Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors: Prohibiting Exemptions on Behalf of Persons Subject to Certain Statutory Disqualifications, 40877-40892 [2020-12607]

Download as PDF Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations telephone number to 301–504–7479. This document also adds an email address to provide an additional contact option to reach the agency’s Secretary: cpsc-os@cpsc.gov. This document does not make any substantive changes to the final rule. We are making these corrections to avoid possible confusion and to provide the public several ways to contact CPSC, even during the COVID–19 pandemic. List of Subjects in 16 CFR Part 1228 Consumer protection, Imports, Infants and children, Law enforcement, and Toys. Accordingly, 16 CFR part 1228 is corrected by making the following correcting amendments: PART 1228—SAFETY STANDARD FOR SLING CARRIERS 1. The authority citation for part 1228 continues to read as follows: ■ Authority: Sec. 104, Pub. L. 110–314, 122 Stat. 3016 (15 U.S.C. 2056a). § 1228.2 [Amended] 2. Amend § 1228.2(a) by: a. Removing ‘‘; www.astm.org.’’ at the end of the third sentence, and adding ‘‘USA; phone: 610–832–9585; www.astm.org.’’ in its place; and ■ b. Removing the telephone number ‘‘301–504–7923,’’ in the fifth sentence, and adding ‘‘301–504–7479, email: cpsc-os@cpsc.gov,’’ in its place. ■ ■ Alberta E. Mills, Secretary, U.S. Consumer Product Safety Commission. public will be able to contact CPSC, in this document, we provide a correct telephone number and add an email address, which will provide the public several ways to contact CPSC, even during the COVID–19 pandemic. DATES: Effective on July 8, 2020. FOR FURTHER INFORMATION CONTACT: Alberta E. Mills, Division of the Secretariat, U.S. Consumer Product Safety Commission, 4330 East West Highway, Bethesda, MD 20814; telephone: 301–504–7479; email: cpscos@cpsc.gov. The Commission is correcting an error in the direct final rule, Revisions to Safety Standard for Children’s Chairs and Stools, 16 CFR part 1232, which published in the Federal Register on April 1, 2020. 85 FR 18111. In § 1232.2, this document corrects the CPSC telephone number to 301–504–7479 and adds an email address to provide another contact option to reach the agency’s Secretary: cpsc-os@cpsc.gov. This document does not make any substantive changes to the final rule. We are making these corrections to avoid possible confusion and to provide the public several ways to contact CPSC, even during the COVID–19 pandemic. SUPPLEMENTARY INFORMATION: List of Subjects in 16 CFR Part 1232 Consumer protection, Imports, Infants and children, Law enforcement, and Toys. Accordingly, 16 CFR part 1232 is corrected by making the following correcting amendment: [FR Doc. 2020–13350 Filed 7–7–20; 8:45 am] BILLING CODE 6355–01–P PART 1232—SAFETY STANDARD FOR CHILDREN’S FOLDING CHAIRS AND STOOLS CONSUMER PRODUCT SAFETY COMMISSION 16 CFR Part 1232 1. The authority citation for part 1232 continues to read as follows: ■ [Docket No. CPSC–2015–0029] Revisions to Safety Standard for Children’s Folding Chair and Stools; Correction Consumer Product Safety Commission. ACTION: Correcting amendment. AGENCY: jbell on DSKJLSW7X2PROD with RULES § 1232.2 VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 [Amended] 2. Amend § 1232.2 by removing the telephone number ‘‘301–504–7923,’’ in the fifth sentence, and adding telephone number ‘‘301–504–7479, email: cpscos@cpsc.gov,’’ in its place. ■ On April 1, 2020, the Consumer Product Safety Commission (Commission or CPSC) issued a direct final rule revising CPSC’s mandatory standard for children’s folding chairs and stools to incorporate by reference the most recent version of the applicable ASTM standard. That document contained a CPSC telephone number that is now inactive. To ensure that the SUMMARY: Authority: Sec. 104, Pub. L. 110–314, 122 Stat. 3016 (15 U.S.C. 2056a); Sec 3, Pub. L. 112–28, 125 Stat. 273. Alberta E. Mills, Secretary, U.S. Consumer Product Safety Commission. [FR Doc. 2020–13349 Filed 7–7–20; 8:45 am] BILLING CODE 6355–01–P PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 40877 COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 4 RIN 3038–AE76 Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors: Prohibiting Exemptions on Behalf of Persons Subject to Certain Statutory Disqualifications Commodity Futures Trading Commission. ACTION: Final rules. AGENCY: The Commodity Futures Trading Commission (CFTC or Commission) is adopting as final (Final Rule) an amendment to Regulation 4.13, which contains the regulations applicable to commodity pool operators (CPOs) and commodity trading advisors. The Final Rule generally prohibits persons who have, or whose principals have, in their backgrounds any of the statutory disqualifications listed in section 8a(2) of the Commodity Exchange Act (CEA or the Act) from claiming a CPO registration exemption under Regulation 4.13. Specifically, the Final Rule will require any person filing a notice claiming such exemption to represent that, subject to limited exceptions, neither the claimant nor any of its principals has in their backgrounds a CEA section 8a(2) disqualification that would require disclosure, if the claimant sought registration with the Commission. DATES: Effective Date: The effective date for this Final Rule is September 8, 2020. Compliance Date: Compliance with the Final Rule will generally be required through the existing notice filing under Regulation 4.13(b)(1), 17 CFR 4.13(b)(1). Therefore, persons who, as of the Final Rule’s effective date, have filed that notice and are currently relying on an exemption from CPO registration under Regulation 4.13 will be required to comply with the Final Rule when those persons next file a notice of exemption for the 2021 filing cycle, i.e., on March 1, 2021. Persons claiming a Regulation 4.13 exemption for the first time on or after the Final Rule’s effective date will be required to comply with the Final Rule when the person first files a notice of exemption. FOR FURTHER INFORMATION CONTACT: Joshua Sterling, Director, at 202–418– 6056 or jsterling@cftc.gov; Amanda Lesher Olear, Deputy Director, at 202– 418–5283 or aolear@cftc.gov; Elizabeth Groover, Special Counsel, at 202–418– SUMMARY: E:\FR\FM\08JYR1.SGM 08JYR1 40878 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations 5985 or egroover@cftc.gov, Division of Swap Dealer and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background a. Statutory and Regulatory Background b. The Commission’s October 2018 Proposal, Request for Public Comment, and Recent Final Rules II. Final Rules a. Proposed Regulation 4.13(a)(6): A Proposal To Prohibit Statutory Disqualifications in CPOs Claiming Exemption Under Regulation 4.13 b. General Comments c. The Final Rule: New Regulation 4.13(b)(1)(iii) and Responses To Specific Comments i. Prohibition v. Disclosure: Clarifying the Consequences of New Regulation 4.13(b)(1)(iii) ii. Scope of the Final Rule: Which statutory disqualifications will be grounds for prohibiting a claim to a CPO exemption? iii. The Representation Requirement Under New Regulation 4.13(b)(1)(iii) and Retaining One of the Proposed Exceptions iv. Principal Classification and Treatment of RIAs v. Persons with Covered Statutory Disqualifications May Seek Individual Exemptive Letter Relief or Apply for CPO Registration vi. Timeframe for Exempt CPO Compliance With New Regulation 4.13(b)(1)(iii) III. Related Matters a. Regulatory Flexibility Act b. Paperwork Reduction Act c. Cost-Benefit Considerations i. General Costs and Benefits ii. Benefits and Costs of the Final Rule iii. Section 15(a) Considerations 1. Protection of Market Participants and the Public 2. Efficiency, Competitiveness, and Financial Integrity of Markets 3. Price Discovery 4. Sound Risk Management 5. Other Public Interest Considerations d. Anti-Trust Considerations jbell on DSKJLSW7X2PROD with RULES I. Background a. Statutory and Regulatory Background Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 1 established a statutory framework for the regulation of the swaps market to reduce risk, increase transparency, and promote market integrity within the financial system. As amended by the Dodd-Frank Act, section 1a(11) of the CEA defines 1 Public Law 111–203, 124 Stat. 1376 (2010), available at https://www.govinfo.gov/content/pkg/ PLAW-111publ203/pdf/PLAW-111publ203.pdf (last retrieved Apr. 20, 2020). VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 the term ‘‘commodity pool operator,’’ as any person 2 engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, with respect to that commodity pool, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests.3 CEA section 4m(1) generally requires each person who satisfies the CPO definition to register as such with the Commission.4 Additionally, CEA section 8a generally authorizes the Commission to register intermediaries and their associated persons, including CPOs, and also to refuse, condition, or revoke such registration.5 CEA section 8a(2) lists the offenses for which the Commission may upon notice, but without a hearing and pursuant to such rules, regulations or orders as the Commission may adopt, refuse to register, to register conditionally, or to suspend or place restrictions upon the registration of, any person, and for which the Commission may revoke the registration of any person with such a hearing as may be appropriate.6 Commission regulations require all persons applying for registration with the Commission to complete Form 7–R.7 Each natural person principal of an applicant is also required to complete Form 8–R, to submit fingerprints, and to undergo a criminal background check.8 One of the purposes of Forms 7–R and 8–R, as well as the fingerprinting requirement, is to determine whether any applicant for registration or any of its principals has in its background one of the enumerated statutory disqualifications in the CEA.9 2 Regulation 1.3 defines ‘‘person’’ as including individuals, associations, partnerships, corporations, and trusts. 17 CFR 1.3. The Commission’s regulations are found at 17 CFR Ch. I (2020). 3 7 U.S.C. 1a(11). The CEA is found at 7 U.S.C. 1, et seq. (2018). Both the Act and the Commission’s regulations are accessible through the Commission’s website, https://www.cftc.gov. 4 7 U.S.C. 6m(1). 5 7 U.S.C. 12a. 6 7 U.S.C. 12a(2). Such decisions to refuse, condition, revoke, or place restrictions on registration are subject to appeal by the affected person or registration in the manner provided in section 6(c) of the CEA. Id. 7 See 17 CFR 3.10(a)(1)(i). 8 17 CFR 3.10(a)(2). 9 See Adoption of Revised Registration Form 8– R, 82 FR 19665, 19665 (Apr. 28, 2017) (describing Form 8–R as designed to ‘‘assess the applicant’s fitness to engage in business as a derivatives professional’’). See also Firm Application (Form 7– R), pp. 12–16 (making various inquiries as to the criminal and disciplinary background of the firm and its principals), and p. 22 (requiring the PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 If a statutory disqualification enumerated in CEA section 8a(2) is disclosed or otherwise revealed through that process, such applicant is generally refused registration on that basis, and such statutorily disqualified principals will generally not be listed with the Commission. The Commission also has the authority under CEA section 8a(5) 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.10 Finally, CEA section 4(c) provides that the Commission, to promote responsible economic or financial innovation and fair competition, by rule, regulation, or order, after notice and opportunity for hearing, may exempt, among other things, any person or class of persons offering, entering into, rendering advice or rendering other services with respect to commodity interests, from any provision of the CEA.11 CEA section 4(c) provides a statutory basis for the Commission’s promulgation of the various regulatory exemptions available to CPOs. Part 4 of the Commission’s regulations governs, among other things, the operations and activities of CPOs.12 Those regulations implement the statutory authority provided to the Commission by the CEA and establish multiple registration exemptions and definitional exclusions for CPOs, as discussed above.13 Part 4 also contains regulations that establish the ongoing compliance obligations applicable to CPOs, whether registered or exempt, as well as to those persons operating in the commodity interest markets pursuant to an exclusion from that definition. These requirements pertain to the commodity pools that CPOs operate and advise, and among other things, dictate matters of customer protection, disclosure, and reporting to a CPO’s commodity pool participants. The Commission has previously promulgated, pursuant to these statutory authorities, the various exemptions from registration as a CPO that are applicant to certify that it would not be statutorily disqualified from registration under section 8a(2) or section 8a(3) of the Act), available at https:// www.nfa.futures.org/registration-membership/ templates-and-forms/Form7-R-entire.pdf (last retrieved June 1, 2020). 10 7 U.S.C. 12a(5). 11 7 U.S.C. 4(c)(1). 12 See 17 CFR pt. 4, generally. 13 See, e.g., 17 CFR 4.13 (providing multiple registration exemptions to qualifying persons meeting the CPO definition). E:\FR\FM\08JYR1.SGM 08JYR1 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations enumerated in Regulation 4.13,14 and the Commission is today utilizing them to revise the basic eligibility criteria and amend the notice filing required to claim certain exemptions set forth in that regulation.15 As discussed above, persons seeking registration with the Commission, and their principals, are generally refused registration with the Commission on the basis that they have disclosed or are found to have in their backgrounds one of the statutory disqualifications enumerated in CEA section 8a(2). Conversely, prior to this Final Rule, persons claiming an exemption from CPO registration under Regulation 4.13 were not required to disclose any previous matters that might impact their eligibility or fitness for registration, or to otherwise meet any basic conduct standards beyond the substantive conditions of their claimed exemption. The Final Rule amendment seeks to close that regulatory gap by effectively prohibiting any person who has, or whose principals have, in their backgrounds a statutory disqualification listed in CEA section 8a(2) (Covered Statutory Disqualification, or CSD) from claiming a CPO exemption under Regulation 4.13. As a result of the Final Rule, persons who have a CSD in their background will generally be foreclosed from acting as a CPO, whether in a registered or exempt capacity, subject to limited exceptions discussed further below. jbell on DSKJLSW7X2PROD with RULES b. The Commission’s October 2018 Proposal, Request for Public Comment, and Recent Final Rules In response to information received from members of the public, as well as CFTC staff’s own internal review of its regulatory regime, the Commission published for public comment in the Federal Register on October 18, 2018, a Notice of Proposed Rulemaking (NPRM, or the Proposal), proposing to adopt several regulatory amendments applicable to CPOs and commodity trading advisors.16 Commission staff 14 See 17 CFR pt. 4 (citing as statutory authority, 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 23). 15 The Commission notes that the title of the Final Rule, ‘‘Amendments to Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors,’’ is consistent with the related notice of proposed rulemaking published in 2018, notwithstanding that the amendment adopted by the Final Rule does not have any effect on commodity trading advisors. 