Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 11252-11344 [2012-3390]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]
[Rules and Regulations]
[Pages 11252-11344]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3390]



[[Page 11251]]

Vol. 77

Friday,

No. 37

February 24, 2012

Part III





Commodity Futures Trading Commission





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17 CFR Parts 4, 145, and 147





Commodity Pool Operators and Commodity Trading Advisors: Compliance 
Obligations; Harmonization of Compliance Obligations for Registered 
Investment Companies Required To Register as Commodity Pool Operators; 
Final Rule and Proposed Rule

Federal Register / Vol. 77 , No. 37 / Friday, February 24, 2012 / 
Rules and Regulations

[[Page 11252]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 4, 145, and 147

RIN 3038-AD30


Commodity Pool Operators and Commodity Trading Advisors: 
Compliance Obligations

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission is adopting 
amendments to its existing part 4 regulations and promulgating one new 
regulation regarding Commodity Pool Operators and Commodity Trading 
Advisors. The Commission is also adopting new data collections for CPOs 
and CTAs that are consistent with a data collection required under the 
Dodd-Frank Act for entities registered with both the Commission and the 
Securities and Exchange Commission. The adopted amendments rescind the 
exemption from registration; rescind relief from the certification 
requirement for annual reports provided to operators of certain pools 
offered only to qualified eligible persons (QEPs; modify the criteria 
for claiming relief); and require the annual filing of notices claiming 
exemptive relief under several sections of the Commission's 
regulations. Finally, the adopted amendments include new risk 
disclosure requirements for CPOs and CTAs regarding swap transactions.

DATES: Effective dates: This final rule is effective on April 24, 2012, 
except for the amendments to Sec.  4.27, which shall become effective 
on July 2, 2012.
    Compliance dates: Compliance with Sec.  4.27 shall be required by 
not later than September 15, 2012, for a CPO having at least $5 billion 
in assets under management, and by not later than December 14, 2012, 
for all other registered CPOs and all CTAs. Compliance with Sec.  4.5 
for registration purposes only shall be required not later than the 
later of December 31, 2012, or 60 days after the effective date of the 
final rulemaking further defining the term ``swap,'' which the 
Commission will publish in the Federal Register at a future date. 
Entities required to register due to the amendments to Sec.  4.5 shall 
be subject to the Commission's recordkeeping, reporting, and disclosure 
requirements pursuant to part 4 of the Commission's regulations within 
60 days following the effectiveness of a final rule implementing the 
Commission's proposed harmonization effort pursuant to the concurrent 
proposed rulemaking. CPOs claiming exemption under Sec.  4.13(a)(4) 
shall be required to comply with the rescission of Sec.  4.13(a)(4) by 
December 31, 2012; however, compliance shall be required for all other 
CPOs on April 24, 2012. Compliance with all other amendments, not 
otherwise specified above, shall be required by December 31, 2012.

FOR FURTHER INFORMATION CONTACT: Kevin P. Walek, Assistant Director, 
Telephone: (202) 418-5463, Email: kwalek@cftc.gov, or Amanda Lesher 
Olear, Special Counsel, Telephone: (202) 418-5283, Email: 
aolear@cftc.gov, Michael Ehrstein, Attorney-Advisor, Telephone: 202-
418-5957, Email: mehrstein@cftc.gov, Division of Swap Dealer and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background on the Proposal To Amend the Registration and Compliance 
Obligations for CPOs and CTAs

A. Statutory and Regulatory Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ The 
legislation was enacted to reduce risk, increase transparency, and 
promote market integrity within the financial system by, inter alia, 
enhancing the Commodity Futures Trading Commission's (the 
``Commission'' or ``CFTC'') rulemaking and enforcement authorities with 
respect to all registered entities and intermediaries subject to the 
Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at https://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
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    The preamble of the Dodd-Frank Act explicitly states that the 
purpose of the legislation is:

    To promote the financial stability of the United States by 
improving accountability and transparency in the financial system, 
to end `too big to fail', to protect the American taxpayer by ending 
bailouts, to protect consumers from abusive financial services 
practices, and for other purposes.\2\
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    \2\ Id.
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    Pursuant to this stated objective, the Dodd-Frank Act has expanded 
the scope of federal financial regulation to include instruments such 
as swaps, enhanced the rulemaking authorities of existing federal 
financial regulatory agencies including the Commission and the 
Securities and Exchange Commission (``SEC''), and created new financial 
regulatory entities.
    In addition to the expansion of the Commission's jurisdiction to 
include swaps under Title VII of the Dodd-Frank Act, Title I of the 
Dodd-Frank Act created the Financial Stability Oversight Council 
(``FSOC'').\3\ The FSOC is composed of the leaders of various state and 
federal financial regulators and is charged with identifying risks to 
the financial stability of the United States, promoting market 
discipline, and responding to emerging threats to the stability of the 
country's financial system.\4\ The Dodd-Frank Act anticipates that the 
FSOC will be supported in these responsibilities by the federal 
financial regulatory agencies.\5\ The Commission is among those 
agencies that could be asked to provide information necessary for the 
FSOC to perform its statutorily mandated duties.\6\
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    \3\ See section 111 of the Dodd-Frank Act.
    \4\ See section 112(a)(1)(A) of the Dodd-Frank Act.
    \5\ See sections 112(a)(2)(A) and 112(d)(1) of the Dodd-Frank 
Act.
    \6\ See section 112(d)(1) of the Dodd-Frank Act.
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    Title IV of the Dodd-Frank Act requires advisers to large private 
funds \7\ to register with the SEC.\8\ Through this registration 
requirement, Congress

[[Page 11253]]

sought to make available to the SEC ``information regarding [the] size, 
strategies and positions'' of large private funds, which Congress 
believed ``could be crucial to regulatory attempts to deal with a 
future crisis.'' \9\ In section 404 of the Dodd-Frank Act, Congress 
amended section 204(b) of the Investment Advisers Act to direct the SEC 
to require private fund advisers registered solely with the SEC \10\ to 
file reports containing such information as is deemed necessary and 
appropriate in the public interest and for investor protection or for 
the assessment of systemic risk. These reports and records must include 
a description of certain prescribed information, such as the amount of 
assets under management, use of leverage, counterparty credit risk 
exposure, and trading and investment positions for each private fund 
advised by the adviser.\11\ Section 406 of the Dodd-Frank Act also 
requires that the rules establishing the form and content of reports 
filed by private fund advisers that are dually registered with the SEC 
and the CFTC be issued jointly by both agencies after consultation with 
the FSOC.\12\
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    \7\ Section 202(a)(29) of the Investment Advisers Act of 1940 
(``Investment Advisers Act'') defines the term ``private fund'' as 
``an issuer that would be an investment company, as defined in 
section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), 
but for section 3(c)(1) or 3(c)(7) of that Act.'' 15 U.S.C. 80a-
3(c)(1), 80a-3(c)(7). Section 3(c)(1) of the Investment Company Act 
provides an exclusion from the definition of ``investment company'' 
for any ``issuer whose outstanding securities (other than short term 
paper) are beneficially owned by not more than one hundred persons 
and which is not making and does not presently propose to make a 
public offering of its securities.'' 15 U.S.C. 80a-3(c)(1). Section 
3(c)(7) of the Investment Company Act provides an exclusion from the 
definition of ``investment company'' for any ``issuer, the 
outstanding securities of which are owned exclusively by persons 
who, at the time of acquisition of such securities, are qualified 
purchasers, and which is not making and does not at that time 
propose to make a public offering of such securities.'' 15 U.S.C. 
80a-3(c)(7). The term ``qualified purchaser'' is defined in section 
2(a)(51) of the Investment Company Act. See 15 U.S.C. 80a-2(a)(51).
    \8\ The Dodd-Frank Act requires private fund adviser 
registration by amending section 203(b)(3) of the Advisers Act to 
repeal the exemption from registration for any adviser that during 
the course of the preceding 12 months had fewer than 15 clients and 
neither held itself out to the public as an investment adviser nor 
advised any registered investment company or business development 
company. See section 403 of the Dodd-Frank Act. There are exemptions 
from this registration requirement for advisers to venture capital 
funds and advisers to private funds with less than $150 million in 
assets under management in the United States. There also is an 
exemption for foreign advisers with less than $25 million in assets 
under management from the United States and fewer than 15 U.S. 
clients and private fund investors. See sections 402, 407 and 408 of 
the Dodd-Frank Act.
    \9\ See S. Conf. Rep. No. 111-176, at 38 (2010).
    \10\ In this release, the term ``private fund adviser'' means 
any investment adviser that is (i) registered or required to be 
registered with the SEC (including any investment adviser that is 
also registered or required to be registered with the CFTC as a CPO 
or CTA) and (ii) advises one or more private funds (including any 
commodity pools that satisfy the definition of ``private fund'').
    \11\ See section 404 of the Dodd-Frank Act.
    \12\ See section 406 of the Dodd-Frank Act.
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    The Commodity Exchange Act (``CEA'') \13\ authorizes the Commission 
to register Commodity Pool Operators (``CPOs'') and Commodity Trading 
Advisors (``CTAs''),\14\ exclude any entity from registration as a CPO 
or CTA,\15\ and require ``[e]very commodity trading advisor and 
commodity pool operator registered under [the CEA to] maintain books 
and records and file such reports in such form and manner as may be 
prescribed by the Commission.'' \16\ The Commission also has the 
authority to include within or exclude from the definitions of 
``commodity pool,'' ``commodity pool operator,'' and ``commodity 
trading advisor'' any entity ``if the Commission determines that the 
rule or regulation will effectuate the purposes of the CEA.'' \17\ In 
addition, the Commission has the authority to ``make and promulgate 
such rules and regulations as, in the judgment of the Commission, are 
reasonably necessary to effectuate the provisions or to accomplish any 
of the purposes of [the CEA].'' \18\ The Commission's discretionary 
authority to exclude or exempt persons from registration was intended 
to be exercised ``to exempt from registration those persons who 
otherwise meet the criteria for registration * * * if, in the opinion 
of the Commission, there is no substantial public interest to be served 
by the registration.'' \19\ It is pursuant to this authority that the 
Commission has promulgated the various exemptions from registration as 
a CPO that are enumerated in Sec.  4.13 of its regulations as well as 
the exclusions from the definition of CPO that are delineated in Sec.  
4.5.\20\
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    \13\ 7 U.S.C. 1, et seq.
    \14\ 7 U.S.C. 6m.
    \15\ 7 U.S.C. 1a(11) and 1a(12).
    \16\ 7 U.S.C. 6n(3)(A). Under part 4 of the Commission's 
regulations, entities registered as CPOs have reporting obligations 
with respect to their operated pools. See 17 CFR. 4.22. Although 
CTAs have recordkeeping obligations under part 4, the Commission has 
not required reporting by CTAs, See generally, 17 CFR. part 4.
    \17\ 7 U.S.C. 1a(10), 1a(11), 1a(12).
    \18\ 7 U.S.C. 12a(5).
    \19\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p. 
20.
    \20\ See 68 FR 47231 (Aug. 8, 2003).
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    As stated previously in this release, and in the Proposal, Congress 
enacted the Dodd-Frank Act in response to the financial crisis of 2007 
and 2008.\21\ That Act requires the reporting of certain information by 
investment advisers to private funds related to potential systemic risk 
including, but not limited to, the amount of assets under management, 
use of leverage, counterparty credit risk exposure, and trading and 
investment positions for each private fund under the reporting entity's 
advisement.\22\ This information facilitates oversight of the 
investment activities of funds within the context of the rest of a 
discrete market or the economy as a whole.
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    \21\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
    \22\ See section 404 of the Dodd-Frank Act.
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    The sources of risk delineated in the Dodd-Frank Act with respect 
to private funds are also presented by commodity pools. To provide the 
Commission with similar information to address these risks, the 
Commission has determined to require registration of certain previously 
exempt CPOs and to further require reporting of information comparable 
to that required in Form PF, which the Commission has previously 
adopted jointly with the SEC. To implement this enhanced oversight, the 
Commission proposed, and has now determined to adopt, the revision and 
rescission of certain discretionary exemptions that it previously 
granted.

B. The Proposal

    Following the recent economic turmoil, and consistent with the 
tenor of the provisions of the Dodd-Frank Act, the Commission 
reconsidered the level of regulation that it believes is appropriate 
with respect to entities participating in the commodity futures and 
derivatives markets. Therefore, on January 26, 2011, the Commission 
proposed amendments and additions to its existing regulatory regime for 
CPOs and CTAs and the creation of two new data collection instruments, 
Forms CPO-PQR and CTA-PR (``Proposal'').\23\ In a concurrent joint 
proposal with the SEC, the Commission also proposed Sec.  4.27(d) and 
sections 1 and 2 of Form PF.\24\
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    \23\ See 76 FR 7976 (Feb. 11, 2011).
    \24\ See 76 FR 8068 (Feb. 11, 2011). Because the Commission did 
not adopt the remainder of proposed Sec.  4.27 at the same time as 
it adopted the subsection of Sec.  4.27 implementing Form PF, the 
Commission modified the designation of Sec.  4.27(d) to be the sole 
text of that section. Additionally, the Commission made some 
revisions to the text of Sec.  4.27 to: (1) clarify that the filing 
of Form PF with the SEC will be considered substitute compliance 
with certain Commission reporting obligations and (2) allow CPOs and 
CTAs who are otherwise required to file Form PF the option of 
submitting on Form PF data regarding commodity pools that are not 
private funds as substitute compliance with certain CFTC reporting 
obligations.
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    In the Proposal, the Commission specifically proposed the following 
amendments: (A) to require the periodic reporting of data by CPOs and 
CTAs regarding their direction of commodity pool assets; (B) to 
identify certain proposed filings with the Commission as being afforded 
confidential treatment; (C) to revise the requirements for determining 
which persons should be required to register as a CPO under Sec.  4.5; 
(D) to require the filing of certified annual reports by all registered 
CPOs; (E) to rescind the exemptions from registration under Sec. Sec.  
4.13(a)(3) and (a)(4); (F) to require annual affirmation of claimed 
exemptive relief for both CPOs and CTAs; (G) to require an additional 
risk disclosure statement from CPOs and CTAs that engage in swaps 
transactions; and (H) to make certain conforming amendments to the 
Commission's regulations in light of the proposed amendments.
    In describing the rationale for the Proposal, the Commission 
stated:

    [T]o ensure that necessary data is collected from CPOs and CTAs 
that are not operators or advisors of private funds, the Commission 
is proposing a new Sec.  4.27, which would require quarterly reports 
from all CPOs and CTAs to be electronically filed with NFA. The 
Commission is promulgating proposed Sec.  4.27 pursuant to the 
Commission's authority to require the filing of reports by 
registered CPOs and CTAs under section 4n

[[Page 11254]]

of the CEA. In an effort to eliminate duplicative filings, proposed 
Sec.  4.27(d) would allow certain CPOs and/or CTAs that are also 
registered as private fund advisers with the SEC pursuant to the 
securities laws to satisfy certain of the Commission's systemic 
reporting requirements by completing and filing the appropriate 
sections of Form PF with the SEC with respect to advised private 
funds.
    In order to ensure that the Commission can adequately oversee 
the commodities and derivatives markets and assess market risk 
associated with pooled investment vehicles under its jurisdiction, 
the Commission is re-evaluating its regulation of CPOs and CTAs. 
Additionally, the Commission does not want its registration and 
reporting regime for pooled investment vehicles and their operators 
and/or advisors to be incongruent with the registration and 
reporting regimes of other regulators, such as that of the SEC for 
investment advisers under the Dodd-Frank Act. (Footnotes 
omitted).\25\
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    \25\ 76 FR 7976, 7977-78 (Feb. 11, 2011).
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C. Comments on the Proposal

    The Commission received 61 comment letters in response to the 
Proposal. The commenters represented a diversity of market 
participants. Seven commenters were registered investment companies or 
registered investment advisers; five commenters were registered or 
exempt CPOs; and three commenters were registered investment companies 
or registered investment advisers that also claimed exemption from 
registration as a CPO under Sec.  4.13. The Commission also received 20 
comments from law firms; 14 comments from trade organizations; two 
comments from individual interested parties; a comment from a 
compliance service provider; and a comment from a registered futures 
association.\26\ The majority of the comments received opposed the 
adoption of the proposed amendments to Sec.  4.5 and the rescission of 
Sec. Sec.  4.13(a)(3) and (a)(4).
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    \26\ Additionally, the Commission received six comments that 
were not pertinent to the substance of the Proposal. Three concerned 
position limits in silver, one consisted of a web address; one was 
an advertisement; and one simply said ``nice.''
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    Having considered these comments, the Commission has decided to 
adopt most of the amendments to part 4 that it proposed, with some 
modifications. In addition, the Commission has decided not to rescind 
the exemption in Sec.  4.13(a)(3) for entities engaged in a de minimis 
amount of derivatives trading. The Commission's amendments to part 4, 
and the modifications to its Proposal are discussed below.
    The scope of this Federal Register release generally is restricted 
to the comments received in response to the Proposal and to the changes 
to, and the clarifications of, the Proposal that the Commission is 
making in response thereto. The Commission encourages interested 
persons to read the Proposal for a fuller discussion of the purpose of 
each of the amendments contained in the Proposal.

D. Significant Changes From the Proposal

    The significant changes from the Proposal that the Commission is 
making in the rules it is adopting today are as follows: (1) The 
marketing restriction in Sec.  4.5 no longer contains the clause ``(or 
otherwise seeking investment exposure to)''; (2) Sec.  4.5 will be 
amended to include an alternative trading threshold test based on the 
net notional value of a registered investment company's derivatives 
positions; (3) annual notices for exemptions and exclusions will be 
filed on an annual calendar year end basis rather than on the 
anniversary of the filing date; and (4) changes have been made to the 
substance of Forms CPO-PQR and CTA-PR and the filing timelines for both 
forms.

II. Responses to Comments on the Proposal

A. Comments Regarding Proposed Amendments to Sec.  4.5

    As part of the Proposal, the Commission proposed amendments to 
Sec.  4.5(c)(2)(iii), reinstating a trading threshold and marketing 
restriction for registered investment companies claiming exclusion from 
the definition of CPO under that section. In support of the Proposal, 
the Commission stated that it became aware that certain registered 
investment companies were offering interests in de facto commodity 
pools while claiming exclusion under Sec.  4.5.\27\ The Commission 
further stated that it believed that registered investment companies 
should not engage in such activities without Commission oversight and 
that such oversight was necessary to ensure consistent treatment of 
CPOs regardless of their status with respect to other regulators.\28\ 
The Commission also recognized that operational issues may exist 
regarding the ability of registered investment companies to comply with 
the Commission's compliance regime.\29\
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    \27\ 76 FR 7976, 7983 (Feb. 12, 2011). The Commission determined 
to propose amendments to Sec.  4.5 following the submission of a 
petition for rulemaking by the National Futures Association, to 
which the Commission has delegated much of its direct oversight 
activities relating to CPOs, CTAs, and commodity pools. See, 75 FR 
56997 (Sept. 17, 2010).
    \28\ Id. at 7984.
    \29\ Id.
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    The Commission received numerous comments regarding the proposed 
amendments to Sec.  4.5. The comments can be broadly categorized into 
eight categories: (1) General comments as to the advisability of making 
such a change and the Commission's justification for doing so; (2) the 
trading threshold; (3) the inclusion of swaps within the trading 
threshold; (4) the proposed marketing restriction; (5) harmonization of 
compliance obligations with those of the SEC; (6) the appropriate 
entity to register as the registered investment company's CPO; (7) the 
use and permissibility of controlled foreign corporations by registered 
investment companies; and (8) the timeline for implementation.
1. General Comments on Proposed Amendments to Sec.  4.5
    Certain comments argued against the adoption of any change to Sec.  
4.5 and questioned the Commission's justification for doing so.\30\ 
Most commenters generally opposed the change because they claimed that 
requiring registration and compliance with the Commission's regulatory 
regime would provide no tangible benefit to the Commission or investors 
because registered investment companies are already subject to 
comprehensive regulation by the SEC.
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    \30\ Comment letter from the Investment Company Institute (April 
12, 2011) (``ICI Letter''); comment letter from the Mutual Fund 
Directors Forum (April 12, 2011) (``MFDF Letter'').
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    The Commission believes that registration with the Commission 
provides two significant benefits. First, registration allows the 
Commission to ensure that all entities operating collective investment 
vehicles participating in the derivatives markets meet minimum 
standards of fitness and competency.\31\ Second, registration provides 
the Commission and members of the public with a clear means of 
addressing wrongful conduct by individuals and entities participating 
in the derivatives markets. The Commission has clear authority to take 
punitive and/or remedial action against registered entities for 
violations of the CEA or of the Commission's regulations. Moreover, the 
Commission has the ability to deny or revoke registration, thereby 
expelling an individual or entity from serving as an intermediary in 
the industry. Members of the public also may access the Commission's 
reparations program or National Futures Association's (``NFA'') 
arbitration program to seek redress for wrongful conduct by a 
Commission registrant

[[Page 11255]]

and/or NFA member. Therefore, the Commission continues to believe that 
its registration requirements further critical regulatory objectives 
and serve important public policy goals.
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    \31\ See H.R. Rep. No. 565 (Part 1), 97th Cong., 2d Sess. 48 
(1982), S. Rep. No. 384, 97th Cong., 2d Sess. 111 (1982). See also, 
48 FR 14933 (Apr. 6, 1983).
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    A number of commenters who expressed general opposition also 
acknowledged that if the Commission determined to proceed with its 
proposed changes to Sec.  4.5, certain areas of harmonization with SEC 
requirements should be addressed. To that end, concurrently with the 
issuance of this rule, the Commission plans to issue a notice of 
proposed rulemaking detailing its proposed modifications to part 4 of 
its regulations to harmonize the compliance obligations that apply to 
dually registered investment companies. Commenters did not question, 
however, that the Commission has a regulatory interest in overseeing 
entities engaging in derivatives trading. Rather, they argued that the 
SEC currently provides adequate oversight of their activities.
    The Commission disagrees with the arguments presented by those 
commenters who argued against the adoption of any change to Sec.  4.5. 
The Commission continues to believe that entities operating collective 
investment vehicles that engage in more than a de minimis amount of 
derivatives trading should be required to register with the Commission. 
The Commission believes that because Congress empowered the Commission 
to oversee the derivatives market, the Commission is in the best 
position to oversee entities engaged in more than a limited amount of 
non-hedging derivatives trading.
    Several commenters also asserted that modifying Sec.  4.5 would 
result in a significant burden to entities required to register with 
the Commission without any meaningful benefit to the Commission.\32\ 
The Commission believes, as discussed throughout this release, that 
entities that are offering services substantially identical to those of 
a registered CPO should be subject to substantially identical 
regulatory obligations. The Commission also recognizes that 
modification to Sec.  4.5 may result in costs for registered investment 
companies. For that reason, as stated above, in conjunction with 
finalizing the proposed amendments to Sec.  4.5, the Commission has 
proposed to adopt a harmonized compliance regime for registered 
investment companies whose activities require oversight by the 
Commission. Although the Commission believes the modifications to Sec.  
4.5 enhance the Commission's ability to effectively oversee derivatives 
markets, it is not the Commission's intention to burden registered 
investment companies beyond what is required to provide the Commission 
with adequate information it finds necessary to effectively oversee the 
registered investment company's derivatives trading activities. Through 
this harmonization, the Commission intends to minimize the burden of 
the amendments to Sec.  4.5.
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    \32\ See ICI Letter; comment letter from Vanguard (April 12, 
2011) (``Vanguard Letter''); comment letter from Reed Smith LLP 
(April 12, 2011) (``Reed Smith Letter''); comment letter from 
AllianceBernstein Mutual Funds (April 12, 2011) (``AllianceBernstein 
Letter''); comment letter from United States Automobile Association 
(April 12, 2011) (``USAA Letter''); comment letter from Principal 
Management Corporation (April 12, 2011) (``PMC Letter''); comment 
letter from Investment Adviser Association (April 12, 2011) (``IAA 
Letter''); comment letter from Dechert LLP and clients (April 12, 
2011) (``Dechert II Letter''); comment letter from Janus Capital 
Management LLC (April 12, 2011) (``Janus Letter''); comment letter 
from Security Traders Association (April 12, 2011) (``STA Letter''); 
comment letter from Invesco Advisers, Inc. (April 12, 2011) 
(``Invesco Letter''); and comment letter from Equinox Fund 
Management, LLC (July 28, 2011) (``Equinox Letter'').
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    Second, the Commission disagrees with the commenters' assertion 
that the Commission would not receive any meaningful benefit from a 
modification to Sec.  4.5. As stated above, the Commission disagrees 
that such registration and oversight is redundant, and emphasizes that 
it is in the best position to adequately oversee the derivatives 
trading activities of entities in which the Commission has a regulatory 
interest. As discussed above, the Commission is charged with 
administering the Commodity Exchange Act to protect market users and 
the public from fraud, manipulation, abusive practices and systemic 
risk related to derivatives that are subject to the Act, and to foster 
open, competitive, and financially sound markets. The Commission's 
programs are structured and its resources deployed in service of that 
mission.
    One commenter questioned the Commission's reasoning for choosing to 
impose additional requirements on registered investment companies but 
not proposing to impose such requirements on other categories of 
entities.\33\ This commenter also stated that the Commission was 
required to detail its reasoning under the Administrative Procedure 
Act.\34\ As stated in the Proposal, the Commission remains concerned 
that registered investment companies are offering managed futures 
strategies, either in whole or in part, without Commission oversight 
and without making the disclosures to both the Commission and investors 
regarding the pertinent facts associated with the investment in the 
registered investment company. The Commission is focused on registered 
investment companies because it is aware of increased trading activity 
in the derivatives area by such entities that may not be appropriately 
addressed in the existing regulatory protections, including risk 
management and recordkeeping and reporting requirements. The SEC has 
also noted this increased trading activity and is reviewing the use of 
derivatives by investment companies.\35\ In its recent concept release 
regarding the use of derivatives by registered investment companies, 
the SEC noted that although its staff had addressed issues related to 
derivatives on a case-by-case basis, it had not developed a 
``comprehensive and systematic approach to derivatives related 
issues.'' \36\ As aptly noted by the Chairman of the SEC, ``The 
controls in place to address fund management in traditional securities 
can lose their effectiveness when applied to derivatives. This is 
particularly the case because a relatively small investment in a 
derivative instrument can expose a fund to potentially substantial gain 
or loss--or outsized exposure to an individual counterparty.'' \37\ 
Despite the commenter's assertion, the Commission is unaware of other 
classes of entities that are excluded from the definition of CPO 
engaging in significant derivatives trading. Of course, if the 
Commission becomes aware of any other categories of excluded entities 
engaging in similar levels of derivatives trading, it will consider 
appropriate action to ensure that such entities and their derivatives

