Amendments to Commodity Pool Operator and Commodity Trading Advisor Regulations Resulting From the Dodd-Frank Act, 54355-54360 [2012-21606]

Download as PDF Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Rules and Regulations COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 4 RIN 3038–AD49 Amendments to Commodity Pool Operator and Commodity Trading Advisor Regulations Resulting From the Dodd-Frank Act Commodity Futures Trading Commission. ACTION: Final rules. AGENCY: The Commodity Futures Trading Commission (Commission) is amending its regulations governing the operations and activities of commodity pool operators (CPOs) and commodity trading advisors (CTAs) in order to have those regulations reflect changes made to the Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act). DATES: Effective Date: November 5, 2012. FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director, or Christopher W. Cummings, Special Counsel, Division of Swap Dealer and Intermediary Oversight, 1155 21st Street NW., Washington, DC 20581. Telephone number: 202–418–6700 and electronic mail: bgold@cftc.gov or ccummings@cftc.gov. SUPPLEMENTARY INFORMATION: SUMMARY: I. Background mstockstill on DSK4VPTVN1PROD with RULES A. The Dodd-Frank Act On July 21, 2010, President Obama signed the Dodd-Frank Act.1 Title VII of the Dodd-Frank Act 2 amended the CEA 3 to establish a comprehensive new regulatory framework for swaps and security-based swaps. The goal of this legislation was to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and comprehensive regulation of swap dealers (SDs) and major swap participants (MSPs); (2) imposing clearing and trade execution requirements on standardized derivative 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 through the Commission’s Web site, www.cftc.gov. 2 Pursuant to Section 701 of the Dodd-Frank Act, Title VII may be cited as the ‘‘Wall Street Transparency and Accountability Act of 2010.’’ 3 7 U.S.C. 1 et seq. (2006). The Commission’s regulations are found at 17 CFR part 1 et seq. (2012). Both the CEA and the Commission’s regulations also may be accessed through the Commission’s Web site. VerDate Mar<15>2010 17:01 Sep 04, 2012 Jkt 226001 products; (3) creating robust recordkeeping and real-time reporting regimes; and (4) enhancing the Commission’s rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the oversight of the Commission. Among the changes made by the Dodd-Frank Act to the CEA were to include within the CPO definition the operator of a collective investment vehicle that trades swaps, and to include within the CTA definition a person who provides advice concerning swaps.4 B. The Proposed Amendments to Part 4 Part 4 of the Commission’s regulations sets forth a comprehensive regulatory framework for the operations and activities of CPOs and CTAs. It includes disclosure, reporting and recordkeeping requirements for registered CPOs and CTAs, registration and compliance exemptions for CPOs and CTAs, and other provisions, including anti-fraud provisions, applicable to CPOs and CTAs, regardless of registration status. To ensure that the Part 4 regulations applied to CPOs and CTAs in the context of these intermediaries’ involvement with swap transactions, on March 3, 2011, the Commission proposed certain amendments to Part 4 (Proposal).5 As the Commission explained in the Proposal, because many of the existing Part 4 regulations generally applied to CPOs and CTAs, they would continue to be applicable to CPOs and CTAs with respect to their swap activities without the need for amendment thereto. The Commission noted that in other instances, however, the text of certain existing Part 4 regulations was specific to activities involving futures contracts, commodity options, and off-exchange retail foreign currency (‘‘commodity interests’’), and it did not include, refer to or otherwise take account of swap activities. As the Commission stated: ‘‘The Proposal [was] intended to clarify and ensure that the requirements governing the operations and activities of CPOs and CTAs continue to apply for these intermediaries in the context of their involvement with swap transactions.’’ 6 Accordingly, the 4 See Section 721(a) of the Dodd-Frank Act, which re-organized (and in some cases amended) existing definitions in, and added new definitions to, Section 1a of the CEA. The CPO and CTA definitions, as amended, are codified at CEA sections 1a(11) and 1a(12), respectively. 5 76 FR 11701. 6 76 FR 11701. Part 4 applies to CPOs with respect to their activities affecting pool participants and to CTAs with respect to their activities affecting clients. Depending on the nature of its activities, a CPO or CTA may also come within the definition PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 54355 Commission proposed to amend Regulations 4.7, 4.10, 4.22, 4.23, 4.24 4.30, 4.33 and 4.34 to include in each of these regulations a reference to swaps or swap activities. II. Comments on the Proposal The Commission received two comment letters on the Proposal,7 each of which supported the Proposal. One of these letters stated that the Proposal ‘‘should act to reduce risk and increase its transparency, and promote market integrity by ensuring that all entities are consistently regulated to the extent that their trading and other activities pertain to swaps.’’ 8 The other letter urged the Commission ‘‘to work quickly and diligently on writing these rules and putting them in place as soon as possible.’’ 9 III. The Final Regulations In light of the supportive comments it received, with one exception the Commission is adopting the amendments to the Part 4 regulations it proposed. That exception concerns the proposed amendment to Regulation 4.10(a) that, for the purposes of Part 4, would have expanded the definition of the term ‘‘commodity interest’’ to include ‘‘swaps.’’ This proposal was superseded by a proposed amendment to Regulation 1.3(yy) that, for the purposes of all of the Commission’s regulations, would define the term ‘‘commodity interest’’ to include ‘‘swaps.’’ 10 Accordingly, the Commission is considering the proposed definition of the term ‘‘commodity interest’’ in connection with its consideration of the comment letters it received on its proposed amendment to Regulation 1.3(yy). A. Adding ‘‘Swap’’ Terms to Part 4 As proposed, the Commission is inserting ‘‘swap,’’ ‘‘swap transaction’’ or a similar term at various regulations throughout Part 4. See the amendments to Regulations 4.23(a)(1), 4.24(g), (h)(1), and (i)(2) for CPOs and Regulations 4.34(g) and 4.34(i)(2) for CTAs. For of the term ‘‘swap dealer’’ or ‘‘major swap participant’’ in new CEA Section 1a(49) or 1a(33), respectively. As directed by the Dodd-Frank Act, the Commission has adopted new regulations that establish business conduct standards for SDs and MSPs. See 77 FR 9734 (Feb. 17, 2012). These new regulations apply to SDs and MSPs with respect to the counterparties with whom they transact swap business, and govern different activity than that to which the Part 4 regulations apply. 7 These comment letters currently are available on the Commission’s Web site. 8 Comment letter from Chris Barnard (Mar. 29, 2011). 9 Comment letter from Kyle Vandergrift (Apr. 20, 2011). 10 See 76 FR 33066, 33069–70 (June 7, 2011). E:\FR\FM\05SER1.SGM 05SER1 54356 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Rules and Regulations example, Regulation 4.23(a)(1) is being amended to include ‘‘swap type and counterparty’’ in the itemized daily record that a CPO must make and keep with respect to a pool’s commodity interest transactions. At other Part 4 regulations, the Commission has included as proposed the term ‘‘swap dealer’’ among the persons for whom a CPO or CTA must provide information in its Disclosure Document and for whom a CPO must provide information in a pool’s periodic Account Statement. See the amendments to Regulations 4.22(a)(3), 4.24(j)(1), (j)(3), (l)(1), and (l)(2) for CPOs and Regulations 4.34(j)(1), (j)(3), (k)(1) and (k)(2) for CTAs. For example, Regulations 4.24(j) and 4.34(j) are being amended to include SDs in the group of persons as to which conflicts of interest must be disclosed by CPOs and CTAs. Similarly, the Commission has included as proposed ‘‘a registered swap dealer’’ among the persons listed in Regulation 4.7(a)(2) that do not have to satisfy a portfolio requirement in order to be a qualified eligible person (QEP), such that a CPO or CTA that has claimed relief under Regulation 4.7 may accept the SD as a pool participant or advisory client without regard to the size of its investment portfolio. As the Commission explained, ‘‘this would be consistent with the current treatment of other financial intermediaries registered with the Commission (such as futures commission merchants [FCMs] and retail foreign exchange dealers [RFEDs]) as QEPs under Regulation 4.7(a)(2).’’ 11 mstockstill on DSK4VPTVN1PROD with RULES B. Including Books and Records Relating to Swap Transactions within Part 4 The Commission has adopted as proposed amendments to Part 4 that require a CPO or CTA to make and keep certain books and records generated by the swap transactions in which it engages on behalf of not only its pool participants and clients, but also itself. See the amendments to Regulations 4.23(a)(7) and (b)(1) for CPOs and Regulations 4.33(a)(6) and (b)(1) for CTAs. The amendments to Regulations 4.23(a)(7) and 4.33(a)(6) require CPOs and CTAs to retain each acknowledgment of a swap transaction received from an SD. The amendments to Regulations 4.23(b)(1) and 4.33(b)(1) make clear that if a CPO or CTA was a counterparty to a swap transaction, then it would be subject to the swap data recordkeeping and reporting requirements of Part 45 of the 11 76 FR at 11702. VerDate Mar<15>2010 17:01 Sep 04, 2012 Jkt 226001 Commission’s regulations, as applicable.12 C. Regulation 4.30 Subject to certain exceptions, Regulation 4.30 provides that no CTA may solicit, accept or receive from an existing or prospective client funds, securities or other property in the trading advisor’s name (or extend credit in lieu thereof) to purchase, margin, guarantee or secure any commodity interest of the client. The Commission proposed to amend Regulation 4.30 by adding to the list of intermediaries then excepted from the foregoing prohibition—i.e., registered FCMs, leverage transaction merchants and RFEDs—a registered SD in connection with a swap that was not cleared through a derivatives clearing organization. The Commission explained that this amendment to Regulation 4.30 was necessary ‘‘[b]ecause swap dealers will generally fall within the statutory definition of CTA, and because a swap dealer engaging in uncleared swap transactions may be accepting funds or other property from its counterparties as variation and initial margin payments.’’ 