16 Several of the proposed amendments were consistent with, or expansions of, relief that had been previously available through a staff advisory or through no-action and exemptive letters issued over the years by staff of the Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) and its predecessors. See Registration and Compliance Requirements for Commodity Pool VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 had previously become aware of a number of statutorily disqualified CPOs operating commodity pools pursuant to the registration exemption formerly available in Regulation 4.13(a)(4), which the Commission rescinded in 2012.17 Since the passage of the Dodd-Frank Act, the Commission has proposed and adopted amendments to Regulation 4.13, which have, in general, been designed to identify, accurately and in a timely manner, the exempt CPOs operating in its markets, to incorporate additional registration exemptions where appropriate, and to facilitate customer protection by requiring annual notice filings. The Commission is adopting this Final Rule because it believes that requiring persons to attest to both their and their principals’ lack of Covered Statutory Disqualifications through an additional representation in the notice filing required by Regulation 4.13(b)(1) will further enhance the customer protection of exempt pool participants, and more generally, promote the public interest. In the NPRM, the Commission included a proposed amendment to Regulation 4.13 that would have required any person claiming an exemption from CPO registration under Regulations 4.13(a)(1)–(a)(5) to represent that neither the person nor any of its principals is subject to any statutory disqualification under section 8a(2) or 8a(3) of the Act, unless such disqualification arises from a matter which was previously disclosed in connection with a previous application, if such registration was granted, or which was disclosed more than thirty days prior to the claim of this exemption (Proposed Regulation 4.13(a)(6)).18 The Commission noted its belief then that ‘‘it poses an undue risk from a customer protection standpoint for its regulations in their current form to permit statutorily disqualified persons or entities to legally operate exempt commodity pools, especially when those same persons would not be permitted to register with the Commission.’’ 19 Additionally, the Commission solicited comment on that particular proposed amendment, raising several specific questions for the Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18, 2018) (Proposal). 17 After the rescission, such CPOs would have been required to modify their operations to comply with a different exemption under Regulation 4.13, cease their operations, or receive relief from the Commission permitting them to register and continue operating. 18 Proposal, 83 FR at 52906–07; see also Proposal, 83 FR at 52927 (proposing to adopt the prohibition at paragraph (a)(6) of Regulation 4.13). 19 Proposal, 83 FR at 52906. PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 40879 public’s consideration.20 In December 2019, the Commission published final amendments (2019 Final Rules) adopting several aspects of the Proposal with the general intent of simplifying the regulatory landscape for CPOs without reducing the customer protection and other benefits provided by those regulations.21 In describing the scope of the 2019 Final Rules, the Commission stated that certain aspects of the Proposal, including Proposed Regulation 4.13(a)(6), elicited a significant number of responsive and detailed public comments, and as a result, the Commission found that those proposed amendments required further consideration before they could be finalized.22 After additional consideration of Proposed Regulation 4.13(a)(6), as well as the ideas, questions, and suggestions received in public comments, the Commission has determined it appropriate to adopt, with specific modifications from the Proposal, the amendment, such that, subject to limited exceptions, persons subject to the Covered Statutory Disqualifications (i.e., those listed in CEA section 8a(2)) will generally no longer be able to claim CPO exemptions under Regulation 4.13, absent a separate determination by the Commission (or its staff, pursuant to delegated authority) under CEA section 8a(2) or Regulation 4.12(a), as more fully described below. The following sections describe the amendment as presented in the Proposal, respond to the substantive comments received, and finally, explain the amendment in its final form and how the Commission intends it to apply in the future. II. Final Rules a. Proposed Regulation 4.13(a)(6): A Proposal To Prohibit Statutory Disqualifications in CPOs Claiming Exemption Under Regulation 4.13 In the Proposal, the Commission, for the first time, proposed that CPOs exempt under Regulation 4.13, and principals of the foregoing, who have statutory disqualifications in their backgrounds be subject to conduct 20 Proposal, 83 FR at 52916 (raising questions regarding the scope of the proposed prohibition and its potential impact on currently exempt CPOs, among several other issues). 21 Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors: Registered Investment Companies, Business Development Companies, and Definition of Reporting Person, 84 FR 67343 (Dec. 10, 2019); and Registration and Compliance Requirements for Commodity Pool Operators (CPOs) and Commodity Trading Advisors: Family Offices and Exempt CPOs, 84 FR 67355 (Dec. 10, 2019) (2019 Final Rules). 22 2019 Final Rules, 84 FR at 67357. E:\FR\FM\08JYR1.SGM 08JYR1 40880 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations standards similar to those of their registered counterparts. The Commission has now determined to exercise its statutory authority to amend the Commission’s CPO exemption regime, such that both registered and exempt CPOs will be required to represent that they and their respective principals are not subject to the Covered Statutory Disqualifications listed in the CEA. The Commission continues to believe that ‘‘preserving the prohibition on statutory disqualifications . . . and applying it to exemptions under § 4.13 would provide a substantial customer protection benefit by prohibiting statutorily disqualified persons from operating and soliciting participants for investment in exempt commodity pools.’’ 23 Proposed Regulation 4.13(a)(6) would have required any person who desires to claim an exemption under paragraphs (a)(1), (a)(2), (a)(3), (a)(4), or (a)(5) of the section to represent that neither the person nor any of its principals is subject to any statutory disqualification under section 8a(2) or 8a(3) of the Act, unless such disqualification arises from a matter which was previously disclosed in connection with a previous application, if such registration was granted, or which was disclosed more than thirty days prior to the claim of this exemption.24 The Commission did not propose to require that representation from CPOs of Family Offices, which it concurrently proposed to exempt from CPO registration, because ‘‘such CPOs would be prohibited from soliciting non-family members/clients to participate in their pool(s), necessarily limiting their contact with prospective participants drawn from the general public, and as a result, reducing the Commission’s customer protection concerns in that context.’’ 25 The Commission stated its preliminary belief that this proposed approach ‘‘addresses customer protection concerns regarding statutory disqualifications, while preserving flexibility in Commission regulations applicable to CPOs.’’ 26 23 Proposal, 83 FR at 52916. 83 FR at 52927. This language is nearly identical to the representation required by paragraph C.4. of Staff Advisory 18–96. See Offshore Commodity Pools Relief for Certain Registered CPOs From Rules 4.21, 4.22, and 4.23(a)(10) and (a)(11) and From the Location of Books and Records Requirement of Rule 4.23, available at https://www.cftc.gov/sites/default/files/ tm/advisory18-96.htm (last visited Apr. 22, 2020). 25 Proposal, 83 FR at 52906. The Commission formally adopted a CPO exemption for qualifying Family Offices in the 2019 Final Rules. See 2019 Final Rules, 84 FR at 67358, 67368. 26 Proposal, 83 FR at 52906. jbell on DSKJLSW7X2PROD with RULES 24 Proposal, VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 The Commission further explained that Proposed Regulation 4.13(a)(6) would ‘‘provide additional customer protection because statutorily disqualified, unregisterable persons would no longer be able to claim the CPO exemptions under § [§ ] 4.13 (a)(1) through (a)(5).’’ 27 With respect to its future application, the Commission stated its intent that CPOs currently claiming an exemption under Regulation 4.13 would comply, ‘‘as they renew their claims on an annual basis— i.e., existing claimants would be required to represent that neither they nor their principals are subject to statutory disqualifications under CEA sections 8a(2) or 8a(3), when they annually affirm their continued reliance on a § 4.13 exemption next year.’’ 28 In contrast, ‘‘CPOs filing new claims of a § 4.13 exemption, however, would be required to comply with this prohibition upon filing, if and when the amendments are adopted as proposed, and become effective.’’ 29 The Commission requested comment generally on all aspects of the Proposal, and also solicited comment through targeted questions about each of the proposed amendments, including Proposed Regulation 4.13(a)(6).30 In particular, the Commission requested comment on ‘‘the impact of adopting this provision on industry participants and currently exempt CPOs, and also, on what, if any, other statutory disqualifications should be permissible for exempt CPOs and their principals.’’ 31 The Commission also asked the following questions: (1) What are the concerns and benefits associated with the expansion of the prohibition on statutory disqualifications to the CPO registration exemptions set forth in § [§ ] 4.13(a)(1), (a)(2), (a)(3), and (a)(5), or proposed to be set forth in § 4.13(a)(4)? (2) Do the limited exceptions that would permit certain statutory disqualifications successfully address any unintended consequences of adding the prohibition to § 4.13, while still providing a base level of customer protection by preventing statutorily disqualified individuals from legally operating exempt commodity pools? (3) Generally, how should the Commission handle the implementation of the statutory disqualification prohibition? (4) Specifically, how should the prohibition apply to current claimants PO 00000 27 Proposal, 83 FR at 52914. 83 FR at 52907. 29 Proposal, 83 FR at 52907. 30 Proposal, 83 FR at 52916. 31 Proposal, 83 FR at 52916. 28 Proposal, Frm 00014 Fmt 4700 Sfmt 4700 under § 4.13? How much time should the Commission allow for filing updated exemption claims subject to the prohibition? (5) How much time should the Commission allow for an exempt CPO to replace statutorily disqualified principals, in order to maintain eligibility for a § 4.13 exemption? 32 The discussion below outlines the public comments received in response to the Proposal, focusing on the substantive comments received regarding Proposed Regulation 4.13(a)(6). The Commission will also explain how it has taken those comments into consideration, via specific adjustments to the Commission’s approach in adopting the new statutory disqualification representation as a condition of receiving exemptive relief under Regulation 4.13. b. General Comments The Commission received 28 individual comment letters responsive to the NPRM: Six from legal and market professional groups; 13 from law firms; seven from individual family offices; one from a government-sponsored enterprise (GSE) actively involved in the housing industry; and one from the National Futures Association (NFA), a registered futures association,33 who through delegation by the Commission, assists Commission staff in administering its CPO regulatory program.34 Additionally, Commission 32 Proposal, 83 FR at 52916. 7 U.S.C. 21. 34 Comments were submitted by the following entities: Alscott, Inc.* (Dec. 7, 2018); Alternative Investment Management Association (AIMA) (Letter 1: Dec. 17, 2018, and Letter 2: Oct. 7, 2019); Buchanan, Ingersoll, and Rooney, PC * (Dec. 12, 2018); Commodore Management Company * (Dec. 12, 2018); Dechert, LLP (Dechert) (Dec. 17, 2018); Freddie Mac (Dec. 17, 2018); Fried, Frank, Harris, Shriver, & Jacobson, LLP (Fried Frank) (Dec. 17, 2018); Investment Adviser Association (IAA) (Dec. 17, 2018); Kramer, Levin, Naftalis, & Frankel, LLP * (Dec. 17, 2018); LBCW Investments * (Dec. 5, 2018); Managed Funds Association (MFA) (Dec. 14, 2018); Marshall Street Capital * (Dec. 13, 2018); McDermott, Will, & Emery, LLP * (Dec. 17, 2018); McLaughlin & Stern, LLP * (Dec. 5, 2018); Moreland Management Company * (Dec. 13, 2018); Morgan, Lewis, & Bockius, LLP * (Dec. 18, 2018); NFA (Dec. 17, 2018); New York City Bar Association, the Committee on Futures and Derivatives (NYC Bar Derivatives Committee) (Jan. 4, 2019); Norton, Rose, Fulbright US, LLP * (Dec. 17, 2018); Perkins Coie, LLP :* (Dec. 17, 2018); the Private Investor Coalition, Inc. (PIC) (Nov. 28, 2018); Ridama Capital * (Dec. 13, 2018); Schiff Hardin, LLP (two offices) * (Dec. 13 and 17, 2018); the Securities Industry and Financial Management Association Asset Management Group (SIFMA AMG) (Letter 1: Dec. 17, 2018, and Letter 2: Sept. 13, 2019); Vorpal, LLC * (Dec. 17, 2018); Willkie, Farr, and Gallagher, LLP (Willkie) (Dec. 11, 2018); and Wilmer Hale, LLP (Wilmer Hale) (Dec. 7, 2018). Those entities marked with an ‘‘ *’’ submitted substantively 33 See E:\FR\FM\08JYR1.SGM 08JYR1 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES staff participated in multiple ex parte meetings concerning the Proposal.35 Seven of the comment letters provided comment specifically on Proposed Regulation 4.13(a)(6). Commenters generally understood the customer protection goals of the Commission, and many supported the amendment; other commenters opposed it and raised several questions regarding its implementation. Dechert, for instance, opposed Proposed Regulation 4.13(a)(6), stating that the Commission should not extend to exempt CPOs a prohibition generally applicable only to registered CPOs.36 Dechert further commented that the proposed amendment would impose one of the most costly aspects of registration, that of principal classification and screening, on CPOs that are intended to be exempt from registration.37 SIFMA AMG additionally opposed Proposed Regulation 4.13(a)(6) and expressed the need for the Commission’s consumer protection goals to be balanced appropriately with compliance burdens and costs.38 Commenters also compared the process surrounding Proposed Regulation 4.13(a)(6) to the Commission’s registration processes currently outlined in part 3 of its regulations. Dechert and other commenters requested more detail on how the proposed amendment would operate and how exceptions would be considered or accepted.39 Although the majority of comments indicated that their submitters understood the Commission’s intention in proposing the prohibition on statutory disqualifications, Dechert expressed confusion as to whether Proposed Regulation 4.13(a)(6) was intended to require disclosure of such disqualifications, or whether it was identical, brief comments, specifically supporting the detailed comments and suggested edits submitted to the Commission by PIC. 35 See ‘‘Comments for Proposed Rule 83 FR 52902,’’ available at https://comments.cftc.gov/ PublicComments/CommentList.aspx?id=2925 (last retrieved May 4, 2020). 36 Dechert, at 7 (arguing that the Commission has generally determined it does not need to apply as close regulatory oversight to exempt CPOs as it does for registered CPOs, and that it is inconsistent with that conclusion for the Commission to apply this prohibition to exempt CPOs). 37 Dechert, at 7–8. Dechert emphasized the difficulty in determining who is and is not a principal of a CPO, pointing out that some types of principal do not involve a ‘‘bright line test,’’ but rather a ‘‘facts-and-circumstances analysis.’’ Id. 38 SIFMA AMG, at 17. SIFMA AMG also requested that the Commission consider performing a study to determine if the prohibition against statutory disqualifications was actually needed in the population of exempt CPOs. Id. 39 Dechert, at 11–12; see also IAA, at 11, and AIMA, at 9–10. VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 actually designed to bar disqualified CPOs from relying on an exemption entirely.40 Some commenters cited a lack of clarity on process and other significant uncertainties associated with the proposed amendment, and a couple of commenters requested that the Commission reconsider and/or repropose it.41 Alternatively, Dechert requested that the Commission develop processes regarding: (a) The identification and screening of principals; (b) disputing a determination by CFTC or NFA to bar a person from claiming exemption under Regulation 4.13; (c) the ‘‘disclosure exception;’’ and (d) the winding down of operations for affected CPOs in a manner that minimizes market disruption and any disadvantages to pool participants.42 MFA shared this concern, requesting clarity on the timing of disclosure for CPOs already exempt under a Regulation 4.13 exemption and pointing out the lack of procedure specified in the Proposal.43 MFA further suggested that the Commission consider adopting regulations that would establish a clear process for currently exempt CPOs to update their disclosures of statutory disqualifications to the Commission or NFA, including the disclosure of violations of requirements of other regulators.44 Several commenters were concerned about the scope of Proposed Regulation 4.13(a)(6), including that offenses enumerated in CEA section 8a(3) would be considered statutory disqualifications.45 AIMA, for instance, explained that the disqualifications listed under that statutory paragraph, in particular, provide the Commission grounds only for potentially disallowing registration, rather than an automatic bar to registration.46 Consequently, AIMA requested that any required representation include only offenses under CEA section 8a(2), or that the Commission exclude from consideration offenses listed in CEA section 8a(3)(B) and generally limit the incorporation of offenses in CEA section 8a(3) to those that are no more than ten years old.47 MFA similarly pointed out that even at 9. at 12; SIFMA AMG, at 17. 42 Dechert, at 11. IAA also requested that the Commission develop a hearing process for denying persons the CPO exemptions, based on a statutory prohibition. IAA, at 11. See also AIMA, at 9. 43 MFA, at 4. 44 MFA, at 4. 45 See, e.g., Dechert, at 8 (stating that the statutory disqualifications impacting a person’s eligibility for exemption are very broad). 46 AIMA, at 10. 47 AIMA, at 10. PO 00000 40 Dechert, 41 Dechert, Frm 00015 Fmt 4700 Sfmt 4700 40881 recordkeeping violations would need to be disclosed pursuant to CEA section 8a(3)(A); MFA also questioned the breadth and meaning of CEA section 8a(3)(M) disqualifications, known only in the statute as ‘‘other good cause.’’ 48 Like AIMA, IAA and SIFMA AMG similarly requested that the representation cover only offenses listed under CEA section 8a(2).49 SIFMA AMG additionally requested clarification from the Commission that a person would not be ‘‘statutorily disqualified’’ pursuant to a violation under CEA section 8a(3), unless and until the person receives a hearing and the Commission has made the filing with respect to the conduct at issue required by that statutory provision.50 Dechert requested that the Commission further limit the scope of Proposed Regulation 4.13(a)(6), such that the provision would only effectively prohibit statutory disqualifications involving instances of fraud and similar offenses involving commodities, securities, and other financial instruments, like CEA section 8a(2)(D).51 Additionally, Dechert requested that the Commission also consider: (a) Applying Proposed Regulation 4.13(a)(6) to only the person itself claiming the CPO exemption, rather than both the claimant and principals, and (b) grandfathering exempt CPOs currently in existence, in conjunction with the proposed amendment’s adoption.52 IAA also requested that the Commission not require compliance with the proposed amendment from registered investment advisers (RIAs) because those entities are already subject to the statutory disqualification regime under the Investment Advisers Act of 1940 (IA Act), which, the IAA argued, Proposed Regulation 4.13(a)(6) would duplicate.53 SIFMA AMG also supported a carve-out for RIAs, explaining that RIAs are subject to a robust statutory disqualification regime under the IA Act, are required to disclose disciplinary events on their 48 MFA, at 4. See also SIFMA AMG, at 19 (arguing that offenses under CEA section 8a(3) are much less serious, more remote in time, or may be difficult to verify at the time a claim for exemption is filed); AIMA, at 10 (stating that including CEA section 8a(3) would be too broad, as it lists as disqualifying: Misdemeanor offenses regardless of age, regulatory offenses routinely cleared by NFA in administering the Commission’s registration process for CPOs, and the ‘‘amorphous ‘other good cause’’’). 49 IAA, at 11; SIFMA AMG, at 19. 50 SIFMA AMG, at 20. 51 Dechert, at 11 (stating that, as the prohibition was proposed, any violations of the CEA ‘‘could require disclosure of a Statutory Disqualification’’ and may prohibit a person from claiming a CPO exemption in Regulation 4.13). 52 Dechert, at 11. 53 IAA, at 10. E:\FR\FM\08JYR1.SGM 08JYR1 40882 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES Forms ADV, and are also subject to fiduciary duties to their clients.54 NFA generally supported Proposed Regulation 4.13(a)(6) and agreed with the Commission’s underlying rationale.55 NFA provided comments specifically regarding the two exceptions the Commission proposed: (a) If the statutory disqualification was previously disclosed in relation to a registration application, which was later granted, or (b) if the statutory disqualification was disclosed within the previous 30 days.56 NFA stated that the exception for disqualifications disclosed within 30 days would not be practical, and was further inappropriate to apply to CPOs exempt from registration under Regulation 4.13, because such persons, in contrast to registered CPOs, generally have no ongoing obligation to update Commission registration forms if they should become inaccurate.57 Thus, NFA stated, there is no mechanism requiring this population of exempt CPOs to update the Commission or NFA as to new or recent statutory disqualifications to which they or their principals may be subject.58 As a result, NFA suggested that the Commission either abandon this exception entirely, or limit its application to persons that are already registered with the Commission and extend the amount of time.59 SIFMA AMG likewise raised questions about how currently exempt CPOs that are not registered with the Commission would update the Commission or NFA as to new statutory disqualifications, suggesting that the Commission accept updates by RIAs to their Forms ADV as substituted compliance for such disclosures.60 Still other commenters expressed concern over the timing of compliance 54 SIFMA AMG, at 18. SIFMA AMG stated that accepting the SEC’s statutory disqualification and disclosure regime for RIAs as substituted compliance for purposes of relying on the CPO exemptions under Regulation 4.13 would eliminate unnecessary costs without sacrificing the Commission’s customer protection goals, and would also count as harmonization of SEC and CFTC regulations. Id. 55 NFA, at 2. 56 NFA, at 2 (stating that the source of the second exception stems from the ongoing obligation of registered CPOs claiming Staff Advisory 18–96 and/ or exemptive relief under Regulation 4.7 to update their registration forms whenever something occurs to make them inaccurate, like the recent commission of a statutory disqualification by the registrant or one of its principals). 57 NFA, at 2. 58 NFA, at 2. 59 NFA, at 3 (explaining that 30 days is simply not enough time to evaluate new statutory disqualifications and/or determine if a registration action or ineligibility determination for exemption is necessary as a result, but failing to specify an alternative amount of time that would be sufficient). 60 SIFMA AMG, at 19–20. VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 with Proposed Regulation 4.13(a)(6). AIMA requested that the Commission allow at least 12 months for persons with such statutory disqualifications to come into compliance, so that the issue of whether those disqualifications should be a bar to claiming a CPO registration exemption could be determined.61 Similarly, Willkie requested that the Commission provide sufficient time for industry to absorb a significant rule change like this one, suggested that the effectiveness of the provision coincide with the annual update filings typically due in the first quarter of each year, and requested further that the Commission generally clarify the process around the proposed prohibition.62 IAA also requested that the Commission delay compliance with the proposed prohibition to allow CPOs to adjust their operations, in case of disqualified principals in their entities.63 c. The Final Rule: New Regulation 4.13(b)(1)(iii) and Responses to Specific Comments After carefully considering Proposed Regulation 4.13(a)(6) as well as all of the public comments received, the Commission has determined it to be an appropriate exercise of its authorities under the CEA to finalize and adopt the proposed amendment with substantive adjustments responsive to those comments. The Commission will additionally provide guidance herein regarding the Final Rule’s implementation. The Commission believes that, in conjunction with the substantive and procedural clarifications and the compliance schedule discussed below, the Final Rule will facilitate compliance by exempt CPOs with new Regulation 4.13(b)(1)(iii), while also minimizing costs associated with implementing the amendment.64 i. Prohibition v. Disclosure: Clarifying the Consequences of New Regulation 4.13(b)(1)(iii) The Final Rule’s amendment to Regulation 4.13 prohibits a person who has, or whose principals have, in their backgrounds a Covered Statutory Disqualification from claiming a CPO at 10. at 8. 63 IAA, at 12. 64 Further, the Commission has determined that moving forward with the Final Rule, rather than reproposing this amendment as requested by a few commenters, is an appropriate and acceptable course of action, consistent with the Commission’s regulatory policies and goals, particularly given the substantive adjustments made in direct response to public comments and the provision of additional compliance time and guidance. PO 00000 61 AIMA, 62 Willkie, Frm 00016 Fmt 4700 Sfmt 4700 exemption thereunder, as opposed to requiring the disclosure of such disqualifications. As the Commission has previously stated, there is an undue risk posed to potential customers in the commodity interest markets, when a person can act as a CPO, including soliciting participants and accepting capital contributions in the name of its operated pool, without meeting the basic conduct standards set forth in the CEA. To address that risk, the Commission wishes to eliminate this inconsistent treatment between exempt and registered CPOs (and the principals thereof), in which certain persons may, by claiming an exemption from CPO registration, avoid the CEA’s basic conduct requirements established for all persons registering as intermediaries with the Commission. The Commission understands that several commenters were generally opposed to prohibiting statutorily disqualified persons from claiming an exemption from CPO registration under Regulation 4.13.65 After further consideration of the Proposal, the comments, and regulatory policy goals, the Commission believes that, for the purpose of ensuring its customer protection goals are met, it is important that all persons falling within the CPO definition not be subject to the most serious statutory disqualifications, prior to operating or soliciting participants for participation in their pools. The Commission finds this regulatory outcome of the Final Rule appropriate because, as discussed further below, persons claiming an exemption under Regulation 4.13 are exempt from the various regulatory obligations resulting from operating in a registered capacity. Dechert commented that with respect to exempt CPOs, ‘‘the CFTC has generally determined it does not need to apply as close regulatory oversight . . . as it does for registered CPOs.’’ 66 The Commission does not consider the Final Rule to be inconsistent with that statement. The Commission notes that, notwithstanding the Final Rule’s amendment to Regulation 4.13, exempt CPOs will continue to be exempt from registration, and as a result, from the compliance obligations applicable to CPOs registered or required to be registered, which are primarily set forth in part 4 of the Commission’s regulations. Each determination to exempt certain persons from CPO registration is inextricably linked to the eligibility criteria of the regulatory exemption being claimed. The Commission has previously concluded 65 See, e.g., Dechert, at 7; SIFMA AMG, at 17. at 7. 66 Dechert, E:\FR\FM\08JYR1.SGM 08JYR1 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations that such eligible persons generally implicate fewer of the Commission’s regulatory and oversight interests, which supports the provision of a regulatory exemption from registration under those circumstances.67 The Commission therefore believes it appropriate to recognize the unique regulatory status of exempt CPOs, but also to ensure that the Final Rule’s amendment applies as intended and in a logical fashion. Dechert further noted that, as an alternative to Proposed Regulation 4.13(a)(6) and to CPO registration generally, the Commission has multiple authorities it might employ and rely upon with respect to CPOs exempt under Regulation 4.13, citing the antifraud authority in CEA section 4o, as well as the recordkeeping and special call authorities in Regulation 4.13(c)(1).68 Although the Commission agrees that exempt CPOs are subject to these authorities, which the Commission may employ on an asneeded basis, none of them is equivalent to or establishes a basic conduct standard applicable to CPOs exempt under Regulation 4.13. Moreover, each of the cited provisions is most useful to the Commission where a discrete issue has been identified that requires the Commission to act; in contrast, the Commission intends new Regulation 4.13(b)(1)(iii) to apply prophylactically, providing a foundational level of customer protection to exempt pool participants. Therefore, the Commission believes that this approach to remedying the fundamental customer protection risk discussed above is appropriate, notwithstanding the logistical and regulatory concerns asserted by commenters regarding the implementation of new Regulation 4.13(b)(1)(iii).69 jbell on DSKJLSW7X2PROD with RULES ii. Scope of the Final Rule: Which statutory disqualifications will be grounds for prohibiting a claim to a CPO exemption? After consideration of the comments received regarding the statutory disqualifications that would be grounds for prohibiting a person from seeking to claim a CPO exemption, the Commission has determined not to include those violations enumerated in 67 See, e.g., 17 CFR 4.13(a)(3)(ii) (requiring CPOs claiming this exemption to comply with one of two de minimis thresholds for commodity interest trading in their exempt pool(s)). 68 Dechert, at 7. 69 As discussed in further detail below, the Final Rule will address those concerns by removing the proposed reference to the disqualifications in CEA section 8a(3) in the required representation and also by providing a meaningful period of time for compliance by currently exempt CPOs. VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 CEA section 8a(3) in the Covered Statutory Disqualifications. The Commission finds persuasive commenters’ arguments that the offenses listed in CEA section 8a(3), in the context of Regulation 4.13, warrant different treatment than those offenses listed in CEA section 8a(2).70 The Commission notes that due to their characteristics, CEA section 8a(3) offenses (unlike those enumerated in CEA section 8a(2)) serve as a bar to registration with the Commission, only after a hearing is conducted to formally find both that the disqualification has occurred, and that the disqualification should prevent a person from registering with the Commission.71 The Commission further believes that limiting the Covered Statutory Disqualifications that would result in a person being unable to rely upon Regulation 4.13 is consistent with the Commission’s longstanding view that persons claiming an exemption from CPO registration generally implicate fewer of its regulatory concerns than those persons registered or required to be registered as CPOs. The Commission notes further that Regulation 4.13 was designed to provide registration relief to CPOs with relatively limited activities in the commodity interest markets. Specifically, exempt CPOs are subject to substantive limitations impacting their exempt pools’ commodity interest footprint or trading strategy, the types of pool participants they may solicit for investment in those exempt pools, as well as the exempt pools’ overall size and marketing activities. The terms of the regulatory exemptions consequently 70 See CEA section 8a(3), 7 U.S.C. 12a(3) (enumerating various disqualifications including: Any violations of CEA or Commission regulations; any violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the IA Act, the Investment Company Act of 1940, among other federal statutes, as well as any similar state statutes and any related regulations; any failure to supervise that results in persons subject to such supervision violating the CEA or Commission regulations; willfully making materially false statements or omissions of fact in Commission reports, applications, disqualification proceedings, and other Commission proceedings; being subject to a denial, suspension, or expulsion order from a registered entity, registered futures association, or other self-regulatory organization; having a principal who has been or could be refused registration; and where there is other good cause). 