[[Page 11256]]

trading activities are brought under the Commission's regulatory 
oversight. As stated previously, the Commission continues to believe 
that entities that are offering services substantially identical to 
those of a registered CPO should be subject to substantially identical 
regulatory obligations.
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    \33\ See ICI Letter.
    \34\ Id.
    \35\ For example, the SEC recently issued a concept release 
seeking comment on use of derivatives by investment companies, 
noting: ``The dramatic growth in the volume and complexity of 
derivatives investments over the past two decades, and funds' 
increased use of derivatives, have led the [Securities and Exchange] 
Commission and its staff to initiate a review of funds' use of 
derivatives under the Investment Company Act. (footnotes omitted)'' 
76 FR 55237, 55238 (Sep. 7, 2011).
    \36\ 76 FR 55237, 55239 (Sept. 7, 2011). See, Press Release, 
Securities and Exchange Commission, SEC Seeks Public Comment on Use 
of Derivatives by Mutual Funds and Other Investment Companies (Aug. 
31, 2011), available at https://www.sec.gov/news/press/2011/2011-175.htm (`` `The derivatives markets have undergone significant 
changes in recent years, and the Commission is taking this 
opportunity to seek public comment and ensure that our regulatory 
approach and interpretations under the Investment Company Act remain 
current, relevant, and consistent with investor protection,' '' said 
SEC Chairman Mary Shapiro.'').
    \37\ Chairman Mary Shapiro, Opening Statement at SEC Open 
Meeting Item 1--Use of Derivatives by Funds (Aug. 31, 2011), 
available at https://www.sec.gov/news/speech/2011/spch083111mls-item1.htm (``The current derivatives review gives us the opportunity 
to re-think our approach to regulating funds' use of derivatives. We 
are engaging in this review with a holistic perspective, in the wake 
of the financial crisis, and in light of the new comprehensive 
regulatory regime for swaps being developed under the Dodd-Frank 
Act.'').
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2. Comments on the Proposed Trading Threshold
    The Commission also received numerous comments on the proposed 
addition of a trading threshold to the exclusion under Sec.  4.5.\38\ 
The proposed trading threshold provided that derivatives trading could 
not exceed five percent of the liquidation value of an entity's 
portfolio, without registration with the Commission. The Proposal 
excluded activity conducted for ``bona fide hedging'' purposes.\39\ 
Most commenters stated that a five percent threshold was far too low in 
light of the Commission's determination to include swaps within the 
measured activities and the limited scope of the Commission's bona fide 
hedging definition, but no data was provided to support this assertion. 
The Commission, in its adoption of the exemption under Sec.  
4.13(a)(3),\40\ previously determined that five percent is an 
appropriate threshold to determine whether an entity warrants oversight 
by the Commission.\41\
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    \38\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith 
Letter; AllianceBernstein Letter; AII Letter; STA Letter; Janus 
Letter; PMC Letter; USAA Letter; comment letter from Fidelity 
Management and Research Co. (April 12, 2011) (``Fidelity Letter''); 
comment letter from Securities Industry and Financial Markets 
Association (April 12, 2011) (``SIFMA Letter''); comment letter from 
Dechert LLP (July 26, 2011) (``Dechert III Letter''); comment letter 
from Rydex/SGI Morgan, Lewis & Bockius LLP (April 12, 2011) (``Rydex 
Letter''); comment letter from the United States Chamber of Commerce 
(April 12, 2011) (``USCC Letter''); comment letter from Sidley 
Austin LLP (April 12, 2011) (``Sidley Letter''); comment letter from 
the National Futures Association (April 12, 2011) (``NFA Letter''); 
comment letter from Campbell & Company, Inc. (April 12, 2011) 
(``Campbell Letter''); comment letter from AQR Capital Management, 
LLC (April 12, 2011) (``AQR Letter''); comment letter from Steben & 
Company, Inc. (April 12, 2011) (``Steben Letter''); comment letter 
from the Investment Company Institute (July 28, 2011) (``ICI II 
Letter''); and comment from the Association of Institutional 
Investors (April 12, 2011) (``AII Letter'').
    \39\ 76 FR 7976, 7989 (Feb. 11, 2011).
    \40\ 17 CFR 4.13(a)(3).
    \41\ 68 FR 47221, 47225 (Aug. 8, 2003).
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    Despite the views of some commenters, the Commission believes that 
the five percent threshold continues to be the appropriate percentage 
for exemption or exclusion based upon an entity's limited derivatives 
trading. Five percent remains the average required for futures margins, 
although the Commission acknowledges that margin levels for securities 
product futures are significantly higher and the levels for swaps 
margining may be as well. The Commission believes, however, that 
trading exceeding five percent of the liquidation value of a portfolio 
evidences a significant exposure to the derivatives markets. The 
Commission believes that such exposure should subject an entity to the 
Commission's oversight. Moreover, the Commission believes that its 
adoption of an alternative net notional test to determine eligibility 
for exclusion from the definition of CPO, as discussed infra, provides 
flexibility to registered investment companies in consideration of the 
fact that initial margin for certain commodity interest products may 
not permit compliance with the five percent threshold.
    Commenters also recommended that the Commission exclude from the 
threshold calculation various instruments including broad-based stock 
index futures, security futures generally, or financial futures 
contracts as a whole.\42\ The Commission does not believe that 
exempting any of these instruments from the threshold calculation is 
appropriate. The Commission does not believe that there is a meaningful 
distinction between those security or financial futures and other 
categories of futures. The Commission believes that its oversight of 
the use of security or financial futures is just as essential as its 
oversight of physical commodity futures. Congress granted the 
Commission authority over all futures in Sec.  2 of the CEA.\43\ The 
Commission believes that it is in the best position to assess investor 
and market risks posed by entities trading in derivatives regardless of 
type. Therefore, the Commission has decided not to modify the scope of 
the threshold from what was proposed in order to exclude security 
futures or financial futures from the trading threshold.
---------------------------------------------------------------------------

    \42\ See Rydex Letter; Invesco Letter; ICI Letter.
    \43\ 7 U.S.C. 2.
---------------------------------------------------------------------------

    Commenters requested that the Commission expand its definition of 
bona fide hedging as it appears in Sec.  1.3(z) to include risk 
management as a recognized bona fide hedging activity for purposes of 
Sec.  4.5.\44\ The Proposal excluded activity conducted for ``bona fide 
hedging'' purposes as that term was defined in Sec.  1.3 as it existed 
at the time of the proposal.\45\ Further, the Proposal noted that the 
Commission anticipated that the definition of ``bona fide hedging'' 
would be modified through future rulemakings,\46\ which were open for 
comments from the public.
---------------------------------------------------------------------------

    \44\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed Smith 
Letter; AllianceBernstein Letter; IAA Letter; Janus Letter; and STA 
Letter.
    \45\ 76 FR 7976, 7989 (Feb. 11, 2011).
    \46\ 76 FR 7976, 7984 (Feb. 11, 2011).
---------------------------------------------------------------------------

    The Commission recently adopted final rules regarding position 
limits and, through that rulemaking, implemented a new statutory 
definition of bona fide hedging transactions for exempt and excluded 
commodity transactions as part of new Sec.  151.5.\47\ This statutory 
definition limits the scope of bona fide hedging transactions for 
exempt and agricultural commodities, and does not provide for a risk 
management exemption for position limits purposes.\48\ With regard to 
position limits and bona fide hedging transactions for excluded 
commodities, the Commission amended the pre-Dodd-Frank definition of 
bona fide hedging in Sec.  1.3(z) to only apply to excluded 
commodities. Further, the Commission allowed DCMs and SEFs that are 
trading facilities to provide for a risk management exemption from 
position limits for excluded commodity transactions.
---------------------------------------------------------------------------

    \47\ 7 U.S.C. 6a(c); 76 FR 71626, 71643 (Nov. 18, 2011).
    \48\ 76 FR 71626, 71644 (Nov. 18, 2011).
---------------------------------------------------------------------------

    The Commission does not believe that it is appropriate to exclude 
risk management transactions from the trading threshold. The Commission 
believes that an important distinction between bona fide hedging 
transactions and those undertaken for risk management purposes is that 
bona fide hedging transactions are unlikely to present the same level 
of market risk as they are offset by exposure in the physical markets. 
Additionally, the Commission is concerned that in the context of 
exclusion under Sec.  4.5, a risk management exclusion would permit 
registered investment companies to engage in a greater volume of 
derivatives trading than other entities which are engaged in similar 
activities, but which are otherwise required to register as CPOs. This 
could result in disparate treatment among similarly situated entities. 
Moreover, there was no consensus among the commenters as to the 
appropriate definition of risk management transactions. Thus, the 
Commission believes that it may be difficult in this context to 
properly limit the scope of such exclusion as objective criteria are 
not universally recognized, which would make such exclusion onerous to 
enforce.\49\
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    \49\ The Commission notes that Sec.  4.5 references the 
definition of bona fide hedging for exempt and agricultural 
commodities under Sec.  151.5 as well as the definition of bona fide 
hedging for excluded commodities under Sec.  1.3(z). Market 
participants should not construe either Sec.  151.5 or Sec.  1.3(z) 
as permitting a risk management exemption for purposes of 
determining compliance with the trading threshold in Sec.  4.5.

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[[Page 11257]]

    During numerous meetings with commenters, the commenters noted that 
most registered investment companies use derivatives for risk 
management purposes, namely to offset the risk inherent in positions 
taken in the securities or bond markets, or to equitize cash 
efficiently. Although the Commission recognizes the importance of the 
use of derivatives for risk management purposes, it does not believe 
that transactions that are not within the bona fide hedging definition 
should be excluded from the determination of whether an entity meets 
the trading threshold for registration and oversight. Therefore, the 
Commission has decided not to exclude risk management activities by 
registered investment companies from the trading threshold for purposes 
of Sec.  4.5.
    Several panelists at the Commission's staff roundtable held on July 
6, 2011\50\ (``Roundtable'') suggested that, instead of a trading 
threshold that is based on a percentage of margin, the Commission 
should focus solely on entities that offer ``actively managed futures'' 
strategies.\51\ The panelist defined ``actively managed futures'' 
strategies as those in which the entity or its investment adviser made 
its own decisions as to which derivatives to take positions in, as 
compared to the ``passive'' use of an index, wherein the entity's 
investments simply track those held by an index.\52\
---------------------------------------------------------------------------

    \50\ See Notice of CFTC Staff Roundtable Discussion on Proposed 
Changes to Registration and Compliance Regime for Commodity Pool 
Operators and Commodity Trading Advisors, available at https://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.
    \51\ See Transcript of CFTC Staff Roundtable Discussion on 
Proposed Changes to Registration and Compliance Regime for Commodity 
Pool Operators and Commodity Trading Advisors (``Roundtable 
Transcript''), at 19, 25, 30, 76-77, 87-90, available at https://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.
    \52\ Id.
---------------------------------------------------------------------------

    The Commission does not believe that it is proper to exclude from 
the Commission's oversight those entities that are using an index or 
other so-called ``passive'' means to track the value of other 
derivatives. Establishing ``active'' versus ``passive'' use of 
derivatives as a criterion for entitlement to the exclusion would 
introduce an element of subjectivity to an otherwise objective standard 
and make the threshold more difficult to interpret, apply, and enforce. 
It also could have the undesirable effect of encouraging funds to 
structure their investment activities to avoid regulation. Moreover, 
the use of an index or other passive investment vehicle by a large 
number of investment companies can amplify the market assumptions built 
into an index or other vehicle. Thus, the Commission has decided not to 
adopt the panelist's suggestion that the Commission focus on whether an 
entity offers an actively managed futures strategy.
    One commenter suggested that the Commission should consider the 
adoption of an alternative test that would be identical to the 
aggregate net notional value test that is currently available under 
Sec.  4.13(a)(3)(ii)(B).\53\ Section 4.13(a)(3)(ii)(B) provides that an 
entity can claim exemption from registration if the net notional value 
of its fund's derivatives trading does not exceed one hundred percent 
of the liquidation value of the fund's portfolio.\54\
---------------------------------------------------------------------------

    \53\ Dechert III Letter.
    \54\ 17 CFR 4.13(a)(3)(ii)(B).
---------------------------------------------------------------------------

    Conversely, several panelists at the Roundtable opposed such a 
test, stating that it was not a reliable means to measure an entity's 
exposure in the market.\55\ Specifically, certain panelists asserted 
that the net notional value of positions may not provide a reliable 
measure of the risk posed by certain entities in the market.\56\
---------------------------------------------------------------------------

    \55\ See Roundtable Transcript at 69-71.
    \56\ See Roundtable Transcript at 70.
---------------------------------------------------------------------------

    The Commission first considered the addition of an alternative net 
notional trading threshold when it proposed to amend Sec.  4.5 in 
2002.\57\ In support of its proposal, the Commission stated that the 
alternative test provided otherwise regulated entities that use certain 
classes of futures with higher initial margin requirements with an 
opportunity to also receive exclusionary relief from the definition of 
CPO.\58\ The Commission further stated that the inclusion of an 
alternative test enabled entities seeking exclusion to rely on 
whichever test was less restrictive based on their futures 
positions.\59\ In 2003, the Commission proposed and adopted final rules 
amending Sec.  4.5, which eliminated the five percent trading threshold 
and did not adopt the alternative net notional test.\60\ In stating its 
rationale for rescinding the five percent threshold test and declining 
to adopt the alternative net notional test, the Commission stated that 
because it was simultaneously proposing, and ultimately adopting, an 
exemption from registration in Sec.  4.13(a)(4), which did not impose 
any trading restriction, the Commission would remove the trading 
restrictions from Sec.  4.5 as well to provide consistent 
treatment.\61\
---------------------------------------------------------------------------

    \57\ 67 FR 65743 (Oct. 28, 2002).
    \58\ 67 FR 65743, 65744-45.
    \59\ 67 FR 65743, 65745.
    \60\ 68 FR 12622 (Mar. 17, 2003); 68 FR 47221 (Aug. 8, 2003).
    \61\ 68 FR 12622, 12625-26 (noting that although entities 
excluded under Sec.  4.5 could solicit retail participants, as 
compared to those entities exempt under Sec.  4.13(a)(4), which may 
only offer to certain high net worth entities and individuals, the 
Commission stated that the fact that the Sec.  4.5 entities were 
otherwise regulated supported consistent criteria for relief).
---------------------------------------------------------------------------

    The Commission no longer believes that its prior justification for 
abandoning the alternative net notional test is persuasive. By the 
adoption of this final rule, the Commission will reinstate the five 
percent trading threshold in Sec.  4.5 for registered investment 
companies and rescind the exemption in Sec.  4.13(a)(4), which reverses 
the regulatory conditions in existence in 2003. The Commission believes 
that the appropriate criteria for exclusion through the use of a net 
notional test is delineated in Sec.  4.13(a)(3)(ii)(B),\62\ commonly 
known as the ``de minimis exemption,'' albeit with the addition of 
allowing unlimited use of futures, options, or swaps for bona fide 
hedging purposes, which is not permitted under Sec.  4.13(a)(3).
---------------------------------------------------------------------------

    \62\ The net notional test as it appears in Sec.  4.13(a)(3) 
will be amended by this rulemaking to provide guidance regarding the 
ability to net cleared swaps.
---------------------------------------------------------------------------

    As stated previously, the net notional test, as set forth under 
Sec.  4.13(a)(3)(ii)(B), permits entities to claim relief if the 
aggregate net notional value of the entity's commodity interest 
positions does not exceed 100 percent of the liquidation value of the 
pool's portfolio.\63\ Notional value is defined by asset class. For 
example, the notional value of futures contracts is derived by 
multiplying the number of contracts by the size of the contract, in 
contract units, and then multiplying by the current market price for 
the contract.\64\ The notional value of a cleared swap, however, will 
be determined consistent with the provisions of part 45 of the 
Commission's regulations. The ability to net positions is also 
determined by asset class, with entities being able to net futures 
contracts across designated contract markets or foreign boards of 
trade, whereas swaps may only be netted if cleared by the same 
designated clearing organization (``DCO'') and it is otherwise 
appropriate.\65\
---------------------------------------------------------------------------

    \63\ 17 CFR 4.13(a)(3)(ii)(B).
    \64\ Id.
    \65\ See discussion of amendments to Sec.  4.13(a)(3)(ii)(B) 
infra.
---------------------------------------------------------------------------

    The Commission believes that the adoption of an alternative net 
notional test will provide consistent standards for relief from 
registration as a CPO for entities whose portfolios only contain a

[[Page 11258]]

limited amount of derivatives positions and will afford registered 
investment companies with additional flexibility in determining 
eligibility for exclusion. Therefore, the Commission will adopt an 
alternative net notional test, consistent with that set forth in Sec.  
4.13(a)(3)(ii)(B) as amended herein, for registered investment 
companies claiming exclusion from the definition of CPO under Sec.  
4.5.
    The Commission also received several comments supporting both the 
imposition of a trading threshold in general and the five percent 
threshold specifically.\66\ At least one commenter suggested, however, 
that the Commission consider requiring registered investment companies 
that exceed the threshold to register, but not subjecting them to the 
Commission's compliance regime beyond requiring them to be subject to 
the examination of their books and records, and examination by the 
National Futures Association.\67\ In effect, this commenter requested 
that the Commission subject such registrant to ``notice registration.'' 
The Commission believes that adopting the commenter's approach would 
not materially change the information that the Commission would receive 
regarding the activities of registered investment companies in the 
derivatives markets, which is one of the Commission's purposes in 
amending Sec.  4.5. Moreover, a type of notice registration would not 
provide the Commission with any real means for engaging in consistent 
ongoing oversight. Notwithstanding such notice registration, the 
Commission would still be deemed to have regulatory responsibility for 
the activities of these registrants. In the Commission's view, notice 
registration does not equate to an appropriate level of oversight. For 
that reason, the Commission has determined not to adopt the notice 
registration system proposed by the commenter. The Commission is 
adopting the amendment to Sec.  4.5 regarding the trading threshold 
with the addition of an alternative net notional test for the reasons 
stated herein and those previously discussed in the Proposal.
---------------------------------------------------------------------------

    \66\ See NFA Letter, Campbell Letter, AQR Letter, Steben Letter.
    \67\ See AQR Letter.
---------------------------------------------------------------------------

3. Comments on the Inclusion of Swaps in the Trading Threshold
    The Commission also received numerous comments opposing its 
decision to include swaps within the threshold test discussed 
above.\68\ Several commenters expressed concern that the Commission 
would require inclusion of swaps within the threshold prior to its 
adoption of final rules further defining the term ``swap'' and 
explaining the margining requirements for such instruments. The 
Commission agrees that it should not implement the inclusion of swaps 
within the threshold test prior to the effective date of such final 
rules. Therefore, it is the Commission's intention to establish the 
compliance date of the inclusion of swaps within the threshold 
calculation as 60 days after the final rules regarding the definition 
of ``swap'' and the delineation of the margin requirement for such 
instruments are effective.\69\ The Commission believes that such 
compliance date will provide entities with sufficient time to assess 
the impact of such rules on their portfolios and to make the 
determination as to whether registration with the Commission is 
required.
---------------------------------------------------------------------------

    \68\ See Janus Letter; Reed Smith Letter; AllianceBernstein 
Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA 
Letter; Dechert II Letter; AII Letter; and SIFMA Letter.
    \69\ Effective Date for Swap Regulation, 76 FR 42508 (issued and 
made effective by the Commission on July 14, 2011; published in 
Federal Register on July 19, 2011).
---------------------------------------------------------------------------

    The Commission also received a comment asking for additional 
clarification regarding its decision to include swaps within the 
threshold.\70\ The Dodd-Frank Act amended the statutory definition of 
the terms ``commodity pool operator'' and ``commodity pool'' to include 
those entities that trade swaps.\71\ If the Commission were to adopt 
the trading threshold and only include futures and options as the basis 
for calculating compliance with the threshold, the swaps activities of 
the registered investment companies would still trigger the 
registration requirement notwithstanding the exclusion of swaps from 
the calculus. That is, the purpose of the threshold test is to define a 
de minimis amount of trading activity that would not trigger the 
registration requirement. If swaps were excluded, any swaps activities 
undertaken by a registered investment company would result in that 
entity being required to register because there would be no de minimis 
exclusion. As a result, one swap contract would be enough to trigger 
the registration requirement. For that reason, if the Commission wants 
to permit some de minimis level of swaps activity by registered 
investment companies without registration with the Commission, it must 
do so explicitly in the exclusion.\72\ Because the Commission has 
determined that de minimis activity by registered investment companies 
does not implicate the Commission's regulatory concerns, the Commission 
has decided to include swaps as a component of the trading threshold.
---------------------------------------------------------------------------

    \70\ See Janus Letter; Reed Smith Letter; AllianceBernstein 
Letter; USAA Letter; ICI Letter; PMC Letter; Invesco Letter; IAA 
Letter; Dechert II Letter; AII Letter; and SIFMA Letter.
    \71\ 7 U.S.C. 1a(10); 1a(11).
    \72\ Any reference to a de minimis level of swaps activities by 
registered investment companies only applies in the context of CPO 
registration by registered investment companies.
---------------------------------------------------------------------------

4. Comments on the Proposed Marketing Restriction
    The marketing restriction, as proposed by the Commission, prohibits 
the marketing of interests in the registered investment company ``as a 
vehicle for trading in (or otherwise seeking investment exposure to) 
the commodity futures, commodity options, or swaps markets.'' \73\ 
Again, as with the other aspects of the proposed amendments to Sec.  
4.5, the Commission received numerous comments on this prohibition.\74\
---------------------------------------------------------------------------

    \73\ 76 FR 7976, 7989 (Feb. 12, 2011).
    \74\ See Rydex Letter; Fidelity Letter; SIFMA Letter; AII 
Letter; ICI Letter; Vanguard Letter; Reed Smith Letter; 
AllianceBernstein Letter; USAA Letter; PMC Letter; Invesco Letter; 
Janus Letter; STA Letter; comment letter from the Managed Futures 
Association regarding proposed amendments to Sec.  4.5 (April 12, 
2011) (``MFA II Letter''); Dechert II Letter; NFA Letter; comment 
letter from Alston & Bird, LLP (April 12, 2011) (``Alston Letter''); 
Campbell Letter; AQR Letter; Steben Letter; and Dechert III Letter.
---------------------------------------------------------------------------

    The vast majority of comments urged the Commission to remove the 
clause ``or otherwise seeking investment exposure to'' as introducing 
an unacceptable level of ambiguity into the marketing restriction.\75\ 
The Commission agrees with these comments and believes that the removal 
of this clause is appropriate as the clause does not meaningfully add 
to the marketing restriction and only creates uncertainty. Thus, the 
Commission will adopt the marketing restriction without the clause ``or 
otherwise seeking investment exposure to * * *''
---------------------------------------------------------------------------

    \75\ See, e.g., ICI Letter; Alston Letter; Rydex Letter; and 
Vanguard Letter.
---------------------------------------------------------------------------

    The Commission also received many comments asking that the 
Commission provide some clarification regarding the factors that it 
would consider in making the determination whether an entity violated 
the marketing restriction.\76\ The Commission agrees that providing 
factors to further explain the plain language of the marketing 
restriction would be helpful to those who plan to market registered 
investment companies

[[Page 11259]]

to investors. The Commission has determined, however, that such factors 
should be instructive and that no single factor is dispositive. The 
Commission will determine whether a violation of the marketing 
restriction exists on a case by case basis through an examination of 
the relevant facts. The Commission seeks to discourage entities from 
designing creative marketing with the intent to avoid the marketing 
restriction.
---------------------------------------------------------------------------

    \76\ See ICI Letter; MFA II Letter; Dechert II Letter; Invesco 
Letter; NFA Letter; Campbell Letter; Steben Letter; and AQR Letter.
---------------------------------------------------------------------------

    To address commenters' requests for guidance, the Commission 
believes that the following factors are indicative of marketing a 
registered investment company as a vehicle for investing in commodity 
futures, commodity options, or swaps:
     The name of the fund;
     Whether the fund's primary investment objective is tied to 
a commodity index;
     Whether the fund makes use of a controlled foreign 
corporation for its derivatives trading;
     Whether the fund's marketing materials, including its 
prospectus or disclosure document, refer to the benefits of the use of 
derivatives in a portfolio or make comparisons to a derivatives index;
     Whether, during the course of its normal trading 
activities, the fund or entity on its behalf has a net short 
speculative exposure to any commodity through a direct or indirect 
investment in other derivatives;
     Whether the futures/options/swaps transactions engaged in 
by the fund or on behalf of the fund will directly or indirectly be its 
primary source of potential gains and losses; and
     Whether the fund is explicitly offering a managed futures 
strategy.\77\
---------------------------------------------------------------------------

    \77\ These factors are derived in substantial part from the 
Steben Letter and AQR Letter.
---------------------------------------------------------------------------

    The Commission will give more weight to the final factor in the 
list when determining whether a registered investment company is 
operating as a de facto commodity pool. In contrast, a registered 
investment company that does not explicitly offer a managed futures 
strategy could still be found to have violated the marketing 
restriction based on whether its conduct satisfied any number of the 
other factors enumerated above. Put differently, if a registered 
investment company offers a strategy with several indicia of a managed 
futures strategy, yet avoids explicitly describing the strategy as such 
in its offering materials, that registered investment company may still 
be found to have violated the marketing restriction.
    The Commission also notes that whether the name of the fund 
includes the terms ``futures'' or ``derivatives,'' or otherwise 
indicates a possible focus on futures or derivatives, will not be 
considered a dispositive factor, but rather one of many that the 
Commission will consider in making its determination. Moreover, the 
Commission will not consider the mere disclosure to investors or 
potential investors that the registered investment company may engage 
in derivatives trading incidental to its main investment strategy and 
the risks associated therewith as being violative of the marketing 
restriction.
    At the Roundtable, several panelists questioned the Commission's 
reasoning for deeming the use of a controlled foreign corporation 
(``CFC'') to be an appropriate factor in determining whether the 
registered investment company violates the marketing restriction. Based 
on comments received at the Roundtable and during the comment period, 
the Commission believes that registered investment companies use 
controlled foreign corporations as a mechanism to invest up to 25 
percent of the registered investment company's portfolio in 
derivatives.\78\ The Commission, therefore, believes that a registered 
investment company's use of a CFC may indicate that the company is 
engaging in derivatives trading in excess of the trading threshold. 
Again, the Commission will consider this factor in the context of the 
registered investment company's other conduct and will not view this 
factor as being dispositive of a violation of the marketing 
restriction.
---------------------------------------------------------------------------

    \78\ See Roundtable Transcript at 152-53.
---------------------------------------------------------------------------

    For these reasons, and those stated in the Proposal, the Commission 
adopts the marketing restriction in Sec.  4.5 with the modifications 
discussed herein.
5. Comments on the Harmonization of Compliance Obligations
    Many commenters raised concerns about the potential conflicts 
between the Commission's regulatory regime and that imposed by the SEC 
if the Commission were to adopt the proposed amendments as final 
rules.\79\ As noted above, in an effort to obtain further information 
from interested parties, Commission staff held the Roundtable, and 
invited staff from the SEC, the IRS, and members of various trade 
organizations. The roundtable focused predominantly on harmonization of 
the Commission's compliance regime with that of the SEC. Upon 
consideration of the comments and the discussions held as a result of 
the Roundtable relating to registered investment companies that will be 
required to register under amended Sec.  4.5, the Commission agrees 
that it is necessary to harmonize the Commission's compliance 
obligations under part 4 of the Commission's regulations with the 
requirements of the SEC for registered investment companies. To that 
end, concurrently with the issuance of this rule, the Commission is 
issuing a notice of proposed rulemaking detailing its proposed 
modifications to part 4 of its regulations to harmonize the compliance 
obligations that apply to dually registered investment companies. The 
Commission will not require entities that must register due to the 
amendments to Sec.  4.5 to comply with the Commission's compliance 
regime until the adoption of final rules governing the compliance 
framework for registered investment companies subject to the 
Commission's jurisdiction.
---------------------------------------------------------------------------

    \79\ See Vanguard Letter; ICI Letter; Dechert III Letter; Reed 
Smith Letter; AllianceBernstein Letter; USAA Letter; PMC Letter; 
Invesco Letter; IAA Letter; Dechert II Letter; Fidelity Letter; 
Janus Letter; SIFMA Letter; STA Letter; AQR Letter; NFA Letter; MFA 
II Letter; Alston Letter; Rydex Letter; and ICI II Letter.
---------------------------------------------------------------------------

6. Comments Regarding the Entity Required to Register as the CPO
    The Commission received a number of comments requesting 
clarification as to which entity would be required to register as a CPO 
if a registered investment company would not qualify for exclusion 
under Sec.  4.5, as amended.\80\ The commenters consistently proposed 
that the registered investment company's investment adviser is the 
appropriate entity to register in the capacity of the investment 
company's CPO. The Commission agrees that the investment adviser is the 
most logical entity to serve as the registered investment company's 
CPO. To require a member or members of the registered investment 
company's board of directors to register would raise operational 
concerns for the registered investment company as it would result in 
piercing the limitation on liability for actions undertaken in the 
capacity of director.\81\ Thus, the Commission concludes that the 
investment adviser for the registered investment company is the entity 
required to register as the CPO.
---------------------------------------------------------------------------

    \80\ See ICI Letter; Reed Smith Letter; AllianceBernstein 
Letter; Rydex Letter; Fidelity Letter; USAA Letter; PMC Letter; IAA 
Letter; Janus Letter; SIFMA Letter; STA Letter; comment letter from 
AlphaSimplex Group (April 12, 2011) (``ASG Letter''); NFA Letter; 
MFDF Letter; and Campbell Letter.
    \81\ See MFDF Letter.