13 Subsequently, the Commission amended Regulation 4.6 to provide therein for an exclusion from the definition of the term ‘‘commodity trading advisor’’ for an SD, provided the commodity interest and swap advisory activities of the SD are solely incidental to the conduct of its business as an SD.14 Because not all SDs may always meet the ‘‘solely incidental’’ proviso, the Commission has determined to amend Regulation 4.30 as proposed, such that any registered SD who is a CTA is not subject to the regulation’s operational prohibition. D. Deleting Regulation 4.32 The Commission has deleted as proposed Regulation 4.32, which concerned trading by a registered CTA on or subject to the rules of a derivatives 12 See Regulation 45.2, which requires SDs and MSPs to keep full, complete and systematic records, together with all pertinent data and memoranda, of all activities relating to their business with respect to swaps, as prescribed by the Commission. (NonSD and non-MSP counterparties subject to the Commission’s jurisdiction have a similar requirement, but only with respect to each swap to which they are a counterparty.) 13 76 FR at 11702. In this regard, the Commission has proposed regulations addressing the circumstances in which non-bank SDs may be required or permitted to accept margin payments in uncleared swap transactions. See 76 FR 23732 (Apr. 28, 2011). Accordingly, this amendment to Regulation 4.30 should not be interpreted to impose or authorize any such margin requirements. 14 See 77 FR 9734, 9739–40 (Feb. 17, 2012). PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 transaction execution facility (DTEF) for non-institutional customers. As the Commission explained: Section 734(a) of the Dodd-Frank Act repeals Section 5a of the CEA, which is the section establishing and providing for the regulation of DTEFs. Accordingly, because subsequent to the effective date of the DoddFrank Act Regulation 4.32 will no longer have a statutory basis or purpose, the Proposal would remove and reserve Regulation 4.32.15 IV. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’) 16 requires federal agencies to consider the impact of those rules on small businesses.17 A regulatory flexibility analysis or certification typically is required for ‘‘any rule for which the agency publishes a general notice of proposed rulemaking pursuant to’’ the notice-and-comment provisions of the Administrative Procedure Act, 5 U.S.C. 553(b).18 The amendments to the Part 4 regulations contained herein will affect CPOs and CTAs. The Commission stated in the Proposal that: With respect to CPOs, the Commission previously has determined that a CPO is a small entity for the purpose of the RFA if it meets the criteria for an exemption from registration under Regulation 4.13(a)(2). Thus, because the Proposal applies to registered CPOs, the RFA is not applicable to it. As for CTAs, the Commission previously has stated that it would evaluate within the context of a particular rule proposal whether all or some affected CTAs would be considered to be small entities and, if so, the economic impact on them of the particular rule. In this regard, the Commission notes that the Proposal applies to registered CTAs. Moreover, the Proposal would not have a significant economic impact on any CPO or CTA who would be affected thereby, because it would merely bring within the current Part 4 regulatory structure of disclosure, reporting and recordkeeping information with respect to swap activities. It would not impose any additional operative requirements or otherwise direct or confine the activities of CPOs and CTAs.19 The Commission did not receive any comments regarding its RFA analysis in the Proposal. Accordingly, pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of the Commission, certifies that the amendments to the Part 4 regulations being published today by this Federal Register release will not have a significant economic impact on a substantial number of small entities. 15 76 FR at 11702. U.S.C. 601 et seq. 17 By its terms, the RFA does not apply to ‘‘individuals.’’ See 48 FR 14933, n. 115 (Apr. 6, 1983). 18 5 U.S.C. 601(2), 603, 604 and 605. 19 76 FR at 11703. 16 5 E:\FR\FM\05SER1.SGM 05SER1 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Rules and Regulations B. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA) 20 imposes certain requirements on Federal agencies (including the Commission) in connection with their conducting or sponsoring any collection of information as defined by the PRA. The amendments to the Part 4 regulations will not require any new collection of information from any entity that is subject to them. Additionally, the Commission did not receive any comments regarding its PRA analysis in the Proposal. Accordingly, for purposes of the PRA, the Chairman, on behalf of the Commission, certifies that the amendments to the Part 4 regulations being published today by this Federal Register release will not impose any new reporting or recordkeeping requirements. mstockstill on DSK4VPTVN1PROD with RULES C. Cost-Benefit Analysis Prior to the passage of the Dodd-Frank Act, the Part 4 regulations did not apply to swap-related activities. This preDodd-Frank Act construct provides a useful reference point from which to compare the costs and benefits of the proposed regulations to the alternative where the Commission would not be taking any action to incorporate swaprelated information into Part 4. As a result of the Dodd-Frank Act including swap-related activities among the activities on which the CPO and CTA definitions are based, CPOs and CTAs who engage in swap-related activities are now subject to Part 4. In various places, however, the wording of particular provisions of Part 4 was incomplete or inconsistent in the context of CPOs and CTAs involved with swap transactions; there is no regulatory need for the prohibition in Regulation 4.30 against directly accepting margin payments to apply to an SD; and the subject matter of Regulation 4.32 (trading on DTEFs) was rendered moot by the Dodd-Frank Act. Under such a scenario, the costs to the public of inaction would be, in qualitative terms, failure to receive Part 4 disclosure, reporting and recordkeeping protections from their CPOs and CTAs with regard to their swap activities, an unnecessary burden on SDs, and regulatory text that is obsolete. The costs of these amendments, if any, will be minimal— limited to the costs associated with including information related to swaps in the Disclosure Documents, Account Statements and books and records already required of CPOs and CTAs under existing Part 4 regulations. 20 44 U.S.C. 3501 et seq. VerDate Mar<15>2010 17:01 Sep 04, 2012 Jkt 226001 Moreover, this information should be readily available to CPOs and CTAs. The costs cannot be feasibly quantified or estimated, because they will vary according to each registrant’s internal processes and registration category. In contrast, the amendments will yield significant if unquantifiable benefit to the public, relative to inaction, by clarifying the application of Part 4 and the obligations of CPOs and CTAs to their participants and clients, respectively. In the CEA,21 Congress provided the Commission with the authority to promulgate regulations that, among other things, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA. In accordance with Section 15(a) of the CEA, it is in this post-Dodd-Frank Act environment that the Commission considers the costs and benefits of its actions before promulgating a regulation under the CEA or issuing an order. Section 15(a) 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. In light of the provisions of the DoddFrank Act that expand the ‘‘commodity pool operator’’ and ‘‘commodity trading advisor’’ definitions to include swaprelated activities, these amendments incorporate into the existing Part 4 framework regulations to take account of the swap-related activities of CPOs and CTAs. Specifically, the amendments subject CPOs and CTAs when involved with swap transactions to the same Part 4 requirements that apply when they are involved with commodity interest transactions, to the extent regulations in place at the time of the enactment of the Dodd-Frank Act did not clearly do so.22 The revision to Regulation 4.30 excepts SDs from the prohibition on accepting margin to treat 21 See 7 U.S.C. 12(a)(5). is explained above, when the Dodd-Frank Act extended the statutory definitions of the terms ‘‘commodity pool operator’’ and ‘‘commodity trading advisor,’’ those existing Part 4 regulations that applied generally to CPOs and CTAs became applicable to CPOs and CTAs captured by the expanded statutory definitions, without further amendment. Certain other existing Part 4 regulations, however, spoke specifically to activities involving commodity interests, but not to swap activities. Accordingly, this rulemaking amends this latter subset of Part 4 regulations by making them applicable to swap activities, thus closing the regulatory gap that would otherwise exist. 22 As PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 54357 them equivalently with FCMs and RFEDs. In addition, these amendments delete Regulation 4.32, pertaining to trading by registered CTAs on DTEFs, given the repeal by the Dodd-Frank Act of CEA Section 5a, which authorized such trading facilities. In the Proposal the Commission sought public comment on the costs and benefits of its contemplated amendments to Part 4.23 The Commission did not receive any comments in response to this request. Section 15(a) Factors (1) Protection of market participants and the public. The Commission believes the amendments to the Part 4 regulations will provide protection to market participants and the public by requiring CPOs and CTAs to include information on swap intermediaries and activities in the disclosure, reporting and recordkeeping framework under Part 4. For example, Regulation 4.24(j) has provided protections to commodity pool participants by requiring their CPO to disclose any actual or potential conflict of interest with any FCM with whom their pool was required to maintain its account. The amendment to Regulation 4.24(j) the Commission has adopted will provide similar protections, by requiring the CPO to disclose any actual or potential conflict of interest with any SD with whom their pool maintains its swap positions. (2) Efficiency, competitiveness, and financial integrity of the futures markets. The Commission does not expect the amendments to Part 4 to have an impact on the efficiency, competitiveness and financial integrity of the commodity interest markets. (3) Price Discovery. The Commission does not expect the amendments to Part 4 to have an impact on the market’s price discovery functions. (4) Sound risk management practices. The Commission does not expect the amendments to Part 4 to have an impact on risk management practices by CPOs, CTAs and other Commission registrants. However, the requirement that CPOs and CTAs account for SD, MSP and swap activities when complying with their disclosure, reporting and recordkeeping requirements under Part 4 will benefit prospective and actual pool participants and clients by ensuring that these participants and clients are afforded the same customer protections as participants and clients 23 76 E:\FR\FM\05SER1.SGM FR 11701, 11703. 