71 This process should be contrasted with that of CEA section 8a(2), the offenses of which may serve as the Commission’s justification, upon notice, but without a hearing to refuse to register, to register conditionally, or to suspend or place restrictions upon the registration, of any person. 7 U.S.C. 12a(2). For persons already registered with the Commission, offenses under CEA section 8a(2) may also be cited by the Commission during such a hearing as may be appropriate to revoke the registration of any person. Id. PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 40883 cause the operations and activities of these exempt CPOs to be more narrowly circumscribed than those of registered CPOs. The Commission believes, as a result, that new Regulation 4.13(b)(1)(iii) should be tailored to the most serious offenses, which can trigger a statutory disqualification without a prior hearing, i.e., those listed in CEA section 8a(2). Commenters also expressed confusion regarding the procedural implications of including the statutory disqualifications in CEA section 8a(3), particularly the hearing requirement, and how they might be incorporated into a new prohibition process under Regulation 4.13. IAA specifically requested that the Commission adopt a ‘‘reasonable person standard,’’ with respect to a person’s knowledge of statutory disqualifications, similar to Rule 506(d) of Regulation D, as adopted by the Securities and Exchange Commission (SEC).72 The Commission believes, however, that limiting the representation in new Regulation 4.13(b)(1)(iii) to those offenses listed in CEA section 8a(2) will generally allow for effective implementation and will adequately address the Commission’s customer protection concerns. By focusing only on the offenses listed in CEA section 8a(2), the Commission is removing from the representation’s purview those disqualifications that do not necessarily serve as a general bar to registration because they require a formal procedural hearing before they can impact a person’s registration status with the Commission. By narrowing the scope of Covered Statutory Disqualifications in this manner, the Commission is also recognizing its historical position that the commodity interest activities of exempt CPOs generally implicate fewer of the Commission’s regulatory concerns. As a result, the Commission believes that new Regulation 4.13(b)(1)(iii) will appropriately bar persons subject to the CSDs from claiming exemption under Regulation 4.13, without the adoption of additional procedural requirements and without the adoption of a ‘‘reasonable person’’ standard, which may be difficult to apply in this circumstance. As such, the Commission believes that the Final Rule will still ensure that persons with the most egregious and recent offenses are unable to solicit and accept funds for participations in commodity pools, even if they are 72 IAA, at 11 (requesting for disqualifications not to apply ‘‘if the entity did not know, and, in the exercise of reasonable care, could not have known that a disqualification exists,’’ and citing 17 CFR 230.506(d)(2)(ii)–(iv) as example). E:\FR\FM\08JYR1.SGM 08JYR1 40884 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations exempt, thereby strengthening overall confidence in pooled investment vehicles engaged in limited commodity interest trading. jbell on DSKJLSW7X2PROD with RULES iii. The Representation Requirement Under New Regulation 4.13(b)(1)(iii) and Retaining One of the Proposed Exceptions The Final Rule will amend the notice requirement in Regulation 4.13 to require a representation that neither the person nor any of its principals has in their backgrounds a Covered Statutory Disqualification, subject to one limited exception discussed below.73 The Commission intends for this representation to be a threshold requirement for any persons claiming an exemption subject to the notice requirement in Regulation 4.13. If a person cannot truthfully make the required representation regarding the person and its principals, then that person will not qualify for an exemption from CPO registration. As discussed in detail above, the representation in its final form has been narrowed in scope to the CSDs, i.e., those offenses listed in CEA section 8a(2). Additionally, consistent with the Proposal, Family Offices relying on the new exemption in Regulation 4.13(a)(6), which are not subject to the notice filing requirement, will therefore also not be required to make the new representation. The Commission concludes that this is an appropriate regulatory outcome because Family Offices, by definition and by the substantive requirements of that exemption, only serve ‘‘family clients,’’ and thus, generally pose little customer protection risk to the investing public. Proposed Regulation 4.13(a)(6) contained two exceptions: Unless such disqualification arises from a matter which was previously disclosed in connection with a previous application, if such registration was granted, or which was disclosed more than thirty days prior to the claim of this exemption.74 As mentioned above, NFA commented that the second exception ‘‘appears premised on the idea that the person claiming the exemption would be under an obligation, and have a method, to report an existing statutory disqualification to the Commission or NFA,’’ and therefore, if the Commission or NFA did not act on it within thirty days, then the statutory disqualification would have no effect on the person.75 NFA further pointed out that ‘‘unlike 73 See infra new Regulation 4.13(b)(1)(iii). 74 Proposal, 83 FR at 52927. As discussed above, this language is derived from other relief containing similar prohibitions. See supra pt. II.A. 75 NFA, at 2. VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 entities claiming relief under Advisory 18–96 and Regulation 4.7, which are registered and under an affirmative obligation to notify the Commission and NFA by updating their [registration forms] if they become subject to a statutory disqualification after they become registered, the vast majority of persons seeking an exemption under Regulation 4.13 are not [so] registered.’’ 76 The Commission agrees with NFA’s description of how the second proposed exception was intended to apply, and also with NFA’s assertion that many persons claiming a Regulation 4.13 exemption are not registered with the Commission in another capacity, meaning they have neither filed, nor have they any ongoing obligation to update, registration forms with the Commission or NFA. After considering these comments, the Commission is therefore not adopting the second proposed exception. As a result, the remaining exception in new Regulation 4.13(b)(1)(iii) adopted by this Final Rule will apply to the Covered Statutory Disqualifications that have been previously disclosed by the person or its principal in prior registration applications that were granted. The Commission believes that this result maintains the strength of the amendment, while permitting flexibility for circumstances where the Commission has affirmatively determined that a CSD in a person’s background should not impede that person’s ability to register. iv. Principal Classification and Treatment of RIAs The Commission also received other substantive and procedural questions in response to Proposed Regulation 4.13(a)(6). Several commenters, for instance, claimed that it would be very burdensome for persons claiming exemption under Regulation 4.13 to identify, classify, and examine the principals within their business entities, and that requiring them to do so was effectively subjecting exempt CPOs to the most significant costs of intermediary registration with the Commission.77 Regulation 3.1(a) defines the term ‘‘principal,’’ by providing examples of who would be considered principals in a variety of legal entity structures, e.g., sole proprietorship, limited liability company, limited partnership, or corporation.78 76 NFA, at 2 (suggesting therefore that the Commission ‘‘either eliminate this exception or limit it to persons that are currently registered’’). 77 See, e.g., Dechert, at 7–8. 78 17 CFR 3.1(a). Additionally, Regulation 4.10(e)(1) also uses that ‘‘principal’’ definition for PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 Consistently though, the ‘‘principal’’ definition is, generally speaking, limited to those individuals and entities within the CPO who have either management authority and responsibilities, or significant power derived from stock ownership or capital contributions. Principals usually include, therefore, managing members, company presidents, corporate executives, chief compliance officers, and any legal person who is a ten percent or more shareholder of the person.79 Dechert explained that ‘‘certain aspects of the [Commission’s principal] definition . . . do not create a bright-line test, but rather require a facts-and-circumstances analysis.’’ 80 Dechert further asserted that ‘‘the principal classification and screening process creates the majority of the work necessary to register CPOs and CTAs, and is costly,’’ requested that the Commission provide guidance ‘‘as to how an exempt CPO could conduct such processes,’’ and also asked that the Commission ‘‘establish[ ] a process for disagreement by the CFTC or NFA with an exempt CPO’s determination.’’ 81 The Commission believes that preventing persons who have one or more statutorily disqualified principals from operating as exempt CPOs will generally increase the customer protection provided to participants in exempt pools, particularly because of the decision-making authority such principals may exercise regarding the operations of an exempt CPO and its exempt pool(s). The Commission also notes that several hundred CPOs currently maintain registration simultaneously with one or more CPO purposes of the Commission’s part 4 regulations. 17 CFR 4.10(e)(1). NFA Registration Rule 101(t) is similar in design, and defines principal, in pertinent part, as ‘‘a proprietor of a sole proprietorship; a general partner of a partnership; a director, president, chief executive officer, chief financial officer or a person in charge of a business unit, division or function subject to regulation by the Commission of a corporation, limited liability company, or limited liability partnership; a manager, managing member, or member vested with management authority for a limited liability company or limited liability partnership; or a chief compliance officer.’’ NFA Registration Rule 101(t), available at https://www.nfa.futures.org/rulebook/ rules.aspx?RuleID=RULE%20101&Section=8 (last retrieved Apr. 7, 2020). 79 17 CFR 3.1(a)(1)–(a)(3). Regulation 3.1(a)(4) additionally defines as a principal any person who employs a trust, proxy, contract, or other device to avoid becoming a ten percent or more shareholder for the purpose of evading being deemed a principal of the entity. 17 CFR 3.1(a)(4). 80 Dechert, at 8 (citing ‘‘the head of business unit, division or function subject to CFTC regulation’’ as an example). Regulation 3.1(a)(1) includes in the ‘‘principal’’ definition, regardless of the entity’s legal structure, any person in charge of a principal business unit, division or function subject to regulation by the Commission. 17 CFR 3.1(a)(1). 81 Dechert, at 8 and 11. E:\FR\FM\08JYR1.SGM 08JYR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations exemptions, due to the nature of the various commodity pools they operate. The Commission believes that such exempt CPOs may be slightly advantaged because they will likely spend less time identifying and classifying principals than persons or entities who have no prior contact with commodity interest markets or the Commission, or who only operate pools pursuant to one or more exemptions from registration. Registered CPOs, who may be also claiming a CPO exemption, will have already gone through those processes for purposes of applying for registration with respect to their nonexempt commodity pools. Further, such CPOs would also be much less likely to have to remove and replace principals with Covered Statutory Disqualifications. In the event such an otherwise registered CPO or a principal thereof did have a CSD, it would likely fall under the exception discussed above for CSDs identified by the person and/or principal in a prior approved application for registration, in light of their existing status as a registrant and the obligation to disclose such offenses as they occur. With respect to persons claiming a CPO exemption under Regulation 4.13 for the first time, and persons who are exempt CPOs and not also registered with the Commission, the Commission understands that such persons will possibly be required to devote time and resources to determining who in their organization is a principal and whether any of them has a Covered Statutory Disqualification in their background. Some classes of principals under the Commission’s regulations may involve a factual analysis to determine status. The Commission continues to believe, however, that most persons will be able to determine their principals relatively easily, due to the standard forms of business organization typically used by exempt CPOs and the detailed definitions provided by the Commission in its regulations.82 In particular, Regulation 3.1 details the roles, titles, ownership, and responsibilities that can give rise to a person being a ‘‘principal’’ of a registrant, which the Commission believes reduces the challenges associated with identifying principals within an organization such as an exempt CPO. As discussed above, the Commission also believes that some persons claiming Regulation 4.13 exemptions may have already been required to identify their principals as part of their registration with the Commission as a CPO with respect to the operation of one or more other pools. The Commission believes that the substantive changes made in this Final Rule address the Commission’s concerns about providing some customer protection to participants in pools operated by an exempt CPO, while permitting flexibility and facilitating compliance with Regulation 4.13 through additional compliance time. Therefore, the Commission is adopting new Regulation 4.13(b)(1)(iii), such that the required representation covers both persons claiming the exemption and their principal(s). The Commission also received several requests for the Commission to exclude RIAs from the proposed amendment, on the basis that such RIAs are already subject to robust conduct requirements in the IA Act, which, commenters argue, the new representation would only serve to duplicate.83 Though the Commission agrees with commenters that RIAs are subject to conduct requirements under the IA Act, the Commission is declining to exclude RIAs from the scope of new Regulation 4.13(b)(1)(iii). IA Act section 203(e) covers censures, denials, or suspensions of registration for investment advisers and provides the SEC the authority to censure, limit, suspend, or revoke the registration of any investment adviser, if, after notice and opportunity for a hearing, certain statutory disqualifications of the adviser or persons associated with it are proven and such adverse