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[[Page 11260]]

7. Comments Regarding the Use of Controlled Foreign Corporations
    The Commission received many comments regarding the use of CFCs by 
registered investment companies for purposes of engaging in commodities 
trading. As stated previously, it is the Commission's understanding 
that registered investment companies invest up to 25 percent of their 
assets in the CFC, which then engages in actively managed derivatives 
strategies, either on its own or under the direction of one or more 
CTAs. Operators of CFCs have been exempt from Commission registration 
by claiming relief under Sec.  4.13(a)(4) of the Commission's 
regulations because the sole participant in the CFC is the registered 
investment company. Additionally, at the Roundtable, panelists informed 
Commission staff that several registered investment companies that 
operated CFCs did not claim relief under Sec.  4.13(a)(4) because it 
was their opinion that the CFC was merely a subdivision of the 
registered investment company and was not a separate commodity 
pool.\82\
---------------------------------------------------------------------------

    \82\ See Roundtable Transcript at 165.
---------------------------------------------------------------------------

    Commenters urged the Commission to continue to permit registered 
investment companies to use CFCs and to allow such CFCs to be exempt 
from registration with the Commission under Sec.  4.13 or exclude them 
under Sec.  4.5 by reason of their sole investor being excluded as 
well. Commenters proposed various mechanisms by which the Commission 
could obtain information regarding the activities of CFCs, including 
requiring disclosure of CFC fees and expenses at the registered 
investment company level, requiring a representation that the CFC will 
comply with key provisions of the Investment Company Act of 1940 
(``Investment Company Act''),\83\ and requiring the registered 
investment company to make its CFC's books and records available to the 
Commission and NFA for inspection.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 80a-1, et seq.
---------------------------------------------------------------------------

    The Commission does not oppose the continued use of CFCs by 
registered investment companies, but it believes that CFCs that fall 
within the statutory definition of ``commodity pool'' should be subject 
to regulation as a commodity pool.\84\ The Dodd-Frank Act amended the 
CEA to define a commodity pool as ``any investment trust, syndicate, or 
similar form of enterprise operated for the purpose of trading in 
commodity interests, including any * * * commodity for future delivery, 
security futures product, or swap.'' \85\ Based on a plain language 
reading of the statutory definition, CFCs wholly owned by registered 
investment companies and used for trading commodity interests are 
properly considered commodity pools. These entities also satisfy the 
definition of ``pool'' delineated in Sec.  4.10(d)(1) of the 
Commission's regulations, which is substantively identical to the 
statutory definition. There is no meaningful basis for concluding 
otherwise. Moreover, the Commission believes that each separate legally 
cognizable entity must be assessed on its own characteristics and that 
a CFC should not be entitled to exclusion simply because its parent 
company is a registered investment company that may be entitled to 
exclusion under Sec.  4.5. Therefore, the Commission does not oppose 
the use of CFCs for trading in commodity interests by registered 
investment companies, but such CFCs will be required to have their CPOs 
register with the Commission unless they may claim exemption or 
exclusion therefrom on their own merits.
---------------------------------------------------------------------------

    \84\ 7 U.S.C. 1a(10).
    \85\ 7 U.S.C. 1a(10).
---------------------------------------------------------------------------

8. Comments Regarding Implementation of Amendments
    The Commission received several comments with suggestions regarding 
implementation of the proposed amendments to Sec.  4.5, if the 
Commission decided to adopt the proposed provisions as final rules.\86\ 
Several commenters recommended that the Commission provide for an 
undefined ``substantial transition period for compliance.'' \87\ 
Conversely, one commenter suggested that the Commission should only 
provide a short period of time for compliance.\88\ Another commenter 
suggested that at least 12-months would be required for registered 
investment companies to come into registration and compliance with 
Commission requirements.\89\ Finally, a commenter suggested that the 
Commission delay implementation until all mandatory Dodd-Frank Act 
rules are implemented.\90\
---------------------------------------------------------------------------

    \86\ See Steben Letter; ICI Letter; NFA Letter; Reed Smith 
Letter; AllianceBernstein Letter; USAA Letter; PMC Letter; IAA 
Letter; Janus Letter; STA Letter; Rydex Letter; Alston Letter; and 
comment letter from the Association of Institutional Investors (July 
1, 2011) (``AII II Letter'').
    \87\ See ICI Letter; NFA Letter; Reed Smith Letter; 
AllianceBernstein Letter; USAA Letter; PMC Letter; IAA Letter; Janus 
Letter; and STA Letter.
    \88\ See Steben Letter.
    \89\ See Rydex Letter.
    \90\ See AII II Letter.
---------------------------------------------------------------------------

    In light of the Commission's proposed harmonization effort with 
respect to the compliance obligations for dually registered investment 
companies and the ongoing efforts to further define the term ``swap'' 
and the margin requirements for swaps positions, the Commission 
recognizes that a short implementation period is not practicable. The 
Commission believes that 11 months is an adequate amount of time to 
enable compliance by existing registered investment companies. 
Recognizing that the definition of swap is not yet finalized, the 
Commission has decided that compliance with the amendments to Sec.  4.5 
for purposes of registration only will occur on the later of either 
December 31, 2012 or within 60-days following the adoption of final 
rules defining the term ``swap,'' and establishing margin requirements 
for such instruments.\91\ Entities required to register due to the 
amendments to Sec.  4.5 shall be subject to the Commission's 
recordkeeping, reporting, and disclosure requirements set forth in part 
4 of the Commission's regulations within 60 days following the 
effectiveness of a final rule implementing the Commission's proposed 
harmonization effort pursuant to the concurrent proposed rulemaking.
---------------------------------------------------------------------------

    \91\ Effective Date for Swap Regulation, 76 FR 42508.
---------------------------------------------------------------------------

    Several commenters also suggested that the Commission exempt from 
compliance those registered investment companies that have already 
claimed relief under Sec.  4.5.\92\ The Commission does not believe 
that ``grandfathering'' is appropriate in this context. As the 
Commission stated in its Proposal, and reaffirms in this preamble, part 
of the purpose of amending Sec.  4.5 is to ensure that entities that 
are engaged in a certain level of derivatives trading are subject to 
the registration and compliance obligations and oversight by the 
Commission.\93\ Grandfathering is inconsistent with the goals of the 
Commission's amendments. The Commission, however, believes that 
harmonization of the Commission's compliance regime with that of the 
SEC will minimize the regulatory burden of existing registered 
investment companies. In addition, the Commission is permitting a 
sufficient amount of time for existing entities to come into compliance 
before the compliance dates set forth above. Therefore, the Commission 
believes that it is addressing the commenters' concerns through 
harmonization while still ensuring that the Commission has the

[[Page 11261]]

information necessary to oversee all participants in the derivatives 
markets.
---------------------------------------------------------------------------

    \92\ See ICI Letter; Reed Smith Letter; AllianceBernstein 
Letter; Invesco Letter; IAA Letter; Janus Letter; AII Letter; SIFMA 
Letter; and STA Letter.
    \93\ 76 FR 7976, 7983-84 (Feb. 12, 2011).
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B. Comments Regarding Proposed Amendment to Sec.  4.7

    The Commission proposed two amendments to Sec.  4.7. The first 
proposed to amend Sec. Sec.  4.7(a)(3)(ix) and (a)(3)(x) to incorporate 
by reference the accredited investor standard from the SEC's Regulation 
D \94\ under the Securities Act of 1933,\95\ rather than by direct 
inclusion of its specific terms. The Commission stated that this 
amendment would ``permit the Commission's definition of QEP to continue 
to include the specific terms of the accredited investor standard in 
the event that it is later modified by the SEC without requiring the 
Commission to amend Sec.  4.7 each time to maintain parity.'' \96\
---------------------------------------------------------------------------

    \94\ 17 CFR 230.501(a)(5), (a)(6) (2011).
    \95\ 15 U.S.C. 77a, et seq.
    \96\ 76 FR 7976, 7985 (Feb. 12, 2011).
---------------------------------------------------------------------------

    The Commission received one comment supporting this proposed 
amendment. Specifically, the commenter stated its belief that this 
amendment would ``facilitate consistency amongst federal standards for 
financial sophistication and reduce investor confusion.'' \97\ The 
Commission agrees and, accordingly, is adopting the amendments to 
Sec. Sec.  4.7(a)(3)(ix) and (a)(3)(x) as proposed.
---------------------------------------------------------------------------

    \97\ See MFA II Letter.
---------------------------------------------------------------------------

    The second proposed amendment to Sec.  4.7 would rescind the relief 
provided in Sec.  4.7(b)(3) \98\ from the certification requirement of 
Sec.  4.22(c) \99\ for financial statements contained in commodity pool 
annual reports. In support of the Proposal, the Commission noted that 
approximately 85 percent of all pools operated under Sec.  4.7 in 
fiscal year 2009 filed financial statements that were certified by 
certified public accountants, ``despite being eligible to claim relief 
from certification under Sec.  4.7(b)(3).'' \100\ The number of 
uncertified financial statements has continued to decline and, for 
fiscal year 2010, approximately 91 percent of all reports filed for 
pools operated under Sec.  4.7 included financial statements that were 
certified by certified public accountants.\101\ In the Proposal, the 
Commission stated its belief that ``requiring certification of 
financial information by an independent accountant in accordance with 
established accounting standards will ensure the accuracy of the 
financial information submitted by its registrants,'' and will further 
the stated purposes of the Dodd-Frank Act.\102\
---------------------------------------------------------------------------

    \98\ 17 CFR 4.7(b)(3) (2011).
    \99\ Id. 4.22(c).
    \100\ 76 FR 7967, 7984-85 (Feb. 12, 2011).
    \101\ In 2010, 951 pools were operated pursuant to Sec.  4.7 and 
84 of those pools filed uncertified financial statements for fiscal 
year 2010.
    \102\ Id. at 7985.
---------------------------------------------------------------------------

    The Commission received two comments regarding this proposed 
amendment. One commenter supported the proposed rescission and the 
Commission's stated justification for doing so.\103\ The other 
commenter recommended that the Commission retain an exemption from 
certification of financial statements for entities where the pool's 
participants are limited to the principals of its CPO(s) and CTA(s) and 
other categories of employees listed in Sec.  4.7(a)(2)(viii).\104\ It 
is unclear how many of the pools operated under Sec.  4.7 would qualify 
for such relief if adopted. The Commission believes that rather than 
adopt an exemption for such entities without data regarding the scope 
of the exemption's applicability, it is more appropriate to rescind the 
exemption from certification for all pools operated under Sec.  
4.7(b)(3) generally and permit entities to write to the Division of 
Swap Dealer and Intermediary Oversight to request exemptive relief from 
the certification requirement on a case by case basis under Sec.  
140.99.\105\ By requiring entities to request relief from the 
Commission, the Commission can better determine whether such an 
exemption should be adopted in the future. Therefore, the Commission is 
adopting the amendments to Sec.  4.7 as proposed.
---------------------------------------------------------------------------

    \103\ See NFA Letter.
    \104\ See MFA II Letter.
    \105\ 17 CFR Sec.  140.99.
---------------------------------------------------------------------------

C. Comments Regarding the Proposed Rescission of Sec. Sec.  4.13(a)(3) 
and (a)(4)

    As stated previously, the Commission proposed to rescind Sec. Sec.  
4.13(a)(3) and (a)(4). After considering the comments received, which 
are detailed herein, the Commission has determined to retain the de 
minimis exemption in Sec.  4.13(a)(3). The Commission concluded that 
overseeing entities with less than five percent exposure to commodity 
interests is not the best use of the Commission's limited resources. 
Moreover, the Commission believes that the retention of the de minimis 
exemption in Sec.  4.13(a)(3) provides for consistent treatment of 
entities engaging in de minimis levels of trading due to the addition 
of a five percent trading threshold in Sec.  4.5 as well. The 
Commission received several comments requesting that the Commission 
modify Sec.  4.13(a)(3) in various respects. The Commission has 
determined, however, that it is appropriate to retain Sec.  4.13(a)(3) 
in its current form, for the reasons detailed below.
1. General Comments
    In addition to the comments that the Commission received regarding 
the specific parts of the Proposal rescinding Sec. Sec.  4.13(a)(3) and 
(a)(4), the Commission received numerous comments regarding the 
proposed rescissions generally.\106\ Broadly, the comments opposed the 
rescission of both provisions.
---------------------------------------------------------------------------

    \106\ See comment letter from the New York State Bar Association 
(April 12, 2011) (``NYSBA Letter''); comment letter from Skadden, 
Arps, Slate, Meagher & Flom LLP (April 12, 2011) (``Skadden 
Letter''); MFA Letter; comment letter from Katten, Muchin Rosenman 
LLP (April 12, 2011) (``Katten Letter''); Fidelity Letter; Dechert 
Letter; comment letter from the Alternative Investment Management 
Association, Ltd. (April 12, 2011) (``AIMA Letter''); comment letter 
from the Alternative Investment Management Association, Ltd. (July 
1, 2011) (``AIMA II Letter''); IAA Letter; SIFMA Letter; comment 
letter from HedgeOp Compliance, LLC (July 28, 2011) (``HedgeOp 
Letter''); comment letter from the Private Investor Coalition; Inc. 
(April 12, 2011) (``PIC Letter''); and comment letter Seward & 
Kissel, LLP (April 12, 2011) (``Seward Letter'').
---------------------------------------------------------------------------

    Several commenters asserted that rescission was not necessary 
because the Commission has the means to obtain any needed information 
from exempt CPOs through its large trader reporting requirements and 
its special call authority.\107\ Although the Commission has the means 
to obtain certain information through the mechanisms delineated by the 
commenters, neither of those mechanisms provide the type of data 
requested on Forms CPO-PQR or CTA-PR with the kind of regularity 
proposed under Sec.  4.27. For example, large trader reporting may 
provide detailed trading information for a particular market 
participant, but it does not provide the Commission with information 
regarding trends across funds that are not large enough to trigger the 
reporting obligation, but that may nevertheless impact the market. 
Also, with respect to the Commission's special call authority under 
Sec.  21.03, the collection of data under that section is generally 
reactive in nature. That is, the Commission would be in a position to 
collect data under Sec.  21.03 after it became aware of an issue. 
Conversely, it is anticipated that collecting data using Forms CPO-PQR 
and CTA-PR will enable the Commission to be more proactive in assessing 
possible threats to market stability and in carrying out its duties in 
overseeing market participants generally.
---------------------------------------------------------------------------

    \107\ See Skadden Letter; Katten Letter; and MFA Letter.
---------------------------------------------------------------------------

    Some commenters suggested that the Commission adopt a limited 
exemption for SEC-registered entities that are not ``primarily 
engaged'' in trading commodity interests.\108\ Pursuant to the

[[Page 11262]]

terms of Sec.  4m(3) of the CEA, as amended by the Dodd-Frank Act, CTAs 
that are registered with the SEC and whose business does not consist 
primarily of acting as a CTA, and that do not act as a CTA to any pool 
engaged primarily in the trading of commodity interests, are exempt 
from registration with the Commission.\109\ The Commission believes 
that that statutory exemption for CTAs is explicit as to Congress's 
limited intentions regarding exempting entities from registration with 
the Commission. By the plain language of Sec.  4m(3), this section 
creates an exemption from the CTA registration requirements of the CEA; 
commodity pools are discussed in that provision only to the extent that 
the characteristics of the pool enable the CTA to claim relief. The 
registration category of CPO is not implicated. Therefore, the 
Commission concludes that the provisions of Sec.  4m(3) do not mandate 
any exemption from the registration requirements for CPOs. Moreover, 
the Commission disagrees with the commenter who asserted that 
rescission is inconsistent with Congress's asserted intention to avoid 
dual registration. The Commission does not believe it is accurate to 
state that Congress intended to avoid oversight by both agencies, and 
indeed Congress clearly anticipated some overlap when, in the Dodd-
Frank Act, it required the Commission to work with the SEC to adopt a 
data collection instrument for dual registrants. Section 406 of the 
Dodd-Frank Act explicitly mandated that the Commission and the SEC 
jointly promulgate a reporting form for dually registered 
entities.\110\ The Commission does not believe that this requirement 
could be consistent with any asserted Congressional intention to 
absolutely avoid dual registration with the commissions. Therefore, the 
Commission concludes that dual registration of certain entities is not 
irreconcilable with the Congressional intent underlying the Dodd-Frank 
Act.
---------------------------------------------------------------------------

    \108\ See Dechert Letter; and Katten Letter.
    \109\ 7 U.S.C. 6m(3).
    \110\ See Section 406 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Other commenters asserted that the compliance and regulatory 
obligations under the Commission's rules are burdensome and costly for 
private businesses and would unnecessarily distract entities from their 
primary focus of managing client assets.\111\ The Commission disagrees 
with this assertion, which in any event was not fully detailed by any 
commenter. The Commission believes that regulation is necessary to 
ensure a well functioning market and to provide investor protection. 
The Commission further believes that the compliance regime that the 
Commission has adopted strikes the appropriate balance between limiting 
the burden placed on registrants and enabling the Commission to carry 
out its duties under the CEA. Moreover, the compliance and regulatory 
obligations imposed on these CPO registrants will be no different from 
those imposed on other registered CPOs. Such compliance and regulatory 
obligations have not been unduly burdensome for these other 
registrants.
---------------------------------------------------------------------------

    \111\ See MFA Letter; Seward Letter; and Katten Letter.
---------------------------------------------------------------------------

2. Comments Regarding the Proposed Rescission of Sec.  4.13(a)(3)
    In the Proposal, the Commission proposed rescinding the ``de 
minimis'' exemption in Sec.  4.13(a)(3). The Commission stated its 
belief that ``it is possible for a commodity pool to have a portfolio 
that is sizeable enough that even if just five percent of the pool's 
portfolio were committed to margin for futures, the pool's portfolio 
could be so significant that the commodity pool would constitute a 
major participant in the futures market.'' \112\ Moreover, the 
Commission stated that it believed that this rescission was consistent 
with the purposes of the Dodd-Frank Act, with specific regard to 
increased transparency and accountability of participants in the 
financial markets. The Commission did, however, solicit comment as to 
whether some form of de minimis exemption should be maintained.
---------------------------------------------------------------------------

    \112\ 76 FR 7976, 7985 (Feb. 12, 2011).
---------------------------------------------------------------------------

    The Commission received ten comments specifically on its proposed 
rescission of the ``de minimis'' exemption in Sec.  4.13(a)(3).\113\ 
The commenters consistently urged the Commission to retain a de minimis 
exemption. Some commenters cited to the amendment to Sec.  4m(3) of the 
CEA by the Dodd Frank Act, which provides an exemption from 
registration for CTAs that are registered with the SEC and whose 
business does not consist primarily of acting as a CTA and that does 
not act as a CTA to any pool engaged primarily in the trading of 
commodity interests.\114\ One commenter stated that the effect of Sec.  
4m(3) was to exempt such CTAs from registration as a CPO or CTA; \115\ 
whereas another commenter asserted that the amendment of Sec.  4m(3) is 
evidence that Congress did not intend to have the operator of a 
commodity pool register as a CPO if its pool is not primarily engaged 
in trading commodity interests.\116\ The Commission notes that under 
the tenets of statutory interpretation, where Congress explicitly 
enumerates certain exceptions to a general prohibition, additional 
exceptions are not to be implied in the absence of evidence of a 
contrary legislative intent.\117\ By the plain language of Sec.  4m(3), 
this section creates an exemption from the CTA registration 
requirements of the CEA; commodity pools are discussed only to the 
extent that the characteristics of the pool enable the CTA to claim 
relief. The registration category of CPO is not referenced. Therefore, 
the Commission concludes that the provisions of Sec.  4m(3) do not 
mandate any exemptions from registration for CPOs. The Commission 
notes, however, that it has determined to retain the de minimis 
exemption set forth in Sec.  4.13(a)(3).
---------------------------------------------------------------------------

    \113\ See MFA Letter; NYSBA Letter; comment letter from Schulte 
Roth & Zabel LLP (April 12, 2011) (``Schulte Letter''); Dechert III 
Letter; Skadden Letter; Seward Letter; IAA Letter; NFA Letter; SIFMA 
Letter; and comment letter from McGuireWoods LLC (April 12, 2011) 
(``McGuireWoods Letter'').
    \114\ 7 U.S.C. 6m(3).
    \115\ See Skadden Letter.
    \116\ See MFA Letter.
    \117\ See Andrus v. Glover Construction Co., 446 U.S. 608 
(1980).
---------------------------------------------------------------------------

    Several commenters suggested adding as a prerequisite for exemptive 
relief under Sec.  4.13(a)(3), registration with the SEC as an 
investment adviser.\118\ The Commission is declining to add SEC 
registration as part of the criteria for relief under Sec.  4.13(a)(3) 
because the basis for providing relief is the limited nature of the 
pool's trading activity rather than its operator's registration status 
with the SEC. To require the CPO of an exempt pool to be regulated by 
the SEC would limit the applicability of Sec.  4.13(a)(3), which is not 
the Commission's intention at this time.
---------------------------------------------------------------------------

    \118\ See MFA Letter; NFA Letter; Skadden Letter; Schulte 
Letter; NYSBA Letter; Dechert III Letter; IAA Letter; and Seward 
Letter.
---------------------------------------------------------------------------

    Most commenters suggesting the additional requirement of SEC 
registration also proposed an increase in the trading threshold, 
ranging from 20 percent to 50 percent of the pool's liquidation value 
due to the inclusion of the pool's swaps activity within the trading 
threshold.\119\ As discussed earlier in this release in the context of 
Sec.  4.5, the Commission believes that a five percent threshold 
continues to be the appropriate level for exemption or exclusion due to 
limited derivatives trading. Moreover, the Commission would again note 
that the inclusion of an alternative net notional test provides CPOs 
with another, perhaps less restrictive means, of qualifying for the 
exemption. The Commission believes

[[Page 11263]]

that trading exceeding five percent of the liquidation value of a 
portfolio, or a net notional value of commodity interest positions 
exceeding 100 percent of the liquidation value of a portfolio, 
evidences a significant exposure to the derivatives markets, and that 
such exposure should subject an entity to the Commission's oversight.
---------------------------------------------------------------------------

    \119\ See MFA Letter; Skadden Letter; NYSBA Letter; Dechert III 
Letter.
---------------------------------------------------------------------------

    With respect to the issue of the inclusion of swaps making it more 
difficult to satisfy the trading threshold, the Commission believes 
that it would be premature to increase the threshold at this time. 
Additionally, as stated previously, the inclusion of an alternative net 
notional test may provides entities with another mechanism for 
qualifying for the exemption in Sec.  4.13(a)(3). The Commission 
believes that it may be more appropriate to reassess the trading 
threshold after collecting data from registered CPOs through Form CPO-
PQR. Therefore, the Commission has decided not to increase the trading 
threshold under Sec.  4.13(a)(3).
    Additionally, the Commission believes that it must include swaps 
within the threshold to enable the most entities to claim relief under 
Sec.  4.13(a)(3). As stated previously with respect to the amendments 
to Sec.  4.5, the Dodd-Frank Act amended the statutory definition of 
the terms ``commodity pool operator'' and ``commodity pool'' to include 
those entities that trade swaps.\120\ If the Commission were to keep 
the de minimis test in Sec.  4.13(a)(3) and only include futures and 
options as the basis for calculating compliance with the threshold, the 
swaps activities of the CPOs would still trigger the registration 
requirement notwithstanding the exclusion of swaps from the calculus. 
That is, the purpose of the threshold test is to define a de minimis 
amount of trading activity that would not trigger the registration 
requirement. If swaps were excluded, any swaps activities undertaken by 
a CPO would result in that entity being required to register because 
there would be no de minimis exclusion for such activity. As a result, 
one swap contract would be enough to trigger the registration 
requirement. For that reason, if the Commission wants to permit some de 
minimis level of swaps activity by CPOs without registration with the 
Commission, it must do so explicitly in the exemption.\121\ Because the 
Commission has determined that de minimis activity by CPOs does not 
implicate the Commission's regulatory concerns, the Commission has 
decided that it is appropriate to include swaps within the trading 
threshold under Sec.  4.13(a)(3).\122\
---------------------------------------------------------------------------

    \120\ 7 U.S.C. 1a(10); 1a(11).
    \121\ Any reference to a de minimis level of swaps activities by 
registered investment companies only applies in the context of CPO 
registration by registered investment companies.
    \122\ The Commission has proposed to amend the definition of 
``commodity interest'' as it appears in Sec.  1.3 to include swaps, 
consistent with the Dodd-Frank Act. See, 76 FR 33066 (June 7, 2011).
---------------------------------------------------------------------------

    Additionally, to enable CPOs to fully exercise the alternative net 
notional test, the Commission is amending Sec.  4.13(a)(3)(ii)(B) to 
provide guidance as to the notional value of cleared swaps positions 
and the ability to net swaps cleared by the same DCO. The Commission 
believes that this amendment will serve to provide equal ability to 
claim relief under Sec.  4.13(a)(3) to all CPOs regardless of the types 
of commodity interests held by their operated pools. Therefore, the 
Commission is amending Sec.  4.13(a)(3)(ii)(B)(1) to provide that the 
notional value of a cleared swap is determined consistent with the 
provisions of part 45 of the Commission's regulations and Sec.  
4.13(a)(3)(ii)(B)(2) to provide that swaps cleared by the same DCO may 
be netted where appropriate.
    After consideration of the comments and the Commission's stated 
rationale for proposing to rescind the exemption in Sec.  4.13(a)(3), 
the Commission has determined to retain the de minimis exemption 
currently set forth in that section without modification.\123\
---------------------------------------------------------------------------

    \123\ The Commission does not need to amend the language of 
Sec.  4.13(a)(3) to include swaps within the trading threshold as 
this section determines eligibility based on the amount of 
``commodity interests'' traded. In a separate rulemaking, the 
Commission has proposed to amend the definition of the term 
``commodity interest'' to include swaps. See 76 FR 11701 (March 3, 
2011).
---------------------------------------------------------------------------

3. Comments Regarding a Family Offices Exemption
    In response to the Commission's proposed rescission of Sec. Sec.  
4.13(a)(3) and (a)(4), the Commission received numerous comments asking 
that the Commission adopt an exemption from registration for family 
offices that is akin to the exemption adopted by the SEC.\124\ The 
commenters noted that prior to the adoption of Sec. Sec.  4.13(a)(3) 
and (a)(4), the Commission staff granted relief to family offices on an 
ad hoc basis, but that when Sec. Sec.  4.13(a)(3) and (a)(4) were 
adopted, most family offices availed themselves of those exemptions 
from registration. The commenters argued that the Commission should 
have less regulatory concern about family offices because their 
clientele is necessarily limited to family members and the family 
offices do not solicit outside of the family unit.
---------------------------------------------------------------------------

    \124\ See 17 CFR 250.202(a)(11)(G)-1.
---------------------------------------------------------------------------

    Due to the exemptions previously granted by Commission staff, and 
the resulting lack of information regarding the activities of CPOs 
claiming relief thereunder, the Commission does not yet have a 
comprehensive view of the positions taken and interests held by 
currently exempt entities. 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 
staff to look into the possibility of adopting a family offices 
exemption in the future.
    The Commission notes 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. The Commission further notes that family offices 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.\125\ Therefore, the Commission does not believe an 
exemption for family offices is necessary at this time.
---------------------------------------------------------------------------

    \125\ See 17 CFR 140.99(a)(3) (``An interpretative letter may be 
relied upon by persons in addition to the Beneficiary.''). The most 
recent letter (CFTC letter 10-25) issued affirming the Division's 
interpretation that a ``family office'' is not a pool under Sec.  
4.10(d) is available at the Commission's Web site at: https://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/10-25.pdf. See, CFTC Interpretative Letter 00-100 [2000-2002 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) ] 28,420 (Nov. 1, 2000); CFTC 
Interpretative Letter No. 96-24, [1994-1996 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) ] 26,653 (March 4, 1996); CFTC Interpretative 
Letter No. 97-29, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. 
(CCH) ] 27,039 (March 21, 1997); CFTC Interpretative Letter No. 95-
35, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 26,376 
(Nov. 23, 1994).
---------------------------------------------------------------------------

4. Comments Regarding a Foreign Advisor Exemption
    Several commenters suggested that if the Commission determines to 
adopt the proposed rescissions, it should adopt a foreign advisor 
exemption similar to that set forth in the Dodd-Frank Act under the 
Investment Adviser Act of

[[Page 11264]]

1940.\126\ The commenters expressed concern that the rescission of the 
exemptions under Sec. Sec.  4.13(a)(3) and (a)(4) would result in 
nearly all non-US based CPOs operating a pool with at least one U.S. 
investor being required to register with the Commission. Commenters 
also expressed concern that foreign CPOs would have to report the 
entirety of their derivatives activities to the Commission even if 
foreign regulators also oversee such activities.
---------------------------------------------------------------------------

    \126\ See Section 403 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Due to the exemptions previously adopted by the Commission, and the 
resulting lack of information regarding the activities of CPOs claiming 
relief thereunder, the Commission does not yet have a comprehensive 
view of the positions taken and interests held by currently exempt 
entities. The Commission, therefore, believes that it is prudent to 
withhold consideration of a foreign advisor exemption until the 
Commission has received data regarding such firms on Forms CPO-PQR and/
or CTA-PR, as applicable, 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. Foreign advisors 
to pools that meet the criteria of Sec.  4.13(a)(3) will be able to 
continue to operate pursuant to that exemption, if previously claimed, 
or file notice of claim of exemption under Sec.  4.13(a)(3). Therefore, 
the Commission is not providing an exemption for foreign advisors at 
this time.
5. Comments Regarding the Proposed Rescission of Sec.  4.13(a)(4)
    In the Proposal, the Commission proposed to rescind the exemption 
in Sec.  4.13(a)(4) for operators of pools that are offered only to 
individuals and entities that satisfy the qualified eligible person 
standard in Sec.  4.7 or the accredited investor standard under the 
SEC's Regulation D.\127\ In the Proposal, the Commission stated that it
---------------------------------------------------------------------------

    \127\ See 17 CFR 4.13(a)(4).

    [S]eeks to eliminate the exemptions under Sec. Sec.  4.13(a)(3) 
and (4) for operators of pools that are similarly situated to 
private funds that previously relied on the exemptions under 
Sec. Sec.  3(c)(1) and (7) of the Investment Company Act and Sec.  
203(b)(3) of the Investment Advisers Act. It is the Commission's 
view that the operators of these pools should be subject to similar 
regulatory obligations, including proposed form CPO-PQR, in order to 
provide improved transparency and increased accountability with 
respect to these pools. The Commission has determined that it is 
appropriate to limit regulatory arbitrage through harmonization of 
the scope of its data collection with respect to pools that are 
similarly situated to private funds so that operators of such pools 
will not be able to avoid oversight by either the Commission or the 
SEC through claims of exemption under the Commission's 
regulations.\128\
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    \128\ 76 FR 7976, 7986 (Feb 12, 2011).