05SER1 54358 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Rules and Regulations in all other commodity pools and managed account programs. (5) Other public interest considerations. The Commission has not identified any other public interest considerations regarding the costs and benefits of the amendments to Part 4. List of Subjects in 17 CFR Part 4 Advertising, Brokers, Commodity futures, Commodity pool operators, Commodity trading advisors, Customer protection, Reporting and recordkeeping requirements, Swaps. For the reasons presented above, the Commission hereby amends Chapter I of Title 17 of the Code of Federal Regulations as follows: PART 4—COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS 1. The authority citation for Part 4 is revised to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 23, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, 124 Stat. 1376 (July 21, 2010). 2. Section 4.7 is amended by adding paragraph (a)(2)(i)(C) to read as follows: ■ § 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) * * * (2) * * * (i) * * * (C) A swap dealer registered pursuant to section 4s(a)(1) of the Act, or a principal thereof; * * * * * ■ 3. Section 4.22 is amended by revising paragraph (a)(3) to read as follows: mstockstill on DSK4VPTVN1PROD with RULES § 4.22 Reporting to pool participants. (a) * * * (3) The Account Statement must also disclose any material business dealings between the pool, the pool’s operator, commodity trading advisor, futures commission merchant, retail foreign exchange dealer, swap dealer, or the principals thereof that previously have not been disclosed in the pool’s Disclosure Document or any amendment thereto, other Account Statements or Annual Reports. * * * * * ■ 4. Section 4.23 is amended by: ■ a. Revising paragraphs (a)(1) and (a)(7); and ■ b. Revising paragraph (b)(1), to read as follows: VerDate Mar<15>2010 17:01 Sep 04, 2012 Jkt 226001 § 4.23 Recordkeeping. * * * * * (a) * * * (1) An itemized daily record of each commodity interest transaction of the pool, showing the transaction date, quantity, commodity interest, and, as applicable, price or premium, delivery month or expiration date, whether a put or a call, strike price, underlying contract for future delivery or underlying physical, swap type and counterparty, the futures commission merchant and/or retail foreign exchange dealer carrying the account and the introducing broker, if any, whether the commodity interest was purchased, sold (including, in the case of a retail forex transaction, offset), exercised, expired (including, in the case of a retail forex transaction, whether it was rolled forward), and the gain or loss realized. * * * * * (7) Copies of each confirmation or acknowledgment of a commodity interest transaction of the pool, and each purchase and sale statement and each monthly statement for the pool received from a futures commission merchant, retail foreign exchange dealer or swap dealer. * * * * * (b) * * * (1) An itemized daily record of each commodity interest transaction of the commodity pool operator and each principal thereof, showing the transaction date, quantity, commodity interest, and, as applicable, price or premium, delivery month or expiration date, whether a put or a call, strike price, underlying contract for future delivery or underlying physical, swap type and counterparty, the futures commission merchant or retail foreign exchange dealer carrying the account and the introducing broker, if any, whether the commodity interest was purchased, sold, exercised, or expired, and the gain or loss realized; Provided, however, that if the pool operator is a counterparty to a swap, it must comply with the swap data recordkeeping and reporting requirements of Part 45 of this chapter, as applicable. * * * * * ■ 5. Section 4.24 is amended by: ■ a. Revising paragraph (g); ■ b. Revising paragraph (h)(1)(i); ■ c. Revising paragraph (i)(2)(xii); ■ d. Revising paragraphs (j)(1)(vi) and (j)(3); and ■ e. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and (l)(2)(i), to read as follows: § 4.24 * PO 00000 General disclosures required. * * Frm 00006 * Fmt 4700 * Sfmt 4700 (g) Principal risk factors. A discussion of the principal risk factors of participation in the offered pool. This discussion must include, without limitation, risks relating to volatility, leverage, liquidity, counterparty creditworthiness, as applicable to the types of trading programs to be followed, trading structures to be employed and investment activity (including retail forex and swap transactions) expected to be engaged in by the offered pool. (h) * * * (1) * * * (i) The approximate percentage of the pool’s assets that will be used to trade commodity interests, securities and other types of interests, categorized by type of commodity or market sector, type of swap, type of security (debt, equity, preferred equity), whether traded or listed on a regulated exchange market, maturity ranges and investment rating, as applicable; * * * * * (i) * * * (2) * * * (xii) Any costs or fees included in the spread between bid and asked prices for retail forex or, if known, swap transactions; and * * * * * (j) * * * (1) * * * (vi) Any other person providing services to the pool, soliciting participants for the pool, acting as a counterparty to the pool’s retail forex or swap transactions, or acting as a swap dealer with respect to the pool. * * * * * (3) Included in the description of such conflicts must be any arrangement whereby a person may benefit, directly or indirectly, from the maintenance of the pool’s account with the futures commission merchant and/or retail foreign exchange dealer and/or from the maintenance of the pool’s swap positions with a swap dealer, or from the introduction of the pool’s account to a futures commission merchant and/or retail foreign exchange dealer and/or swap dealer by an introducing broker (such as payment for order flow or soft dollar arrangements) or from an investment of pool assets in investee pools or funds or other investments. * * * * * (l) * * * (1) * * * (iii) The pool’s futures commission merchants and/or retail foreign exchange dealers and/or swap dealers and its introducing brokers, if any. (2) With respect to a futures commission merchant and/or retail E:\FR\FM\05SER1.SGM 05SER1 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Rules and Regulations foreign exchange dealer and/or swap dealer or an introducing broker, an action will be considered material if: (i) The action would be required to be disclosed in the notes to the futures commission merchant’s, retail foreign exchange dealer’s, swap dealer’s or introducing broker’s financial statements prepared pursuant to generally accepted accounting principles; * * * * * ■ 6. Section 4.30 is revised to read as follows: § 4.30 Prohibited activities. (a) Except as provided in paragraph (b) of this section, no commodity trading advisor may solicit, accept or receive from an existing or prospective client funds, securities or other property in the trading advisor’s name (or extend credit in lieu thereof) to purchase, margin, guarantee or secure any commodity interest of the client. (b) The prohibition in paragraph (a) of this section shall not apply to: (1) A futures commission merchant that is registered as such under the Act; (2) A leverage transaction merchant that is registered as a commodity trading advisor under the Act; (3) A retail foreign exchange dealer that is registered as such under the Act; or (4) A swap dealer that is registered as such under the Act, with respect to funds, securities or other property accepted to purchase, margin, guarantee or secure any swap that is not cleared through a derivatives clearing organization. § 4.32 [Removed and Reserved] 7. Section 4.32 is removed and reserved. ■ 8. Section 4.33 is amended by: ■ a. Revising paragraph (a)(6); and ■ b. Revising paragraph (b)(1), to read as follows: ■ § 4.33 Recordkeeping. mstockstill on DSK4VPTVN1PROD with RULES * * * * * (a) * * * (6) Copies of each confirmation or acknowledgment of a commodity interest transaction, and each purchase and sale statement and each monthly statement received from a futures commission merchant, a retail foreign exchange dealer or a swap dealer. * * * * * (b) * * * (1) An itemized daily record of each commodity interest transaction of the commodity trading advisor, showing the transaction date, quantity, commodity interest, and, as applicable, price or VerDate Mar<15>2010 17:01 Sep 04, 2012 Jkt 226001 premium, delivery month or expiration date, whether a put or a call, strike price, underlying contract for future delivery or underlying physical, swap type and counterparty, the futures commission merchant and/or retail foreign exchange dealer carrying the account and the introducing broker, if any, whether the commodity interest was purchased, sold (including, in the case of a retail forex transaction, offset), exercised, expired (including, in the case of a retail forex transaction, whether it was rolled forward), and the gain or loss realized; Provided, however, that if the trading advisor is a counterparty to a swap, it must comply with the swap data recordkeeping and reporting requirements of Part 45 of this chapter, as applicable. * * * * * ■ 9. Section 4.34 is amended by: ■ a. Revising paragraph (g); ■ b. Revising paragraph (i)(2); ■ c. Revising paragraph (j)(3); and ■ d. Revising paragraphs (k)(1)(iii), (k)(2) introductory text and (k)(2)(i), to read as follows: § 4.34 General disclosures required. * * * * * (g) Principal risk factors. A discussion