action is in the public interest.84 The Commission finds that the statutory disqualification regime of the IA Act differs materially from the corresponding provisions in the CEA. Of particular relevance to the Final Rule, the IA Act does not specify any statutory disqualifications that bar investment advisers from registration in a manner similar to the mechanism in CEA section 8a(2), i.e., without a procedural hearing or order. The Commission notes that preserving its independent authority to determine which persons should be permitted to operate commodity pools in its markets subject to an exemption is consistent with the Commission’s independent assessment of RIAs seeking registration with the Commission regarding their commodity interest activities. Under those circumstances, notwithstanding the RIA’s registration with the SEC, the Commission assesses the registration application of the RIA under the terms of the CEA and the Commission’s regulations promulgated thereunder, which reflect the unique regulatory concerns associated with intermediaries 83 See, 82 17 CFR 3.1(a). VerDate Sep<11>2014 15:59 Jul 07, 2020 84 IA Jkt 250001 PO 00000 e.g., IAA, at 10; SIFMA AMG, at 18. Act section 203(e), 15 U.S.C. 80b–3(e). Frm 00019 Fmt 4700 Sfmt 4700 40885 in the commodity interest markets. Although the Commission recognizes that most RIAs would not present any cause for reservation in permitting them to operate in the commodity interest markets, the Commission believes that retaining the ability to engage in an independent assessment regarding an RIA’s fitness to act as an exempt CPO best serves its customer protection interests. Therefore, the Commission is not adopting the suggestion to exclude RIAs from the scope of new Regulation 4.13(b)(1)(iii).85 v. Persons With Covered Statutory Disqualifications May Seek Individual Exemptive Letter Relief or Apply for CPO Registration As explained herein, the Commission believes that the adoption of this representation regarding the Covered Statutory Disqualifications for persons, and their principals, claiming exemption under Regulation 4.13 is generally necessary to protect the participants in exempt commodity pools; however, the Commission recognizes that there may be facts and circumstances, pursuant to which permitting such disqualified CPOs and principals to operate exempt commodity pools may not be inconsistent with the Commission’s customer protection concerns. The Commission notes its authority under Regulation 4.12(a) to ‘‘exempt any person or any class or classes of persons from any provision of this part 4, if it finds that the exemption is not contrary to the public interest and the purposes of the provisions from which exemption is sought.’’ 86 The Commission has, by rule, delegated that authority to the Director of DSIO.87 Pursuant to that delegated authority and Regulation 140.99, those persons who have a Covered Statutory Disqualification, but nonetheless believe that it should not negatively affect their ability to claim a CPO exemption, may seek, on an individual or firm-by-firm basis, exemptive letter relief from the 85 The Commission notes, however, that the majority of RIAs, based on their registration status with the SEC, should be able to easily comply with the representation regarding Covered Statutory Disqualifications required by amended Regulation 4.13. 86 17 CFR 4.12(a). 87 17 CFR 140.93 (delegating the authority in Regulation 4.12(a) to the DSIO Director, further facilitating the issuance of exemptive letter relief with respect to provisions in 17 CFR part 4). As with all Commission delegations to staff generally: (1) The relevant Division Director (in this case, DSIO) may submit such a request regarding the delegated matter to the Commission for its consideration; and (2) the Commission may, at its election, exercise the delegated authority to consider such a request for relief. See 17 CFR 140.93(b)–(c). E:\FR\FM\08JYR1.SGM 08JYR1 40886 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES representation adopted by this Final Rule by presenting the facts and legal rationale demonstrating that such exemptive letter relief would be consistent with the public interest and not contrary to the specific purposes of Regulation 4.13(b)(1), i.e., providing some customer protection to exempt pool participants.88 The Commission notes that it expects the granting of such requests to be infrequent and supported by a strong factual and legal basis, so as to avoid undermining the purposes of the Final Rule. The Commission further advises that, at any time, even if a CPO is unsuccessful in its request for such exemptive letter relief, persons with CSDs may submit an application for CPO registration, in which any and all statutory disqualifications would be disclosed as required by Forms 7–R and 8–R, and reviewed through the existing registration process.89 Utilizing this existing process allows for the detailed analysis of each disqualification, and all of the facts related thereto, specifically with respect to the propriety of the Commission permitting such person to register as a CPO, and/or to list a principal with any such disqualifications in its background. This assessment further includes determining whether any conditions or restrictions might sufficiently mitigate the customer protection risks posed by the statutorily disqualified person or principals.90 Should the determination be made to permit the registration, such persons would be subject to the Commission’s ongoing oversight regarding their commodity pool operations, and subject to all statutory and regulatory obligations applicable to registered CPOs and their principals. The Commission believes that these existing procedures for seeking individualized 88 17 CFR 140.99(a)(1) (defining an exemptive letter as ‘‘a written grant of relief issued by the staff of a Division of the Commission from the applicability of a specific provision of the Act or of a rule, regulation or order issued thereunder by the Commission’’). Such exemptive letters are typically issued subject to conditions determined by Commission staff to be necessary or appropriate, and further, these letters are subject to Commission review prior to issuance. 89 See, e.g., 17 CFR 3.10. 90 7 U.S.C. 12a(2) (providing that the Commission has the authority to condition, restrict, or suspend the registration of any person under the Act). See also 17 CFR 3.60 (establishing the Commission’s regulatory procedure to deny, condition, suspend, revoke, or place restrictions upon registration pursuant to sections 8a(2), 8a(3), and 8a(4) of the Act). The Commission has delegated the implementation of its registration authority to NFA. Performance of Registration Functions by National Futures Association, 49 FR 39593 (Oct. 9, 1984) (delegating by Commission Order the registration function to NFA with respect to futures commission merchants, CPOs, commodity trading advisors, and the associated persons thereof). VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 exemptive letter relief under part 4 of the Commission’s regulations, as well as the registration process, present appropriate methods for considering alternative outcomes, where appropriate, from the prohibition of Covered Statutory Disqualifications in exempt CPOs adopted herein. vi. Timeframe for Exempt CPO Compliance With New Regulation 4.13(b)(1)(iii) The Commission also received and considered multiple comments regarding the exact timing of the effective and compliance dates regarding Proposed Regulation 4.13(a)(6). As stated above, the Commission anticipates that the changes in approach employed in this Final Rule should reduce the analysis required in order to comply. Nonetheless, the Commission believes it appropriate to facilitate persons claiming an exemption under Regulation 4.13 in transitioning and adjusting to the application of new Regulation 4.13(b)(1)(iii). Although the Final Rule will be effective within 60 days of publication, the Commission has determined not to mandate compliance with the additional representation required by new Regulation 4.13(b)(1)(iii) for CPOs currently relying on an exemption in Regulation 4.13, as of that effective date. The Commission is establishing for these particular CPOs a compliance date of March 1, 2021, which coincides with the deadline for persons filing annual reaffirmation notices under Regulation 4.13(b)(1) in the upcoming 2021 filing cycle. Although the Commission is declining to ‘‘grandfather’’ existing exempt CPOs with respect to the Final Rule, because it believes doing so may dilute any positive effect on customer protection the amendment would have, persons currently claiming an exemption from CPO registration may continue to do so, while identifying, classifying, and checking the backgrounds of the claiming person and its principals. The additional compliance period will allow currently exempt CPOs to continue operating their exempt pools, while they conduct the necessary inquiries regarding the claimant and principals (if they have not already been required to do so due to being otherwise registered). On the other hand, persons claiming a Regulation 4.13 exemption for the first time on or after the Final Rule’s effective date will not be provided additional compliance time. Publication of the Final Rule serves as notice to such persons that, to successfully claim an exemption from CPO registration, PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 they will be thereafter required to identify their principals, conduct background checks, and represent that neither the person nor its principals are subject to the Covered Statutory Disqualifications, unless such offenses were disclosed in a registration application already approved by the Commission or NFA. The Commission believes this distinction between existing and new claimants under Regulation 4.13 is reasonable because persons establishing a new exempt CPO generally would have the opportunity to identify and check principals as part of the start-up process for the CPO and pool business, and prior to operating an exempt pool for the first time. III. Related Matters a. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) requires that Federal agencies, in promulgating regulations, consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities, and if so, to provide a regulatory flexibility analysis regarding the economic impact on those entities.91 Each Federal agency is required to conduct an initial and final regulatory flexibility analysis for each rule of general applicability for which the agency issues a general notice of proposed rulemaking. The regulatory amendments adopted herein affect only persons registered or required to be registered as CPOs and persons claiming exemptions from registration as such. The Commission previously has determined that a CPO is a small entity for purposes of the RFA, if it meets the criteria for an exemption from registration under Regulation 4.13(a)(2).92 Such CPOs will generally continue to qualify for the exemption from registration, though the Commission believes that such exempt CPOs claiming Regulation 4.13(a)(2) may incur some costs as a result of the Final Rule. Like most other exempt CPOs, they will also be required to identify their principals and affirm that neither they nor the claiming entity 91 5 U.S.C. 601, et seq. Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618, 18619–20 (Apr. 30, 1982). Regulation 4.13(a)(2) exempts a person from registration as a CPO when: (1) None of the pools operated by that person has more than 15 participants at any time, and (2) when excluding certain sources of funding, the total gross capital contributions the person receives for units of participation in all of the pools it operates or intends to operate do not, in the aggregate, exceed $400,000. See 17 CFR 4.13(a)(2). As of April 20, 2020, there are approximately 313 entities claiming this exemption. 92 Policy E:\FR\FM\08JYR1.SGM 08JYR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations have in their backgrounds a Covered Statutory Disqualification. The Commission notes that this requirement will apply equally to all persons filing a notice of exemption under Regulation 4.13, after the effective date of the Final Rule, and that all CPOs currently claiming an exemption, including those that are small entities for RFA purposes, are subject to the guidance herein, requiring them to comply with new Regulation 4.13(b)(1)(iii) by March 1, 2021. The Commission did not receive any comments on its analysis of the application of the RFA to the Proposal or Proposed Regulation 4.13(a)(6). The costs of new Regulation 4.13(b)(1)(iii), which are expected to vary depending on the size and complexity of the CPO in question, will generally be incurred once by exempt CPOs: Either at the compliance date required by the Final Rule, or at the formation of a new exempt CPO after the Final Rule is effective. The Commission believes further that, as small entities which are typically less complex organizationally, CPOs exempt under Regulation 4.13(a)(2) may potentially have an easier time identifying, classifying, and verifying the backgrounds of their principals. As such, the Commission believes that such small CPOs will incur, in general, lower costs, especially when compared to other types of exempt CPOs that are more likely to employ complex business structures or have more principals to identify and review.93 If an exempt CPO or its principal has a Covered Statutory Disqualification in its background, the Commission recognizes that such person could be significantly impacted, as the person would therefore likely be required to replace the disqualified principal to continue operating, or under some circumstances, may be required to even wind up and cease operating their pool(s) as an exempt CPO. Throughout this Final Rule, the Commission has evaluated and taken into consideration the amendment’s impact on small exempt CPOs. Though the Commission lacks sufficient data to predict exactly how many exempt CPOs may ultimately be required to cease pool operations by virtue of the Final Rule, the Commission expects very few CPOs exempt under Regulation 4.13(a)(2) will be required to cease operations as a result. The current number of exempt CPOs that are also small entities is relatively low (approximately 313), and 93 Persons claiming an exemption under Regulation 4.13(a)(3), for example, include persons operating complex pooled investment vehicle structures that typically have at least several principals operating the CPO and pools. VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 the costs of new Regulation 4.13(b)(1)(iii) are generally limited in occurrence, as discussed above. Finally, the Commission is also providing guidance in the Final Rule that provides additional time for certain affected persons to comply and incur costs resulting from this amendment, as an effort to mitigate disruption to these businesses. Therefore, the Commission concludes that the Final Rule does 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 regulation adopted by the Commission in the Final Rule will not have a significant economic impact on a substantial number of small entities. b. Paperwork Reduction Act 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.94 Under the PRA, 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). The Commission believes that as adopted, the Final Rule results in a collection of information within the meaning of the PRA, as discussed below. As such, the publication of a PRA notice soliciting comment regarding the Commission’s estimated burden calculation for new Regulation 4.13(b)(1)(iii) will be required. As discussed in the Proposal, the Commission’s proposed regulations would have impacted or amended two collections of information for which the Commission has previously received control numbers from OMB: Collections 3038–0005 and 3038–0023.95 In the 2019 Final Rules, the Commission adopted amendments to 17 CFR part 4, submitted those final amendments for OMB approval, and amended those information collections to reflect the regulatory changes adopted by that final rulemaking.96 Significantly, because Proposed Regulation 4.13(a)(6) was initially proposed as a substantive requirement to be applicable to any person who desires to claim an exemption under paragraphs (a)(1), (a)(2), (a)(3), (a)(4), or (a)(5) in this section, the Commission never 44 U.S.C. 3501, et seq. 83 FR at 52918. 