
any such benefits.
14. Has the Commission accurately identified the costs of the
Proposal? Are there additional costs to market participants or the
public that may result from the adoption of this NPRM that the
Commission should consider? Please provide specific examples and
explanations of any such costs.
15. Does the Proposal impact the section 15(a) factors in any way
that is not described above? Please provide specific examples and
explanations of any such impact.
D. Antitrust Laws
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under CEA section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the CEA.\192\
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\192\ 7 U.S.C. 19(b).
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The Commission preliminarily believes that the public interest to
be protected by the antitrust laws is generally to protect competition.
The Commission requests comment on whether the Proposal implicates any
other specific public interest to be protected by the antitrust laws.
The Commission has considered the Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether the Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that the
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the Act. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the Act that would otherwise be served by adopting 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 stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I 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. In Sec. 4.5, revise paragraphs (a)(1), (b)(1), introductory text of
paragraph (c)(2), (c)(2)(i), (c)(2)(ii), and introductory text of
paragraph (c)(2)(iii) to read as follows:
Sec. 4.5 Exclusion for certain otherwise regulated persons from the
definition of the term ``commodity pool operator.''
(a) * * *
(1) An investment adviser registered as such under the Investment
Advisers Act of 1940, as amended;
* * * * *
(b) * * *
(1) With respect to any person specified in paragraph (a)(1) of
this section, an investment company registered as such, under the
Investment Company Act of 1940, as amended, or a business development
company that elected an exemption from registration as an investment
company under the Investment Company Act of 1940;
* * * * *
(c) * * *
(2) The notice of eligibility must contain representations that
such person will operate the qualifying entity specified therein in the
following ways, as applicable:
(i) The person will disclose in writing to each participant,
whether existing or prospective, that the qualifying entity is
[[Page 52926]]
operated by a person who has claimed an exclusion from the definition
of the term ``commodity pool operator'' under the Act and, therefore,
who is not subject to registration or regulation as a pool operator
under the Act; Provided, that such disclosure is made in accordance
with the requirements of any other federal or state regulatory
authority to which the qualifying entity is subject. The qualifying
entity may make such disclosure by including the information in any
document that its other Federal or State regulator requires to be
furnished routinely to participants or, if no such document is
furnished routinely, the information may be disclosed in any instrument
establishing the entity's investment policies and objectives that the
other regulator requires to be made available to the entity's
participants; and
(ii) The person will submit to such special calls as the Commission
may make to require the qualifying entity to demonstrate compliance
with the provisions of this paragraph (c); Provided, however, that the
making of such representations shall not be deemed a substitute for
compliance with any criteria applicable to commodity futures or
commodity options trading established by any regulator to which such
person or qualifying entity is subject; and
(iii) If the person is an investment adviser claiming an exclusion
with respect to the operation of a qualifying entity under paragraph
(b)(1) of this section, then the notice of eligibility must also
contain representations that such person will operate that qualifying
entity in a manner such that the qualifying entity:
* * * * *
0
3. Amend Sec. 4.7 paragraph (b) by:
0
a. Revising introductory text of paragraph (b);
0
b. Renumbering paragraphs (b)(1) through (b)(5) as paragraphs (b)(2)
through (b)(6);
0
c. Adding a new paragraph (b)(1); and
0
d. Revising renumbered paragraph (b)(3).
The addition and revisions read as follows:
Sec. 4.7 Exemption from certain part 4 requirements for commodity
pool operators with respect to offerings to qualified eligible persons
and for commodity trading advisors with respect to advising qualified
eligible persons.
* * * * *
(b) Relief available to commodity pool operators--(1) Eligibility.
Relief from specific compliance obligations is available to certain
registered commodity pool operators with respect to the pool(s) they
operate, provided that the registered commodity pool operator files the
required notice under paragraph (d) of this section and otherwise
complies with the conditions of paragraph (d) of this section in
operating the exempt pool(s).