of the principal risk factors of this trading program. This discussion must include, without limitation, risks due to volatility, leverage, liquidity, and counterparty creditworthiness, as applicable to the trading program and the types of transactions and investment activity expected to be engaged in pursuant to such program (including retail forex and swap transactions, if any). * * * * * (i) * * * (2) Where any fee is determined by reference to a base amount including, but not limited to, ‘‘net assets,’’ ‘‘gross profits,’’ ‘‘net profits,’’ ‘‘net gains,’’ ‘‘pips’’ or ‘‘bid-asked spread,’’ the trading advisor must explain how such base amount will be calculated. Where any fee is based on the difference between bid and asked prices on retail forex or swap transactions, the trading advisor must explain how such fee will be calculated; * * * * * (j) * * * (3) Included in the description of any such conflict must be any arrangement whereby the trading advisor or any principal thereof may benefit, directly or indirectly, from the maintenance of the client’s commodity interest account with a futures commission merchant and/or retail foreign exchange dealer, and/or from the maintenance of the PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 54359 client’s swap positions with a swap dealer or from the introduction of such account through an introducing broker (such as payment for order flow or soft dollar arrangements). (k) * * * (1) * * * (iii) Any introducing broker through which the client will be required to introduce its account to the futures commission merchant and/or retail foreign exchange dealer and/or swap dealer. (2) With respect to a futures commission merchant, retail foreign exchange dealer, swap dealer or introducing broker, an action will be considered material if: (i) The action would be required to be disclosed in the notes to the futures commission merchant’s, retail foreign exchange dealer’s, swap dealer’s or introducing broker’s financial statements prepared pursuant to generally accepted accounting principles; * * * * * Dated: Issued in Washington, DC, on August 23, 2012, by the Commission. Sauntia S. Warfield, Assistant Secretary of the Commission. Appendices to Amendments to Commodity Pool Operator and Commodity Trading Advisor Regulations Resulting From the DoddFrank Act—Commission Voting Summary and Statements of Commissioners Note: The following appendices will not appear in the Code of Federal Regulations. Appendix 1—Commission Voting Summary On this matter, Chairman Gensler and Commissioners Sommers, Chilton, O’Malia and Wetjen voted in the affirmative; no Commissioner voted in the negative. Appendix 2—Statement of Chairman Gary Gensler I support the final rule to amend certain provisions of Part 4 of the Commission’s regulations regarding the operations and activities of commodity pool operators (CPOs) and commodity trading advisors (CTAs). The amendments ensure that CFTC regulations with regard to CPOs and CTAs reflect changes made to the Commodity Exchange Act by the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act). Consistent with Dodd-Frank’s expansion of the CPO and CTA definitions to include those involved in swaps and advising on swaps, the final amendments require swaps information to be included in the disclosure, reporting and recordkeeping obligations that currently exist for CPOs and CTAs under Part 4. Such information will enhance customer E:\FR\FM\05SER1.SGM 05SER1 54360 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Rules and Regulations protections by increasing the transparency of CPO and CTA swap activities to their pool participants and clients. [FR Doc. 2012–21606 Filed 9–4–12; 8:45 am] BILLING CODE 6351–01–P DEPARTMENT OF COMMERCE Patent and Trademark Office 37 CFR Parts 1 and 41 [PTO–C–2011–0007] RIN 0651–AC55 CPI Adjustment of Patent Fees for Fiscal Year 2013 United States Patent and Trademark Office, Commerce. ACTION: Final rule. AGENCY: The United States Patent and Trademark Office (Office or USPTO) is adjusting certain patent fee amounts for fiscal year 2013 to reflect fluctuations in the Consumer Price Index (CPI). The patent statute provides for the annual CPI adjustment of patent fees set by statute to recover the higher costs associated with doing business as reflected by the CPI. DATES: This final rule is effective on October 5, 2012. FOR FURTHER INFORMATION CONTACT: Gilda Lee by email at Gilda.Lee@uspto.gov, by telephone at (571) 272–8698, or by fax at (571) 273– 8698. SUPPLEMENTARY INFORMATION: mstockstill on DSK4VPTVN1PROD with RULES SUMMARY: Executive Summary Purpose: Section 41(f) of Title 35 of the United States Code provides the USPTO with the authority to adjust certain statutory patent fees to reflect fluctuations during the preceding twelve months in the Consumer Price Index (CPI). The purpose of this provision is to allow the USPTO to recover higher costs of providing services as reflected by the CPI. This final rule sets forth which fees will be adjusted and how the adjustment is calculated based on the current fluctuation in the CPI over the twelve months preceding this notice. Summary of Major Provisions: The USPTO is adjusting certain patent fees in accordance with 35 U.S.C. 41(f), as amended by the Consolidated Appropriations Act (Pub. L. 108–447, 118 Stat. 2809 (2004)) and the LeahySmith America Invents Act (Pub. L. 112–29). The fee increase helps the USPTO to meet its strategic goals and maintain effective and efficient operation of the patent system. VerDate Mar<15>2010 17:01 Sep 04, 2012 Jkt 226001 Costs and Benefits: This rulemaking is not economically significant as that term is defined in Executive Order 12866 (Sept. 30, 1993). Background Statutory Provisions: Patent fees are set by or under the authority provided in 35 U.S.C. 41, 119, 120, 132(b), 156, 157(a), 255, 302, 311, 376, section 532(a)(2) of the Uruguay Round Agreements Act (URAA) (Pub. L. 103– 465, § 532(a)(2), 108 Stat. 4809, 4985 (1994)), and section 4506 of the American Inventors Protection Act of 1999 (AIPA) (Pub. L. 106–113, 113 Stat. 1501, 1501A–565 (1999)). For fees paid under 35 U.S.C. 41(a) and (b) and 132(b), independent inventors, small business concerns, and nonprofit organizations who meet the requirements of 35 U.S.C. 41(h)(1) are entitled to a fifty-percent reduction. The USPTO published a notice proposing to adjust the patent fees charged under 35 U.S.C. 41(a) and (b) for fiscal year 2013 to reflect fluctuations in the CPI on May 14, 2012. The fiscal year 2005 Consolidated Appropriations Act (section 801 of Division B) provided that 35 U.S.C. 41(a), (b), and (d) shall be administered in a manner that revises patent application fees (35 U.S.C. 41(a)) and patent maintenance fees (35 U.S.C. 41(b)), and provides for a separate filing fee (35 U.S.C. 41(a)), search fee (35 U.S.C. 41(d)(1)), and examination fee (35 U.S.C. 41(a)(3)) during fiscal years 2005 and 2006. See Public Law 108– 447, 118 Stat. 2809, 2924–30 (2004). The Omnibus Appropriations Act, 2009, extended the patent and trademark fee provisions of the fiscal year 2005 Consolidated Appropriations Act through September 30, 2011. See Public Law 112–4, 125 Stat. 6 (2011); Public Law 111–322, 124 Stat. 3518 (2010); Public Law 111–317, 124 Stat. 3454 (2010); Public Law 111–290, 124 Stat. 3063 (2010); Public Law 111–242, 124 Stat. 2607 (2010); Public Law 111–224, 124 Stat. 2385 (2010); Public Law 111– 117, 123 Stat. 3034 (2009); Public Law 111–8, 123 Stat. 524 (2009); Public Law 111–6, 123 Stat. 522 (2009); Public Law 111–5, 123 Stat. 115 (2009); Public Law 110–329, 122 Stat. 3574 (2008); Public Law 110–161, 121 Stat. 1844 (2007); Public Law 110–149, 121 Stat. 1819 (2007); Public Law 110–137, 121 Stat. 1454 (2007); Public Law 110–116, 121 Stat. 1295 (2007); Public Law 110–92, 121 Stat. 989 (2007); Public Law 110–5, 121 Stat. 8 (2007); Public Law 109–383, 120 Stat. 2678 (2006); Public Law 109– 369, 120 Stat. 2642 (2006); and Public Law 109–289, 120 Stat. 1257 (2006). The Leahy-Smith America Invents Act, PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 enacted September 16, 2011, codified the patent and trademark fee provisions of the fiscal year 2005 Consolidated Appropriations Act. Section 11 of the Leahy-Smith America Invents Act provides for a surcharge of fifteen percent, rounded by standard arithmetic rules, on all fees charged or authorized by 35 U.S.C. 41(a), (b), and (d)(1), as well as by 35 U.S.C. 132(b). Section 11 of the Act provides that this fifteen percent surcharge is effective ten days after the date of enactment (i.e., September 26, 2011). Section 11 also provides that this fifteen percent surcharge shall terminate, with respect to a fee to which the surcharge applies, on the effective date of the setting or adjustment of that fee pursuant to the exercise of the authority under section 10 of the Act for the first time with respect to that fee. Section 10 fee-setting will be implemented in a future separate rulemaking. As for this rulemaking, Section 41(f) of Title 35, United States Code, provides that fees established under 35 U.S.C. 41(a) and (b) may be adjusted on October 1, 1992, and every year thereafter, to reflect fluctuations in the Consumer Price Index over the previous twelve months. If the annual change in CPI is one percent or less, no fee adjustment for CPI fluctuations will be pursued. This CPI increase will be implemented on October 1, 2012. This interim increase in fees is necessary to allow the USPTO to meet its strategic goals within the time frame outlined in the FY 2013 President’s Budget. The interim fee increase is a bridge to provide resources until the USPTO exercises its fee-setting authority and develops a new fee structure that will provide sufficient financial resources in the long term. An adequately funded USPTO will optimize the administration of the U.S. intellectual property system, and thereby move innovation to the marketplace more quickly, creating and sustaining U.S. jobs and enhancing the health and living standards of Americans. Fee Adjustment Level: The patent statutory fees established by 35 U.S.C. 41(a) and (b) are adjusted to reflect the most recent fluctuations occurring during the twelve-month period prior to publication of the final rule implementing this CPI adjustment, as measured by the Consumer Price Index for All Urban Consumers (CPI–U). The Office of Management and Budget (OMB) has advised that in calculating these fluctuations, the USPTO should use CPI–U data as determined by the Secretary of Labor, which is found at E:\FR\FM\05SER1.SGM 05SER1