    The Commission received several comments regarding its proposed 
rescission.\129\ Several commenters argued that the Commission should 
consider retaining the exemption in Sec.  4.13(a)(4) for funds that do 
not directly invest in commodity interests, but do so through a fund of 
funds structure, and who are advised by an SEC registered investment 
adviser. Due to the exemptions previously adopted by the Commission, 
and the resulting lack of information regarding the activities of CPOs 
claiming relief thereunder, the Commission does not yet have a 
comprehensive view of the positions taken and interests held by 
currently exempt entities. The Commission, therefore, believes that it 
is prudent to withhold consideration of a fund of fund exemption until 
the Commission has received data regarding such firms on Forms CPO-PQR 
and/or CTA-PR, as applicable, 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 not providing an exemption for funds of funds at this 
time. The Commission notes, however, that staff will consider requests 
for exemptive relief for funds of funds on a case by case basis.
---------------------------------------------------------------------------

    \129\ See comment letter from Sidley Austin LLP (April 12, 2011) 
(``Sidley Letter''); MFA Letter; NYSBA Letter; comment letter from 
Cranwood Capital Management (April 12, 20110 (``Cranwood Letter''); 
Dechert III Letter; and comment letter from Nantucket Multi 
Managers, LLC (April 12, 2011) (``Nantucket Letter'').
---------------------------------------------------------------------------

    The Commission received two comments that argued that the 
rescission of Sec.  4.13(a)(4) is inconsistent with the private 
offering framework under the SEC's Regulation D and that the rescission 
would result in the end of private offerings.\130\ The Commission 
believes that this analysis is flawed and is the result of a mistaken 
conflation of the private fund structure under the Commission's rules 
and privately-offered ownership interests under the SEC's rules. The 
Commission notes that the rescission of Sec.  4.13(a)(4) does not 
preclude CPOs from utilizing Regulation D with respect to the offering 
of pool interests because the availability of relief from the 
registration of an offering under Regulation D does not require that 
the entity involved be exempt from regulation. Therefore, the 
Commission continues to believe that rescission of Sec.  4.13(a)(4) is 
appropriate for the reasons stated in the Proposing Release and that it 
is consistent with the registration of investment advisers of such 
exempt funds with the SEC.
---------------------------------------------------------------------------

    \130\ See MFA Letter; and NYSBA Letter.
---------------------------------------------------------------------------

    One commenter expressed concerns about the fact that the class of 
eligible participants in a pool operated pursuant to Sec.  4.13(a)(4) 
is broader than that for a pool qualifying under Sec.  4.7.\131\ 
Specifically, this commenter noted that under Sec.  4.13(a)(4), 
participants may include non-natural participants that are QEPs under 
Sec.  4.7 or accredited investors under Sec.  230.501(a)(1)-(3), (a)(7) 
or (a)(8),\132\ whereas Sec.  4.7 does not include such participants as 
QEPs.\133\ The Commission recognizes that this discrepancy may result 
in certain entities being unable to claim relief under Sec.  4.7; 
however, due to the exemptions previously adopted by the Commission, 
and the resulting lack of information regarding the activities of CPOs 
claiming relief thereunder, the Commission does not yet have a 
comprehensive view of the positions taken and interests held by 
currently exempt entities and until the Commission has more information 
regarding the universe of entities affected, the Commission does not 
believe that it is appropriate to amend Sec.  4.7 to reflect the nature 
of participants in funds previously entitled to relief under Sec.  
4.13(a)(4). After the Commission has collected data from such entities 
through Form CPO-PQR, the Commission may reconsider this issue. The 
Commission also notes that staff will consider requests for exemptive 
relief from the limitations of Sec.  4.7 on a case-by-case basis.
---------------------------------------------------------------------------

    \131\ MFA raised this concern during several meetings with 
Commission staff, although it did not provide any detail regarding 
the scope of its concerns and the topic was not discussed in the 
written comments submitted regarding this rulemaking.
    \132\ 17 CFR Sec.  4.13(a)(4)(ii)(B).
    \133\ 17 CFR Sec.  4.7(a).
---------------------------------------------------------------------------

    One commenter argued that rescission is not necessary because any 
fund that seeks to attract qualified eligible purchasers is already 
required to maintain oversight and controls that exceed those mandated 
by part 4 of the Commission's regulations such that any regulation 
imposed would be duplicative and unnecessarily burdensome.\134\ That 
commenter further stated that:
---------------------------------------------------------------------------

    \134\ See Cranwood Letter.

    We are accustomed to intense scrutiny from potential investors 
that frequently includes independent background checks of our key 
employees, onsite visits that include

[[Page 11265]]

interviews with our traders and other key personnel, interviews of 
our third-party administrator and our auditors, interviews of 
officials of our clearing broker, interviews of officers at our 
custodial bank, and bulk delivery of transactional data for 
independent analysis. To say that such information-gathering goes 
far beyond the contents of a mandated disclosure document is a gross 
understatement.\135\
---------------------------------------------------------------------------

    \135\ See Cranwood Letter.

    The commenter primarily focused on the significant level of 
controls that the fund operator implements independent of regulation. 
The Commission believes that, contrary to the commenter's arguments as 
to the import of that fact, such controls and internal oversight should 
facilitate compliance with the Commission's regulatory regime. 
Moreover, the Commission continues to believe that registration serves 
important regulatory purposes as stated previously in this release in 
the context of the amendments to Sec.  4.5.
    The Commission has determined to eliminate the exemption in Sec.  
4.13(a)(4) because, as stated in the proposal, there are no limits on 
the amount of commodity interest trading in which pools operating under 
this regulation can engage. That is, it is possible that a commodity 
pool that is exempted from registration under Sec.  4.13(a)(4) could be 
invested solely in commodities, which, in the Commission's view, 
necessitates Commission oversight to ensure adequate customer 
protection and market oversight. Therefore, the Commission adopts the 
rescission of Sec.  4.13(a)(4) as proposed.
    The Commission received several comments regarding the timing of 
the implementation of the rescission of Sec.  4.13(a)(4).\136\ Two 
commenters suggested that 18 months is the appropriate time period to 
permit entities to prepare for compliance with the Commission's 
registration and compliance regime.\137\ One commenter suggested that 
the Commission provide ``sufficient time,'' but provided no proposed 
specific period of time.\138\ Several commenters asserted that 
currently exempt entities should be grandfathered.\139\
---------------------------------------------------------------------------

    \136\ See NYSBA Letter; AIMA Letter; Schulte Letter; comment 
letter from Fulbright & Jaworski L.L.P. (April 12, 2011) 
(``Fulbright Letter''); SIFMA Letter; Seward Letter; Katten Letter; 
and comment letter from TIF Fund Management LLC (May 19, 2011) 
(``TIF Letter''); NFA Letter; IAA Letter; and Dechert Letter.
    \137\ See Schulte Letter; and Fulbright Letter.
    \138\ See NFA Letter. See also, IAA Letter.
    \139\ See NYSBA Letter; AIMA Letter; Schulte Letter; Fulbright 
Letter; SIFMA Letter; Seward Letter; and Katten Letter.
---------------------------------------------------------------------------

    The Commission recognizes that entities will need time to come into 
compliance with the Commission's regulations. The Commission does not, 
however, believe that the process of preparing for Commission oversight 
necessitates an 18 month time period. Based on the comments received 
indicating that a certain portion of entities currently claiming relief 
under Sec.  4.13(a)(4) already have robust controls in place 
independent of Commission oversight, the Commission believes that 
entities currently claiming relief under Sec.  4.13(a)(4) should be 
capable of becoming registered and complying with the Commission's 
regulations within 12 months following the issuance of the final rule. 
For entities that are formed after the effective date of the 
rescission, the Commission expects the CPOs of such entities to comply 
with the Commission's regulations upon formation and commencement of 
operations.
    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.\140\ Grandfathering is not consistent with 
the stated goals of the Commission's rescission and would result in 
disparate treatment of similarly situated entities.
---------------------------------------------------------------------------

    \140\ 76 FR 7976, 7986 (Feb. 12, 2011).
---------------------------------------------------------------------------

    Therefore, the Commission will implement the rescission of Sec.  
4.13(a)(4) for all entities currently claiming exemptive relief 
thereunder on December 31, 2012, but the rescission will be implemented 
for all other CPOs upon the effective date of this final rulemaking.

D. Comments Regarding the Proposed Annual Notices for Continued 
Exemptive or Exclusionary Relief

    In the Proposal, the Commission proposed to require annual 
reaffirmance of a claim of exemption or exclusion from registration as 
a CPO or CTA. In the Proposal, the Commission stated its position that 
an annual notice requirement would promote improved transparency 
regarding the number of entities either exempt or excluded from the 
Commission's registration and compliance programs, which is consistent 
with one of the primary purposes of the Dodd-Frank Act. Moreover, the 
Commission stated its belief that an annual notice requirement would 
enable the Commission to determine whether exemptions and exclusions 
should be modified, repealed, or maintained as part of the Commission's 
ongoing assessment of its regulatory scheme.
    The Commission received three comments on this provision in the 
Proposal.\141\ One commenter supported the adoption of an annual notice 
requirement, but suggested that the due date of the notice be changed 
from the exemption's original filing date to a calendar-year end for 
all filers.\142\ The Commission agrees that moving the due date for the 
annual notice requirement to the calendar-year end for all filers may 
be more operationally efficient. Therefore, the Commission will adopt 
the annual notice requirement mandating that the notice be filed at the 
calendar year-end rather than the anniversary of the original filing.
---------------------------------------------------------------------------

    \141\ See NFA Letter; AII Letter; and SIFMA Letter.
    \142\ See NFA Letter.
---------------------------------------------------------------------------

    Two commenters suggested that the 30-day time period for filing was 
not adequate to enable firms to comply.\143\ One commenter proposed a 
60-day time period,\144\ whereas the other commenter proposed 90 days 
as the necessary amount of time.\145\ The Commission recognizes that 
the proposed 30-day filing period may not be adequate due to the 
ramifications of an entity's failure to file its annual notice in a 
timely manner, which would result in the exemption or exclusion being 
deemed withdrawn. This issue is particularly important because of the 
NFA's Bylaw 1101, which prohibits NFA members from conducting business 
with non-members. Should an entity fail to file its annual notice 
within the requisite time frame, its NFA membership could be deemed 
withdrawn, which could potentially impact numerous other NFA members. 
The Commission believes that extending the filing period from 30 days 
to 60 days will provide NFA with adequate time to follow up with filing 
entities to ensure that a filing is not omitted inadvertently and to 
limit the adverse consequences for other NFA members. The Commission 
does not, however, believe that 90 days is necessary as it intends for 
such notice to be filed electronically with NFA and for NFA's filing 
system to pre-populate the notice with the names and NFA IDs of all 
exempt pools operated by the CPO with an option to choose to reaffirm 
the exemptions for all exempt pools. The Commission believes that this 
minimizes both the time and expense burdens on the CPO and should 
enable

[[Page 11266]]

all entities to comply with the requirement within 60 days.
---------------------------------------------------------------------------

    \143\ See NFA Letter; and SIFMA Letter.
    \144\ See NFA Letter.
    \145\ See SIFMA Letter.
---------------------------------------------------------------------------

E. Comments Regarding the Proposed Risk Disclosure Statement for Swaps 
in Sec.  4.24 and Sec.  4.34

    The Commission also proposed adding standard risk disclosure 
statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.  
4.24(b) and 4.34(b), respectively.\146\
---------------------------------------------------------------------------

    \146\ 76 FR 7976, 7986 (Feb. 12, 2011).
---------------------------------------------------------------------------

    The Commission received three comments with respect to the proposed 
standard risk disclosure statement for swaps.\147\ Two argued that a 
standard risk disclosure statement is not the appropriate way to 
disclose the risks inherent in swaps activity to participants or 
clients.\148\ Specifically, those commenters argued that the use of 
swaps by CPOs and CTAs varies and depending on the reason for using 
swaps, different risks may be implicated. Furthermore, those commenters 
also noted that the proposed risk disclosure statement is inconsistent 
with recent SEC guidance to registered investment companies to avoid 
generic disclosures. The Commission respectfully disagrees with the 
assertions of those commenters who believe that a standard risk 
disclosure statement is not appropriate. The Commission believes that a 
standardized risk disclosure statement addressing certain risks 
associated with the use of swaps is necessary due to the revisions to 
the statutory definitions of CPO, CTA, and commodity pool enacted by 
the Dodd-Frank Act.\149\ Moreover, it is the Commission's position that 
concerns about ``one-size-fits-all'' disclosure of risks are addressed 
through additional disclosures required under Sec. Sec.  4.24(g) and 
4.34(g), which govern disclosures regarding the risks associated with 
participating in the offered commodity pool or program.
---------------------------------------------------------------------------

    \147\ See SIFMA Letter; Fidelity Letter; and comment letter from 
Chris Barnard (Feb. 26, 2011) (``Barnard Letter'').
    \148\ See SIFMA Letter; and Fidelity Letter.
    \149\ See 7 U.S.C. 1a(10), 1a(11), and 1a(12).
---------------------------------------------------------------------------

    With respect to the comments submitted regarding the conflicting 
requirements imposed on registered investment companies whose advisers 
are required to register as CPOs pursuant to amended Sec.  4.5,\150\ 
such concerns will be addressed through the proposed modifications to 
the Commission's compliance regime that will be applicable to 
registered investment companies overseen by both the SEC and the 
Commission.
---------------------------------------------------------------------------

    \150\ See SIFMA Letter; and Fidelity Letter.
---------------------------------------------------------------------------

    Additionally, the Commission received one comment that supported 
the adoption of the standard risk disclosure statement for swaps, but 
suggested that the Commission consider whether the wording needed to be 
modified depending on whether the swaps were cleared or uncleared.\151\ 
Based on the language proposed, the Commission does not believe that 
different language must be adopted to account for the differences 
between cleared and uncleared swaps. In particular, the Commission 
notes that the proposed risk disclosure statement is not intended to 
address all risks that may be associated with the use of swaps, but 
that the CPO or CTA is required to make additional disclosures of any 
other risks in its disclosure document pursuant to Sec. Sec.  4.24(g) 
and 4.34(g) of the Commission's regulations. Moreover, the language of 
the proposed risk disclosure statement is conditional and does not 
purport to assert that all of the risks discussed are applicable in all 
circumstances. For the reasons discussed above and those stated in the 
Proposal, the Commission adopts the proposed risk disclosure statements 
for CPOs and CTAs regarding swaps.\152\ These additional risk 
disclosure statements will be required for all new disclosure documents 
and all updates filed after the effective date of this final 
rulemaking.
---------------------------------------------------------------------------

    \151\ See Barnard Letter.
    \152\ These risk disclosure statements do not affect the swap 
disclosure requirements mandated in CEA Section 4s(h)(3)(B) and 
rules relating to that statutory provision. See proposed Sec.  
23.431 Disclosure of Material Information, Business Conduct 
Standards for Swap Dealers and Major Swap Participants with 
Counterparties, 75 FR 80638 (Dec. 22, 2010). In addition, managed 
accounts that do not convey discretionary authority to the CTA will 
require the pass through of the swap disclosures in any final rule 
promulgated pursuant to 4s(h)(3)(B).
---------------------------------------------------------------------------

F. Section 4.27 and Forms CPO-PQR and CTA-PR

1. General Comments
    The Commission received numerous comments in response to proposed 
Sec.  4.27, which requires CPOs and CTAs to report certain information 
to the Commission on Forms CPO-PQR and CTA-PR, respectively. Several 
commenters questioned whether the data collection was necessary for the 
Commission's oversight of its registrants.\153\ Others asserted that 
certain groups, such as registered investment companies or family 
offices, should be exempted from completing the data collection.\154\
---------------------------------------------------------------------------

    \153\ See Fidelity Letter; and AIMA Letter.
    \154\ See ICI Letter; AIMA Letter; and comment letter from K&L 
Gates LLP (Feb. 12, 2011) (``K&L Letter'').
---------------------------------------------------------------------------

    The Commission's new reporting requirements supplement SEC 
reporting requirements for dual registrants that must file Form PF with 
the SEC by virtue of their dual registration status. Information about 
CTAs and CPOs that are non-dual registrants is necessary for the 
Commission to identify significant risk to the stability of the 
derivatives market and the financial market as a whole. Following the 
recent economic turmoil, the Commission has reconsidered the level of 
regulation that it believes is appropriate for entities participating 
in the commodity futures and derivatives markets. With respect to the 
assertion that registered investment companies should not be required 
to file Form CPO-PQR, the Commission believes that it is important to 
collect the data in Form CPO-PQR from registered investment companies 
whose activities require CPO registration to assess the risk posed by 
such investment vehicles to derivatives markets and the broader 
financial system. Consequently, the Commission intends to require from 
registered investment companies that are also registered as CPOs the 
same information that it is requiring from entities solely registered 
as CPOs. Additionally, the Commission notes that to the extent that the 
entity registered as the CPO for the registered investment company is 
registered as an investment adviser and is required to file Form PF 
with the SEC, the activities of the registered investment company may 
be reported on Form PF as well.
    The Commission further believes that the same reasoning applies 
with respect to the collection of data from family offices. To enable 
the Commission to evaluate a potential family offices exemption 
following the collection and analysis of data regarding their 
activities, the Commission believes that it is essential that family 
offices remain subject to the data collection requirements to the 
extent that such entities are not entitled to claim relief pursuant to 
the Commission's interpretative guidance regarding family offices.
    One commenter recommended that the Commission clarify the filing 
obligations for CPOs and CTAs that are required to file Form PF with 
the SEC and to streamline the reporting obligations.\155\ Another 
commenter argued that a very large private fund that has a limited 
amount of derivatives trading should not be subject to Schedule C of 
Form CPO-PQR.\156\ As

[[Page 11267]]

stated in the Proposal, CPOs that are dually registered with the SEC 
and that file Form PF must still file Schedule A with the Commission, 
and CTAs must still file Form CTA-PR. The Commission intends to adopt 
Sec.  4.27 as proposed and permit dual registrants to file Form PF with 
the SEC in lieu of completing Schedules B and/or C of Form CPO-PQR. The 
Commission never intended to require very large dual registrants to 
file anything more than the general identifying information required on 
Schedule A with the Commission, and neither Sec.  4.27 nor the forms 
require dual registrants to file Schedules B or C if they are filing 
Form PF.
---------------------------------------------------------------------------

    \155\ See Fidelity Letter.
    \156\ See AIMA Letter; SIFMA Letter; and Fidelity Letter.
---------------------------------------------------------------------------

    The Commission has modified both Schedule A of Form CPO-PQR and 
Form CTA-PR so that both documents are only soliciting general 
demographic data. The Commission has moved Question 12, which asked for 
information regarding position information, from proposed Schedule A to 
Schedule B of Form CPO-PQR in an effort to avoid collecting redundant 
information from dual registrants. Additionally, the Commission is not 
adopting Schedule B from Form CTA-PR, and therefore, will be limiting 
the information collected from registered CTAs to demographic data and 
the names of the pools advised by the CTA.
    One commenter questioned whether the information collected on Forms 
CTA-PR and CPO-PQR will provide the Commission with real-time data that 
will enable it to have an accurate and timely picture of a CTA's 
activities and operating status.\157\ The Commission recognizes the 
limitations of the data collection instruments with respect to the 
timeliness of the information requested. The Commission believes, 
however, that the forms strike the appropriate balance between the time 
needed to compile complex data and the Commission's need for timely 
information. Moreover, the Commission believes that the information 
required on Form CPO-PQR and CTA-PR will be useful because it will 
allow the Commission to better deploy its enforcement and examination 
resources.
---------------------------------------------------------------------------

    \157\ See Barnard Letter.
---------------------------------------------------------------------------

    Another commenter questioned whether the Commission possessed the 
staffing and financial resources necessary to meaningfully use such 
data as part of its oversight.\158\ The Commission recognizes that the 
resources available to it are limited. To that end, the Commission, as 
stated in the Proposal, intends to coordinate with the NFA to 
accomplish the analysis necessary to make full use of the data 
collected from Commission registrants.
---------------------------------------------------------------------------

    \158\ See Dechert Letter.
---------------------------------------------------------------------------

    In addition, the Commission intends for the data to be collected 
from registrants in an electronic format, which will enable the 
Commission to leverage its technology and to require less intensive 
staff time to achieve the desired results. The use of an electronic 
format will enable the FSOC to conduct additional analysis of the data 
collected in the event that the FSOC requests such information from the 
Commission, without significant consumption of Commission resources. 
For these reasons, the Commission believes that it has the tools 
necessary to make full use of the data that it intends to collect on 
Forms CPO-PQR and CTA-PR, notwithstanding the Commission's current 
staffing and financial resources.
2. Comments Regarding the Reporting Thresholds
    The Commission received several comments regarding the appropriate 
reporting thresholds for the various schedules of Form CPO-PQR.\159\ 
The commenters stated that $150 million in assets under management was 
too low of a threshold for entities to be categorized as mid-sized and 
required to file Schedule B. Rather, the commenters urged the 
Commission to increase the threshold to $500 million in assets under 
management.\160\ The Commission believes that $150 million in assets 
under management is still the appropriate threshold for mid-sized CPOs. 
The Commission will retain this threshold because it is consistent with 
the threshold for advisers filing Section 1 of Form PF, which is 
substantively similar to Schedule B of Form CPO-PQR, and it will ensure 
comparable treatment of entities of similar magnitude.
---------------------------------------------------------------------------

    \159\ See AIMA Letter; MFA II Letter; Seward Letter. See also, 
AIMA II Letter.
    \160\ See AIMA Letter.
---------------------------------------------------------------------------

    These commenters also suggested that the Commission increase the 
threshold for large CPOs from $1 billion to $5 billion in assets under 
management.\161\ The Commission has decided not to increase the large 
CPO threshold to $5 billion. The Commission has decided, however, to 
increase the threshold from $1 billion to $1.5 billion. The Commission 
believes that increasing the threshold to $1.5 billion will reduce the 
number of CPOs required to file Schedule C of Form CPO-PQR, but will 
still represent a substantial portion of the assets under management by 
registered CPOs. Moreover, the Commission notes that this modification 
is consistent with the revised threshold for large hedge fund advisers 
that it recently adopted with respect to Form PF.\162\ The Commission 
believes that increasing the threshold beyond $1.5 billion could limit 
the Commission's access to information necessary to oversee entities 
that could pose a risk to the derivatives markets or the financial 
system as a whole.
---------------------------------------------------------------------------

    \161\ See AIMA Letter; MFA II Letter; Seward Letter.
    \162\ 76 FR 71128, 71135 (Nov. 16, 2011).
---------------------------------------------------------------------------

3. Comments Regarding Harmonization With the SEC's Compliance Regime
    The Commission received numerous comments on harmonizing Forms CPO-
PQR and CTA-PR with Form PF.\163\ The Commission has considered 
comments received on the Form PF proposed jointly with the SEC that 
address harmonization of the CFTC and SEC forms in addition to the 
comments received specifically on the Proposal. Two commenters argued 
that the Commission and the SEC should use the same metrics for 
measuring assets under management for purposes of determining filing 
obligations.\164\ As noted several times in this preamble, the 
Commission has sought to harmonize Forms CPO-PQR and CTA-PR to the 
extent possible; however, it is not appropriate in all circumstances. 
For example, the SEC and the CFTC use different methods for determining 
the threshold for reporting assets under management. In order to 
determine whether a CPO meets the asset threshold for classification as 
a mid-sized or large CPO, Form CPO-PQR requires the use of the 
aggregated gross pool assets under management. Conversely, Form PF 
defines ``regulatory assets under management'' as the gross value of 
the securities portfolio as reported on the SEC's Form ADV.\165\ 
Additionally, Form CPO-PQR uses net assets under management as the 
method for determining whether a commodity pool is a large commodity 
pool for filing purposes, whereas Form PF uses net regulatory assets. 
In the Commission's view, gross assets under management and net asset 
value are more appropriate means for determining filing obligations for 
CPOs and large commodity pools because entities registered with the 
Commission are familiar with the use of net asset value for other 
purposes including

[[Page 11268]]

determining the required frequency of reporting to participants.\166\ 
Moreover, the Commission believes that it is inappropriate for it to 
incorporate the SEC definitions of regulatory assets under management 
and net regulatory assets under management into Form CPO-PQR as those 
terms are not consistent with the existing CFTC regulatory 
framework.\167\ The use of net asset value is consistent with the 
longstanding utilization of net asset value in U.S. GAAP and in the 
Commission's regulations.\168\ Therefore, the Commission does not 
believe that its use of net asset value requires any additional 
calculation by dual registrants beyond that required to complete Form 
PF.
---------------------------------------------------------------------------

    \163\ See AIMA Letter; MFA II Letter; Dechert Letter; Seward 
Letter; IAA Letter; Fidelity Letter; AIMA II Letter; K&L Letter; MFA 
Letter; and SIFMA Letter.
    \164\ See AIMA Letter; and MFA II Letter.
    \165\ Form PF defines net assets under management as regulatory 
assets under management less liabilities 76 FR 71128, 71136 (Nov. 
16, 2011).
    \166\ Id.
    \167\ Id. Additionally, the Commission notes that Form PF also 
asks for net assets under management in question 3 of Section 1.
    \168\ See, e.g., 17 CFR 4.22.
---------------------------------------------------------------------------

    Several commenters argued that the Commission does not need to 
collect information through Forms CPO-PQR and CTA-PR because it already 
receives information through the Large Trader Reporting System and Form 
40.\169\ Large Trader Reporting and Form 40 do not provide the 
information regarding the relationship between a large position held by 
a pool and the rest of the pool's other derivatives positions and 
securities investments. The Commission believes that the scope of 
information sought through Forms CPO-PQR and CTA-PR will provide it 
with substantially more detail regarding the activities of entities 
engaged in derivatives trading and will better enable it to assess the 
risk posed by a pool or CPO as a whole.
---------------------------------------------------------------------------

    \169\ See Fidelity Letter; and K&L Letter.
---------------------------------------------------------------------------

    Several commenters also urged the Commission to consider 
coordinating with the SEC to promulgate a single form.\170\ The 
Commission believes that it is most efficient for Commission-only 
registrants to use a form that is based upon the format of NFA's Form 
PQR, with which current registrants are already familiar. Currently 
registered CPOs have been filing NFA's Form PQR on a quarterly basis 
for more than one year and have experience using NFA's interface for 
the collection of data. The Commission recognizes that new registrants 
will not have any experience with NFA's Form PQR or NFA's filing 
system; however, the same would be true if the Commission were to 
implement an altogether new system. Therefore, the Commission believes 
that by continuing to use the system developed by NFA for collecting 
data from CPOs and CTAs, it is minimizing the burden on current 
registrants because they will not be required to learn a new system, 
without adding any additional burden to new registrants.
---------------------------------------------------------------------------

    \170\ See AIMA II Letter; Seward Letter; MFA Letter; AIMA 
Letter; and SIFMA Letter.
---------------------------------------------------------------------------

    Several commenters raised concerns about how affiliated entities 
will be treated on the forms.\171\ The Commission believes that 
affiliated entities should be permitted, but should not be required, to 
report on a single form with respect to all affiliates and the pools 
that they advise. This position is consistent with the treatment of 
affiliated entities on Form PF. Furthermore, the Commission believes 
that where a pool is operated by one or more co-CPOs, only one CPO 
should report on the activities of the jointly operated pool, but that 
CPO must disclose the identities of the other co-CPOs. The Commission 
believes that this will eliminate the potential for double counting of 
pool assets if all co-CPOs were required to report on the jointly 
operated pool.
---------------------------------------------------------------------------

    \171\ See MFA II Letter; MFA Letter; AIMA Letter; SIFMA Letter; 
and Seward Letter.
---------------------------------------------------------------------------

4. Comments Regarding Funds of Funds
    The Commission also received one comment regarding issues unique to 
fund of funds and feeder funds.\172\ Specifically, this commenter 
asserted that funds of funds that invest in unaffiliated commodity 
pools are ``not in the business of trading commodity interests,'' and 
therefore, should not be subject to reporting obligations on Form CPO-
PQR.\173\ This commenter further argues that funds of funds reporting 
is not necessary because either the Commission or the SEC will oversee 
the investee fund and that funds of funds likely do not have access to 
information with sufficient detail to respond to the questions in Form 
CPO-PQR regarding size, strategy, or positions held by the investee 
fund.\174\
---------------------------------------------------------------------------

    \172\ See MFA II Letter.
    \173\ Id.
    \174\ Id.
---------------------------------------------------------------------------

    The Commission disagrees with the commenter's assertion that funds 
investing in unaffiliated commodity pools are not in the business of 
trading commodity interests. Although it is true that the fund does not 
directly engage in such trading, it is the position of the Commission 
that a fund investing in an unaffiliated commodity pool is itself a 
commodity pool. This interpretation is consistent with the statutory 
definition of commodity pool, which draws no distinctions between 
direct and indirect investments in commodity interests.\175\ Moreover, 
the Commission believes that permitting indirect investment in 
commodity interests to occur without Commission oversight would create 
an incentive for entities to avoid direct investment in commodity 
interests and possibly increase the opacity of the market. Therefore, 
the Commission concludes that a fund that invests in an unaffiliated 
commodity pool is a commodity pool for purposes of the CEA and the 
Commission's regulations promulgated thereunder.
---------------------------------------------------------------------------