(i) Regarding an offering that is exempt from registration under
section 4(a)(2) of the Securities Act of 1933 and/or offered and sold
pursuant to Regulation D, Sec. Sec. 230.500-230.508 of this title, or
resold pursuant to Rule 144A, Sec. 230.144A of this title, or an
offering that is offered and sold pursuant to Regulation S, Sec. Sec.
230.901-230.905 of this title, any registered commodity pool operator
who sells participations in such a pool solely to qualified eligible
persons may claim any or all of the relief described in this paragraph
(b) with respect to such pool.
(ii) Regarding the operation of a pool that is a collective trust
fund, the securities of which are exempt from registration pursuant to
section 3(a)(2) of the Securities Act of 1933 and sold solely to
qualified eligible persons, any bank registered as a commodity pool
operator may claim any or all of the relief described in this paragraph
(b) with respect to such pool.
* * * * *
(3) Periodic reporting relief. (i) Exemption from the specific
requirements of Sec. 4.22(a) and (b); Provided, That a statement
signed and affirmed in accordance with Sec. 4.22(h) is prepared and
distributed to pool participants no less frequently than quarterly
within 30 calendar days after the end of the reporting period. This
statement must be presented and computed in accordance with generally
accepted accounting principles and indicate:
(A) The net asset value of the exempt pool as of the end of the
reporting period;
(B) The change in net asset value from the end of the previous
reporting period; and
(C) Either the net asset value per outstanding participation unit
in the exempt pool as of the end of the reporting period, or the total
value of the participant's interest or share in the exempt pool as of
the end of the reporting period.
(ii) Where the pool is comprised of more than one ownership class
or series, the net asset value of the series or class on which the
account statement is reporting, and the net asset value per unit or
value of the participant's share, also must be included in the
statement required by this paragraph (b)(3); except that, for a pool
that is a series fund structured with limitation on liability among the
different series, the account statement required by this paragraph
(b)(3) is not required to include the consolidated net asset value of
all series of the pool.
(iii) A commodity pool operator that meets the conditions specified
in Sec. 4.22(d)(2)(i) to present and compute the commodity pool's
financial statements contained in the Annual Report other than in
accordance with generally accepted accounting principles and has filed
notice pursuant to Sec. 4.22(d)(2)(iii) may also use the alternative
accounting principles, standards or practices identified in the notice
with respect to the computation and presentation of the account
statement.
* * * * *
0
4. Amend Sec. 4.13 by:
0
a. Revising paragraphs (a)(3)(i) and (a)(3)(iii)(E);
0
b. Adding paragraph (a)(4);
0
c. Renumbering paragraph (a)(6) as paragraph (a)(7);
0
d. Adding a new paragraph (a)(6) and paragraph (a)(8);
0
e. Revising paragraphs (b)(1)(ii), (b)(2), and (e)(1); and
0
f. Adding paragraph (e)(3).
The revisions and additions read as follows:
Sec. 4.13 Exemption from registration as a commodity pool operator.
* * * * *
(a) * * *
(3) * * *
(i) Interests in the pool are exempt from registration under the
Securities Act of 1933, and the interests are marketed and advertised
to the public in the United States solely, if at all, in compliance
with Regulation D, Sec. Sec. 230.500 through 230.508 of this title, or
with Rule 144A, Sec. 230.144A of this title;
* * * * *
(iii) * * *
(E) A non-U.S. person; and
* * * * *
(4) For each pool for which the person claims exemption from
registration under this paragraph (a)(4):
(i) The pool is, and will remain, organized and operated outside of
the United States;
(ii) The pool will not hold meetings or conduct administrative
activities within the United States;
(iii) No shareholder of or other participant in the pool is or will
be a U.S. person;
(iv) The pool will not receive, hold or invest any capital directly
or indirectly contributed from sources within the United States; and
[[Page 52927]]
(v) The person, the pool, and any person affiliated therewith will
not undertake any marketing activity for the purpose, or that could
reasonably be expected to have the effect, of soliciting participation
in the pool from U.S. persons.