Agencies

[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Rules and Regulations]
[Pages 54355-54360]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21606]



[[Page 54355]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD49


Amendments to Commodity Pool Operator and Commodity Trading 
Advisor Regulations Resulting From the Dodd-Frank Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
amending its regulations governing the operations and activities of 
commodity pool operators (CPOs) and commodity trading advisors (CTAs) 
in order to have those regulations reflect changes made to the 
Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act).

DATES: Effective Date: November 5, 2012.

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director, 
or Christopher W. Cummings, Special Counsel, Division of Swap Dealer 
and Intermediary Oversight, 1155 21st Street NW., Washington, DC 20581. 
Telephone number: 202-418-6700 and electronic mail: bgold@cftc.gov or 
ccummings@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\ 
Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a 
comprehensive new regulatory framework for swaps and security-based 
swaps. The goal of this legislation was to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of swap dealers (SDs) and major swap 
participants (MSPs); (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
oversight of the Commission. Among the changes made by the Dodd-Frank 
Act to the CEA were to include within the CPO definition the operator 
of a collective investment vehicle that trades swaps, and to include 
within the CTA definition a person who provides advice concerning 
swaps.\4\
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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 through the Commission's Web site, 
www.cftc.gov.
    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq. (2006). The Commission's regulations are 
found at 17 CFR part 1 et seq. (2012). Both the CEA and the 
Commission's regulations also may be accessed through the 
Commission's Web site.
    \4\ See Section 721(a) of the Dodd-Frank Act, which re-organized 
(and in some cases amended) existing definitions in, and added new 
definitions to, Section 1a of the CEA. The CPO and CTA definitions, 
as amended, are codified at CEA sections 1a(11) and 1a(12), 
respectively.
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B. The Proposed Amendments to Part 4

    Part 4 of the Commission's regulations sets forth a comprehensive 
regulatory framework for the operations and activities of CPOs and 
CTAs. It includes disclosure, reporting and recordkeeping requirements 
for registered CPOs and CTAs, registration and compliance exemptions 
for CPOs and CTAs, and other provisions, including anti-fraud 
provisions, applicable to CPOs and CTAs, regardless of registration 
status. To ensure that the Part 4 regulations applied to CPOs and CTAs 
in the context of these intermediaries' involvement with swap 
transactions, on March 3, 2011, the Commission proposed certain 
amendments to Part 4 (Proposal).\5\
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    \5\ 76 FR 11701.
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    As the Commission explained in the Proposal, because many of the 
existing Part 4 regulations generally applied to CPOs and CTAs, they 
would continue to be applicable to CPOs and CTAs with respect to their 
swap activities without the need for amendment thereto. The Commission 
noted that in other instances, however, the text of certain existing 
Part 4 regulations was specific to activities involving futures 
contracts, commodity options, and off-exchange retail foreign currency 
(``commodity interests''), and it did not include, refer to or 
otherwise take account of swap activities. As the Commission stated: 
``The Proposal [was] intended to clarify and ensure that the 
requirements governing the operations and activities of CPOs and CTAs 
continue to apply for these intermediaries in the context of their 
involvement with swap transactions.'' \6\ Accordingly, the Commission 
proposed to amend Regulations 4.7, 4.10, 4.22, 4.23, 4.24 4.30, 4.33 
and 4.34 to include in each of these regulations a reference to swaps 
or swap activities.
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    \6\ 76 FR 11701. Part 4 applies to CPOs with respect to their 
activities affecting pool participants and to CTAs with respect to 
their activities affecting clients. Depending on the nature of its 
activities, a CPO or CTA may also come within the definition of the 
term ``swap dealer'' or ``major swap participant'' in new CEA 
Section 1a(49) or 1a(33), respectively. As directed by the Dodd-
Frank Act, the Commission has adopted new regulations that establish 
business conduct standards for SDs and MSPs. See 77 FR 9734 (Feb. 
17, 2012). These new regulations apply to SDs and MSPs with respect 
to the counterparties with whom they transact swap business, and 
govern different activity than that to which the Part 4 regulations 
apply.
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II. Comments on the Proposal

    The Commission received two comment letters on the Proposal,\7\ 
each of which supported the Proposal. One of these letters stated that 
the Proposal ``should act to reduce risk and increase its transparency, 
and promote market integrity by ensuring that all entities are 
consistently regulated to the extent that their trading and other 
activities pertain to swaps.'' \8\ The other letter urged the 
Commission ``to work quickly and diligently on writing these rules and 
putting them in place as soon as possible.'' \9\
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    \7\ These comment letters currently are available on the 
Commission's Web site.
    \8\ Comment letter from Chris Barnard (Mar. 29, 2011).
    \9\ Comment letter from Kyle Vandergrift (Apr. 20, 2011).
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III. The Final Regulations