    \175\ See 7 U.S.C. 1a(11).
---------------------------------------------------------------------------

    With respect to the commenter's assertion that the funds of funds 
need not report because the investee fund will be subject to the 
jurisdiction of either the Commission or the SEC, the Commission must 
again disagree. As the commenter itself noted in its comment, the funds 
of funds could be invested in a fund whose adviser or operator is not 
required to report due to exemptive relief granted by either the 
Commission or the SEC. The Commission acknowledges that a fund of funds 
may not have access to the kind of information necessary to respond to 
all of the data elements in Schedules B and C with respect to the 
investment activities of its investee funds. Nevertheless, the 
Commission believes that requiring basic information about the 
investment in the investee funds without requiring that funds of funds 
complete the additional detail strikes an appropriate balance between 
recognizing the limitations of the information available to funds of 
funds and enabling the Commission to analyze and monitor the levels of 
interconnectedness among a CPO's funds. The Commission believes that a 
fund of funds should still be required to provide at a minimum the name 
of the investee fund(s) and the size of its investment(s) in such 
funds.
    Accordingly, the Commission is adding a question to Schedule A of 
Form CPO-PQR requesting the names of the investee funds and the size of 
the fund of funds' investment in the investee funds. The Commission is 
also adding an instruction to Form CPO-PQR permitting the CPO of a fund 
of funds to exclude any assets invested in the equity of commodity 
pools or private funds for purposes of determining the CPO's reporting 
obligations. The CPO must, however, treat these assets consistently for 
purposes of Form CPO-PQR. For example, an adviser may not include these 
assets for purposes of certain questions such as those regarding 
borrowing, but disregard such assets for purposes of determining the 
reporting thresholds. This new instruction will permit a CPO to 
disregard investments in commodity pools or private funds,

[[Page 11269]]

but would not allow a CPO to disregard the liabilities of the fund, 
even if incurred due to the investment in the underlying fund. 
Moreover, if any of the CPO's commodity pools invests substantially all 
of its assets in the equity of other commodity pools or private funds 
and, aside from those investments, holds only cash, cash equivalents, 
and instruments intended to hedge currency risk, the CPO may complete 
only Schedules A and B with respect to that fund and otherwise 
disregard such assets for reporting purposes. These instructions are 
consistent with those instructions adopted as part of the joint Form 
PF, and the Commission believes that this treatment of funds of funds 
reduces the burden of reporting for CPOs and improves the quality of 
the data obtained by the Commission. Therefore, the Commission is 
adding a general question regarding funds of funds, but is otherwise 
permitting CPOs to disregard the assets of such funds that are invested 
in other commodity pools or private funds for reporting purposes.
5. Adopted Modifications to Form CPO-PQR
    The Commission has decided to make several additional revisions to 
Form CPO-PQR in addition to those discussed previously. The Commission 
believes that these revisions are necessary to provide clarification, 
decrease the burden imposed on registrants, and further harmonize Form 
CPO-PQR with Form PF.
a. Instructions
    As discussed previously, the Commission has decided to revise 
certain instructions governing the completion of Form CPO-PQR. 
Specifically, the Commission has determined that it is appropriate to 
raise the threshold for large CPOs from $1 billion to $1.5 billion in 
an effort to reduce the number of CPOs required to report on a 
quarterly basis and respond to commenters' concerns, but still provide 
the Commission with the information necessary to effectively oversee 
such large market participants. The Commission has also determined to 
modify the frequency of reporting for filers of Form CPO-PQR. As 
adopted, all CPOs, other than large CPOs, will be required to file 
Schedule A on an annual basis; mid-size CPOs will be required to file 
Schedule B on an annual basis; and large CPOs will be required to file 
Schedules A, B, and C on a quarterly basis.
    The Commission received several comments asserting that the 15-day 
period for reporting was not sufficient to permit reporting CPOs to 
complete and file the form and all suggested extending the period to 30 
or 45 days.\176\ The Commission agrees that reporting CPOs will need 
additional time in which to submit the various schedules of Form CPO-
PQR.
---------------------------------------------------------------------------

    \176\ See NFA Letter; Seward Letter; and AIMA Letter.
---------------------------------------------------------------------------

    Upon further consideration, the Commission believes that it is 
appropriate to require all CPOs, other than large CPOs, to file 
Schedule A within 90 days of the end of the calendar year. This time 
period coincides with the annual questionnaire required by NFA of its 
entire population of member CPOs and with the vast majority of annual 
report filings for commodity pools. The revised deadline will enable 
CPOs, other than large CPOs, to benefit from the availability of the 
NFA annual questionnaire and the availability of the information in CPO 
annual report filings. Moreover, because the Commission has transferred 
the pool position information from Schedule A to Schedule B, the 
Commission believes that non-large CPOs should be able to comply with 
filing basic demographic data within 90 days.
    With respect to mid-sized CPOs filing Schedule B, the Commission 
believes that 90 days is an adequate time period for compiling data and 
completing that schedule. The Commission notes that CPOs are generally 
required to file annual reports for their pools within 90 days of their 
fiscal year end, most of which coincide with the calendar year end. The 
Commission believes that the alignment of pools' fiscal years with the 
calendar year end should facilitate the preparation of Schedule B and 
reduce the burden imposed on mid-size CPOs because some of the 
information required will be similar to that included in a pool's 
annual financial statements.
    With respect to the quarterly reporting by large CPOs on Schedules 
A, B, and C, the Commission believes that 60 days is a sufficient 
amount of time to complete those schedules for large CPOs. The 
Commission notes that the entities required to file on a quarterly 
basis have a significant amount of assets under management, and as 
such, the Commission anticipates that such entities routinely generate 
the type of information requested on Schedules B and C as part of their 
internal governance. Accordingly, the Commission will require large 
CPOs to file Schedules B and C within 60 days following the end of the 
reporting period as defined in Form CPO-PQR.
    In October 2011, the Commission adopted Form PF as a joint 
reporting form with the SEC. The terms of Form PF permit dually 
registered entities that are filing the form for their private funds 
under advisement to report on the activities of their other commodity 
pools as well. Entities that choose to file Form PF for all of their 
funds under advisement will still be required to file Schedule A on an 
annual basis, which is consistent with the terms of the Proposal. The 
instructions of Form CPO-PQR have been modified to reflect this change.
    The Commission has also determined to omit the statement that the 
failure to answer all required questions completely and accurately may 
severely impact your ability to operate. The Commission does not 
believe that such language is necessary to inform registered CPOs of 
their obligations under the CEA and the Commission's regulations to 
comply with such obligations in good faith.
    Additionally, the Commission has concluded that it should clarify 
the obligations of co-CPOs of a pool with respect to the submission of 
Form CPO-PQR. The Commission has amended the instructions to the form 
to clarify that for co-CPOs, the CPO with the greater assets under 
management overall is required to report for the co-operated pool. 
Furthermore, if a pool is operated by co-CPOs and one of the CPOs is 
also a registered investment adviser, the non-investment adviser CPO 
will still be obligated to file the applicable sections of Form CPO-PQR 
regardless of whether the investment adviser CPO filed a Form PF. The 
Commission believes that this will prevent the possibility of double 
counting and unnecessary duplicative filings regarding co-operated 
pools.
b. Schedule A
    Schedule A seeks basic identifying information about the CPO, each 
of its pools, and any services providers used. The Commission has 
decided to adopt Schedule A as proposed with the following revisions. 
In question 3 of part 2, the Commission has added a question asking 
whether the pool is operated by co-CPOs and for the name of the other 
CPO(s). This question will enable the Commission to ensure that only 
one CPO is filing with respect to each co-operated commodity pool. In 
addition, question 12 of part 2, which asked for information regarding 
the pool's trading strategies, has been moved to Schedule B, both in 
response to a commenter's suggestion \177\ and in an effort to ensure 
that dual registrants are not required to file extensive duplicative 
information

[[Page 11270]]

on Schedule A that they are already providing on Form PF.
---------------------------------------------------------------------------

    \177\ See AIMA Letter.
---------------------------------------------------------------------------

    The Commission added a question asking for the telephone number and 
email for the contact person for the reporting CPO as this was 
inadvertently omitted in the Proposal. Also, the Commission added a 
subpart h. to question 10 regarding the base currency used by the CPO 
for the particular pool for which it is reporting. This question was 
inadvertently omitted but is necessary for the Commission to fully 
utilize the information reported regarding the changes in the pool's 
assets under management.
    The Commission added subparts to question 12 regarding prospective 
risks for the imposition of ``gates'' and restrictions on redemption of 
participant withdrawals. The terms of question 12, as proposed, only 
seek information on a retrospective basis, which, although useful to 
the Commission in assessing overall issues regarding the imposition of 
restrictions on redemption, does not assist the Commission in assessing 
possible sources of prospective risk to the market and pool 
participants. Moreover, question 12, as proposed, did not capture 
information about pools that have procedures in place governing the 
imposition of restrictions on redemptions, but whose restrictions have 
not been triggered. The Commission believes that the modifications to 
this question solicits such information and will provide the Commission 
with a more complete understanding of the role of restrictions on 
redemptions in the operation of commodity pools. Moreover, the 
Commission believes that the request for additional information 
regarding the potential imposition of restrictions on redemptions is 
consistent with the tenor and intent of question 12 as proposed.
    The Commission also has made numerous non-substantive technical 
amendments in Schedule A, including formatting corrections, the 
deletion of the term ``carrying'' from question 5 in part 2, and the 
addition of two months that were inadvertently omitted from the monthly 
rate of return table in part 2, question 11.
c. Schedule B
    Mid-sized and large CPOs will be required to complete Schedule B, 
which will solicit data about each pool operated by these CPOs. The 
Commission has decided to adopt Schedule B with the following 
revisions.
    In question 1, subpart d, the Commission has decided to change the 
format of the question from a pull-down list of options to a chart, 
consistent with the format used for substantively identical question 
20, section 1c in Form PF. The Commission believes that the chart 
format change will add clarity to the question and will facilitate the 
completion by registrants. The Commission also has added a column 
requesting the percentage of the pool's capital invested in each 
strategy. This additional information aligns Form CPO-PQR with the 
information requested in Form PF and also provides the Commission with 
the means to assess the risk that a pool derives from its borrowing 
activities.
    The Commission has also amended question 1 to add a subpart g 
asking the reporting CPO to report the percentage of the commodity 
pool's net asset value that is traded pursuant to a high frequency 
trading strategy. This subpart previously appeared as part of the chart 
in question 1 regarding investment strategies. The Commission believes 
that denoting the issue of high frequency trading as its own subpart of 
question 1 will enhance the clarity of the question and make the data 
gained by the Commission more usable in its assessment of risks posed 
to the derivatives markets.
    The Commission is amending question 2 to include the percentage of 
a pool's borrowings from U.S. and non-U.S. creditors that are not 
``financial institutions,'' as that term is defined in Form CPO-PQR, as 
separate line items. This revision parallels the structure of subparts 
b and c of that question.
    Finally, the Commission has made several non-substantive 
corrections/alterations, including modifying the format of question 3 
to provide a more user-friendly interface for reporting funds and 
combining several subparts into charts, correcting a typographical 
error in question 5, adding the question that was formerly question 12 
of Schedule A to Schedule B as question 6, and expanding several 
categories of investments to provide a parallel level of detail among 
the asset classes.
d. Schedule C
    Schedule C requests information about the pools operated by large 
CPOs on an aggregated and pool by pool basis. The Commission is 
adopting Schedule C as proposed with the following revisions.
Part 1
    The questions in part 1 of Schedule C seek information for all of 
the pools operated by the large CPO on an aggregate basis.
    Question 1 requires a CPO to report a geographical breakdown of 
investments held by the pools that it operates. The Commission has 
modified this question to require a less detailed breakdown by focusing 
on regions as opposed to individual countries and has added a separate 
disclosure regarding investment in certain countries of interest. The 
Commission expects that this revision will reduce the burden of 
responding to this question because the less granular categories should 
permit more CPOs to rely on classifications that they already use.
    The Commission has determined that question 3, which seeks 
information regarding the duration of the pools' fixed income 
investments on an aggregate basis, is redundant in light of question 9 
in part 2 of Schedule C. Question 9 in part 2 of Schedule C asks for 
the same information on a pool by pool basis. For that reason, the 
Commission has deleted question 3 from part 1 of Schedule C.
Part 2
    Part 2 of Schedule C seeks information from large CPOs on an 
individual pool basis for each operated ``large pool'' as that term is 
defined in Form CPO-PQR. The Commission has revised subpart c of 
question 3 to be a yes/no response with respect to whether the pool 
used a central clearing counterparty (``CCP'') during the reporting 
period. The Commission believes that this is less burdensome and 
provides it with sufficient information regarding the use of CCPs 
because the CPO's relationship is with the swap dealer, futures 
commission merchant, or direct clearing member rather than directly 
with the CCP.
    In subpart b of question 4, the Commission has made several 
revisions correcting the technical terminology used with respect to 
``value at risk'' (``VaR''). These revisions are non-substantive. The 
Commission also added a new subpart c to question 4, which asks the CPO 
whether it uses any metrics other than VaR for risk management purposes 
for the reporting fund. The Commission believes that this information 
will be useful as it continues to amend Form CPO-PQR as necessary to 
obtain relevant information from registrants. Because of the addition 
of a new subpart c to question 4, subpart c of question 4 as proposed 
has been redesignated as subpart d of question 4. The Commission also 
added a category of ``relevant/not formally tested'' to subpart d of 
question 4 in an effort to capture all possible opinions of the 
reporting CPO with respect to the listed market factors. The Commission 
believes that this modification will reduce the burden on reporting 
CPOs

[[Page 11271]]

because fewer CPOs will need to provide detailed responses, and because 
those CPOs without existing quantitative models will not be required to 
build or acquire them to respond to the question. The Commission 
continues to believe that this question will provide valuable risk 
information to the Commission with respect to specific large pools.
    The Commission is revising subpart a of question 5 to include the 
percentage of a pool's borrowings from U.S. and non-U.S. creditors that 
are not ``financial institutions'' as that term is defined in Form CPO-
PQR, as separate line items. This revision parallels the structure of 
the question as proposed with respect to financial institutions.
    The Commission is also amending question 9, regarding the duration 
of each large pool's fixed income instruments. This question, as 
amended, requires the CPO to report the duration, weighted average 
tenor, or 10-year equivalents of fixed income portfolio holdings, 
including asset-backed securities. This is a difference from the 
question as proposed, which would have required all large CPOs to 
report duration. Through this revision, the Commission is giving large 
CPOs the option of instead reporting weighted average tenor or 10-year 
bond equivalents because the Commission understands that CPOs may use a 
wide range of metrics to measure interest rate sensitivity. The 
Commission expects that this revised approach will reduce the burden on 
CPOs because they will generally be able to utilize their existing 
practices when providing this information on the form.
6. Form CTA-PR
    The Commission received several comments regarding the content of 
Form CTA-PR.\178\ Most commenters urged the Commission to eliminate the 
form in its entirety.\179\ Although the Commission does not believe 
that the complete elimination of Form CTA-PR is appropriate, it 
believes that Schedule B of the form contains redundant information 
that will already be collected through Form CPO-PQR. To reduce the 
burden on CTAs, the Commission will eliminate Schedule B. Instead, the 
Commission has decided to adopt only Schedule A of Form CTA-PR and will 
add a question asking the reporting CTA to identify the pools under its 
advisement so that the Commission can analyze the relationships among 
the various registrants to better assess sources of risk to the market 
and measure their potential reach. Because Form CTA-PR will be limited 
to demographic data, the Commission believes that it is appropriate for 
CTAs to file the form on an annual basis within 45 days of the end of 
the fiscal year. Therefore, the Commission has amended the text of 
Sec.  4.27 to reflect this modification of the reporting obligations of 
CTAs.
---------------------------------------------------------------------------

    \178\ See, e.g., IAA Letter; MFA II Letter; AIMA Letter; SIFMA 
Letter; and Fidelity Letter.
    \179\ Id.
---------------------------------------------------------------------------

7. Implementation
    The effective date for Sec.  4.27 and Forms CPO-PQR and CTA-PR is 
July 2, 2012. The Commission is adopting a two-stage phase-in period 
for compliance with Form CPO-PQR filing requirements. The compliance 
date for Sec.  4.27 is September 15, 2012 for any CPO having at least 
$5 billion in assets under management attributable to commodity pools 
as of the last day of the fiscal quarter most recently completed prior 
to September 15, 2012. Therefore, a CPO with $5 billion in commodity 
pool assets under management as of June 30, 2012, must file its first 
Form CPO-PQR within 60 days following September 30, 2012. Reporting 
CPOs must file all schedules of Form CPO-PQR.
    For all other registered CPOs and all CTAs, the compliance date for 
Sec.  4.27 is December 15, 2012. As a result, most advisers must file 
their first Form CPO-PQR or CTA-PR based on information as of December 
31, 2012. This delay in compliance should allow sufficient time for 
CPOs and CTAs to develop systems for collecting the information 
required on the forms and prepare for filing. The Commission 
anticipates that this timeframe will also enable the NFA to have 
adequate time to program a system to accept the filings. The Commission 
has determined that the extension of the compliance dates is necessary 
because the rule and forms are being adopted later than expected.

G. Amendments to Sec. Sec.  145.5 and 147.3: Confidential Treatment of 
Data Collected on Forms CPO-PQR and CTA-PR

    As the Commission stated in the Proposal, the collection of certain 
proprietary information through Forms CPO-PQR and CTA-PR raises 
concerns regarding the protection of such information from public 
disclosure.\180\ The Commission received two comments requesting that 
the Commission treat the disclosure of a pool's distribution channels 
as nonpublic information,\181\ and numerous other comments urging the 
Commission to be exceedingly circumspect in ensuring the 
confidentiality of the information received as a result of the data 
collections.\182\
---------------------------------------------------------------------------

    \180\ 76 FR 7976, 7982 (Feb. 12, 2011).
    \181\ See MFA II Letter and Seward & Kissel Letter.
    \182\ See Roundtable transcript. Commission staff also had 
numerous meetings with commenters that addressed this issue of 
confidentiality of information.
---------------------------------------------------------------------------

    The Commission agrees that the distribution and marketing channels 
used by a CPO for its pools may be sensitive information that 
implicates other proprietary secrets, which, if revealed to the general 
public, could put the CPO at a competitive disadvantage. Accordingly, 
the Commission is amending Sec. Sec.  145.5 and 147.3 to include 
question 9 of Schedule A of Form CPO-PQR as a nonpublic document.
    Additionally, the Commission is amending Sec. Sec.  145.5 and 147.3 
to remove reference to question 13 in Schedule A of Form CPO-PQR 
because such question no longer exists due to amendments to that 
schedule. Similarly, the Commission will be designating question 
subparts (c) and (d) of question 2 of Form CTA-PR as nonpublic because 
it identifies the pools advised by the reporting CTA.
    Therefore, as adopted, the parts of Form CPO-PQR that are 
designated nonpublic under parts 145 and 147 of the Commission 
regulations are:
     Schedule A: Question 2, subparts (b) and (d); Question 3, 
subparts (g) and (h); Question 9; Question 10, subparts (b), (c), (d), 
(e), and (g); Question 11; and Question 12.
     Schedule B: All.
     Schedule C: All; and
     Form CTA-PR: question 2, subparts c and d.

H. Conforming Amendments to Part 4

    As a result of the amendments adopted herein, the Commission must 
amend various provisions in part 4 of the Commission's regulations for 
purposes of making conforming changes. Specifically, the Commission is 
deleting references to repealed Sec.  4.13(a)(4) in other sections of 
the Commission's regulations.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA)\183\ requires that agencies, 
in proposing rules, consider the impact of those rules on small 
businesses. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on

[[Page 11272]]

such entities in accordance with the RFA.\184\
---------------------------------------------------------------------------

    \183\ See 5 U.S.C. 601, et seq.
    \184\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------

    CPOs: The Commission has determined previously that registered CPOs 
are not small entities for the purpose of the RFA.\185\ With respect to 
CPOs exempt from registration, the Commission has previously determined 
that a CPO is a small entity if it meets the criteria for exemption 
from registration under current Rule 4.13(a)(2).\186\ Such CPOs will 
continue to qualify for either exemption or exclusion from registration 
and therefore will not be required to report on proposed Form CPO-PQR; 
however, they will have an annual notice filing obligation confirming 
their eligibility for exemption or exclusion from registration and 
reporting. The Commission estimates that the time required to complete 
this new requirement will be approximately 0.25 of an hour, which the 
Commission has concluded will not be a significant time expenditure. 
The Commission has determined that the proposed regulation will not 
create a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \185\ See 47 FR 18618, 18619, Apr. 30, 1982.
    \186\ See 47 FR at 18619-20.
---------------------------------------------------------------------------

    CTAs: The Commission has previously decided to evaluate, within the 
context of a particular rule proposal, whether all or some CTAs should 
be considered to be small entities, and if so, to analyze the economic 
impact on them of any such rule.\187\ Form CTA-PR is proposed to be 
required of all registered CTAs, which necessarily includes entities 
that would be considered small. The majority of the information 
requested on Form CTA-PR is information that is readily available to 
the CTA or readily calculable by the CTA, regardless of size. 
Therefore, the Commission estimates that the time required to complete 
the items contained in Form CTA-PR will be approximately 0.5 hours as 
it is comprised of only two questions, which solicit information that 
is expected to be readily available. The Commission has determined that 
Form CTA-PR will not create a significant economic impact on a 
substantial number of small entities. Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that the proposed rules, will not have a significant impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \187\ See 47 FR at 18620.
---------------------------------------------------------------------------

    The Commission did not receive any comments on its analysis of the 
application of the RFA to the instant part 4 amendments.

B. Paperwork Reduction Act

    This rulemaking contains information collection requirements. 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.\188\ An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number from the Office of Management and Budget (``OMB'').
---------------------------------------------------------------------------

    \188\ See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Commission is amending Collection 3038-0023 to allow for an 
increase in response hours for the rulemaking resulting from the 
rescission of Sec. Sec.  4.13(a)(4) and the modification of Sec.  4.5. 
This amendment differs from that in the Proposal due to the 
Commission's decision to retain the exemption set forth in Sec.  
4.13(a)(3). The Commission is amending Collection 3038-0005 to allow 
for an increase in response hours for the rulemaking associated with 
new and modified compliance obligations under part 4 of the 
Commission's regulations resulting from these revisions. The titles for 
these collections are ``Part 3--Registration'' (OMB Control number 
3038-0023) and ``Part 4--Commodity Pool Operators and Commodity Trading 
Advisors'' (OMB Control number 3038-0005). Responses to this collection 
of information will be mandatory.
    Both amendments differ from those set forth in the Proposal due to 
comments received asserting that, absent harmonization of the 
Commission's compliance regime for CPOs with that of the SEC for 
registered investment companies, entities operating registered 
investment companies that would be required to register with the 
Commission would not be able to comply with the Commission's 
regulations and would have to discontinue its activities involving 
commodity interests.\189\ The Commission acknowledges that there are 
certain provisions of its compliance regime that conflict with that of 
the SEC and that it would not be possible to comply with both. For this 
reason, the Commission is considering issuing a notice of proposed 
rulemaking regarding the areas of potential harmonization between the 
Commission's compliance obligations and those of the SEC. Until such 
time as the harmonized compliance regime is adopted as final rules, the 
Commission will not be requiring compliance with the provisions of 
Sec.  4.5 for registered investment companies. Therefore, the 
Commission is excluding Sec.  4.5 compliance from the PRA burden 
calculation for these final rules, and is recalculating the information 
collection requirements associated with Sec.  4.5 in the proposed 
harmonized compliance rules.
---------------------------------------------------------------------------

    \189\ See, e.g., ICI Letter, Fidelity Letter, Dechert III 
Letter.
---------------------------------------------------------------------------

    The Commission will protect proprietary information according to 
the Freedom of Information Act (``FOIA'') and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the CEA strictly prohibits the Commission, unless specifically 
authorized by the CEA, from making public ``data and information that 
would separately disclose the business transactions or market position 
of any person and trade secrets or names of customers.'' \190\ The 
Commission is also required to protect certain information contained in 
a government system of records according to the Privacy Act of 
1974.\191\
---------------------------------------------------------------------------

    \190\ See 7 U.S.C. 12.
    \191\ See 5 U.S.C. 552a.
---------------------------------------------------------------------------

1. Additional Information Provided by CPOs and CTAs
a. OMB Control Number 3038-0023
    Part 3 of the Commission's regulations concern registration 
requirements. The Commission is amending existing Collection 3038-0023 
to reflect the obligations associated with the registration of new 
entrants, i.e., CPOs that were previously exempt from registration 
under Sec. Sec.  4.5 and 4.13(a)(4), that had not previously been 
required to register. The Commission is omitting those CPOs continuing 
to claim relief under Sec.  4.13(a)(3), as that section will remain 
effective, and those CPOs that would be required to register under 
revised Sec.  4.5, as those entities will not be able to register and 
comply with the Commission's compliance obligations until such time as 
the harmonization of its requirements with those of SEC is finalized. 
Because the registration requirements are in all respects the same as 
for current registrants, the collection has been amended only insofar 
as it concerns the increased estimated number of respondents and the 
corresponding estimated annual burden.
    Accordingly, the Commission is amending existing Collection 3038-
0023 to provide, in the aggregate:
    Estimated number of respondents: 75,425.