* * * * *
(6) Any person who desires to claim an exemption under paragraphs
(a)(1), (a)(2), (a)(3), (a)(4), or (a)(5) of this section must
represent that neither the person nor any of its principals is subject
to any statutory disqualification under section 8a(2) or 8a(3) of the
Act, unless such disqualification arises from a matter which was
previously disclosed in connection with a previous application, if such
registration was granted, or which was disclosed more than thirty days
prior to the claim of this exemption.
* * * * *
(8) For each pool for which the person claims exemption from
registration under this paragraph (a)(8):
(i) Interests in the pool are exempt from registration under the
Securities Act of 1933, and such interests are offered and sold only to
``family clients,'' as defined in Sec. 275.202(a)(11)(G)-1 of this
title;
(ii) The pool qualifies as a ``family office,'' as defined in Sec.
275.202(a)(11)(G)-1 of this title; and
(iii) The person reasonably believes, at the time of investment, or
in the case of an existing pool, at the time of conversion to a pool
meeting the criteria of paragraph (a)(8) of this section, that each
person who participates in the pool is a ``family client'' of a
``family office,'' as defined in Sec. 275.202(a)(11)(G)-1 of this
title.
(b)(1) * * *
(ii) Contain the section number pursuant to which the operator is
filing the notice (i.e., Sec. 4.13(a)(1), (2), (3), (4), (5) or (8))
and represent that the pool will be operated in accordance with the
criteria of that paragraph; and
* * * * *
(2)(i) The person must file the notice by no later than the time
that the pool operator delivers a subscription agreement for the pool
to a prospective participant in the pool; Provided, however that:
(A) In the case of a claim for relief under Sec. 4.13(a)(4), the
person must file the notice within 30 days of registering as a
commodity pool operator, or claiming an exemption pursuant to this
section with respect to pools marketed to U.S. persons, containing
funds belonging to U.S. persons, or otherwise operated in the U.S., its
territories, or possessions.
(B) In the case of a claim for relief under Sec. 4.13(a)(5), the
person must file the notice by the later of the effective date of the
pool's registration statement under the Securities Act of 1933 or the
date on which the person first becomes a director or trustee; and
(C) Where a person registered with the Commission as a commodity
pool operator intends to withdraw from registration in order to claim
exemption hereunder, the person must notify its pool's participants in
written communication physically delivered or delivered through
electronic transmission that it intends to withdraw from registration
and claim the exemption, and it must provide each such participant with
a right to redeem its interest in the pool prior to the person filing a
notice of exemption from registration.
* * * * *
(e)(1) Subject to the provisions of paragraphs (e)(2) and (e)(3) of
this section, if a person who is eligible for exemption from
registration as a commodity pool operator under this section
nonetheless registers as a commodity pool operator, the person must
comply with the provisions of this part with respect to each commodity
pool identified on its registration application or supplement thereto.
* * * * *
(3) If a person operates one or more commodity pools described in
paragraph (a)(4) of this section, and one or more commodity pools for
which it must be, and is, registered as a commodity pool operator, the
person is exempt from the requirements applicable to a registered
commodity pool operator with respect to the pool or pools described in
paragraph (a)(4) of this section.
* * * * *
0
5. In Sec. 4.14, add paragraph (a)(11) to read as follows:
Sec. 4.14 Exemption from registration as a commodity trading
advisor.
* * * * *
(a) * * *
(11) The person's commodity trading advice is solely directed to,
and is for the sole use of, ``family clients,'' as defined in Sec.
275.202(a)(11)(G)-1 of this title.
* * * * *
0
6. Revise Sec. 4.23 to read as follows:
Sec. 4.23 Recordkeeping.
(a) Each commodity pool operator registered or required to be
registered under the Act must make and keep the following books and
records concerning any commodity pool it operates, as well as the pool
operator itself, in an accurate, current and orderly manner, and
maintain such books and records in accordance with Sec. 1.31 of this
chapter.
Unless otherwise noted, all books and records required to be kept
under this section shall be kept and maintained at the pool operator's
main business office. Books and records that are not maintained at the
pool operator's main business office shall be maintained by one or more
of the pool's administrator, distributor, or custodian, or a bank or
registered broker or dealer acting in a similar capacity with respect
to the pool, pursuant to the relief provided in paragraphs (b) or (c)
of this section.