    In light of the supportive comments it received, with one exception 
the Commission is adopting the amendments to the Part 4 regulations it 
proposed. That exception concerns the proposed amendment to Regulation 
4.10(a) that, for the purposes of Part 4, would have expanded the 
definition of the term ``commodity interest'' to include ``swaps.'' 
This proposal was superseded by a proposed amendment to Regulation 
1.3(yy) that, for the purposes of all of the Commission's regulations, 
would define the term ``commodity interest'' to include ``swaps.'' \10\ 
Accordingly, the Commission is considering the proposed definition of 
the term ``commodity interest'' in connection with its consideration of 
the comment letters it received on its proposed amendment to Regulation 
1.3(yy).
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    \10\ See 76 FR 33066, 33069-70 (June 7, 2011).
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A. Adding ``Swap'' Terms to Part 4

    As proposed, the Commission is inserting ``swap,'' ``swap 
transaction'' or a similar term at various regulations throughout Part 
4. See the amendments to Regulations 4.23(a)(1), 4.24(g), (h)(1), and 
(i)(2) for CPOs and Regulations 4.34(g) and 4.34(i)(2) for CTAs. For

[[Page 54356]]

example, Regulation 4.23(a)(1) is being amended to include ``swap type 
and counterparty'' in the itemized daily record that a CPO must make 
and keep with respect to a pool's commodity interest transactions.
    At other Part 4 regulations, the Commission has included as 
proposed the term ``swap dealer'' among the persons for whom a CPO or 
CTA must provide information in its Disclosure Document and for whom a 
CPO must provide information in a pool's periodic Account Statement. 
See the amendments to Regulations 4.22(a)(3), 4.24(j)(1), (j)(3), 
(l)(1), and (l)(2) for CPOs and Regulations 4.34(j)(1), (j)(3), (k)(1) 
and (k)(2) for CTAs. For example, Regulations 4.24(j) and 4.34(j) are 
being amended to include SDs in the group of persons as to which 
conflicts of interest must be disclosed by CPOs and CTAs.
    Similarly, the Commission has included as proposed ``a registered 
swap dealer'' among the persons listed in Regulation 4.7(a)(2) that do 
not have to satisfy a portfolio requirement in order to be a qualified 
eligible person (QEP), such that a CPO or CTA that has claimed relief 
under Regulation 4.7 may accept the SD as a pool participant or 
advisory client without regard to the size of its investment portfolio. 
As the Commission explained, ``this would be consistent with the 
current treatment of other financial intermediaries registered with the 
Commission (such as futures commission merchants [FCMs] and retail 
foreign exchange dealers [RFEDs]) as QEPs under Regulation 4.7(a)(2).'' 
\11\
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    \11\ 76 FR at 11702.
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B. Including Books and Records Relating to Swap Transactions within 
Part 4

    The Commission has adopted as proposed amendments to Part 4 that 
require a CPO or CTA to make and keep certain books and records 
generated by the swap transactions in which it engages on behalf of not 
only its pool participants and clients, but also itself. See the 
amendments to Regulations 4.23(a)(7) and (b)(1) for CPOs and 
Regulations 4.33(a)(6) and (b)(1) for CTAs. The amendments to 
Regulations 4.23(a)(7) and 4.33(a)(6) require CPOs and CTAs to retain 
each acknowledgment of a swap transaction received from an SD. The 
amendments to Regulations 4.23(b)(1) and 4.33(b)(1) make clear that if 
a CPO or CTA was a counterparty to a swap transaction, then it would be 
subject to the swap data recordkeeping and reporting requirements of 
Part 45 of the Commission's regulations, as applicable.\12\
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    \12\ See Regulation 45.2, which requires SDs and MSPs to keep 
full, complete and systematic records, together with all pertinent 
data and memoranda, of all activities relating to their business 
with respect to swaps, as prescribed by the Commission. (Non-SD and 
non-MSP counterparties subject to the Commission's jurisdiction have 
a similar requirement, but only with respect to each swap to which 
they are a counterparty.)
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C. Regulation 4.30

    Subject to certain exceptions, Regulation 4.30 provides that no CTA 
may solicit, accept or receive from an existing or prospective client 
funds, securities or other property in the trading advisor's name (or 
extend credit in lieu thereof) to purchase, margin, guarantee or secure 
any commodity interest of the client.
    The Commission proposed to amend Regulation 4.30 by adding to the 
list of intermediaries then excepted from the foregoing prohibition--
i.e., registered FCMs, leverage transaction merchants and RFEDs--a 
registered SD in connection with a swap that was not cleared through a 
derivatives clearing organization. The Commission explained that this 
amendment to Regulation 4.30 was necessary ``[b]ecause swap dealers 
will generally fall within the statutory definition of CTA, and because 
a swap dealer engaging in uncleared swap transactions may be accepting 
funds or other property from its counterparties as variation and 
initial margin payments.'' \13\
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    \13\ 76 FR at 11702. In this regard, the Commission has proposed 
regulations addressing the circumstances in which non-bank SDs may 
be required or permitted to accept margin payments in uncleared swap 
transactions. See 76 FR 23732 (Apr. 28, 2011). Accordingly, this 
amendment to Regulation 4.30 should not be interpreted to impose or 
authorize any such margin requirements.
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    Subsequently, the Commission amended Regulation 4.6 to provide 
therein for an exclusion from the definition of the term ``commodity 
trading advisor'' for an SD, provided the commodity interest and swap 
advisory activities of the SD are solely incidental to the conduct of 
its business as an SD.\14\ Because not all SDs may always meet the 
``solely incidental'' proviso, the Commission has determined to amend 
Regulation 4.30 as proposed, such that any registered SD who is a CTA 
is not subject to the regulation's operational prohibition.
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    \14\ See 77 FR 9734, 9739-40 (Feb. 17, 2012).
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D. Deleting Regulation 4.32

    The Commission has deleted as proposed Regulation 4.32, which 
concerned trading by a registered CTA on or subject to the rules of a 
derivatives transaction execution facility (DTEF) for non-institutional 
customers. As the Commission explained:

    Section 734(a) of the Dodd-Frank Act repeals Section 5a of the 
CEA, which is the section establishing and providing for the 
regulation of DTEFs. Accordingly, because subsequent to the 
effective date of the Dodd-Frank Act Regulation 4.32 will no longer 
have a statutory basis or purpose, the Proposal would remove and 
reserve Regulation 4.32.\15\
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    \15\ 76 FR at 11702.
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IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \16\ requires federal 
agencies to consider the impact of those rules on small businesses.\17\ 
A regulatory flexibility analysis or certification typically is 
required for ``any rule for which the agency publishes a general notice 
of proposed rulemaking pursuant to'' the notice-and-comment provisions 
of the Administrative Procedure Act, 5 U.S.C. 553(b).\18\ The 
amendments to the Part 4 regulations contained herein will affect CPOs 
and CTAs. The Commission stated in the Proposal that:
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    \16\ 5 U.S.C. 601 et seq.
    \17\ By its terms, the RFA does not apply to ``individuals.'' 
See 48 FR 14933, n. 115 (Apr. 6, 1983).
    \18\ 5 U.S.C. 601(2), 603, 604 and 605.

    With respect to CPOs, the Commission previously has determined 
that a CPO is a small entity for the purpose of the RFA if it meets 
the criteria for an exemption from registration under Regulation 
4.13(a)(2). Thus, because the Proposal applies to registered CPOs, 
the RFA is not applicable to it. As for CTAs, the Commission 
previously has stated that it would evaluate within the context of a 
particular rule proposal whether all or some affected CTAs would be 
considered to be small entities and, if so, the economic impact on 
them of the particular rule. In this regard, the Commission notes 
that the Proposal applies to registered CTAs. Moreover, the Proposal 
would not have a significant economic impact on any CPO or CTA who 
would be affected thereby, because it would merely bring within the 
current Part 4 regulatory structure of disclosure, reporting and 
recordkeeping information with respect to swap activities. It would 
not impose any additional operative requirements or otherwise direct 
or confine the activities of CPOs and CTAs.\19\
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    \19\ 76 FR at 11703.

    The Commission did not receive any comments regarding its RFA 
analysis in the Proposal. Accordingly, pursuant to 5 U.S.C. 605(b), the 
Chairman, on behalf of the Commission, certifies that the amendments to 
the Part 4 regulations being published today by this Federal Register 
release will not have a significant economic impact on a substantial 
number of small entities.