[[Page 11273]]

    Annual responses by each respondent: 75,932.
    Estimated average hours per response: 0.09.
    Annual reporting burden: 6,833.9.
    In addition to the reporting burdens, each CPO or CTA not 
previously subject to registration will be obligated to submit a $200 
registration fee, an $85 registration fee for each associated person, 
and a $15 fee for fingerprinting services for each associated person. 
Those entities that do not already provide certified annual reports 
will now incur public accounting costs as a result of the newly adopted 
rules requiring certification. Moreover, the Commission anticipates 
that reporting entities may hire external service providers, such as 
law firms or accounting firms, to prepare and submit some of the 
documents required both in Collection 3038-0023 and in Collection 3038-
0005, which is accounted for below.
b. OMB Control Number 3038-0005
    Part 4 of the Commission's regulations concerns the operations of 
CTAs and CPOs, and the circumstances under which they may be exempted 
or excluded from registration. Under existing Collection 3038-0005 the 
estimated average time spent per response has not been altered; 
however, adjustments have been made to the collection to account for 
current information available from NFA concerning CPOs and CTAs 
registered or claiming exemptive relief under the part 4 regulations, 
and the new burden expected under proposed Sec.  4.27. The Commission 
estimates that a total of 300 entities annually will file the Notice of 
Exemption from CTA Registration under Sec.  4.14(a)(8), with an 
estimated burden of 0.5 hours per notice filing. An estimated 253 
entities will annually file 7,890 Notices of Exclusion from CPO 
Definition under Sec.  4.5, with an estimated burden of 0.5 hours per 
notice filing. The rules also require certain reports by each entity 
registered as a CPO or CTA. These include certain disclosure documents, 
pool account statements and pool annual reports, and requests for 
extensions of the annual report deadline. The Commission estimates that 
180 entities will prepare an average of 1.5 pool account statements as 
required under Sec.  4.22(a) an average of 9 times per year, with a 
per-response burden of 3.85 hours. The Commission estimates that these 
same 180 entities will prepare and file an average of 1.5 annual 
reports, with a burden of 9.58 hours per report. In addition, the 
Commission anticipates that 962 entities will file a request for a 
deadline extension for the annual report each year, with a burden of 
0.5 hours per request.
    These burden estimates, together with those associated with the 
increases necessary to account for the filing of forms CPO-PQR, PF, and 
CTA-PR discussed below, will result in an amendment to Collection 3038-
0005 to provide, in the aggregate:
    Estimated number of respondents: 43,168.
    Annual responses for all respondents: 61,868.
    Estimated average hours per response: 8.77.
    Annual reporting burden: 257,635.8.
    Proposed Sec.  4.27 is expected to be the main reason for the 
increased burden under Collection 3038-0005.
    The Commission has amended its burden estimates with respect to 
Form CPO-PQR to reflect the fact that dually registered entities that 
operate pools that are not private funds may report the activities for 
such funds on Form PF.\192\ The Commission expects that any entity that 
is eligible to file form PF will file that form and not the form CPO-
PQR, and has excluded from the estimates for form CPO-PQR those 
entities. As most of the burden associated with filing form PF for CPOs 
newly required to register with the Commission has been accounted for 
by the Commission in an information collection request associated with 
a rulemaking adopted jointly with the SEC, the amendment to Collection 
3038-0005 accounts only for the burden of filing form PF by dually 
registered CPOs for pools that are not private funds as defined in the 
joint rulemaking.
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    \192\ Based on information that the Commission received from 
registrants on their annual financial report filings, the Commission 
determined that \1/3\ of all pools reporting to the Commission in 
2009 reported gains or losses from securities or a combination of 
securities and futures. Based on the provisions of Form PF, which 
permits filers of the form to file with respect to commodity pools 
that are not private funds, the Commission anticipates that all 
entities entitled to file Form PF for their commodity pools will do 
so, as it is less burdensome on the filer. Therefore, the Commission 
has included burden estimates for CPOs to file Form PF for their 
commodity pools that are not private funds, which is an incremental 
increase over the burden imposed by the obligation to file Form PF 
for the entity's private funds.
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i. Comments on Sec.  4.27 Reporting Requirements
    The Commission received numerous comments in response to proposed 
Sec.  4.27, and in response has adopted a number of cost-mitigating 
measures. Several commenters questioned whether the data collection was 
necessary for the Commission's oversight of its registrants.\193\ 
Others asserted that certain groups, such as registered investment 
companies or family offices, should be exempted from completing the 
data collection.\194\ In the Commission's judgment, in order to fulfill 
the Commission's systemic-risk mitigation mandate, it is necessary to 
obtain information from the full universe of registrants to fully 
assess the activities of CPOs and CTAs in the derivatives markets.
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    \193\ See Fidelity Letter; and AIMA Letter.
    \194\ See ICI Letter; AIMA Letter; and K&L Letter.
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    With respect to the assertion that registered investment companies 
should not be required to file form CPO-PQR, the Commission believes 
that it is important to collect the data in form CPO-PQR from 
registered investment companies whose activities require CPO 
registration to assess the risk posed by such investment vehicles in 
the derivatives markets and the financial system generally. In this 
respect, the Commission intends to require the same information from 
the CPOs of registered investment companies as it is requiring from 
other registered CPOs. Additionally, the Commission notes that to the 
extent that the entity registered as the CPO for the registered 
investment company is registered as an investment adviser and is 
required to file Form PF with the SEC, the activities of the registered 
investment company may be reported on Form PF rather than form CPO-PQR.
    The Commission further believes that the same reasoning applies 
with respect to the collection of data from family offices. To enable 
the Commission to evaluate a potential family offices exemption 
following the collection and analysis of data regarding their 
activities, the Commission believes that it is essential that family 
offices remain subject to the data collection requirements.
    One commenter recommended that the Commission clarify the filing 
obligations for CPOs and CTAs that are required to file form PF with 
the SEC and streamline the reporting obligations.\195\ Another 
commenter argued that a very large private fund that has a limited 
amount of derivatives trading should not be subject to schedule C of 
form CPO-PQR.\196\
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    \195\ See Fidelity Letter.
    \196\ See AIMA Letter; see also, SIFMA Letter; and Fidelity 
Letter.
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    As stated in the Proposal, CPOs that are dually registered with the 
SEC and that file form PF must still file schedule A, containing basic 
demographic information, with the Commission, and CTAs must still file 
form CTA-PR. The Commission intends to adopt Sec.  4.27 as proposed and 
permit dual registrants to

[[Page 11274]]

file form PF with the SEC in lieu of completing schedules B and/or C of 
form CPO-PQR.
    However, the Commission did not intend to require very large dual 
registrants to file anything more than the general identifying 
information required on schedule A with the Commission, and neither 
Sec.  4.27 nor the forms require dual registrants to file schedules B 
or C if they are filing form PF. Similarly, the Commission is not 
adopting schedule B from form CTA-PR, and therefore, will be limiting 
the information collected from registered CTAs to demographic data and 
the names of the pools advised by the CTA. These measures will mitigate 
costs to market participants by limiting the number of registrants that 
must file these forms with the Commission.
    One commenter questioned whether the information collected on forms 
CTA-PR and CPO-PQR will provide the Commission with real-time data that 
will enable it to have an accurate and timely picture of a CTA's 
activities and operating status.\197\ Another commenter questioned 
whether the Commission possessed the staffing and financial resources 
necessary to meaningfully use such data as part of its oversight.\198\ 
The Commission recognizes the limitations of the data collection 
instruments with respect to the timeliness of the information 
requested. The Commission believes, however, that the forms strike the 
appropriate balance between the time needed to compile complex data and 
the Commission's need for timely information. Information that is less 
than real-time is nevertheless useful in assisting the Commission in 
overseeing registrants as it will provide additional information upon 
which the Commission can base future program adjustments to ensure 
efficient deployment of the Commission's resources.
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    \197\ See Barnard Letter.
    \198\ See Dechert Letter.
---------------------------------------------------------------------------

    As an offset to the costs otherwise associated with additional 
reporting, the Commission intends for the data to be collected from 
registrants in an electronic format. The Commission anticipates that 
electronic data filing will be less time-intensive and should lower 
compliance costs for participants, as well as processing costs for the 
Commission. Moreover, the Commission believes that, over time, 
participants will develop certain efficiencies in the filing of their 
annual CPO-PQR and CTA-PR forms, allowing costs to continue to decrease 
over time. Further, the Commission recognizes that the resources 
available to it are variable. As a further cost-mitigating measure, the 
Commission will leverage any limits on its resources through its 
coordination with NFA to accomplish the analysis necessary to make full 
use of the data collected from Commission registrants.
    The Commission received several comments regarding the appropriate 
reporting thresholds for the various schedules of form CPO-PQR.\199\ 
The commenters stated that $150 million in assets under management was 
too low of a threshold for entities to be categorized as mid-sized and 
required to file schedule B. Rather, the commenters urged the 
Commission to increase the threshold to $500 million in assets under 
management.\200\ These commenters also suggested that the Commission 
increase the threshold for large CPOs to $5 billion in assets under 
management.\201\
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    \199\ See AIMA Letter; MFA II Letter; Seward Letter. See also, 
AIMA II Letter.
    \200\ See AIMA Letter.
    \201\ See AIMA Letter; MFA II Letter; and Seward Letter.
---------------------------------------------------------------------------

    The Commission believes that $150 million in assets under 
management is still the appropriate threshold for mid-sized CPOs. The 
Commission will retain this threshold because it is consistent with the 
threshold for advisers filing section 1 of form PF, which is 
substantively similar to schedule B of form CPO-PQR, and it will ensure 
comparable treatment of entities of similar magnitude. In addition, the 
Commission has decided not to increase the large CPO threshold to $5 
billion. The Commission has decided, however, to increase the threshold 
for large CPOs from $1 billion to $1.5 billion. The Commission 
anticipates that increasing the threshold to $1.5 billion will lower 
costs by reducing the number of CPOs required to file schedule C of 
form CPO-PQR, while still capturing data concerning a substantial 
portion of the assets under management by registered CPOs. The 
Commission believes that increasing the threshold beyond $1.5 billion, 
however, could limit the Commission's access to information necessary 
to oversee entities that could pose a risk to the derivatives markets 
or the financial system as a whole.
    In response to comments, the Commission has also determined to 
mitigate costs and promote efficiency by modifying the frequency of 
reporting for filers of form CPO-PQR. As adopted, all CPOs other than 
large CPOs will be required to file schedule A on an annual basis; mid-
size CPOs will be required to file schedule B on an annual basis; and 
large CPOs will be required to file schedules A, B, and C on a 
quarterly basis.
    The Commission received several comments asserting that the 15-day 
period for reporting was not sufficient to permit reporting CPOs to 
complete and file the form and all suggested extending the period to 30 
or 45 days.\202\ The Commission agrees that reporting CPOs will need 
additional time in which to submit the various schedules of form CPO-
PQR. In a further effort to reduce costs to participants, all CPOs 
other than large CPOs will be required to file schedule A within 90 
days of the end of the calendar year. This time period was chosen for 
efficiency and cost mitigation inasmuch as it coincides with the annual 
questionnaire required by NFA of its entire population of member CPOs 
and with the vast majority of annual report filings for commodity 
pools. Moreover, because the Commission has transferred the pool 
position information from schedule A to schedule B, the Commission 
believes that CPOs should be able to comply with filing basic 
demographic data within 90 days.
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    \202\ See NFA Letter; Seward Letter; and AIMA Letter.
---------------------------------------------------------------------------

    For schedule B, mid-sized CPOs are required to submit that schedule 
within 90 days; the Commission believes this is an adequate time period 
for compiling and reporting that schedule. The Commission notes that 
CPOs are generally required to file annual reports for their pools 
within 90 days of their fiscal year end, most of which coincide with 
the calendar year end. The Commission believes that the alignment of 
pools' fiscal years with the calendar year end should facilitate the 
preparation of schedule B and reduce the burden imposed on mid-size 
CPOs because some of the information required will be similar to that 
included in a pool's annual financial statements.
    With respect to the quarterly reporting by large CPOs on schedules 
A, B, and C, the Commission believes that 60 days is a sufficient 
amount of time to complete those schedules for large CPOs. The 
Commission notes that the entities required to file on a quarterly 
basis have a significant amount of assets under management, and as 
such, the Commission anticipates that such entities routinely generate 
the type of information requested on schedules B and C as part of their 
internal governance. Accordingly, the Commission will require large 
CPOs to file schedules A, B, and C within 60 days following the end of 
the reporting period as defined in form CPO-PQR.

[[Page 11275]]

    The Commission received several comments regarding the content of 
form CTA-PR.\203\ Most commenters urged the Commission to eliminate the 
form in its entirety.\204\ The Commission does not believe that the 
complete elimination of form CTA-PR is appropriate; however, the 
Commission agrees that schedule B of the form contains redundant 
information that will already be collected through form CPO-PQR. 
Accordingly, the Commission has decided to adopt only schedule A of 
form CTA-PR. In so doing, the Commission believes the burden on CTAs 
should be significantly reduced. Because form CTA-PR will be limited to 
demographic data, the Commission believes that it is appropriate for 
CTAs to file the form on an annual basis within 45 days of the end of 
the fiscal year.
---------------------------------------------------------------------------

    \203\ See e.g., IAA Letter; MFA II Letter; AIMA Letter; SIFMA 
Letter; and Fidelity Letter.
    \204\ Id.
---------------------------------------------------------------------------

    Finally, because the regulations have been modified to allow dually 
registered entities to file only form PF (plus the first schedule A of 
form CPO-PQR) for all of their commodity pools, even those that are not 
``private funds,'' the Commission expects that such entities should not 
be burdened by the costs of dual registration and dual filing.
ii. Information Collection Estimates for Forms CPO-PQR, PF, and CTA-PR
    The Commission expects the following burden with respect to the 
various schedules of Forms CPO-PQR, PF, and CTA-PR:
    Form CPO-PQR: Schedule A:
    Estimated number of respondents (excluding large CPOs): 3,890.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 6.
    Annual reporting burden: 23,340.
    Estimated number of respondents (large CPOs): 170.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 6.
    Annual reporting burden: 4,080.
    Form CPO-PQR: Schedule B:
    Estimated number of respondents (mid size CPOs): 440.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 4.
    Annual reporting burden: 1,760.
    Estimated number of respondents (large CPOs): 170.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 4.
    Annual reporting burden: 2,720.
    Form CPO-PQR: Schedule C:
    Estimated number of respondents: 170.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 18.
    Annual reporting burden: 12,240.
    Form PF (non-large CPOs):
    Estimated number of respondents: 220.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 4.
    Annual reporting burden: 880.
    Form PF (large CPOs):
    Estimated number of respondents: 90.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 18.
    Annual reporting burden: 6,480.
    Form CTA-PR:
    Estimated number of respondents: 450.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 0.5.
    Annual reporting burden: 225.

C. Considerations of Costs and Benefits

    The Commission has historically exercised its authority to exempt 
certain categories of entity from the CPO and CTA registration 
requirement set forth in Section 4m(1) of the CEA, which states that it 
is otherwise ``unlawful for any commodity trading advisor or commodity 
pool operator, unless registered under this Act'' to conduct business 
in interstate commerce.\205\ Exempted entities have included certain 
investment companies registered with the SEC pursuant to the Investment 
Company Act of 1940, and certain entities whose only participants are 
``qualified eligible persons.'' \206\ This system of exemptions was 
appropriate because such entities engaged in relatively little 
derivatives trading, and dealt exclusively with qualified eligible 
persons, who are considered to possess the resources and expertise to 
manage their risk exposure.
---------------------------------------------------------------------------

    \205\ 7 U.S.C. 6m.
    \206\ 17 CFR Sec. Sec.  4.5(a)(1), 4.13(a)(4).
---------------------------------------------------------------------------

    In the Commission's judgment, changed circumstances warrant 
revisions to these rules. The Commission is aware, for example, of 
increased derivatives trading activities by entities that have 
previously been exempted from registration with the Commission, such 
that entities now offering services substantially identical to those of 
registered entities are not subject to the same regulatory oversight. 
Meanwhile, the Dodd-Frank Act has given the Commission a more robust 
mandate to manage systemic risk and to ensure safe trading practices by 
entities involved in the derivatives markets, including qualified 
eligible persons and other participants in commodity pools. Yet, while 
the Commission must execute this mandate, there currently is no source 
of reliable information regarding the general use of derivatives by 
registered investment companies.
    The Commission, therefore, is adopting a new registration and data 
collection regime for CPOs and CTAs that is consistent with the data 
collection required under the Dodd-Frank Act. In these final rules, the 
adopted amendments to part 4 of the Commission's regulations will do 
the following: (A) Rescind the exemption from CPO registration provided 
in Sec.  4.13(a)(4) of the Commission's regulations; (B) rescind relief 
from CTA registration for those CTAs who advise pools with relief under 
Sec.  4.13(a)(4); (C) rescind relief from the certification requirement 
for annual reports provided to operators of certain pools only offered 
to qualified eligible persons (``QEPs'') under Sec.  4.7(b)(3); (D) 
modify the criteria for claiming relief under Sec.  4.5 of the 
Commission's regulations; (E) require the annual filing of notices 
claiming exemptive relief under Sec.  4.5, Sec.  4.13, and Sec.  4.14 
of the Commission's regulations; and (F) require additional risk 
disclosures for CPOs and CTAs regarding swap transactions and, certain 
conforming amendments. By these amendments, the Commission seeks to 
eliminate informational ``blind spots,'' which will benefit all 
investors and market participants by enhancing the Commission's ability 
to form and frame effective policies and procedures.
    Section 15(a) \207\ of the CEA requires the Commission to consider 
the costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing an order. 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. To the extent that these new regulations reflect the 
statutory requirements of the Dodd-

[[Page 11276]]

Frank Act, they will not create costs and benefits beyond those 
resulting from Congress's statutory mandates in the Dodd-Frank Act. 
However, to the extent that the new regulations reflect the 
Commission's own determinations regarding implementation of the Dodd-
Frank Act's provisions, such Commission determinations may result in 
other costs and benefits. It is these other costs and benefits 
resulting from the Commission's own determinations pursuant to and in 
accordance with the Dodd-Frank Act that the Commission considers with 
respect to the Section 15(a) factors.
---------------------------------------------------------------------------

    \207\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission has quantified estimated costs and benefits where it 
is reasonably practicable to do so. The Commission notes that, unless 
otherwise specified, all costs discussed herein are estimates based on 
the Commission's knowledge of the operations and registration statuses 
of CPOs and CTAs. Moreover, the Commission is obligated to estimate the 
burden of and provide supporting statements for any collections of 
information it seeks to establish under considerations contained in the 
PRA, 44 U.S.C. 3501 et seq., and to seek approval of those requirements 
from the OMB. Therefore, the estimated burden and support for the 
collections of information in this this rulemaking, as well as the 
consideration of comments thereto, are discussed in the PRA section of 
this rulemaking and the information collection requests filed with OMB 
as required by that statute. All estimates are based on average costs; 
actual costs may vary depending on the entity's individual business 
model and compliance procedures.
    The Commission is sensitive to costs incurred by market 
participants and has attempted in a variety of ways to minimize burdens 
on affected entities. These include the Commission's efforts to 
harmonize its compliance requirements with those of the SEC, including 
through specific harmonizing provisions in the joint SEC-CFTC rule for 
dually registered investment advisers, as well as through tailoring of 
the current amendments.\208\ A number of other cost-mitigation measures 
are discussed later in this section.
---------------------------------------------------------------------------

    \208\ See 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).
---------------------------------------------------------------------------

    In its Proposal, the Commission invited commenters to ``to submit 
any data and other information that they may have quantifying or 
qualifying the costs and benefits of this proposed rule with their 
comment letters.'' \209\ Many comments addressed the costs and benefits 
of the proposed rule in qualitative terms. These comments are 
considered below.
---------------------------------------------------------------------------

    \209\ 76 FR 7976, 7989 (Feb. 11, 2011).
---------------------------------------------------------------------------

    In the following discussion, the Commission sets forth its own 
assessment of the benefits and costs of the amendments; addresses 
relevant comments on the Proposal and alternatives to the Proposal 
submitted by commenters; and evaluates the benefits and costs in light 
of the five broad areas of market and public concern set forth in 
Section 15(a) of the CEA. The analysis begins by addressing general 
comments related to cost-benefit analysis in the context of the 
Proposal as a whole, and then proceeds to examine the specific issues 
according to the following three categories of regulation contained 
within the Proposal: (1) registration (including changes to Sec.  4.5, 
Sec.  4.13(a), and Sec.  4.14); (2) data collection (including the 
adoption of forms CPO-PQR and CTA-PR); and (3) complementary amending 
provisions (including changes to Sec.  4.7, Sec.  4.24, Sec.  4.34, and 
parts 145 and 147).
1. General Comments
    Several commenters claimed that the Commission did not provide a 
sufficient consideration of costs and benefits in the Notice of 
Proposed Rulemaking.\210\ One commenter noted that the cost-benefit 
considerations focused on benefits that are already provided by other 
federal securities laws, making the regulations duplicative.\211\ 
Another commenter asserted that until other rules, such as the further 
definition of ``swaps,'' as well as capital and margin requirements, 
have been finalized, it is not possible to determine the costs and 
benefits of these rules.\212\ Other commenters suggested there be 
another roundtable meeting to discuss the proposed rules.\213\
---------------------------------------------------------------------------

    \210\ See SIFMA Letter; USCC Letter; Reed Smith Letter; NFA 
Letter; Invesco Letter; Dechert II Letter; and ICI Letter.
    \211\ See ICI Letter.
    \212\ See Dechert II Letter.
    \213\ See Vanguard Letter; MFA Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission has further 
considered costs and benefits as they relate to the final rules. As 
explained below in the discussion concerning dual SEC and Commission 
registrants, the Commission believes that the benefits provided by 
these rules are supplementary to, and not duplicative or redundant of, 
benefits provided by the federal securities laws. The Commission does 
not believe that the adoption of these regulations should be postponed 
until after other regulations are finalized and believes that the costs 
and benefits are sufficiently clear at this point and that delay is not 
justified.\214\ In addition, the Commission has no reason to believe 
that another roundtable meeting would yield information substantially 
different from that gleaned from prior roundtables, comment letters, 
and meetings with industry representatives.
---------------------------------------------------------------------------

    \214\ As noted above, however, the Commission agrees that it 
should not implement the inclusion of swaps within the threshold 
test prior to the effective date of such relevant final rules. 
Therefore, it is the Commission's intention to delay the effective 
date of the inclusion of swaps into the threshold calculation until 
60 days after the final rules regarding the definition of ``swap'' 
and the delineation of the margin requirement for such instruments 
are effective.
---------------------------------------------------------------------------

    The Commission has determined that these amendments will create 
additional compliance costs for affected participants. These costs 
include, but may not be limited to, the cost to prepare and file new 
forms CPO-PQR and CTA-PR; the cost to file an annual notice to claim 
exemptive relief under Sec. Sec.  4.5, 4.13, and 4.14; the cost of 
preparing, certifying, and submitting annual reports as required for 
registrants; the cost of preparing required disclosure documents; the 
cost of preparing and distributing account statements on a periodic 
basis to participants; the cost of keeping certain records as required; 
and the cost of registering as a CPO or CTA. These costs each relate to 
collections of information subject to PRA compliance, and therefore 
have been accounted for in the PRA section of this rulemaking and the 
information collection requests filed with OMB as required by that 
statute.
    Notably, many of the benefits associated with the requirements 
adopted or amended in these regulations are recognized not only by the 
Commission in its mission to protect derivatives markets and the 
participants in them but also by the industry. Several ``best 
practices'' manuals highlight the benefits of being registered with the 
Commission, preparing and disseminating risk disclosure documents, 
confirming receipt of disclosure documents, and ensuring independent 
audit of financial statements and annual reports.\215\ These benefits 
include increased consumer

[[Page 11277]]

confidence in offered pools and funds as well as increased internal 
risk management structures.
---------------------------------------------------------------------------

    \215\ See, e.g. ``Sound Practices for Hedge Fund Managers.'' 
Managed Funds Association (MFA). Washington DC, 2007.; ``Principles 
and Best Practices for the Hedge Fund Industry.'' Investors 
Committee Report to the President's Working Group on Financial 
Markets, Washington DC, 2008.; and ``Best Practices for the Hedge 
Fund Industry.'' Asset Managers Committee Report to the President's 
Working Group on Financial Markets, Washington DC, 2009.
---------------------------------------------------------------------------

2. Regulations Regarding Registration Requirements for CPOs and CTAs
    As discussed above, the amendments to the registration provisions 
under part 4 include rescissions of the exemptions for entities 
functioning as commodity pools with only ``qualified eligible persons'' 
as participants and the exclusion of registered investment companies 
under the Investment Company Act of 1940, unless those investment 
companies fall below a certain threshold level of derivatives 
investment activity. With respect to those entities that will continue 
to claim exemption or exclusion from registration as CPOs or CTAs under 
the rules, the amendments will also require annual reaffirmance of 
those claims of exemption or exclusion.
a. Benefits of Registration Provisions
    As discussed above in II.A.1, the Commission believes that 
registration provides two significant interrelated benefits. First, 
registration allows the Commission to ensure that entities with greater 
than a de minimis level of participation in the derivatives markets 
meet minimum standards of fitness and competency. Second, registration 
provides the Commission and members of the public with a direct means 
to address wrongful conduct by participants in the derivatives markets. 
The Commission has direct authority to take punitive and/or remedial 
action against registered entities for violations of the CEA or of the 
Commission's regulations. The Commission also has the ability to deny 
or revoke registration, thereby prohibiting an unfit individual or 
entity from serving as an intermediary in the industry. Members of the 
public also may access the Commission's reparations program to seek 
redress for wrongful conduct by a Commission registrant.
    The Commission believes that the registration procedures enacted as 
part of its regulatory regime upgrade the overall quality of market 
participants, which, in turn, strengthens the derivatives industry by 
minimizing lost business due to customer dissatisfaction and by 
reducing litigation arising from acts of market participants. 
Therefore, the Commission believes that its registration requirements 
further critical regulatory objectives and serve important public 
policy goals.
    By expanding the Commission's regulatory oversight of entities 
performing the functions of CPOs and CTAs, the Commission believes that 
the final rules related to registration will help to ensure that such 
entities meet basic standards of competency and fitness, which in turn 
will provide a greater level of protection to market participants. 
Ensuring that CPOs and CTAs are qualified in the first instance--as 
opposed to relying solely on after-the-fact enforcement actions to 
deter and remedy misconduct--should reduce such instances of misconduct 
and resulting litigation, and thereby promote overall market 
confidence. Therefore, the Commission believes that its registration 
requirements are integral to its regulatory objectives and are in the 
public interest.
    With specific respect to the annual reaffirmance requirement, this 
amendment will promote transparency regarding the number of entities 
either exempt or excluded from the Commission's registration and 
compliance programs. One primary purpose of the Dodd Frank Act is the 
promotion of transparency in the financial system, particularly in the 
derivatives market. This requirement is consistent with and will 
further that purpose. Finally, the annual notice requirement will 
enable the Commission to determine whether exemptions and exclusions 
should be modified, repealed, or maintained as part of the Commission's 
ongoing assessment of its regulatory scheme.
    These benefits--enhancing the quality of entities operating within 
the market, and the screening of unfit participants from the markets--
are substantial, even if unquantifiable. Through registration, the 
Commission will be better able to protect the public and markets from 
unfit persons and conduct that may threaten the integrity of the 
markets subject to its jurisdiction.
b. Costs of Registration Provisions
    Because of the amendments to part 4 as adopted here, the Commission 
recognizes that some participants who previously were excluded or 
exempted from registering as a CPO or CTA will now be required to 
register with the Commission through NFA. In addition to costs 
associated with registration accounted for under the PRA, which one 
commenter said would ``vary significantly depending on a range of 
factors, including the number of employees who will need to pass 
examinations, the number of funds advised, investment strategy and 
complexity, existing IT systems, and whether or not an adviser is 
already registered or authorized and subject to a different regulatory 
regime,'' \216\ the commenter estimated ongoing costs to be in the 
range of $150,000 to $250,000 per year, a substantial part of which 
would be made up of additional compliance personnel, information 
technology development and legal/accounting advice that will be 
required, and again vary significantly depending on the factors 
mentioned above.\217\ The Commission presents these estimates for the 
consideration of affected entities, reiterating the high variability of 
costs depending on the factors enumerated by the commenter. This 
variability is one reason the Commission presented its own estimates of 
costs on a per-requirement basis; affected entities should be aware 
that the total cost of registration and compliance will most likely be 
the sum of any number of the estimates presented in this section and 
under the PRA. In addition to the information collection costs 
addressed by the Commission under the PRA, entities that will be 
required to register with the Commission also will become subject to 
NFA rules and to NFA audit procedures. NFA assesses annual membership 
dues on CPOs and CTAs, currently $750, and charges $90 for the National 
Commodity Futures Examination (NCFE) or Series 3 Examination for each 
AP. The Commission understands that NFA audits CPOs and CTAs, on 
average, every two to three years, though the frequency of audit 
depends greatly on individual risk factors, and NFA generally conducts 
an audit within the first year following registration of an 
entity.\218\ The cost of such an audit may be incurred by the CPO or 
CTA through an ``audit fee'' imposed by NFA; however, the audit fee 
varies greatly by individual entity and individual audit and thus is 
difficult to quantify on any sort of aggregated basis. Notwithstanding 
the difficulty of quantifying such a burden, the Commission notes this 
cost will most likely arise in the first year of registration and on 
average every few years thereafter, and entities should expect such a 
fee to be incurred.
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    \216\ See AIMA II Letter.
    \217\ Id.
    \218\ For more information on audit procedures, visit the NFA 
Web site, currently at https://www.nfa.futures.org/NFA-compliance/NFA-general-compliance-issues/nfa-audits.HTML.
---------------------------------------------------------------------------

c. Comments Regarding Registration Provisions
1. Sec.  4.5 Amendments
    Commenters who opposed the changes to Sec.  4.5 claimed that 
requiring registered investment companies to register and comply with 
the Commission's regulatory regime would

[[Page 11278]]

provide no benefit, because such entities are already subject to 
comprehensive regulation by the SEC.\219\ The Commission disagrees.
---------------------------------------------------------------------------

    \219\ See, e.g., ICI Letter.
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    While the Commission and the SEC share many of the same regulatory 
objectives, including protecting market users and the public from fraud 
and manipulation, the Commission administers the CEA to foster open, 
competitive, and financially sound commodity and derivatives markets. 
The Commission's programs are structured and its resources deployed to 
meet the needs of the markets it regulates. In light of this 
Congressional mandate, it is the Commission's view that entities 
engaging in more than a de minimis amount of derivatives trading should 
be required to register with the Commission. The alternative approaches 
suggested by commenters would, as discussed above, detract from the 
benefits of registration.
    As also discussed above, the Commission is aware that currently 
unregistered entities are offering services substantially identical to 
those of registered CPOs. Several commenters also asserted that 
modifying Sec.  4.5 would result in a significant burden on entities 
required to register with the Commission without any meaningful benefit 
to the Commission.\220\ The Commission recognizes that significant 
burdens may arise from the modifications to Sec.  4.5; however, the 
Commission believes, as discussed throughout this release, that 
entities that are offering services substantially identical to those of 
a registered CPO should be subject to substantially identical 
regulatory obligations.
---------------------------------------------------------------------------

    \220\ See ICI Letter; Vanguard Letter; Reed Smith Letter; 
AllianceBernstein Letter; USAA Letter; PMC Letter; IAA Letter; 
Dechert II Letter; Janus Letter; STA Letter; Invesco Letter; and 
Equinox Letter.
---------------------------------------------------------------------------