(1) Concerning the commodity pool. (i) An itemized daily record of
each commodity interest transaction of the pool, showing the
transaction date, quantity, commodity interest, and, as applicable,
price or premium, delivery month or expiration date, whether a put or a
call, strike price, underlying contract for future delivery or
underlying commodity, swap type and counterparty, the futures
commission merchant and/or retail foreign exchange dealer carrying the
account and the introducing broker, if any, whether the commodity
interest was purchased, sold (including, in the case of a retail forex
transaction, offset), exercised, expired (including, in the case of a
retail forex transaction, whether it was rolled forward), and the gain
or loss realized.
(ii) A journal of original entry or other equivalent record showing
all receipts and disbursements of money, securities and other property.
(iii) The acknowledgment specified by Sec. 4.21(b) for each
participant in the pool.
(iv) A subsidiary ledger or other equivalent record for each
participant in the pool showing the participant's name and address and
all funds, securities and other property that the pool received from or
distributed to the participant. This requirement may be satisfied
through a transfer agent's maintenance of records or through a list of
relevant intermediaries where shares are held in an omnibus account or
through intermediaries.
(v) Adjusting entries and any other records of original entry or
their equivalent forming the basis of entries in any ledger.
(vi) A general ledger or other equivalent record containing details
of all asset, liability, capital, income and expense accounts.
(vii) Copies of each confirmation or acknowledgment of a commodity
interest transaction of the pool, and each purchase and sale statement
and each monthly statement for the pool
[[Page 52928]]
received from a futures commission merchant, retail foreign exchange
dealer or swap dealer.
(viii) Cancelled checks, bank statements, journals, ledgers,
invoices, computer generated records, and all other records, data and
memoranda prepared or received in connection with the operation of the
pool.
(ix) The original or a copy of each report, letter, circular,
memorandum, publication, writing, advertisement or other literature or
advice (including the texts of standardized oral presentations and of
radio, television, seminar or similar mass media presentations)
distributed or caused to be distributed by the commodity pool operator
to any existing or prospective pool participant or received by the pool
operator from any commodity trading advisor of the pool, showing the
first date of distribution or receipt if not otherwise shown on the
document.
(x) A Statement of Financial Condition as of the close of:
(A) Each regular monthly period if the pool had net assets of
$500,000 or more at the beginning of the pool's fiscal year, or
(B) Each regular quarterly period for all other pools. The
Statement must be completed within 30 days after the end of that
period.
(xi) A Statement of Income (Loss) for the period between:
(A) The later of: The date of the most recent Statement of
Financial Condition furnished to the Commission pursuant to Sec.
4.22(c), April 1, 1979 or the formation of the pool, and
(B) The date of the Statement of Financial Condition required by
paragraph (a)(1)(x) of this section. The Statement must be completed
within 30 days after the end of that period.
(xii) A manually signed copy of each Account Statement and Annual
Report provided pursuant to Sec. 4.22, 4.7(b) or 4.12(b), and records
of the key financial balances submitted to the National Futures
Association for each commodity pool Annual Report, which records must
clearly demonstrate how the key financial balances were compiled from
the Annual Report.
(2) Concerning the commodity pool operator. (i) An itemized daily
record of each commodity interest transaction of the commodity pool
operator and each principal thereof, showing the transaction date,
quantity, commodity interest, and, as applicable, price or premium,
delivery month or expiration date, whether a put or a call, strike
price, underlying contract for future delivery or underlying commodity,
swap type and counterparty, the futures commission merchant or retail
foreign exchange dealer carrying the account and the introducing
broker, if any, whether the commodity interest was purchased, sold,
exercised, or expired, and the gain or loss realized; Provided,
however, that if the pool operator is a counterparty to a swap, it must
comply with the swap data recordkeeping and reporting requirements of
part 45 of this chapter, as applicable.