96 See 2019 Final Rules, 84 FR at 67348; 84 FR at 67353. PO 00000 94 See considered the proposed amendment in the context of the PRA or those collections of information. In the Proposal, the Commission invited the public and other Federal agencies to comment on any aspect of the information collection requirements discussed therein.97 The Commission did not receive any such comments. As discussed above, the Final Rule adopts new Regulation 4.13(b)(1)(iii), which requires a person filing a notice of exemption under Regulation 4.13(b)(1) to represent that neither the claimant nor any of its principals has in their backgrounds a Covered Statutory Disqualification that would require disclosure, if the claimant sought registration with the Commission. Because Proposed Regulation 4.13(a)(6) did not require any additional information to be provided as part of the notice filed to claim an exemption under Regulation 4.13, the Commission did not account in the Proposal for any PRA burden associated with an additional representation in the notice filing required under Regulation 4.13(b)(1). Therefore, concurrent with the Final Rule, the Commission is updating the estimated burden associated with Regulation 4.13(b)(1), as amended by this Final Rule, and seeking public comment on those estimates in a PRA notice, separately published in this Federal Register. c. Cost-Benefit Considerations Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA.98 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the CEA section 15(a) considerations. i. General Costs and Benefits The baseline for the Commission’s consideration of the costs and benefits of the Final Rule is the regulatory status quo, as determined by the CEA and the Commission’s existing regulations. The Commission has endeavored to assess the costs and benefits of the Final Rule 95 Proposal, Frm 00021 Fmt 4700 Sfmt 4700 40887 97 Proposal, 98 7 E:\FR\FM\08JYR1.SGM 83 FR at 52920. U.S.C. 19(a). 08JYR1 40888 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES in quantitative terms wherever possible. Where estimation or quantification is not feasible, however, the Commission has provided its assessment in qualitative terms. The Commission notes that the consideration of costs and benefits below is based on the understanding that the markets function internationally, with many transactions involving U.S. firms taking place across international boundaries; with some Commission registrants being organized outside of the United States; with leading industry members commonly following substantially similar business practices wherever located. Therefore, the below discussion of costs and benefits refers to the effects of the Final Rule on all activity covered by the amended regulations. Consequently, the Commission notes that some entities affected by the Final Rule are located outside of the United States. ii. Brief Overview of the Final Rule The Final Rule adds new paragraph (b)(1)(iii) to the annual notice filing requirement in Regulation 4.13(b)(1), which will, once effective, require all persons filing a notice of exemption under Regulation 4.13 to represent that neither they nor their principals have in their backgrounds a Covered Statutory Disqualification, unless such disqualification arises from a matter which was disclosed in connection with a previous application for registration, if such registration was granted. The Commission intends for CPOs claiming a notice of exemption as of the Final Rule’s effective date to first make this representation in the 2021 reaffirmation of the exemption, i.e., March 1, 2021. The Commission believes that the adjustments to the Final Rule, discussed in detail above, as well as its guidance establishing an extended compliance period for currently exempt CPOs, address the majority of public comments received in response to Proposed Regulation 4.13(a)(6). The Commission concludes therefore that these efforts appropriately balance the Commission’s regulatory interests with the costs of compliance to affected persons. New Regulation 4.13(b)(1)(iii) will effectively prohibit Covered Statutory Disqualifications, i.e., those listed in CEA section 8a(2), in persons filing a notice of exemption under Regulation 4.13, as well as in their principals, in a more tailored manner than the proposed amendment. As a result, the Commission believes the Final Rule addresses the Commission’s customer protection concerns with respect to the exempt CPO population, while still reducing the regulatory VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 burdens for exempt CPOs and their commodity pools. ii. Benefits and Costs of the Final Rule The Commission believes that prohibiting persons who are statutorily disqualified under CEA section 8a(2), or who employ principals so disqualified, from claiming exemptions under Regulation 4.13 will result in several benefits. As discussed in further detail above and in the Proposal, the Commission has concerns that ‘‘pool participants may be exposed to risk posed by regulations permitting the operation of an offered [exempt] pool by a person who, generally, would not otherwise be permitted to register with the Commission.’’ 99 The Commission has noted that, ‘‘even if the activities of a CPO do not rise to a level warranting Commission oversight through registration, a prospective participant should be able to be confident that a collective investment vehicle using commodity interests is not operated by a person,’’ who, for example, has previously been the subject of an injunction relating to fraud or embezzlement.100 Prior to the Final Rule, persons claiming an exemption from CPO registration under Regulation 4.13 generally were not required to meet any basic conduct standards, in contrast to persons registered or required to register as CPOs with the Commission.101 The Final Rule remedies that regulatory gap by requiring that a person filing a notice of exemption from CPO registration under Regulation 4.13 meets substantively similar basic conduct standards as a person registered or required to be registered as a CPO. The Commission expects that correcting this regulatory inconsistency will increase overall investor confidence by setting a standard applicable to the vast majority of exempt CPOs operating pooled investment vehicles in the commodity interest markets. The result of the Final Rule will be that persons and/or principals who have a Covered Statutory Disqualification not previously disclosed in a prior approved application for registration will generally be prohibited from operating or soliciting the public for investment in exempt pools, or from serving as a principal of an exempt CPO. Because the Final Rule will require such CPOs to assess themselves and their principals for any CEA section Proposal, 83 FR at 52921. 100 Proposal, 83 FR at 52921–22 (citing 7 U.S.C. 12a(2)(C)(ii) as an example of a disqualification proposed to be prohibited by this amendment). 101 See supra pt. II.c.i for additional historical and legal discussion. PO 00000 99 See Frm 00022 Fmt 4700 Sfmt 4700 8a(2) disqualifications, the Commission believes that once it is fully implemented, new Regulation 4.13(b)(1)(iii) may provide reasonable assurance that persons subject to the Covered Statutory Disqualifications are not soliciting exempt pool participants and/or managing their capital via exempt pools. Moreover, the Commission expects that both prospective and actual participants in pools operated by exempt CPOs will experience enhanced customer protection by removing statutorily disqualified CPOs and/or principals thereof from the commodity interest markets. The Commission believes further that those participants will likely, as a result, also experience improved overall confidence in the exempt commodity pool space. The Commission understands that the Final Rule could also result in potentially substantial costs to persons filing a notice of exemption under Regulation 4.13(b)(1). In the Proposal, the Commission further identified and described ‘‘costs associated with either divesting from commodity interests held within a collective investment vehicle, or in completely winding up a commodity pool’s operations,’’ that could result from Proposed Regulation 4.13(a)(6).102 In addition to these ‘‘windup’’ costs, the Commission understands that principal identification and classification processes will likely result in costs to each affected exempt CPO, and that those costs will vary based on the overall structure of the CPO, the number of principals it employs, and other circumstances unique to its pool operations. Although these potential costs were a point of significant concern for several commenters, and the Commission specifically solicited comment in the Proposal on the ‘‘impact of adopting [Proposed Regulation 4.13(a)(6)] on industry participants and currently exempt CPOs,’’ commenters did not provide specific data or estimates quantifying the actual costs of compliance resulting from the proposed amendment.103 Despite the lack of information from commenters regarding potential or actual costs to affected persons, the Commission nonetheless considered those public comments, and strove to balance those costs with its regulatory and policy goals in a way that benefits market participants, customers, and the 102 Proposal, 83 FR at 52923 (though the Commission noted that it ‘‘lacks sufficient data to determine how many CPOs might be required to cease operating commodity pools pursuant to the exemptions . . . due to the presence of statutorily disqualified [persons or] principals’’). 103 Proposal, 83 FR at 52916. E:\FR\FM\08JYR1.SGM 08JYR1 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations general public interest. By narrowing the scope of the Covered Statutory Disqualifications in new Regulation 4.13(b)(1)(iii) to those listed in CEA section 8a(2), the Commission believes that the Final Rule strikes an appropriate regulatory balance between customer protection concerns and increased regulatory requirements. This adjustment means the required representation will target the most serious offenses warranting the statutory disqualifications listed in the CEA within the general population of exempt CPOs, including their principals. Moreover, the Final Rule further reduces procedural confusion by limiting the CSDs to those disqualifications that would serve as a bar to registration with the Commission, absent an additional hearing or proceeding. Finally, by providing guidance herein that extends the compliance period for persons currently relying upon a claim of exemption under Regulation 4.13(b)(1), the Commission wishes to facilitate compliance with the Final Rule. Specifically, the Commission intends this guidance to mitigate the risk of business interruption by providing affected persons with additional time to assess themselves and their principals, and to identify and address any CSDs that are found. The Commission is employing this tailored and gradual approach for the Final Rule and its implementation to, among other things, generally moderate costs to affected persons caused by new Regulation 4.13(b)(1)(iii). jbell on DSKJLSW7X2PROD with RULES iii. Section 15(a) Considerations 1. Protection of Market Participants and the Public The Commission considered whether the Final Rule will have any detrimental effect on the customer protections of the Commission’s regulatory regime and has concluded that the Final Rule will generally have a positive effect on the protection of market participants and the public. Through new Regulation 4.13(b)(1)(iii), the Commission is remedying an inconsistency, in which a person who may be prohibited by the CEA from conducting activities requiring registration could nonetheless engage in those activities by claiming a CPO registration exemption instead. The Final Rule will ensure that persons filing a notice of exemption under Regulation 4.13(b)(1), as amended, and persons registered or required to be registered as CPOs with the Commission will be treated similarly—in either instance, all such persons must be able to represent that they and their VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 principals are, at a minimum, not disqualified under CEA section 8a(2), prior to soliciting the public for investment in, or otherwise operating a commodity pool. The Commission believes that basic conduct standards applicable to CPOs, regardless of registration status, will improve customer protection within the Commission’s CPO regulatory program. 2. Efficiency, Competitiveness, and Financial Integrity of Markets Section 15(a)(2)(B) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of efficiency, competitiveness, and financial integrity considerations. The Commission believes that the Final Rule may positively impact the efficiency, competitiveness, and financial integrity of the commodity interest markets. The Final Rule will require all persons filing a notice under amended Regulation 4.13(b)(1) to represent that neither they nor their principals have in their backgrounds a Covered Statutory Disqualification. To the extent that disqualified persons are prevented from being an exempt CPO or from serving as a principal of an exempt CPO, as a result of new Regulation 4.13(b)(1)(iii), the Commission expects such disqualified persons (and principals) would either exit the commodity interest markets, or at least, discontinue operating in the exempt commodity pool space. Therefore, because it will ultimately cause the removal of entities, persons, and principals disqualified under CEA section 8a(2) from the exempt commodity pool space, the Commission believes that the Final Rule could have a positive impact on the efficiency, competitiveness, and financial integrity of the commodity interest markets overall. 3. Price Discovery Section 15(a)(2)(C) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of price discovery considerations. For the reasons noted above, the Commission believes that the Final Rule generally results in limited, discrete changes to regulatory processes and filings that will not have a significant impact on price discovery. 4. Sound Risk Management Section 15(a)(2)(D) of the CEA requires the Commission to evaluate a regulation in light of sound risk management practices. The Commission believes that the Final Rule will not have a significant impact on the practice of sound risk management because the manner in which various CPOs, pooled PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 40889 investment vehicles, and their respective principals organize, register, or claim an exemption from such registration has only a small influence on how such market participants manage their risks overall. 5. Other Public Interest Considerations Section 15(a)(2)(E) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of other public interest considerations. The Commission did not identify any additional public interest considerations not already discussed above. d. Anti-Trust Considerations Section 15(b) of the CEA requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA, in issuing any order or adopting any Commission rule or regulation (including any exemption under CEA section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of the CEA.104 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission requested comment on whether the Proposal implicated any other specific public interest to be protected by the antitrust laws and received no comments addressing this issue. The Commission has considered the Final Rule to determine whether it is anticompetitive and has identified no anticompetitive effects. Because the Commission has determined the Final Rule is not anticompetitive and has no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the CEA. List of Subjects in 17 CFR Part 4 Advertising, Brokers, Commodity futures, Commodity pool operators, Commodity trading advisors, Consumer protection, Reporting and recordkeeping requirements. For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR part 4 as follows: 104 7 E:\FR\FM\08JYR1.SGM U.S.C. 19(b). 08JYR1 40890 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations Appendix 2—Supporting Statement of Chairman Heath P. Tarbert PART 4—COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS 1. The authority citation for part 4 continues to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 23. 