    Nevertheless, the Commission has not eliminated altogether the 
exemption available under Sec.  4.5. Where an entity's trading does not 
exceed five percent of the liquidation value of its portfolio, that 
entity will remain exempt from registration. In the Commission's 
judgment, trading exceeding five percent of the liquidation value of a 
portfolio evidences a significant exposure to the derivatives 
markets.\221\ This threshold was adopted by the Commission in its 
earlier enactment of Sec.  4.13(a)(3).\222\ In promulgating that 
exemption for de minimis activity, the Commission determined that five 
percent is an appropriate threshold beyond which oversight by the 
Commission is warranted.\223\ Because current data and information does 
not allow the Commission to evaluate the difference in market impact at 
various threshold levels \224\ the Commission believes it is prudent to 
maintain the current threshold level. Further, as discussed above, no 
facts have been put before the Commission that would warrant deviation 
from the five-percent threshold, including data respecting the costs 
and benefits of the same. The Commission also received numerous 
comments on the proposed addition of a trading threshold to the 
exclusion under Sec.  4.5.\225\ Some commenters stated that a five 
percent de minimis threshold is too low in light of the Commission's 
determination to include swaps within the measured activities. Although 
these commenters presented alternatives to this five percent threshold 
(some said twenty percent would be more reasonable, for example) the 
Commission believes, as stated in the Proposal, that trading exceeding 
five percent of the liquidation value of a portfolio evidences a 
significant exposure to the derivatives markets.\226\ Moreover, in its 
adoption of the exemption under Sec.  4.13(a)(3),\227\ the Commission 
previously determined that five percent is an appropriate threshold to 
determine whether an entity warrants oversight by the Commission.\228\ 
Current data and information does not allow the Commission to evaluate 
the difference in market impact at various threshold levels; \229\ 
thus, the Commission believes it is prudent to maintain the current 
threshold level. Commenters also recommended that the Commission 
exclude from the threshold calculation various instruments including 
broad-based stock index futures, security futures generally, or 
financial futures contracts as a whole.\230\ As discussed above, the 
Commission does not believe that a meaningful distinction can be drawn 
between those security or financial futures and other categories of 
futures for the purposes of registration; thus, the Commission does not 
believe that exempting any of these instruments from the threshold 
calculation is appropriate.
---------------------------------------------------------------------------

    \221\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the] 
Commission believes that it is possible for a commodity pool to have 
a portfolio that is sizeable enough that even if just five percent 
of the pool's portfolio were committed to margin for futures, the 
pool's portfolio could be so significant that the commodity pool 
would constitute a major participant in the futures market'').
    \222\ 17 CFR 4.13(a)(3).
    \223\ 68 FR 47221, 47225 (Aug. 8, 2003).
    \224\ The Commission currently only has information on the 
positions held by CPOs in futures markets, i.e., those entities 
already registered as CPOs, as opposed to those excluded from the 
definition of CPO under Sec.  4.5. The Commission does not have 
access to information on the total liquidation value of funds 
operated by registered CPOs or those operated by excluded CPOs, 
values that are needed to determine the universe of entities 
affected by one particular percentage threshold versus another. 
These data limitations are one reason why the Commission is pursuing 
additional data collection initiatives under these final rules.
    \225\ See Invesco Letter; ICI Letter; Vanguard Letter; Reed 
Smith Letter; AllianceBernstein Letter; AII Letter; STA Letter; 
Janus Letter; PMC Letter; USAA Letter; Fidelity Letter; SIFMA 
Letter; Dechert III Letter; Rydex Letter; USCC Letter; Sidley 
Letter; NFA Letter; Campbell Letter; AQR Letter; Steben Letter; ICI 
II Letter; and AII Letter.
    \226\ 76 FR 7976, 7985 (Feb. 12, 2011) (stating that ``[the] 
Commission believes that it is possible for a commodity pool to have 
a portfolio that is sizeable enough that even if just five percent 
of the pool's portfolio were committed to margin for futures, the 
pool's portfolio could be so significant that the commodity pool 
would constitute a major participant in the futures market'').
    \227\ 17 CFR 4.13(a)(3).
    \228\ 68 FR 47221, 47225 (Aug. 8, 2003).
    \229\ The Commission currently only has information on the 
positions held by CPOs in futures markets, i.e., those entities 
already registered as CPOs, as opposed to those excluded from the 
definition of CPO under Sec.  4.5. The Commission does not have 
access to information on the total liquidation value of funds 
operated by registered CPOs or those operated by excluded CPOs, 
values that are needed to determine the universe of entities 
affected by one particular percentage threshold versus another. 
These data limitations are one reason why the Commission is pursuing 
additional data collection initiatives under these final rules.
    \230\ See Rydex Letter; Invesco Letter; and ICI Letter.
---------------------------------------------------------------------------

    Several panelists at the Roundtable suggested that, instead of a 
trading threshold that is based on a percentage of margin, that the 
Commission should focus solely on entities that offer ``actively 
managed futures'' strategies.\231\ As discussed in section II.A.2, the 
Commission does not find it appropriate to establish a differentiation 
between ``active'' and ``passive'' derivative investments because, in 
addition to other reasons,\232\ establishing such differentiation would 
introduce an element of subjectivity to an otherwise objective standard 
and make the threshold more difficult to interpret, apply, and enforce.
---------------------------------------------------------------------------

    \231\ See Transcript of CFTC Staff Roundtable Discussion on 
Proposed Changes to Registration and Compliance Regime for Commodity 
Pool Operators and Commodity Trading Advisors (``Roundtable 
Transcript''), at 19, 25, 30, 76-77, 87-90, available at https://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission27_070611-trans.pdf.
    \232\ Additional reasons for not accepting this alternative are 
discussed in section II.A.2 of this release.
---------------------------------------------------------------------------

    One commenter suggested that the Commission should consider the 
adoption of an alternative test that would be identical to the 
aggregate net notional value test that is currently available under 
Sec.  4.13(a)(3)(ii)(B).\233\ Section 4.13(a)(3)(ii)(B) provides that 
an entity can claim exemption from

[[Page 11279]]

registration if the net notional value of its fund's derivatives 
trading does not exceed one hundred percent of the liquidation value of 
the fund's portfolio.\234\
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    \233\ See Dechert III Letter.
    \234\ 17 CFR 4.13(a)(3)(ii)(B).
---------------------------------------------------------------------------

    Conversely, several panelists at the Roundtable opposed such a 
test, stating that it was not a reliable means to measure an entity's 
exposure in the market.\235\ As stated previously herein, the 
Commission believes that the adoption of an alternative net notional 
test will provide consistent standards for relief from registration as 
a CPO for entities whose portfolios only contain a limited amount of 
derivatives positions and will afford registered investment companies 
with additional flexibility in determining eligibility for exclusion. 
Therefore, the Commission will adopt an alternative net notional test, 
consistent with that set forth in Sec.  4.13(a)(3)(ii)(B) as amended 
herein, for registered investment companies claiming exclusion from the 
definition of CPO under Sec.  4.5.
---------------------------------------------------------------------------

    \235\ See Roundtable Transcript at 69-71.
---------------------------------------------------------------------------

    The Commission also received several comments supporting both the 
imposition of a trading threshold in general and the five percent 
threshold specifically.\236\ At least one commenter suggested, however, 
that the Commission consider requiring registered investment companies 
that exceed the threshold to register, but not subjecting them to the 
Commission's compliance regime beyond requiring them to be subject to 
the examination of their books and records, and examination by 
NFA.\237\ In effect, this commenter requested that the Commission 
subject such registrant to ``notice registration.'' The Commission 
believes that adopting the approach proposed by the commenter would not 
materially change the information that the Commission would receive 
regarding the activities of registered investment companies in the 
derivatives markets, which is one of the Commission's purposes in 
amending Sec.  4.5. Moreover, a type of notice registration would not 
provide the Commission with any real means for engaging in consistent 
ongoing oversight. Notwithstanding such notice registration, the 
Commission would still be deemed to have regulatory responsibility for 
the activities of these registrants. In the Commission's view, notice 
registration does not equate to an appropriate level of oversight. For 
that reason, the Commission has determined not to adopt the alternative 
proposed by the commenter. The Commission is adopting the amendment to 
Sec.  4.5 regarding the trading threshold without modification for the 
reasons stated herein and those previously discussed in the Proposal.
---------------------------------------------------------------------------

    \236\ See NFA Letter, Campbell Letter, AQR Letter, and Steben 
Letter.
    \237\ See AQR Letter.
---------------------------------------------------------------------------

2. Sec. Sec.  4.13(a)(3) and (a)(4) Rescissions
    In addition to the comments that the Commission received regarding 
the specific parts of the Proposal rescinding Sec. Sec.  4.13(a)(3) and 
(a)(4), the Commission received numerous comments regarding the 
proposed rescissions generally.\238\ Broadly, the comments opposed the 
rescission of the provisions. In the Proposal, the Commission proposed 
rescinding the ``de minimis'' exemption in Sec.  4.13(a)(3). The 
Commission received ten comments specifically on this aspect of the 
Proposal, which consistently urged the Commission to retain a de 
minimis exemption. As discussed above in section II.C.2, the 
Commission, after consideration of the comments and the Commission's 
stated rationale for proposing to rescind the exemption in Sec.  
4.13(a)(3), has determined to retain the ``de minimis'' exemption 
currently set forth in that section without modification.
---------------------------------------------------------------------------

    \238\ See NYSBA Letter; Skadden Letter; MFA Letter; Katten 
Letter; Fidelity Letter; Dechert Letter; AIMA Letter; AIMA II 
Letter; IAA Letter; SIFMA Letter; HedgeOp Letter; PIC Letter; and 
Seward Letter.
---------------------------------------------------------------------------

    Several commenters asserted that rescission was not necessary 
because the Commission has the means to obtain any needed information 
from exempt CPOs through its large trader reporting requirements and 
its special call authority.\239\ Although the Commission has those 
means, neither of those rules were intended to provide the kind of data 
requested of registered entities on forms CPO-PQR or CTA-PR with the 
regularity proposed under Sec.  4.27.
---------------------------------------------------------------------------

    \239\ See Skadden Letter; Katten Letter; and MFA Letter.
---------------------------------------------------------------------------

    Another commenter asserted that the compliance and regulatory 
obligations under the Commission's rules are burdensome for private 
businesses and would unnecessarily distract entities from their primary 
focus of managing client assets.\240\ The Commission believes that 
regulation is necessary to ensure a well functioning market and to 
provide protection of those clients. The Commission further believes 
that the compliance regime that the Commission has adopted strikes the 
appropriate balance between limiting the burden placed on registrants 
and enabling the Commission to carry out its duties under the Act.
---------------------------------------------------------------------------

    \240\ See MFA Letter; Seward Letter; and Katten Letter.
---------------------------------------------------------------------------

    In the Proposal, the Commission also proposed to rescind the 
exemption in Sec.  4.13(a)(4) for operators of pools that are offered 
only to individuals and entities that satisfy the qualified eligible 
person standard in Sec.  4.7 or the accredited investor standard under 
the SEC's Regulation D.\241\ Several commenters argued that the 
Commission should consider retaining the exemption in Sec.  4.13(a)(4) 
for funds that do not directly invest in commodity interests, but do so 
through a fund of funds structure, and who are advised by an SEC 
registered investment adviser. The Commission has not developed a 
comprehensive view regarding the role of funds of funds in the 
derivatives markets, in part, due to a lack of data regarding their 
investment activities. The Commission, therefore, believes that it is 
prudent to withhold consideration of a fund of funds exemption until 
the Commission has received data regarding such firms on forms CPO-PQR 
and/or CTA-PR, as applicable, 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 declines to adopt the commenter's alternative to provide an 
exemption for funds of funds at this time.
    One commenter argued that rescission is not necessary because any 
fund that seeks to attract qualified eligible persons is already 
required to maintain oversight and controls that exceed those mandated 
by part 4 of the Commission's regulations such that any regulation 
imposed would be duplicative and unnecessarily burdensome.\242\ The 
commenter primarily focused on the significant level of controls that 
the fund operator implements independent of regulation. The Commission 
believes that, contrary to the commenter's arguments as to the import 
of that fact, such controls and internal oversight should make 
compliance with the Commission's regulatory regime easier and cheaper 
rather than more burdensome. If the information required to be 
disclosed under the Commission's regulations is to a large extent 
already being disclosed by the firm, the Commission anticipates that 
this would limit the costs of compliance to those costs directly 
involved with formatting such information as required by the 
Commission's disclosure and reporting

[[Page 11280]]

rules. The Commission adopts the rescission of Sec.  4.13(a)(4) as 
proposed.
---------------------------------------------------------------------------

    \242\ See Cranwood Letter.
---------------------------------------------------------------------------

    The Commission has also elected to mitigate costs by phasing in 
gradually the rescission of Sec.  4.13(a)(4). As discussed in section 
II.C.5, in response to certain comments, the Commission will implement 
the rescission of Sec.  4.13(a)(4) for all entities currently claiming 
exemptive relief thereunder on December 31, 2012, but the rescission 
will be implemented for all other CPOs upon the effective date of this 
final rulemaking. This timeline reflects the Commission's belief that 
entities currently claiming relief under Sec.  4.13(a)(4) should be 
capable of becoming registered and complying with the Commission's 
regulations within 11 months following the issuance of the final rule. 
For entities that are formed after the effective date of the 
rescission, the Commission expects the CPOs of such entities to comply 
with the Commission's regulations upon formation and commencement of 
operations.
3. Annual Notice of Exemption or Exclusion Requirement
    The amendments will require annual reaffirmance of any claim of 
exemption or exclusion from registration as a CPO or CTA.\243\ In the 
Proposal, the Commission stated that an annual notice requirement would 
promote transparency, a primary purpose of the Dodd Frank Act, 
regarding the number of entities either exempt or excluded from the 
Commission's registration and compliance programs. Moreover, the 
Commission stated that an annual notice requirement would enable the 
Commission to determine whether exemptions and exclusions should be 
modified, repealed, or maintained as part of the Commission's ongoing 
assessment of its regulatory scheme.
---------------------------------------------------------------------------

    \243\ 76 FR 7976, 7986 (Feb. 12, 2011).
---------------------------------------------------------------------------

    Two commenters suggested that the 30-day time period for filing was 
not adequate to enable firms to comply.\244\ One commenter proposed a 
60-day time period,\245\ whereas the other commenter proposed 90 days 
as the necessary amount of time.\246\ As a further cost-mitigating 
measure, and for the reasons discussed in section II.D, the Commission 
has elected to extend the filing period from 30 days to 60 days. 
Further, the Commission will adopt the annual notice requirement with 
one significant modification designed, among other things, to mitigate 
costs--that the notice be filed at the end of the calendar year and not 
the anniversary of the original filing. The Commission believes this 
alternative presented by a commenter will be more operationally 
efficient.\247\
---------------------------------------------------------------------------

    \244\ See NFA Letter; and SIFMA Letter.
    \245\ See NFA Letter.
    \246\ See SIFMA Letter.
    \247\ See NFA Letter.
---------------------------------------------------------------------------

d. Section 15(a)
    In this section, the Commission considers the costs and benefits of 
its actions in light of five broad areas of market and public concern 
set forth in Sec.  15(a) of the CEA: (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.
1. Protection of Market Participants and the Public
    Registration provides many benefits for both the registrants and 
their customers. The registration process allows the Commission to 
ensure that all entities participating in derivative markets meet a 
minimum standard of fitness and competency. The regulations governing 
who must register and what registrants must do provide clear direction 
for CPOs and CTAs. At the same time, clients wishing to invest with 
registered entities have the knowledge that such entities are held to a 
high financial standard through periodic account statements, disclosure 
of risk, audited financial statements, and other measures designed to 
provide transparency to investors. The Commission believes its 
regulations protect market participants and the public by requiring 
certain parties previously excluded or exempt from registration to be 
held to the same standards as registered operators and advisors, which 
ensures the fitness of such market participants and professionals.
    Additionally furthering the goal of investor protection, NFA 
provides an on-line, public database with information on the 
registration status of market participants and their principals as well 
as certain additional registrant information such as regulatory actions 
taken by the NFA or Commission.\248\ This information is intended to 
assist the public in making investment decisions regarding the use of 
derivatives professionals. Although those previously exempt entities 
may incur costs associated with registering and the compliance 
obligations arising therefrom, or may incur costs to inform the 
Commission of their exempt status, the Commission believes the benefits 
of transparency in the derivatives markets in the long term will 
outweigh these costs, which should decrease over time as efficiencies 
develop.
---------------------------------------------------------------------------

    \248\ The National Futures Association's Background Affiliation 
Status Information Center (BASIC) is currently available at https://www.nfa.futures.org/basicnet/.
---------------------------------------------------------------------------

2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    The amendments adopted herein will result in the registration of 
more CPOs and CTAs, which will enable the Commission to better oversee 
their activities in the derivatives markets, thereby protecting the 
integrity of the markets. Indeed, even including those entities still 
exempt under revised part 4 that are required to file notice with the 
Commission on an annual basis, the Commission will be able to better 
understand who is operating in derivatives markets and identify any 
threats to the efficiency, competitiveness, or integrity of markets. 
Moreover, because similarly situated entities in the derivatives 
markets will be subject to the same regulatory regime, the 
competitiveness of market participants will be enhanced.
3. Price Discovery
    The Commission has not identified any impact on price discovery 
through the registration of additional CPOs and CTAs as a result of 
these regulations.
4. Sound Risk Management
    The information the Commission gains from the registration of 
entities allows the Commission to better understand the participants in 
the derivatives markets and the interconnectedness of all market 
participants. Such an understanding allows the Commission to better 
assess potential threats to the soundness of derivatives markets and 
thus the financial system of the United States. The Commission also 
believes that the information required of registrants, to the extent 
that producing such information requires entities to examine their 
internal systems and operations in a manner not previously assessed, 
provides registrants with an additional method of understanding the 
risk inherent in their day-to-day businesses.
5. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations impacted by the registration of additional CPOs and CTAs 
as a result of these regulations.
3. Data Collection
    In these final rules, the Commission is enacting new Sec.  4.27, 
which requires CPOs and CTAs to report certain

[[Page 11281]]

information to the Commission on forms CPO-PQR and CTA-PR, 
respectively. The forms, reporting thresholds, and filing deadlines are 
further detailed in section II.F of this release.
a. Benefits of Data Collection
    The Commission expects that the data collected from forms CPO-PQR 
and CTA-PR will increase the amount and quality of information 
available to the Commission regarding a previously opaque area of 
investment activity. Entities that are required to file all three 
schedules of the forms are large enough to have, potentially, a great 
impact on derivatives markets should such entities default, whereas 
smaller entities are required to file only basic demographic 
information. Because the data currently available to the Commission 
regarding CPOs and CTAs is limited in scope, the Commission does not 
have complete information as to who is transacting in derivatives 
markets. With the additional information that the Commission will have 
as a result of the new requirements under Sec.  4.27, the Commission 
will be able to tailor its regulations to the needs of, and risks posed 
by, entities in the market, and to protect investors and the general 
public from potentially negative or overly risky behavior.
    The Dodd-Frank Act charged the Commission, as a member of FSOC and 
as a financial regulatory agency, with mitigating risks that may impact 
the financial stability of the United States. The Commission is 
dedicated to assisting FSOC in that goal, and these final regulations 
are essential for the Commission to be able to fulfill that role 
effectively because the Commission cannot protect against risks of 
which it is not aware. By creating a reporting regime that makes the 
operations of commodity pools more transparent to the Commission, the 
Commission is better able to identify and address potential threats. 
The total benefit of risk mitigation as it pertains to the overall 
financial stability of the United States is not quantifiable, but it is 
significant insofar as the Commission may be able to use this data to 
prevent further future shocks to the U.S. financial system.
b. Costs of Data Collection
    The Commission has not identified costs of data collection that are 
not associated with an information collection subject to the PRA. These 
costs therefore have been accounted for in the PRA section of this 
rulemaking and the information collection requests filed with OMB, as 
required by the PRA.
c. Section 15(a) Determination
    This section analyzes the data collection rules according to the 
five factors set forth in section 15(a) of the CEA: (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.
1. Protection of Market Participants and the Public
    The Commission believes that the information to be gathered from 
forms CPO-PQR and CTA-PR increases the amount and quality of 
information available regarding a previously opaque area of investment 
activity and, thereby, enhances the ability of the Commission to 
protect investors and oversee derivatives markets. This enhanced 
ability provides a better understanding of the participants in 
derivatives markets and their operations, and as such, the Commission 
is better able to protect the public from the potential risk that 
large, unregulated entities could bring to markets under the 
Commission's jurisdiction, many of which are essential to society at 
large. Moreover, to mitigate reporting costs to regulated entities that 
may be registered both with the Commission and with the SEC, the 
regulations have been modified to allow dually registered entities to 
file only form PF (plus the first schedule A of form CPO-PQR) for all 
of their commodity pools, even those that are not ``private funds.'' 
The cost mitigation has been accounted for in the PRA section of this 
rulemaking and the information collection requests filed with OMB, as 
required by the PRA.
2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Although the Commission does not believe this rule relates directly 
to the efficiency or competitiveness of futures markets, the Commission 
does recognize that the interconnectedness of the participants within 
derivatives markets can be extensive such that the proper oversight of 
each category of participants affects proper oversight of derivatives 
markets and the financial system as a whole. To the extent that the 
information collected by form CPO-PQR and form CTA-PR and the adopted 
amendments to the Commission's compliance regime assist the Commission 
in identifying threats in derivatives markets, the regulations herein 
protect the integrity of futures markets.
3. Price Discovery
    The Commission has not identified any impact on price discovery as 
a result of this data collection initiative.
4. Sound Risk Management
    The Dodd-Frank Act tasks FSOC and its member agencies (including 
both the SEC and the Commission) with mitigating risks to the financial 
stability the United States. The Commission believes these regulations 
are necessary to fulfill that obligation. These regulations improve the 
ability of the Commission to oversee the derivatives markets. As the 
Commission's understanding of the regulated entities, their behavior in 
derivatives markets, and the overall riskiness of their positions 
increases through the data collection in these rules, the Commission 
will be able to better understand any risks posed to the financial 
system as a whole arising from markets under the Commission's 
jurisdiction. These benefits are shared by market participants, at 
least indirectly, as a part of the United States financial system. In 
addition, CPOs and CTAs may benefit from these regulations to the 
extent that reporting form CPO-PQR and form CTA-PF requires such 
entities to review their firms' portfolios, trading practices, and risk 
profiles; thus, the CFTC believes that these regulations may improve 
the sound risk management practices within their internal risk 
management systems.
5. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations impacted by this data collection initiative.
4. Complementary Provisions
    As part of these final regulations, the Commission is also adopting 
other amending provisions that complement the registration and data 
collection provisions, including changes to Sec.  4.7, Sec.  4.22, 
Sec. Sec.  4.24 and 4.34, and parts 145 and 147. This section sets 
forth the Commission's consideration of related costs and benefits in 
general, responds to relevant comments, and then analyzes the 
complementary provisions in light of the five factors enumerated in 
Sec.  15(a) of the CEA.
a. Benefits of the Complementary Provisions
    The provisions in this category amend additional sections of part 4 
in order to improve the Commission's ability to effectively regulate 
derivatives markets and their participants. Some of these complementary 
provisions are specifically designed to protect

[[Page 11282]]

investors, e.g., requiring certified annual reports and disclosure of 
swaps risk ensures investors are getting complete and accurate 
information regarding their investment, which increases consumer 
confidence in the financial system. As the information available to 
consumers becomes more accurate and complete, a prospective investor 
can more easily compare investment vehicles to choose the investment 
vehicle best suited to the investor's individual financial plan and 
risk tolerance.
    Other provisions protect market participants by amending the 
Commission's internal procedures to provide for the confidentiality of 
certain proprietary information. Moreover, the Commission's planned 
harmonization rules are designed to limit the impact to entities 
regulated by multiple entities, protecting those participants from 
overly burdensome regulatory regimes.
b. Costs of the Complementary Provisions
    The Commission has identified no costs of the complementary 
provisions that are not associated with an information collection 
subject to the PRA. These costs therefore have been accounted for in 
the PRA section of this rulemaking and the information collection 
requests filed with OMB, as required by the PRA.
c. Comments on the Complementary Provisions
1. Sec.  4.7 Amendments
    As stated previously, the Commission is adopting an amendment to 
Sec.  4.7 that would rescind the relief provided in Sec.  4.7(b)(3) 
from the certification requirement of Sec.  4.22(c) for financial 
statements contained in commodity pool annual reports. The Commission 
received two comments regarding this proposed amendment. One commenter 
supported the proposed rescission and the Commission's stated 
justification for doing so. The other commenter recommended that the 
Commission retain an exemption from certification of financial 
statements for entities where the pool's participants are limited to 
the principals of its CPO(s) and CTA(s) and other categories of 
employees listed in Sec.  4.7(a)(2)(viii). It is unclear how many of 
the pools operated under Sec.  4.7 would qualify for such relief if 
adopted. The Commission is therefore unable to agree that such 
exclusions would materially reduce costs or increase any benefit 
achieved by the rule.
2. Sec.  4.24 and Sec.  4.34 Amendments
    The Commission also proposed adding standard risk disclosure 
statements for CPOs and CTAs regarding their use of swaps to Sec. Sec.  
4.24(b) and 4.34(b), respectively. The Commission received three 
comments with respect to the proposed standard risk disclosure 
statement for swaps. Two argued that a standard risk disclosure 
statement does not beneficially disclose the risks inherent in swaps 
activity to participants or clients. A third recommended that the 
Commission consider whether the wording of the standard disclosure 
should be modified depending on whether the swaps were cleared or 
uncleared.
    The Commission respectfully disagrees with the assertions of those 
commenters who believe that a standard risk disclosure statement is not 
beneficial. The Commission believes that a standardized risk disclosure 
statement addressing certain risks associated with the use of swaps is 
necessary due to the revisions to the statutory definitions of CPO, 
CTA, and commodity pool enacted by the Dodd-Frank Act. In addition, 
based on the language proposed, the Commission does not believe that 
different language must be adopted to account for the differences 
between cleared and uncleared swaps. In particular, the Commission 
notes that the proposed risk disclosure statement is not intended to 
address all risks that may be associated with the use of swaps, but 
that the CPO or CTA is required to make additional disclosures of any 
other risks in its disclosure document pursuant to Sec. Sec.  4.24(g) 
and 4.34(g) of the Commission's regulations. Moreover, the language of 
the proposed risk disclosure statement is conditional and does not 
purport to assert that all of the risks discussed are applicable in all 
circumstances.
    For the reasons discussed above in section II.E and those stated in 
the Proposal, the Commission adopts the proposed risk disclosure 
statements for CPOs and CTAs regarding swaps. These additional risk 
disclosure statements will be required for all new disclosure documents 
and all updates filed after the effective date of this final 
rulemaking.
3. Harmonization of Regulations and Fund-of-Fund Investments
    The Commission received numerous other comments regarding such 
subjects as harmonizing CFTC regulations with SEC regulations and fund 
of fund investments. These comments are discussed in detail in sections 
II.F.3 and 4 and adopted by reference herein.
4. Confidentiality of Submitted Data
    Additionally, as the Commission stated in the Proposal, the 
collection of certain proprietary information through forms CPO-PQR and 
CTA-PR raises concerns regarding the protection of such information 
from public disclosure. The Commission received two comments requesting 
that the Commission treat the disclosure of a pool's distribution 
channels as nonpublic information, and numerous other comments urging 
the Commission to be exceedingly circumspect in ensuring the 
confidentiality of the information received as a result of the data 
collections.
    The Commission agrees that the distribution and marketing channels 
used by a CPO for its pools may be sensitive information that 
implicates other proprietary secrets, which, if revealed to the general 
public, could put the CPO at a competitive disadvantage. Accordingly, 
and to mitigate costs and eliminate risks to participants, the 
Commission is amending Sec. Sec.  145.5 and 147.3 to include question 9 
of schedule A of form CPO-PQR as a nonpublic document. Additionally, 
the Commission is amending Sec. Sec.  145.5 and 147.3 to remove 
reference to question 13 in Schedule A of Form CPO-PQR because that 
such question no longer exists due to amendments to that schedule. 
Similarly, the Commission will be designating subparts c. and d. of 
question 2 of form CTA-PR as nonpublic because it identifies the pools 
advised by the reporting CTA.
d. Section 15(a) Determination
    This section considers these costs and benefits in light of the 
five broad areas of market and public concern set forth in section 
15(a) of the CEA: (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.
1. Protection of Market Participants and the Public
    The complementary provisions discussed in this section protect 
market participants and the public in a variety of ways. The changes 
under Sec.  4.7 require entities to have their annual financial 
statements independently audited; such a requirement protects the 
investors in pools registered under Sec.  4.7 by ensuring that the 
financial statements provided to participants are accurate and correct. 
As most CPOs registered under Sec.  4.7 currently file audited annual 
reports, the burden to the industry as a whole will be relatively minor 
whereas the benefits, including increased consumer confidence, are 
likely to be

[[Page 11283]]

large. The dollar value of improvements to overall accuracy of 
financial reporting is not quantifiable, but is a significant benefit.
    Registered entities can remain confident in the confidentiality of 
their reports to the Commission, as the revised parts 145 and 147 
protect proprietary information from being released to the public, 
while still giving the Commission needed information to protect 
derivatives markets and their participants.
    The amending provisions that require similar information from CPOs 
transacting in swaps products and markets increase the Commission's 
awareness of transactions in the previously unregulated over-the-
counter markets. That awareness will help to bring transparency to the 
swaps markets, as well as to the interaction of swaps and futures 
markets, protecting the participants in both markets from potentially 
negative behavior.
2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Although the Commission does not believe this part of these 
regulations has a direct impact on the efficiency of futures markets, 
the Commission does recognize that the protection of proprietary 
information is essential for the competitiveness and integrity of 
futures markets. The Commission believes that requiring all registered 
CPOs to provide participants and the Commission with annual financial 
statements that are certified by independent public accountants will 
increase the reliability of the information provided, which will serve 
to enhance the financial integrity of market participants, and by 
extension, the market as a whole. Moreover, the Commission also 
believes that requiring such certified statement of all registrants 
serves to make market participants more competitive as it enables 
prospective participants to more easily compare various investment 
vehicles.
3. Price Discovery
    The Commission has not identified any impact on price discovery as 
a result of these regulations.
4. Sound Risk Management
    The Commission has not identified any other impacts on sound risk 
management as a result of the other amending provisions that are 
different from the impacts of the registration and data collection 
initiatives described in sections III.A.3 and 4.
5. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations impacted by as a result of these regulations.
5. Conclusion
    The Commission recognizes that the final regulations will impose 
some significant costs on the industry, as described above and in the 
PRA section. Notwithstanding the costs, the Commission has determined 
to adopt this rule because the Commission believes that proper 
regulation and oversight of market participants is necessary to promote 
fair and orderly derivatives markets.