[[Page 54357]]

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \20\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. The amendments to the Part 4 
regulations will not require any new collection of information from any 
entity that is subject to them. Additionally, the Commission did not 
receive any comments regarding its PRA analysis in the Proposal. 
Accordingly, for purposes of the PRA, the Chairman, on behalf of the 
Commission, certifies that the amendments to the Part 4 regulations 
being published today by this Federal Register release will not impose 
any new reporting or recordkeeping requirements.
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    \20\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis

    Prior to the passage of the Dodd-Frank Act, the Part 4 regulations 
did not apply to swap-related activities. This pre-Dodd-Frank Act 
construct provides a useful reference point from which to compare the 
costs and benefits of the proposed regulations to the alternative where 
the Commission would not be taking any action to incorporate swap-
related information into Part 4.
    As a result of the Dodd-Frank Act including swap-related activities 
among the activities on which the CPO and CTA definitions are based, 
CPOs and CTAs who engage in swap-related activities are now subject to 
Part 4. In various places, however, the wording of particular 
provisions of Part 4 was incomplete or inconsistent in the context of 
CPOs and CTAs involved with swap transactions; there is no regulatory 
need for the prohibition in Regulation 4.30 against directly accepting 
margin payments to apply to an SD; and the subject matter of Regulation 
4.32 (trading on DTEFs) was rendered moot by the Dodd-Frank Act. Under 
such a scenario, the costs to the public of inaction would be, in 
qualitative terms, failure to receive Part 4 disclosure, reporting and 
recordkeeping protections from their CPOs and CTAs with regard to their 
swap activities, an unnecessary burden on SDs, and regulatory text that 
is obsolete. The costs of these amendments, if any, will be minimal--
limited to the costs associated with including information related to 
swaps in the Disclosure Documents, Account Statements and books and 
records already required of CPOs and CTAs under existing Part 4 
regulations. Moreover, this information should be readily available to 
CPOs and CTAs. The costs cannot be feasibly quantified or estimated, 
because they will vary according to each registrant's internal 
processes and registration category. In contrast, the amendments will 
yield significant if unquantifiable benefit to the public, relative to 
inaction, by clarifying the application of Part 4 and the obligations 
of CPOs and CTAs to their participants and clients, respectively.
    In the CEA,\21\ Congress provided the Commission with the authority 
to promulgate regulations that, among other things, are reasonably 
necessary to effectuate any of the provisions or to accomplish any of 
the purposes of the CEA. In accordance with Section 15(a) of the CEA, 
it is in this post-Dodd-Frank Act environment that the Commission 
considers the costs and benefits of its actions before promulgating a 
regulation under the CEA or issuing an order.
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    \21\ See 7 U.S.C. 12(a)(5).
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    Section 15(a) 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.
    In light of the provisions of the Dodd-Frank Act that expand the 
``commodity pool operator'' and ``commodity trading advisor'' 
definitions to include swap-related activities, these amendments 
incorporate into the existing Part 4 framework regulations to take 
account of the swap-related activities of CPOs and CTAs. Specifically, 
the amendments subject CPOs and CTAs when involved with swap 
transactions to the same Part 4 requirements that apply when they are 
involved with commodity interest transactions, to the extent 
regulations in place at the time of the enactment of the Dodd-Frank Act 
did not clearly do so.\22\ The revision to Regulation 4.30 excepts SDs 
from the prohibition on accepting margin to treat them equivalently 
with FCMs and RFEDs. In addition, these amendments delete Regulation 
4.32, pertaining to trading by registered CTAs on DTEFs, given the 
repeal by the Dodd-Frank Act of CEA Section 5a, which authorized such 
trading facilities.
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    \22\ As is explained above, when the Dodd-Frank Act extended the 
statutory definitions of the terms ``commodity pool operator'' and 
``commodity trading advisor,'' those existing Part 4 regulations 
that applied generally to CPOs and CTAs became applicable to CPOs 
and CTAs captured by the expanded statutory definitions, without 
further amendment. Certain other existing Part 4 regulations, 
however, spoke specifically to activities involving commodity 
interests, but not to swap activities. Accordingly, this rulemaking 
amends this latter subset of Part 4 regulations by making them 
applicable to swap activities, thus closing the regulatory gap that 
would otherwise exist.
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    In the Proposal the Commission sought public comment on the costs 
and benefits of its contemplated amendments to Part 4.\23\ The 
Commission did not receive any comments in response to this request.
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    \23\ 76 FR 11701, 11703.
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Section 15(a) Factors
    (1) Protection of market participants and the public.
    The Commission believes the amendments to the Part 4 regulations 
will provide protection to market participants and the public by 
requiring CPOs and CTAs to include information on swap intermediaries 
and activities in the disclosure, reporting and recordkeeping framework 
under Part 4. For example, Regulation 4.24(j) has provided protections 
to commodity pool participants by requiring their CPO to disclose any 
actual or potential conflict of interest with any FCM with whom their 
pool was required to maintain its account. The amendment to Regulation 
4.24(j) the Commission has adopted will provide similar protections, by 
requiring the CPO to disclose any actual or potential conflict of 
interest with any SD with whom their pool maintains its swap positions.
    (2) Efficiency, competitiveness, and financial integrity of the 
futures markets.
    The Commission does not expect the amendments to Part 4 to have an 
impact on the efficiency, competitiveness and financial integrity of 
the commodity interest markets.
    (3) Price Discovery.
    The Commission does not expect the amendments to Part 4 to have an 
impact on the market's price discovery functions.
    (4) Sound risk management practices.
    The Commission does not expect the amendments to Part 4 to have an 
impact on risk management practices by CPOs, CTAs and other Commission 
registrants. However, the requirement that CPOs and CTAs account for 
SD, MSP and swap activities when complying with their disclosure, 
reporting and recordkeeping requirements under Part 4 will benefit 
prospective and actual pool participants and clients by ensuring that 
these participants and clients are afforded the same customer 
protections as participants and clients

[[Page 54358]]

in all other commodity pools and managed account programs.
    (5) Other public interest considerations.
    The Commission has not identified any other public interest 
considerations regarding the costs and benefits of the amendments to 
Part 4.

List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Commodity trading advisors, Customer protection, Reporting and 
recordkeeping requirements, Swaps.
    For the reasons presented above, the Commission hereby amends 
Chapter I of Title 17 of the Code of Federal Regulations as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
1. The authority citation for Part 4 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 23, 
as amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (July 21, 
2010).


0
2. Section 4.7 is amended by adding paragraph (a)(2)(i)(C) 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) * * *
    (2) * * *
    (i) * * *
    (C) A swap dealer registered pursuant to section 4s(a)(1) of the 
Act, or a principal thereof;
* * * * *

0
3. Section 4.22 is amended by revising paragraph (a)(3) to read as 
follows:


Sec.  4.22  Reporting to pool participants.

    (a) * * *
    (3) The Account Statement must also disclose any material business 
dealings between the pool, the pool's operator, commodity trading 
advisor, futures commission merchant, retail foreign exchange dealer, 
swap dealer, or the principals thereof that previously have not been 
disclosed in the pool's Disclosure Document or any amendment thereto, 
other Account Statements or Annual Reports.
* * * * *
0
4. Section 4.23 is amended by:
0
a. Revising paragraphs (a)(1) and (a)(7); and
0
b. Revising paragraph (b)(1), to read as follows:


Sec.  4.23  Recordkeeping.

* * * * *
    (a) * * *
    (1) An itemized daily record of each commodity interest transaction 
of the pool, showing the transaction date, quantity, commodity 
interest, and, as applicable, price or premium, delivery month or 
expiration date, whether a put or a call, strike price, underlying 
contract for future delivery or underlying physical, swap type and 
counterparty, the futures commission merchant and/or retail foreign 
exchange dealer carrying the account and the introducing broker, if 
any, whether the commodity interest was purchased, sold (including, in 
the case of a retail forex transaction, offset), exercised, expired 
(including, in the case of a retail forex transaction, whether it was 
rolled forward), and the gain or loss realized.
* * * * *
    (7) Copies of each confirmation or acknowledgment of a commodity 
interest transaction of the pool, and each purchase and sale statement 
and each monthly statement for the pool received from a futures 
commission merchant, retail foreign exchange dealer or swap dealer.
* * * * *
    (b) * * *
    (1) An itemized daily record of each commodity interest transaction 
of the commodity pool operator and each principal thereof, showing the 
transaction date, quantity, commodity interest, and, as applicable, 
price or premium, delivery month or expiration date, whether a put or a 
call, strike price, underlying contract for future delivery or 
underlying physical, swap type and counterparty, the futures commission 
merchant or retail foreign exchange dealer carrying the account and the 
introducing broker, if any, whether the commodity interest was 
purchased, sold, exercised, or expired, and the gain or loss realized; 
Provided, however, that if the pool operator is a counterparty to a 
swap, it must comply with the swap data recordkeeping and reporting 
requirements of Part 45 of this chapter, as applicable.
* * * * *

0
5. Section 4.24 is amended by:
0
a. Revising paragraph (g);
0
b. Revising paragraph (h)(1)(i);
0
c. Revising paragraph (i)(2)(xii);
0
d. Revising paragraphs (j)(1)(vi) and (j)(3); and
0
e. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and 
(l)(2)(i), to read as follows:


Sec.  4.24  General disclosures required.