2. Amend § 4.13 by: a. Revising paragraph (b)(1)(ii); and ■ b. Redesignating paragraph (b)(1)(iii) as (b)(1)(iv), and adding new paragraph (b)(1)(iii). The addition and revision read as follows: ■ ■ § 4.13 Exemption from registration as a commodity pool operator. * * * * * (b)(1) * * * (ii) Specify the paragraph number pursuant to which the person is filing the notice (i.e., § 4.13(a)(1), (2), (3), or (5)) and represent that the pool will be operated in accordance with the criteria of that paragraph; (iii) Represent that neither the person nor any of its principals has in its background a statutory disqualification that would require disclosure under section 8a(2) of the Act if such person sought registration, unless such disqualification arises from a matter which was disclosed in connection with a previous application for registration, where such registration was granted; and * * * * * Issued in Washington, DC, on June 5, 2020, by the Commission. Robert Sidman, Deputy Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. jbell on DSKJLSW7X2PROD with RULES Appendices to Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors: Prohibiting Exemptions Under Regulation 4.13 on Behalf of Persons Subject to Certain Statutory Disqualifications—Commission Voting Summary, Chairman’s Statement, and Commissioners’ Statements Appendix 1—Commission Voting Summary On this matter, Chairman Tarbert and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative. VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 As Robert Louis Stevenson aptly put it, ‘‘Everybody, sooner or later, sits down to a banquet of consequences.’’ 1 Today we are focused on the consequences of bad acts that result in ‘‘statutory disqualification’’ under the Commodity Exchange Act (‘‘CEA’’). These acts include the most serious types of financial crimes, such as embezzlement, theft, extortion, fraud, misappropriation, and bribery. Once an individual is statutorily disqualified, the CFTC may deny or revoke his or her registration. The same is true for corporate entities. It stands to reason that someone who has been statutorily disqualified—and thus has no right to register with the CFTC—would be precluded from managing other people’s money and positions in the derivatives markets the CFTC regulates. But currently, this is not exactly the case. As it turns out, a statutorily disqualified person who wishes to operate a fund that trades derivatives may simply claim one of the exemptions from registration as a commodity pool operator (‘‘CPO’’) under CFTC Rule 4.13. Although each of these exemptions has a number of conditions, the absence of statutory disqualification is not currently among them. Today’s final rule closes this loophole for bad actors. Under our rule as amended, a CPO claiming a registration exemption would be required to certify that neither the CPO nor any of its principals has in its background conduct that would result in automatic statutory disqualification under the CEA. I believe this rule will enhance customer protections and public confidence in the integrity of the derivatives markets by ensuring that bad actors cannot gain access to the funds of innocent, third-party investors simply by filing an exemption claim.2 1 While this is the popular rendering of Stevenson’s quote, it appears to be apocryphal. Stevenson apparently used the phrase ‘‘game of consequences.’’ See Spurious Quotations, The Robert Louis Stevenson Archive, https://www.robertlouis-stevenson.org/richard-dury-archive/ nonquotes.htm. Regardless whether Stevenson referred to a banquet or a game, his point was the same: Everyone must face the consequences of his or her actions. That is true for life generally, and for the derivatives markets specifically. 2 The Commission has adopted a registration exemption for CPOs that meet the definition of ‘‘family office’’ under the Securities and Exchange Commission’s regulations governing investment advisers. 84 FR 67,368 (Dec. 10, 2019). Section 409 of the Dodd-Frank Act excluded family offices from the definition of ‘‘investment adviser’’ subject to the Investment Advisers Act. Given the clear legislative intent to remove family offices from regulation, it would be inappropriate for the CFTC to exert its own oversight over such offices. As Congress recognized in the Dodd-Frank Act, regulatory oversight over family offices would be a wasteful use of taxpayer funds, as such offices are owned and controlled by a single wealthy family. Given their affluence and familial ties, these investors generally neither desire nor need investor protections designed for the retail public at large. Consistent with this approach, today’s prohibition on statutory disqualification does not apply to CPOs that are family offices. That said, we cannot allow bad actors to operate a family office in a way that adversely affects the market as a whole—for PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 In so doing, we also strike a balance between bad acts that warrant automatic disqualification and other behavior that requires the opportunity for a hearing before the subject is disqualified. Because the CEA itself makes this kind of distinction in the context of registration, the Commission believes that lesser offenses 3 warrant different treatment than recent and more serious offenses in the context of registration exemptions. Thus, today’s prohibition on statutory disqualification does not include offenses for which the CEA itself requires a hearing prior to disqualification. I am comfortable with this exclusion, both because it is consistent with legislative intent and because CPOs relying on a Rule 4.13 registration exemption generally do not manage the money and derivatives positions of the retail public at large. Rather, these CPOs are limited by the terms of their exemption to small pools of select participants, pools limited to sophisticated investors, pools with de minimis derivatives positions, and the like.4 In addition to protecting customers from bad actors and enhancing the integrity of the derivatives profession, this rule also furthers the CFTC’s strategic goal of ‘‘being tough on those who break the rules.’’ 5 No longer will financial wrongdoers be able to use registration exemptions as a loophole to avoid the full consequences of their actions. For these reasons, I am pleased we are acting to finalize this rule. Finally, it is worth remembering that sound regulation of the U.S. derivatives markets stems from a robust federal framework that the CFTC primarily administers, complemented and strengthened by an equally robust regime of selfregulation. A central pillar of that regime is the National Futures Association (‘‘NFA’’), the main self-regulatory organization for CPOs. NFA’s strong support for this rule is just one of countless actions that demonstrate their steadfast commitment to the integrity of the derivatives community.6 example, by engaging in manipulative or deceptive transactions through the family office. To that end, I have asked the Division of Swap Dealer and Intermediary Oversight to conduct a special call to determine how many family office managers would be prohibited from claiming the exemption if they were covered by this rule. 3 This includes offenses that are less recent (e.g., felony convictions that are more than ten years old) or are less relevant to a person’s fitness to handle customer funds (e.g., convictions for felonies that do not involve financial wrongdoing). See, e.g., CEA Section 8a(3)(D). 4 The rule also excludes statutory disqualifications that were previously disclosed to the Commission in a registration application, if the Commission chose to permit registration notwithstanding the disqualification. This exclusion is relevant because a CPO may be registered with the CFTC with respect to certain pools that it manages and claim a registration exemption with respect to other pools. 5 See Draft CFTC 2020–2024 Strategic Plan, 85 FR 29,935 (May 19, 2020), https://www.govinfo.gov/ content/pkg/FR-2020-05-19/pdf/2020-10676.pdf. 6 See NFA Comment Letter on Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors (Dec. 17, 2018). E:\FR\FM\08JYR1.SGM 08JYR1 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations Appendix 3—Supporting Statement of Commissioner Brian Quintenz I am pleased to support today’s final rule amending the procedures for certain commodity pool operators (CPOs) to claim an exemption from registration.1 It is sound policy to prevent a firm from claiming a registration exemption if the entity or its principals are ‘‘statutorily disqualified’’ under section 8a(2) of the Commodity Exchange Act, when the same disqualification would prevent them from registering with the Commission. The disqualification applicable under today’s amendment covers some of the most serious offenses under the Act, including fraud. While an exempt CPO is more limited in its activities than a registered CPO, for example, no pool has more than 15 participants 2 or the CPO’s commodity interest activity must remain below certain initial margin and notional amount thresholds,3 an exempt CPO still manages money for the public. I therefore agree with today’s amendment that the firm should be held to one of the most fundamental customer protection standards under the Commodity Exchange Act. I thank the Commission’s staff for their work on this rulemaking, in particular for their thoughtful responses to issues that had been raised by commenters. Appendix 4—Concurring Statement of Commissioner Rostin Behnam jbell on DSKJLSW7X2PROD with RULES I support today’s adoption of a final rule (the ‘‘Final Rule’’) requiring any person that files with the CFTC a notice claiming an exemption from registration as a commodity pool operator (‘‘CPO’’) under Regulation 4.13 of the Commodity Exchange Act (‘‘CEA’’ or the ‘‘Act’’) to affirmatively represent that neither the claimant nor any of the CPO’s principals has in its background any statutory disqualifications listed in section 8a(2) of the CEA, which are required to be disclosed as a part of a CPO registration application with the Commission. Beyond closing a regulatory gap that allows certain persons that would generally fail to meet the CEA’s basic conduct requirements to nevertheless claim an exemption from CPO registration, the Final Rule invigorates the Commission’s stance as an active regulator with respect to the most diverse registration category within our jurisdiction. As I have said before, CPOs (and commodity trading advisors or ‘‘CTAs’’) are often identifiable by variable organizational structures, investment focus, participation, and solicitation, as well as complexity in how they are regulated within our authority.1 These factors demand that when we act, we do so with a laser focus on customer protections. I am pleased that 1 Amended Commission regulation 4.13(b)(1)(iii) (17 CFR 4.13(b)(1)(iii)). 2 Commission regulation 4.13(a)(2). 3 Commission regulation 4.13(a)(3). 1 Rostin Behnam, Statement of Concurrence by CFTC Commissioner Rostin Behnam: Amendments to Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors, Nov. 25, 2019, https:// www.cftc.gov/PressRoom/SpeechesTestimony/ behnamstatement112519. VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 this Final Rule aggressively advances customer protection in a tangible way. I believe it is fully within our statutory duty to provide, at the very least, a foundational level of security on which customers, regardless of their experience and aptitude, can rely when parsing and considering what can seem like an endless amount of important information and fine print. Today’s Final Rule provides that footing for exempt commodity pool participants by generally prohibiting persons who have, or whose principals have, in their backgrounds any of the statutory disqualifications listed in CEA section 8a(2)—which are generally egregious, recent in time, and based upon a previous finding or order by the Commission, a court, or another governmental body—from soliciting and accepting funds for participation in commodity pools, even if they are exempt. I am pleased that the Final Rule and its preamble address the significant number of responsive public comments, especially those seeking clarity on process and procedure. Last fall, when the Commission finalized several amendments to Part 4 of the regulations addressing various registration and compliance requirements for CPOs and CTAs, I commended, among other things, its decision to not move forward at that time on the part of the proposal that led to today’s Final Rule.2 That decision has led to a more thoughtful consideration of the comments received, the practicalities of the proposal, and the Commission’s need to fulfill its regulatory goals while remaining true to the Act. To that end, I appreciate that the Final Rule preserves the Commission’s direct and delegated authorities under CEA section 8a(2) and Regulation 4.12(a) to ultimately evaluate fitness for registration—or exemption, as the facts may dictate. Appendix 5—Statement of Commissioner Dan M. Berkovitz I support today’s final rule to prohibit commodity pool operators (‘‘CPOs’’) or their principals who are subject to statutory disqualification under Section 8a(2) from claiming an exemption from registration. This rule narrows a loophole in our CPO registration framework and strengthens the Commission’s regulations to protect customers and market integrity. Section 8a(2) of the Commodity Exchange Act (‘‘CEA’’) lists the offenses for which the Commission may refuse, suspend, or condition registration without a prior hearing. These offenses include major violations of a number of laws and regulations governing financial markets, including felony convictions for embezzlement, theft, extortion, and fraud.1 Today’s rule will ensure that persons who are restricted under Section 8a(2) from operating in registered activities cannot escape such restrictions by engaging in activities that are exempt from registration. Although to a large degree this rule closes an existing loophole in our regulations, it perpetuates a glaring deficiency by failing to hold CPOs of family offices or their PO 00000 2 Id. 1 CEA Section 8a(2)(D)(iii). Frm 00025 Fmt 4700 Sfmt 4700 40891 principals to the same standards of conduct as other exempt CPOs. The risks to market integrity presented by this omission are compounded by another recent rulemaking exempting CPOs of family offices from a requirement to notify the Commission if they claim an exemption from registration.2 Thus, under this set of new rules completed today, CPOs of family offices are exempt from registration, exempt from providing notice that they are using an exemption, and exempt from the statutory disqualifications that generally apply to all other CPOs. This triad of exemptions for CPOs of family offices leaves the Commission uniquely unaware of the activities and integrity of these entities. As I noted in my dissent on the final rule that exempted CPOs of family offices from notifying the Commission that they are claiming an exemption, family offices today are not ‘‘mom and pop’’ operations that invest small sums in commodities, but rather large and sophisticated asset management enterprises established by and for megamillionaires and billionaires.3 The Commission justified these exemptions on the grounds that related family members in these ‘‘sophisticated’’ entities do not need the customer protections that the CFTC otherwise applies to CPO activities. However, regardless of whether this assessment is accurate, customer protection is just one of several objectives of the Commission’s CPO regulations. The regulation of CPOs facilitates the Commission’s oversight of the derivative markets, management of systemic risks, and mandate to ensure safe trading practices.4 There is no basis to conclude that the activities of large family office CPOs pose less of a concern in these areas than the activities of other exempt or non-exempt CPOs. The regulatory principle here is straightforward. We are not only responsible for monitoring market participants that pose risk to customers, but also those who pose risk to the integrity of our markets. Individuals who commit felonies or other serious violations affecting the integrity of financial markets should not be permitted to trade in CFTC markets, particularly without at least some supervision and oversight. If a 2 Final Rule, Registration and Compliance Requirements for Commodity Pool Operators (CPOs) and Commodity Trading Advisors: Family Offices and Exempt CPOs, 84 FR 67355 (Dec. 10, 2019). 