(ii) Each confirmation of a commodity interest transaction, each
purchase and sale statement and each monthly statement furnished by a
futures commission merchant or retail foreign exchange dealer to:
(A) The commodity pool operator relating to a personal account of
the pool operator; and
(B) Each principal of the pool operator relating to a personal
account of such principal.
(iii) Books and records of all other transactions in all other
activities in which the pool operator engages. Those books and records
must include cancelled checks, bank statements, journals, ledgers,
invoices, computer generated records and all other records, data and
memoranda which have been prepared in the course of engaging in those
activities.
(3) All books and records required to be kept by this section,
except those required by paragraphs (a)(1)(iii), (a)(1)(iv), (a)(2)(i),
(a)(2)(ii), and (a)(2)(iii), must be made available to participants for
inspection and copying during normal business hours. Upon request,
copies must be sent by mail to any participant within five business
days if reasonable reproduction and distribution costs are paid by the
pool participant.
(4) If the books and records are maintained at the commodity pool
operator's main business address that is outside the United States, its
territories or possessions, then upon the request of a Commission
representative, the pool operator must provide such books and records
as requested at the place in the United States, its territories or
possessions designated by the representative within 72 hours after the
pool operator receives the request.
(b) If the pool operator does not maintain its books and records at
its main business office, the pool operator shall:
(1) At the time it registers with the Commission or delegates its
recordkeeping obligations, whichever is later, file a statement that:
(i) Identifies the name, main business address, and main business
telephone number of the person(s) who will be keeping required books
and records in lieu of the pool operator;
(ii) Sets forth the name and telephone number of a contact for each
person who will be keeping required books and records in lieu of the
pool operator;
(iii) Specifies, by reference to the respective paragraph of this
section, the books and records that such person will be keeping; and
(iv) Contains representations from the pool operator that:
(A) It will promptly amend the statement if the contact information
or location of any of the books and records required to be kept by this
section changes, by identifying in such amendment the new location and
any other information that has changed;
(B) It remains responsible for ensuring that all books and records
required by this section are kept in accordance with Sec. 1.31;
(C) Within 48 hours after a request by a representative of the
Commission, it will obtain the original books and records from the
location at which they are maintained, and provide them for inspection
at the pool operator's main business office; Provided, however, that if
the original books and records are permitted to be, and are maintained,
at a location outside the United States, its territories or
possessions, the pool operator will obtain and provide such original
books and records for inspection at the pool operator's main business
office within 72 hours of such a request; and
(D) It will disclose in the pool's Disclosure Document the location
of its books and records that are required under this section.
(2) The pool operator shall also file electronically with the
National Futures Association a statement from each person who will be
keeping required books and records in lieu of the pool operator wherein
such person:
(i) Acknowledges that the pool operator intends that the person
keep and maintain required pool books and records;
(ii) Agrees to keep and maintain such records required in
accordance with Sec. 1.31 of this chapter; and
(iii) Agrees to keep such required books and records open to
inspection by any representative of the Commission or the United States
Department of Justice in accordance with Sec. 1.31 of this chapter and
to make such required books and records available to pool participants
in accordance with this section.
(c) Each registered commodity pool operator whose main business
office is located in the United States, its territories or possessions,
and who operates a commodity pool that has its main business office
outside of the United States, its territories or
[[Page 52929]]
possessions, may claim relief from the requirement in paragraph (a) of
this section that such books and records be kept at the pool operator's
main business office, provided however, that the registered pool
operator files a claim for exemptive relief with the National Futures
Association representing that:
(1) The pool operator will maintain the original books and records
of the commodity pool at the main office of the commodity pool located
outside the United States, its territories or possessions, and states
the name, title, full mailing address, telephone number, and
relationship to the commodity pool of the person who will have custody
of the pool's original books and records and the location outside the
United States where those books and records will be kept;
(2) The pool operator desires to maintain such books and records
outside the United States in furtherance of compliance with Internal
Revenue Service requirements for relief from U.S. federal income
taxation;
(3) The pool operator will maintain duplicate books and records of
the commodity pool at a designated office in the United States, its
territories or possessions listed in the notice;
(4) The claim is electronically signed by an individual duly
authorized to bind the pool operator; and
(5) Within 72 hours after the request from the Commission, the
United States Department of Justice, or the National Futures
Association, the original books and records will be provided to such
representative at a place located in the United States that is
specified by the representative.