List of Subjects

17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Commodity trading advisors, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 145

    Commission records and information.

17 CFR Part 147

    Open commission Meetings.

    Accordingly, 17 CFR Chapter I is amended 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, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 
12a, and 23.


0
2. In Sec.  4.5, add paragraphs (c)(2)(iii) and (c)(5) to read as 
follows:


Sec.  4.5  Exclusion from the definition of the term ``commodity pool 
operator.''

* * * * *
    (c) * * *
    (2) * * *
    (iii) Furthermore, if the person claiming the exclusion is an 
investment company registered as such under the Investment Company Act 
of 1940, then the notice of eligibility must also contain 
representations that such person will operate the qualifying entity as 
described in Rule 4.5(b)(1) in a manner such that the qualifying 
entity:
    (A) Will use commodity futures or commodity options contracts, or 
swaps solely for bona fide hedging purposes within the meaning and 
intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5); 
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 Rules 1.3(z)(1) and 151.5, a 
qualifying entity may represent that the aggregate initial margin and 
premiums required to establish such positions will not exceed five 
percent of the liquidation value of the qualifying entity'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 as defined in Rule 190.01(x) (17 CFR 190.01(x)) may 
be excluded in computing such five percent;
    (B) 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 Rules 
1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5), determined at the 
time the most recent position was established, does not exceed 100 
percent of the liquidation value of the pool's portfolio, after taking 
into account unrealized profits and unrealized losses on any such 
positions it has entered into. For the purpose of this paragraph:
    (1) The term ``notional value'' shall be calculated for each 
futures position by multiplying the number of contracts by the size of 
the contract, in contract units (taking into account any multiplier 
specified in the contract, by the current market price per unit, for 
each such option position by multiplying the number of contracts by the 
size of the contract, adjusted by its delta, in contract units (taking 
into account any multiplier specified in the contract, by the strike 
price per unit, for each such retail forex transaction, by calculating 
the value in U.S. Dollars for such transaction, at the time the 
transaction was established, excluding for this purpose the value in 
U.S. Dollars of offsetting long and short transactions, if any, and for 
any cleared swap by the value as determined consistent with the terms 
of 17 CFR part 45; and
    (2) The person may net futures contracts with the same underlying 
commodity across designated contract markets and foreign boards of 
trade; and swaps cleared on the same designated clearing organization 
where appropriate; and
    (C) Will not be, and has not been, marketing participations to the 
public as or in a commodity pool or otherwise as or in a vehicle for 
trading in the commodity futures, commodity options, or swaps markets.
* * * * *
    (5) Annual notice. Each person who has filed a notice of exclusion 
under

[[Page 11284]]

this section must affirm on an annual basis the notice of exemption 
from registration, withdraw such exemption due to the cessation of 
activities requiring registration or exemption therefrom, or withdraw 
such exemption and apply for registration within 30 days of the 
calendar year end through National Futures Association's electronic 
exemption filing system.
* * * * *

0
3. In Sec.  4.7:
0
a. Revise paragraphs (a)(3)(ix), (a)(3)(x), and (b)(3) to 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.

* * * * *
    (a) * * *
    (3) * * *
    (ix) A natural person whose individual net worth, or joint net 
worth with that person's spouse at the time of either his purchase in 
the exempt pool or his opening of an exempt account would qualify him 
as an accredited investor as defined in Sec. 230.501(a)(5) of this 
title;
    (x) A natural person who would qualify as an accredited investor as 
defined in SSec.  203.501(a)(6) of this title;
* * * * *
    (b) * * *
    (3) Annual report relief. (i) Exemption from the specific 
requirements of Sec.  4.22(c) of this part; Provided, that within 90 
calendar days after the end of the exempt pool's fiscal year or the 
permanent cessation of trading, whichever is earlier, the commodity 
pool operator electronically files with the National Futures 
Association and distributes to each participant in lieu of the 
financial information and statements specified by that section, an 
annual report for the exempt pool, affirmed in accordance with Sec.  
4.22(h) which contains, at a minimum:
    (A) A Statement of Financial Condition as of the close of the 
exempt pool's fiscal year (elected in accordance with Sec.  4.22(g));
    (B) A Statement of Operations for that year;
    (C) Appropriate footnote disclosure and such further material 
information as may be necessary to make the required statements not 
misleading. For a pool that invests in other funds, this information 
must include, but is not limited to, separately disclosing the amounts 
of income, management and incentive fees associated with each 
investment in an investee fund that exceeds five percent of the pool's 
net assets. The income, management and incentive fees associated with 
an investment in an investee fund that is less than five percent of the 
pool's net assets may be combined and reported in the aggregate with 
the income, management and incentive fees of other investee funds that, 
individually, represent an investment of less than five percent of the 
pool's net assets. If the commodity pool operator is not able to obtain 
the specific amounts of management and incentive fees charged by an 
investee fund, the commodity pool operator must disclose the percentage 
amounts and computational basis for each such fee and include a 
statement that the CPO is not able to obtain the specific fee amounts 
for this fund;
    (D) Where the pool is comprised of more than one ownership class or 
series, information for the series or class on which the financial 
statements are reporting should be presented in addition to the 
information presented for the pool as a whole; except that, for a pool 
that is a series fund structured with a limitation on liability among 
the different series, the financial statements are not required to 
include consolidated information for all series.
    (ii) Legend. If a claim for exemption has been made pursuant to 
this section, the commodity pool operator must make a statement to that 
effect on the cover page of each annual report.
* * * * *

0
4. In Sec.  4.13:
0
a. Revise paragraphs (a)(3)(ii)(B)(1) and (2);
0
b. Remove and reserve paragraph (a)(4);
0
c. Revise paragraph (b)(1)(ii);
0
d. Redesignate paragraph (b)(4) as paragraph (b)(5) and add new 
paragraph (b)(4); and
0
e. Revise paragraph (e)(2) introductory text.
    The revisions and additions read as follows:


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

* * * * *
    (a) * * *
    (3) * * *
    (ii) * * *
    (B) * * *
    (1) The term ``notional value'' shall be calculated for each 
futures position by multiplying the number of contracts by the size of 
the contract, in contract units (taking into account any multiplier 
specified in the contract, by the current market price per unit, for 
each such option position by multiplying the number of contracts by the 
size of the contract, adjusted by its delta, in contract units (taking 
into account any multiplier specified in the contract, by the strike 
price per unit, for each such retail forex transaction, by calculating 
the value in U.S. Dollars of such transaction, at the time the 
transaction was established, excluding for this purpose the value in 
U.S. Dollars of offsetting long and short transactions, if any, and for 
any cleared swap by the value as determined consistent with the terms 
of part 45 of the Commission's regulations; and
    (2) The person may net futures contracts with the same underlying 
commodity across designated contract markets and foreign boards of 
trade; and swaps cleared on the same designated clearing organization 
where appropriate; and
* * * * *
    (b) * * *
    (2) * * *
    (ii) Contain the section number pursuant to which the operator is 
filing the notice (i.e., Sec.  4.13(a)(1), (2), or (3)) and represent 
that the pool will be operated in accordance with the criteria of that 
paragraph; and
* * * * *
    (4) Annual Notice. Each person who has filed a notice of exemption 
from registration under this section must affirm on an annual basis the 
notice of exemption from registration, withdraw such exemption due to 
the cessation of activities requiring registration or exemption 
therefrom, or withdraw such exemption and apply for registration within 
30 days of the calendar year end through National Futures Association's 
electronic exemption filing system.
* * * * *
    (e) * * *
    (2) If a person operates one or more commodity pools described in 
paragraph (a)(3) 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)(3) of this section; Provided, That the person:
* * * * *

0
5. In Sec.  4.14:
0
a. Revise paragraph (a)(8)(i)(D); and
0
b. Redesignate paragraph (a)(8)(iii)(D) as (a)(8)(iii)(E) and add a new 
paragraph (a)(8)(iii)(D).
    The revision and addition read as follows:


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

* * * * *
    (a) * * *

[[Page 11285]]

    (8) * * *
    (i) * * *
    (D) A commodity pool operator who has claimed an exemption from 
registration under Sec.  4.13(a)(3), or, if registered as a commodity 
pool operator, who may treat each pool it operates that meets the 
criteria of Sec.  4.13(a)(3) as if it were not so registered; and
* * * * *
    (iii) * * *
    (D) Annual notice. Each person who has filed a notice of exemption 
from registration under this section must affirm on an annual basis the 
notice of exemption from registration, withdraw such exemption due to 
the cessation of activities requiring registration or exemption 
therefrom, or withdraw such exemption and apply for registration within 
30 days of the calendar year end through National Futures Association's 
electronic exemption filing system.
* * * * *

0
6. In Sec.  4.24, add paragraph (b)(5) to read as follows:


Sec.  4.24  General disclosures required.

* * * * *
    (b) * * *
    (5) If the pool may engage in swaps, the Risk Disclosure Statement 
must further state:
    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A 
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A 
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE 
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS 
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, 
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL 
RISK.
    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE 
LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY 
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN 
VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF 
AN UNDERLYING OR RELATED MARKET FACTOR.
    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH 
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP 
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE 
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED 
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL 
OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE 
POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS 
SCHEDULED TERMINATION DATE.
* * * * *

0
7. In Sec.  4.34, add paragraph (b)(4) to read as follows:


Sec.  4.34  General disclosures required.

* * * * *
    (b) * * *
    (4) If the commodity trading advisor may engage in swaps, the Risk 
Disclosure Statement must further state:
    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A 
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A 
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE 
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS 
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, 
FUNDING RISK, AND OPERATIONAL RISK.
    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE 
LIQUIDITY RISK, WHICH MAY RESULT IN YOUR ABILITY TO WITHDRAW YOUR FUNDS 
BEING LIMITED. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL 
GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE 
VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.
    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH 
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP 
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE 
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED 
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE TO MODIFY, TERMINATE, OR 
OFFSET YOUR OBLIGATIONS OR YOUR EXPOSURE TO THE RISKS ASSOCIATED WITH A 
TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.
* * * * *

0
8. Effective July 2, 2012, revise Sec.  4.27, as added November 16, 
2011, at 76 FR 71114, and effective March 31, 2012 to read as follows:


Sec.  4.27  Additional reporting by advisors of certain large commodity 
pools.

    (a) General definitions. For the purposes of this section:
    (1) Commodity pool operator or CPO has the same meaning as 
commodity pool operator defined in section 1a(11) of the Commodity 
Exchange Act;
    (2) Commodity trading advisor or CTA has the same meaning as 
defined in section 1a(12);
    (3) Direct has the same meaning as defined in section 4.10(f);
    (4) Net asset value or NAV has the same meaning as net asset value 
as defined in section 4.10(b);
    (5) Pool has the same meaning as defined in section 1(a)(10) of the 
Commodity Exchange Act;
    (6) Reporting period means the reporting period as defined in the 
forms promulgated hereunder;
    (b) Persons required to report. A reporting person is:
    (1) Any commodity pool operator that is registered or required to 
be registered under the Commodity Exchange Act and the Commission's 
regulations thereunder; or
    (2) Any commodity trading advisor that is registered or required to 
be registered under the Commodity Exchange Act and the Commission's 
regulations thereunder.
    (c) Reporting. (1) Except as provided in paragraph (c)(2) of this 
section, each reporting person shall file with the National Futures 
Association, a report with respect to the directed assets of each pool 
under the advisement of the commodity pool operator consistent with 
appendix A to this part or commodity trading advisor consistent with 
appendix C to this part.
    (2) All financial information shall be reported in accordance with 
generally accepted accounting principles consistently applied.
    (d) Investment advisers to private funds. Except as otherwise 
expressly provided in this section, CPOs and CTAs that are dually 
registered with the Securities and Exchange Commission and are required 
to file Form PF pursuant to the rules promulgated under the Investment 
Advisers Act of 1940, shall file Form PF with the Securities and 
Exchange Commission in lieu of filing such other reports with respect 
to private funds as may be required under this section. In addition, 
except as otherwise expressly provided in this section, CPOs and CTAs 
that are dually registered with the Securities and

[[Page 11286]]

Exchange Commission and are required to file Form PF pursuant to the 
rules promulgated under the Investment Advisers Act of 1940, may file 
Form PF with the Securities and Exchange Commission in lieu of filing 
such other reports with respect to commodity pools that are not private 
funds as may be required under this section. Dually registered CPOs and 
CTAs that file Form PF with the Securities and Exchange Commission will 
be deemed to have filed Form PF with the Commission for purposes of any 
enforcement action regarding any false or misleading statement of a 
material fact in Form PF.
    (e) Filing requirements. Each report required to be filed with the 
National Futures Association under this section shall:
    (1)(i) Contain an oath and affirmation that, to the best of the 
knowledge and belief of the individual making the oath and affirmation, 
the information contained in the document is accurate and complete; 
Provided, however, That it shall be unlawful for the individual to make 
such oath or affirmation if the individual knows or should know that 
any of the information in the document is not accurate and complete and
    (ii) Each oath or affirmation must be made by a representative duly 
authorized to bind the CPO or CTA.
    (2) Be submitted consistent with the National Futures Association's 
electronic filing procedures.
    (f) Termination of reporting requirement. All reporting persons 
shall continue to file such reports as are required under this section 
until the effective date of a Form 7W filed in accordance with the 
Commission's regulations.
    (g) Public records. Reports filed pursuant to this section shall 
not be considered Public Records as defined in Sec.  145.0 of this 
chapter.

0
9. Revise appendix A to part 4 to read as follows:

Appendix A to Part 4--Form CPO-PQR

BILLING CODE 6351-01-P

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0
10. Add appendix C to part 4 to read as follows:

Appendix C to Part 4--Form CTA-PR

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BILLING CODE 6351-01-C

PART 145--COMMISSION RECORDS AND INFORMATION

0
11. The authority citation for part 145 continues to read as follows:

    Authority: Publ. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80 
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat. 
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389 
(5 U.S.C. 4a(j)).


0
12. In Sec.  145.5, revise paragraphs (d)(1)(viii) and (h) to read as 
follows:


Sec.  145.5  Disclosure of nonpublic records.

* * * * *
    (d) * * *
    (1) * * *
    (viii) The following reports and statements that are also set forth 
in paragraph (h) of this section, except as specified in 17 CFR 
1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant 
to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR 
pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 
17 CFR 31.13; the accountant's report on material inadequacies filed in 
accordance with 17 CFR 1.16(c)(5); all reports and statements required 
to be filed pursuant to 17 CFR 1.17(c)(6); and
    (A)(1) The following portions of Form CPO-PQR required to be filed 
pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d); 
Question 3, subparts (g) and (h); Question 9; Question 10, subparts 
(b), (c), (d), (e), and (g); Question 11; Question 12; and Schedules B 
and C;
    (2) The following portions of Form CTA-PR required to be filed 
pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d);
* * * * *
    (h) Contained in or related to examinations, operating, or 
condition reports prepared by, on behalf of, or for the use of the 
Commission or any other agency responsible for the regulation or 
supervision of financial institutions, including, but not limited to 
the following reports and statements that are also set forth in 
paragraph (d)(1)(viii) of this section, except as specified in 17 CFR 
1.10(g)(2) and 17 CFR 31.13(m): Forms 1-FR required to be filed 
pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 
1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed 
pursuant to 17 CFR 31.13; the accountant's report on material 
inadequacies filed in accordance with 17 CFR 1.16(c)(5); all reports 
and statements required to be filed pursuant to 17 CFR 1.17(c)(6); and
    (1) The following portions of Form CPO-PQR required to be filed 
pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and (d); 
Question 3, subparts (g) and (h); Question 9; Question 10, subparts 
(b), (c), (d), (e), and (g); Question 11; Question 12; and Question 13; 
and Schedules B and C;
    (2) The following portions of Form CTA-PR required to be filed 
pursuant to 17 CFR 4.27: Question 2, subparts (c) and (d); and
* * * * *

PART 147--OPEN COMMISSION MEETINGS

0
13. The authority citation for part 147 continues to read as follows:

    Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C. 
552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C. 
4a(j) (Supp. V, 1975)).


0
14. In Sec.  147.3, revise paragraphs (b)(4)(i)(H) and (b)(8) to read 
as follows:


Sec.  147.3  General requirement of open meetings; grounds upon which 
meetings may be closed.

* * * * *
    (b) * * *
    (4)(i) * * *
    (H) The following reports and statements that are also set forth in 
paragraph (b)(8) of this section, except as specified in 17 CFR 
1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant 
to 17 CFR 1.10;

[[Page 11343]]

FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR 
1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the 
accountant's report on material inadequacies filed in accordance with 
17 CFR 1.16(c)(5); all reports and statements required to be filed 
pursuant to 17 CFR 1.17(c)(6); the following portions of Form CPO-PQR 
required to be filed pursuant to 17 CFR 4.27: Schedule A: Question 2, 
subparts (b) and (d); Question 3, subparts (g) and (h); Question 9; 
Question 10, subparts (b), (c), (d), (e), and (g); Question 11; and 
Question 12; and Schedules B and C; and the following portions of Form 
CTA-PR required to be filed pursuant to 17 CFR 4.27: Question 2, 
subparts (c) and (d);
* * * * *
    (8) Disclose information contained in or related to examination, 
operating, or condition reports prepared by, on behalf of, or for the 
use of the Commission or any other agency responsible for the 
regulation or supervision of financial institutions, including, but not 
limited to the following reports and statements that are also set forth 
in paragraph (b)(4)(i)(H) of this section, except as specified in 17 
CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed 
pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 
1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR pursuant to 17 CFR 31.13; 
the accountant's report on material inadequacies filed in accordance 
with 1.16(c)(5); and all reports and statements required to be filed 
pursuant to 17 CFR 1.17(c)(6); and
    (i) The following portions of Form CPO-PQR required to be filed 
pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D; 
Question 3, subparts (g) and (h); Question 10, subparts (b), (c), (d), 
(e), and (g); Question 11; Question 12; and Question 13; and Schedules 
B and C; and
    (ii) The following portions of Form CTA-PR required to be filed 
pursuant to 17 CFR 4.27: Schedule B: Question 4, subparts (b), (c), 
(d), and (e); Question 5; and Question 6;
* * * * *

    Issued in Washington, DC, on February 8, 2012, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations:

Appendices to Commodity Pool Operators and Commodity Trading Advisors: 
Amendments to Compliance Obligations--Commission Voting Summary and 
Statements of Commissioners

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler, Commissioners Chilton, O'Malia 
and Wetjen voted in the affirmative; Commissioners Sommers voted in 
the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule increasing the transparency to 
regulators of commodity pool operators (CPOs) and commodity trading 
advisors (CTAs) acting in the derivatives marketplace--for both 
futures and swaps. This rule reinstates the regulatory requirements 
in place prior to 2003 for registered investment companies that 
trade over a de minimis amount in commodities or market themselves 
as commodity funds. This rule enhances transparency in a number of 
ways and increases customer protections through amendments to the 
compliance obligations for CPOs and CTAs.
    First, these amendments are consistent with the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act), as these 
changes bring the swaps activities of CPOs and CTAs under the CFTC's 
oversight. If CPOs and CTAs are trading swaps, they will have to 
register with the Commission, giving their customers the benefit of 
the protections in the Dodd-Frank Act.
    Second, these amendments addressed the concerns raised by the 
National Futures Association (NFA) in its petition requesting the 
Commission to reinstate Commission oversight of CPOs and CTAs for 
futures that existed prior to 2003. Since 2003, the participation of 
registered investment companies in commodity futures, swaps, and 
options markets has increased significantly. Some registered 
investment companies have been marketing commodity pools to retail 
investors and are operating without the supervision of the CFTC and 
the NFA. In addition, foreign advisors with U.S. customers have been 
exempt from supervision since 2003. The final rule reinstates the 
protections that futures customers of CPOs and CTAs had prior to the 
exemptions the Commission granted in 2003. It is critical to bring 
the pools that have been in the dark since 2003 back into the light 
so their customers can benefit from the CFTC's oversight.
    Third, the final rule increases transparency to regulators by 
enhancing data available to the Commission and the NFA, providing a 
much more complete understanding of how these pools are operating in 
the derivatives markets for futures and swaps. The data, which CPOs 
and CTAs will submit through Form CPO-PQR and Form CTA-PR, will help 
the Commission develop further regulatory protections for customers 
of these entities, market participants and the American public.
    The Commission benefited from significant public comment on this 
rule. Some commenters raised questions about the definition of bona 
fide hedging under section 4.5, in particular that risk mitigation 
positions were not included in such bona fide hedging transactions. 
The final rule provides treatments consistent with the Commission's 
treatment of registered investment companies prior to 2003, and, in 
fact, this rule reinstates criteria in place before 2003. The 
Commission determined not to include risk management positions 
within the bona fide hedging exemption because many, if not most, 
positions in a portfolio could potentially be characterized as 
serving a risk management purpose. This would result in an overly 
broad exclusion from the definition of CPO.
    Further, bona fide hedging transactions are excluded from 
determining whether a registered investment company has to register 
under 4.5, though these transactions are not excluded when 
determining whether commodity pools not registered with the 
Securities and Exchange Commission (SEC) will be required to 
register with the CFTC under section 4.13(a)(3). With respect to the 
consideration of bona fide hedging positions under 4.13(a)(3), the 
Commission previously stated its position that bona fide hedging 
positions should not be excluded within the de minimis exemption in 
4.13(a)(3) when it proposed that rule. In the proposal for 
4.13(a)(3) (68 FR 12622, 12627), the Commission stated its belief 
that 4.13(a)(3) should not differentiate between trading for bona 
fide hedging and non-hedging purposes because the rule is intended 
to apply to strictly de minimis situations, where trading is limited 
regardless of purpose. Conversely, the exclusion under 4.5 was not 
solely determined by the de minimis nature of the trading, but 
rather the combination of the de minimis amount of trading and the 
fact that the investment vehicle was otherwise regulated by the SEC. 
See 67 FR 65743.
    Several commenters asked the Commission to reconsider the 
treatment of family offices under these rules. The Commission will 
continue to permit family offices to rely on existing guidance for 
family offices seeking relief from the requirements of Part 4. The 
Commission also is directing staff to look into the possibility of 
adopting a family offices exemption that is similar to the rule 
recently adopted by the SEC and is soliciting comment from the 
public.

Appendix 3--Dissenting Statement of Commissioner Jill E. Sommers

    The amendments to the Commission's Part 4 regulations we are 
adopting with these final rules were prompted by a petition from the 
NFA seeking to reinstate certain operating restrictions that were in 
place prior to 2003 for entities excluded from the definition of CPO 
under Sec.  4.5. Had we limited the amendments to address the issues 
raised by the NFA's petition, we could have met our regulatory 
objectives without disrupting a significant number of business 
structures. I would have supported such an approach. As it is, we 
have gone far beyond what was needed to resolve NFA's concerns and I 
must dissent.
    Section 404 of the Dodd-Frank Act requires certain advisors of 
private funds to register

[[Page 11344]]

with the SEC and to report to the SEC information ``as necessary and 
appropriate * * * for the protection of investors or for the 
assessment of systemic risk by the Financial Stability Oversight 
Council.'' With the finalization of these rules, the Commission has 
determined that the ``sources of risk delineated in the Dodd-Frank 
Act with respect to private funds are also presented by commodity 
pools'' and that registration of certain previously exempt or 
excluded CPOs is therefore necessary ``to assess the risk posed by 
such investment vehicles in the derivatives markets and the 
financial system generally.'' The Commission states that the data it 
will collect as a consequence of registration is necessary ``in 
order to fulfill the Commission's systemic risk mitigation 
mandate.'' While I agree that the Commission has a regulatory 
interest in the activities of commodity pools, this overstates the 
case and gives a false impression that the data we gather will 
enable us to actively monitor pools for systemic risk, that we have 
the resources to do so, and that we will do so. Moreover, Congress 
was aware of the existing exclusions and exemptions for CPOs when it 
passed Dodd-Frank and did not direct the Commission to narrow their 
scope or require reporting for systemic risk purposes. The 
Commission justifies the new rules as a response to the financial 
crisis of 2007 and 2008 and the passage of Dodd-Frank, yet there is 
no evidence to suggest that inadequate regulation of commodity pools 
was a contributing cause of the crisis, or that subjecting entities 
to a dual registration scheme will somehow prevent a similar crisis 
in the future.
    I could nevertheless support a revision of the current 
exclusions and exemptions that would give us access to information 
we determine is necessary to carry out our regulatory mission if 
supported by a sufficient cost-benefit analysis. The rationale 
underlying a number of the decisions encompassed by the rules is 
sorely lacking, however, and is not supported by the existing cost-
benefit analysis. The Commission concludes, for example, that bona 
fide hedging transactions are unlikely to present the same level of 
risk as risk mitigation positions because they are offset by 
exposure in the physical markets. A risk mitigation position is, by 
definition, a position that mitigates or ``offsets'' exposure in 
another market. Both are hedges and there is no explanation as to 
why the Commission believes that bona fide hedges are less risky. 
The preamble states that the alternative net notional test under 
Sec.  4.5 is meant to be consistent with the net notional test set 
forth in Sec.  4.13(a)(3), except the Sec.  4.5 test allows 
unlimited use of futures, options or swaps for bona fide hedging 
purposes, while the Sec.  4.13(a)(3) test does not. No explanation 
is given for the differing treatment. We reject an exemption for 
foreign advisors similar to the exemption allowed by the Investment 
Advisors Act of 1940 under Section 403 of Dodd-Frank because we lack 
information on the activities of foreign pools, even though, as some 
commenters observed, this may result in nearly all non-U.S. based 
CPOs operating a pool with at least one U.S. investor having to 
register and report all of their derivatives activities to the 
Commission, including activity that may be subject to comparable 
foreign regulation. While we leave open the possibility of future 
exemptions based on information we collect on Forms CPO-PQR and CTA-
PR, the more likely result of this new policy is that U.S. 
participants will be excluded from investing in foreign pools. The 
Commission may have good reasons for this course of action, but no 
rationale is given.
    Our ``split the baby'' approach on the issue of family offices 
is illogical. The Commission states that it is ``essential that 
family offices remain subject to the data collection requirements'' 
to fulfill our regulatory mission and to develop a comprehensive 
view of such firms to determine whether an exemption may be 
appropriate in the future. At the same time, we are allowing an 
unknown percentage of family offices to rely on previously issued 
interpretive letters to avoid registration, reporting and other 
compliance obligations. This makes no sense. We either need this 
data or we do not. Family offices may fit within the parameters of 
the existing interpretive letters, in which case we will not develop 
the comprehensive view we are seeking. On the other hand, we ignore 
the fact that we have consistently found, for more than three 
decades, that family offices are not the type of collective 
investment vehicle that Congress intended to regulate in adopting 
the CPO and commodity pool definitions, a finding that Congress 
confirmed in Sec.  409 of Dodd-Frank with respect to investment 
advisors. Moreover, our repeal of the family office exemption is 
inconsistent with the exclusion recently adopted by the SEC pursuant 
to Sec.  409 at a time when Dodd-Frank has urged us to harmonize our 
rules to the fullest extent possible.
    It is unlikely, in my view, that the cost-benefit analysis 
supporting the rules will survive judicial scrutiny if challenged. 
And, although I am relieved that the recordkeeping, reporting and 
disclosure obligations required by the rules will be delayed until 
after proposed harmonization rules are finalized, the rules contain 
a confusing and needlessly complicated set of compliance dates for 
other provisions.
    While I have felt that many of the rules we have finalized in 
the last few months were far too overreaching, our justification 
that a particular rule was required by statute was largely accurate. 
With regard to these rules the same justification does not hold 
true. These rules are not mandated by Dodd-Frank, and I do not 
believe that the benefits articulated within the final rules 
outweigh the substantial costs to the fund industry. We admit in the 
preamble that we do not have enough information to determine the 
validity of requiring some of these entities to register. A more 
prudent approach would have been to gather the information first and 
then decide what constitutes sound policy. For these and other 
reasons, I cannot support the final rules.

[FR Doc. 2012-3390 Filed 2-23-12; 8:45 am]
BILLING CODE 6351-01-P