* * * * *
    (g) Principal risk factors. A discussion of the principal risk 
factors of participation in the offered pool. This discussion must 
include, without limitation, risks relating to volatility, leverage, 
liquidity, counterparty creditworthiness, as applicable to the types of 
trading programs to be followed, trading structures to be employed and 
investment activity (including retail forex and swap transactions) 
expected to be engaged in by the offered pool.
    (h) * * *
    (1) * * *
    (i) The approximate percentage of the pool's assets that will be 
used to trade commodity interests, securities and other types of 
interests, categorized by type of commodity or market sector, type of 
swap, type of security (debt, equity, preferred equity), whether traded 
or listed on a regulated exchange market, maturity ranges and 
investment rating, as applicable;
* * * * *
    (i) * * *
    (2) * * *
    (xii) Any costs or fees included in the spread between bid and 
asked prices for retail forex or, if known, swap transactions; and
* * * * *
    (j) * * *
    (1) * * *
    (vi) Any other person providing services to the pool, soliciting 
participants for the pool, acting as a counterparty to the pool's 
retail forex or swap transactions, or acting as a swap dealer with 
respect to the pool.
* * * * *
    (3) Included in the description of such conflicts must be any 
arrangement whereby a person may benefit, directly or indirectly, from 
the maintenance of the pool's account with the futures commission 
merchant and/or retail foreign exchange dealer and/or from the 
maintenance of the pool's swap positions with a swap dealer, or from 
the introduction of the pool's account to a futures commission merchant 
and/or retail foreign exchange dealer and/or swap dealer by an 
introducing broker (such as payment for order flow or soft dollar 
arrangements) or from an investment of pool assets in investee pools or 
funds or other investments.
* * * * *
    (l) * * *
    (1) * * *
    (iii) The pool's futures commission merchants and/or retail foreign 
exchange dealers and/or swap dealers and its introducing brokers, if 
any.
    (2) With respect to a futures commission merchant and/or retail

[[Page 54359]]

foreign exchange dealer and/or swap dealer or an introducing broker, an 
action will be considered material if:
    (i) The action would be required to be disclosed in the notes to 
the futures commission merchant's, retail foreign exchange dealer's, 
swap dealer's or introducing broker's financial statements prepared 
pursuant to generally accepted accounting principles;
* * * * *

0
6. Section 4.30 is revised to read as follows:


Sec.  4.30  Prohibited activities.

    (a) Except as provided in paragraph (b) of this section, no 
commodity trading advisor may solicit, accept or receive from an 
existing or prospective client funds, securities or other property in 
the trading advisor's name (or extend credit in lieu thereof) to 
purchase, margin, guarantee or secure any commodity interest of the 
client.
    (b) The prohibition in paragraph (a) of this section shall not 
apply to:
    (1) A futures commission merchant that is registered as such under 
the Act;
    (2) A leverage transaction merchant that is registered as a 
commodity trading advisor under the Act;
    (3) A retail foreign exchange dealer that is registered as such 
under the Act; or
    (4) A swap dealer that is registered as such under the Act, with 
respect to funds, securities or other property accepted to purchase, 
margin, guarantee or secure any swap that is not cleared through a 
derivatives clearing organization.


Sec.  4.32  [Removed and Reserved]

0
7. Section 4.32 is removed and reserved.
0
8. Section 4.33 is amended by:
0
a. Revising paragraph (a)(6); and
0
b. Revising paragraph (b)(1), to read as follows:


Sec.  4.33  Recordkeeping.

* * * * *
    (a) * * *
    (6) Copies of each confirmation or acknowledgment of a commodity 
interest transaction, and each purchase and sale statement and each 
monthly statement received from a futures commission merchant, a retail 
foreign exchange dealer or a swap dealer.
* * * * *
    (b) * * *
    (1) An itemized daily record of each commodity interest transaction 
of the commodity trading advisor, showing the transaction date, 
quantity, commodity interest, and, as applicable, price or premium, 
delivery month or expiration date, whether a put or a call, strike 
price, underlying contract for future delivery or underlying physical, 
swap type and counterparty, the futures commission merchant and/or 
retail foreign exchange dealer carrying the account and the introducing 
broker, if any, whether the commodity interest was purchased, sold 
(including, in the case of a retail forex transaction, offset), 
exercised, expired (including, in the case of a retail forex 
transaction, whether it was rolled forward), and the gain or loss 
realized; Provided, however, that if the trading advisor is a 
counterparty to a swap, it must comply with the swap data recordkeeping 
and reporting requirements of Part 45 of this chapter, as applicable.
* * * * *

0
9. Section 4.34 is amended by:
0
a. Revising paragraph (g);
0
b. Revising paragraph (i)(2);
0
c. Revising paragraph (j)(3); and
0
d. Revising paragraphs (k)(1)(iii), (k)(2) introductory text and 
(k)(2)(i), to read as follows:


Sec.  4.34  General disclosures required.

* * * * *
    (g) Principal risk factors. A discussion of the principal risk 
factors of this trading program. This discussion must include, without 
limitation, risks due to volatility, leverage, liquidity, and 
counterparty creditworthiness, as applicable to the trading program and 
the types of transactions and investment activity expected to be 
engaged in pursuant to such program (including retail forex and swap 
transactions, if any).
* * * * *
    (i) * * *
    (2) Where any fee is determined by reference to a base amount 
including, but not limited to, ``net assets,'' ``gross profits,'' ``net 
profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading 
advisor must explain how such base amount will be calculated. Where any 
fee is based on the difference between bid and asked prices on retail 
forex or swap transactions, the trading advisor must explain how such 
fee will be calculated;
* * * * *
    (j) * * *
    (3) Included in the description of any such conflict must be any 
arrangement whereby the trading advisor or any principal thereof may 
benefit, directly or indirectly, from the maintenance of the client's 
commodity interest account with a futures commission merchant and/or 
retail foreign exchange dealer, and/or from the maintenance of the 
client's swap positions with a swap dealer or from the introduction of 
such account through an introducing broker (such as payment for order 
flow or soft dollar arrangements).
    (k) * * *
    (1) * * *
    (iii) Any introducing broker through which the client will be 
required to introduce its account to the futures commission merchant 
and/or retail foreign exchange dealer and/or swap dealer.
    (2) With respect to a futures commission merchant, retail foreign 
exchange dealer, swap dealer or introducing broker, an action will be 
considered material if:
    (i) The action would be required to be disclosed in the notes to 
the futures commission merchant's, retail foreign exchange dealer's, 
swap dealer's or introducing broker's financial statements prepared 
pursuant to generally accepted accounting principles;
* * * * *

    Dated: Issued in Washington, DC, on August 23, 2012, by the 
Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.

Appendices to Amendments to Commodity Pool Operator and Commodity 
Trading Advisor Regulations Resulting From the Dodd-Frank Act--
Commission Voting Summary and Statements of Commissioners

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

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, O'Malia and Wetjen voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to amend certain provisions of Part 4 
of the Commission's regulations regarding the operations and 
activities of commodity pool operators (CPOs) and commodity trading 
advisors (CTAs). The amendments ensure that CFTC regulations with 
regard to CPOs and CTAs reflect changes made to the Commodity 
Exchange Act by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act).
    Consistent with Dodd-Frank's expansion of the CPO and CTA 
definitions to include those involved in swaps and advising on 
swaps, the final amendments require swaps information to be included 
in the disclosure, reporting and recordkeeping obligations that 
currently exist for CPOs and CTAs under Part 4. Such information 
will enhance customer

[[Page 54360]]

protections by increasing the transparency of CPO and CTA swap 
activities to their pool participants and clients.

[FR Doc. 2012-21606 Filed 9-4-12; 8:45 am]
BILLING CODE 6351-01-P