0
7. Amend Sec. 4.27 by revising the section heading and paragraph (b)
to read as follows:
Sec. 4.27 Additional reporting by commodity pool operators and
commodity trading advisors.
* * * * *
(b) Persons required to report. (1) Except as provided in paragraph
(b)(2) of this section, a reporting person is:
(i) Any commodity pool operator that is registered or required to
be registered under the Commodity Exchange Act and the Commission's
regulations thereunder; or
(ii) Any commodity trading advisor that is registered or required
to be registered under the Commodity Exchange Act and the Commission's
regulations thereunder.
(2) The following categories of persons shall not be considered
reporting persons, as that term is defined in paragraph (b)(1) of this
section:
(i) A commodity pool operator that is registered, but operates only
pools for which it maintains an exclusion from the definition of the
term ``commodity pool operator'' in Sec. 4.5 and/or an exemption from
registration as a commodity pool operator in Sec. 4.13;
(ii) A commodity trading advisor that is registered, but does not
direct, as that term is defined in Sec. 4.10(f), the trading of any
commodity interest accounts;
(iii) A commodity trading advisor that is registered, but directs
only the accounts of commodity pools for which it is registered as a
commodity pool operator and, though registered, complies with Sec.
4.14(a)(4); and
(iv) A commodity trading advisor that is registered, but directs
only the accounts of commodity pools for which it is exempt from
registration as a commodity pool operator, and though registered,
complies with Sec. 4.14(a)(5).
* * * * *
Issued in Washington, DC, on October 9, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Registration and Compliance Requirements for Commodity
Pool Operators and Commodity Trading Advisors--Commission Voting
Summary and Chairman's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
In response to the Request for Information issued as part of
Project KISS, the Commission received a number of letters from
members of the asset management industry suggesting areas of
potential rulemaking that, in their view, would make the
Commission's regulations more efficient and less burdensome. I
believe that today's notice of proposed rulemaking furthers both of
those interests.
This proposal would incorporate relief from registration and
compliance obligations for commodity pool operators (CPOs) and
commodity trading advisors (CTAs) consistent with relief currently
provided by staff letters and advisories. By integrating this relief
now into the Commission's regulations, the Commission is eliminating
the need to search for a staff advisory that is over 20 years old
and is providing legal certainty to entities currently relying upon
the staff relief. This will make regulatory obligations clearer and
thereby facilitate compliance.
Specifically, today's notice of proposed rulemaking would reduce
burdens for CPOs that operate pools in multiple jurisdictions by
permitting them to register with respect to the pools that solicit
or accept U.S. domiciled participants. It would maintain an
exemption with respect to those offshore activities whose only nexus
to the U.S. is that the CPO also manages some U.S. derived assets.
It would also shore up our consumer protection provisions by
prohibiting statutorily disqualified persons from operating exempt
pools and soliciting and accepting funds, thereby giving such pool
participants more confidence in their pool's operator. It would
ensure that the Commission's regulations treat similarly situated
entities in a commensurate manner by excluding the investment
advisers of business development companies under terms identical to
those under which the investment advisers of registered investment
companies are already excluded. It would also eliminate the burden
of filing data collection forms for persons with no meaningful,
reportable information. Finally, it would provide appropriate relief
to the operators and advisors of asset management vehicles whose
clients are limited to a single family, consistent with the terms of
a comparable regulation adopted by the SEC, furthering our efforts
at harmonizing with our fellow regulators in how we treat market
participants in this space.
In short, this proposal appropriately tailors regulation and
codifies decades-old no action relief in line with the goals of the
CFTC's Project KISS. I expect this proposal to be the first in a
series of staff recommendations to streamline and simplify
regulation of commodity pool operators and commodity trading
advisors.
[FR Doc. 2018-22324 Filed 10-17-18; 8:45 am]
BILLING CODE 6351-01-P