3 Dissenting Statement of Commissioner Dan M. Berkovitz: Rulemaking to Provide Exemptive Relief for Family Office CPOs: Customer Protection Should be More Important than Relief for Billionaires, available at https://www.cftc.gov/ PressRoom/SpeechesTestimony/ berkovitzstatement112519. 4 See, e.g., Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 FR 11252, 11253, 11275 (Feb. 24, 2012); upheld in Investment Company Institute v. CFTC, 720 F.3d 370 (D.C. Cir. 2013). In Section 4l of the CEA, Congress declared, ‘‘the activities of commodity trading advisors and commodity pool operators are affected with a national interest in that, among other things . . . their operations are directed toward and cause the purchase and sale of commodities for future delivery . . . and the foregoing transactions occur in such volume as to affect substantially transactions in contract markets.’’ 7 U.S.C. 6l. E:\FR\FM\08JYR1.SGM 08JYR1 40892 Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 / Rules and Regulations CPO of a family office or one of its principals has engaged in conduct serious enough to be subject to the disqualification provisions of Section 8a(2), such as fraud or misappropriation, then it should seek registration with the Commission and be subject to our oversight. However, I am pleased that at my request, the CFTC staff will be making a special call to CPOs of family offices to determine how many, if any, are subject to statutory disqualification under Section 8a(2). The Commission currently has no information in this regard. I have consistently supported basing our regulatory decisions on the best available data. The data we will obtain from this special call will inform our judgment about whether further action is necessary to protect customers and the market. I also am pleased that the Commission has declined to exclude registered investment advisers from the scope of this rule. The Securities and Exchange Commission has a different statutory disqualification regime. Registrants should abide by CFTC rules when they operate in our markets. Going forward, the Commission should propose similar restrictions on the claiming of exemptions by statutorily disqualified commodity trading advisors. While this rule narrows one of the gaps in our Part 4 regulatory framework, this additional significant gap remains and should be closed. I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for working with my office to incorporate some of our comments and proposed revisions to this rule. As a matter of course, a collaborative rulemaking process that takes into account the input from all five Commissioners will produce better regulations. [FR Doc. 2020–12607 Filed 7–7–20; 8:45 am] BILLING CODE 6351–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602 [TD 9900] RIN 1545–BP84 Carryback of Consolidated Net Operating Losses Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulations. AGENCY: This document contains temporary regulations under section 1502 of the Internal Revenue Code (Code) that affect corporations filing consolidated returns. These regulations permit consolidated groups that acquire new members that were members of another consolidated group to elect in a year subsequent to the year of acquisition to waive all or part of the pre-acquisition portion of an extended jbell on DSKJLSW7X2PROD with RULES SUMMARY: VerDate Sep<11>2014 15:59 Jul 07, 2020 Jkt 250001 carryback period under section 172 of the Code for certain losses attributable to the acquired members where there is a retroactive statutory extension of the NOL carryback period under section 172. These regulations respond to the enactment of section 2303 of the CARES Act, which retroactively extends the carryback period under section 172 for taxable years beginning after 2017 and before 2021. DATES: Effective date: These temporary regulations are effective on July 2, 2020. Applicability date: For the date of applicability, see § 1.1502–21T(h)(9). FOR FURTHER INFORMATION CONTACT: Jonathan R. Neuville, at (202) 317–5363 (not a toll-free number). SUPPLEMENTARY INFORMATION: The text of these temporary regulations also serves as the text of part of the proposed regulations set forth in the related notice of proposed rulemaking on this subject (REG–125716–18) in the Proposed Rules section in this issue of the Federal Register. Background This Treasury decision amends the Income Tax Regulations (26 CFR part 1) under section 1502 of the Code. Section 1502 authorizes the Secretary of the Treasury or his delegate (Secretary) to prescribe regulations for an affiliated group of corporations that join in filing (or that are required to join in filing) a consolidated return (consolidated group) to reflect clearly the Federal income tax liability of the consolidated group and to prevent avoidance of such tax liability. See § 1.1502–1(h) (defining the term ‘‘consolidated group’’). For purposes of carrying out those objectives, section 1502 also permits the Secretary to prescribe rules that may be different from the provisions of chapter 1 of the Code that would apply if the corporations composing the consolidated group filed separate returns. Terms used in the consolidated return regulations generally are defined in § 1.1502–1. The Department of the Treasury (Treasury Department) and the IRS are issuing these temporary regulations to provide guidance to consolidated groups regarding the application of the net operating loss (NOL) carryback rules under section 172(b) of the Code, as amended by (i) section 2303(b) of the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116–136, 134 Stat. 281 (March 27, 2020) (CARES Act), and (ii) any future statutory amendments to section 172. Specifically, if there is a retroactive statutory extension of the NOL PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 carryback period under section 172, these temporary regulations permit consolidated groups that acquired new members that were members of another consolidated group prior to the statutory change to elect to waive, in a taxable year subsequent to the taxable year of the acquisition, all or part of the preacquisition portion of an extended carryback period (as defined in part I of the Explanation of Provisions) under section 172 for consolidated net operating losses (CNOLs) attributable to the acquired members. I. NOL Carrybacks and Carryovers Under Section 172 For purposes of section 172, an NOL equals the excess of a taxpayer’s deductions allowed by chapter 1 of the Code over the taxpayer’s gross income, computed with the modifications specified in section 172(d). Section 172(c). For a taxable year beginning before January 1, 2021, section 172(a)(1) allows as a deduction an amount equal to the aggregate of the NOL carryovers and carrybacks to such year. As amended by section 2303(b)(2) of the CARES Act, section 172(b)(1)(A)(i) of the Code provides that an NOL for any taxable year must be an NOL carryback to the extent provided in section 172(b)(1)(B), 172(b)(1)(C)(i), and 172(b)(1)(D). A. Tax Cuts and Jobs Act Amendments to Section 172 Prior to enactment of the CARES Act, section 172 was most recently amended by Public Law 115–97, 131 Stat. 2054 (December 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). In relevant part, section 13302(b) of the TCJA amended section 172(b) to generally prohibit the carryback of NOLs arising in taxable years beginning after December 31, 2017 (post–2017 NOLs). The TCJA also provided limited exceptions to the general carryback prohibition by amending sections 172(b)(1)(B) and 172(b)(1)(C)(i) to provide that farming losses (within the meaning of section 172(b)(1)(B)(ii)) and losses incurred by insurance companies (as defined in section 816(a) of the Code) other than life insurance companies (non-life insurance companies), respectively, must be carried back to each of the two taxable years preceding the taxable year of the loss. Therefore, prior to enactment of the CARES Act, taxpayers generally could not carry back post-2017 NOLs to prior taxable years. E:\FR\FM\08JYR1.SGM 08JYR1

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 85, Number 131 (Wednesday, July 8, 2020)]
[Rules and Regulations]
[Pages 40877-40892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12607]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AE76


Registration and Compliance Requirements for Commodity Pool 
Operators and Commodity Trading Advisors: Prohibiting Exemptions on 
Behalf of Persons Subject to Certain Statutory Disqualifications

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission) 
is adopting as final (Final Rule) an amendment to Regulation 4.13, 
which contains the regulations applicable to commodity pool operators 
(CPOs) and commodity trading advisors. The Final Rule generally 
prohibits persons who have, or whose principals have, in their 
backgrounds any of the statutory disqualifications listed in section 
8a(2) of the Commodity Exchange Act (CEA or the Act) from claiming a 
CPO registration exemption under Regulation 4.13. Specifically, the 
Final Rule will require any person filing a notice claiming such 
exemption to represent that, subject to limited exceptions, neither the 
claimant nor any of its principals has in their backgrounds a CEA 
section 8a(2) disqualification that would require disclosure, if the 
claimant sought registration with the Commission.

DATES: 
    Effective Date: The effective date for this Final Rule is September 
8, 2020.
    Compliance Date: Compliance with the Final Rule will generally be 
required through the existing notice filing under Regulation 
4.13(b)(1), 17 CFR 4.13(b)(1). Therefore, persons who, as of the Final 
Rule's effective date, have filed that notice and are currently relying 
on an exemption from CPO registration under Regulation 4.13 will be 
required to comply with the Final Rule when those persons next file a 
notice of exemption for the 2021 filing cycle, i.e., on March 1, 2021. 
Persons claiming a Regulation 4.13 exemption for the first time on or 
after the Final Rule's effective date will be required to comply with 
the Final Rule when the person first files a notice of exemption.

FOR FURTHER INFORMATION CONTACT: Joshua Sterling, Director, at 202-418-
6056 or [email protected]; Amanda Lesher Olear, Deputy Director, at 
202-418-5283 or [email protected]; Elizabeth Groover, Special Counsel, at 
202-418-

[[Page 40878]]

5985 or [email protected], Division of Swap Dealer and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1151 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    a. Statutory and Regulatory Background
    b. The Commission's October 2018 Proposal, Request for Public 
Comment, and Recent Final Rules
II. Final Rules
    a. Proposed Regulation 4.13(a)(6): A Proposal To Prohibit 
Statutory Disqualifications in CPOs Claiming Exemption Under 
Regulation 4.13
    b. General Comments
    c. The Final Rule: New Regulation 4.13(b)(1)(iii) and Responses 
To Specific Comments
    i. Prohibition v. Disclosure: Clarifying the Consequences of New 
Regulation 4.13(b)(1)(iii)
    ii. Scope of the Final Rule: Which statutory disqualifications 
will be grounds for prohibiting a claim to a CPO exemption?
    iii. The Representation Requirement Under New Regulation 
4.13(b)(1)(iii) and Retaining One of the Proposed Exceptions
    iv. Principal Classification and Treatment of RIAs
    v. Persons with Covered Statutory Disqualifications May Seek 
Individual Exemptive Letter Relief or Apply for CPO Registration
    vi. Timeframe for Exempt CPO Compliance With New Regulation 
4.13(b)(1)(iii)
III. Related Matters
    a. Regulatory Flexibility Act
    b. Paperwork Reduction Act
    c. Cost-Benefit Considerations
    i. General Costs and Benefits
    ii. Benefits and Costs of the Final Rule
    iii. Section 15(a) Considerations
    1. Protection of Market Participants and the Public
    2. Efficiency, Competitiveness, and Financial Integrity of 
Markets
    3. Price Discovery
    4. Sound Risk Management
    5. Other Public Interest Considerations
    d. Anti-Trust Considerations

I. Background

a. Statutory and Regulatory Background

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) \1\ established a statutory framework 
for the regulation of the swaps market to reduce risk, increase 
transparency, and promote market integrity within the financial system. 
As amended by the Dodd-Frank Act, section 1a(11) of the CEA defines the 
term ``commodity pool operator,'' as any person \2\ engaged in a 
business that is of the nature of a commodity pool, investment trust, 
syndicate, or similar form of enterprise, and who, with respect to that 
commodity pool, solicits, accepts, or receives from others, funds, 
securities, or property, either directly or through capital 
contributions, the sale of stock or other forms of securities, or 
otherwise, for the purpose of trading in commodity interests.\3\ CEA 
section 4m(1) generally requires each person who satisfies the CPO 
definition to register as such with the Commission.\4\ Additionally, 
CEA section 8a generally authorizes the Commission to register 
intermediaries and their associated persons, including CPOs, and also 
to refuse, condition, or revoke such registration.\5\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010), available at 
https://www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf (last retrieved Apr. 20, 2020).
    \2\ Regulation 1.3 defines ``person'' as including individuals, 
associations, partnerships, corporations, and trusts. 17 CFR 1.3. 
The Commission's regulations are found at 17 CFR Ch. I (2020).
    \3\ 7 U.S.C. 1a(11). The CEA is found at 7 U.S.C. 1, et seq. 
(2018). Both the Act and the Commission's regulations are accessible 
through the Commission's website, https://www.cftc.gov.
    \4\ 7 U.S.C. 6m(1).
    \5\ 7 U.S.C. 12a.
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    CEA section 8a(2) lists the offenses for which the Commission may 
upon notice, but without a hearing and pursuant to such rules, 
regulations or orders as the Commission may adopt, refuse to register, 
to register conditionally, or to suspend or place restrictions upon the 
registration of, any person, and for which the Commission may revoke 
the registration of any person with such a hearing as may be 
appropriate.\6\ Commission regulations require all persons applying for 
registration with the Commission to complete Form 7-R.\7\ Each natural 
person principal of an applicant is also required to complete Form 8-R, 
to submit fingerprints, and to undergo a criminal background check.\8\ 
One of the purposes of Forms 7-R and 8-R, as well as the fingerprinting 
requirement, is to determine whether any applicant for registration or 
any of its principals has in its background one of the enumerated 
statutory disqualifications in the CEA.\9\ If a statutory 
disqualification enumerated in CEA section 8a(2) is disclosed or 
otherwise revealed through that process, such applicant is generally 
refused registration on that basis, and such statutorily disqualified 
principals will generally not be listed with the Commission. The 
Commission also has the authority under CEA section 8a(5) 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.\10\ Finally, CEA section 
4(c) provides that the Commission, to promote responsible economic or 
financial innovation and fair competition, by rule, regulation, or 
order, after notice and opportunity for hearing, may exempt, among 
other things, any person or class of persons offering, entering into, 
rendering advice or rendering other services with respect to commodity 
interests, from any provision of the CEA.\11\ CEA section 4(c) provides 
a statutory basis for the Commission's promulgation of the various 
regulatory exemptions available to CPOs.
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    \6\ 7 U.S.C. 12a(2). Such decisions to refuse, condition, 
revoke, or place restrictions on registration are subject to appeal 
by the affected person or registration in the manner provided in 
section 6(c) of the CEA. Id.
    \7\ See 17 CFR 3.10(a)(1)(i).
    \8\ 17 CFR 3.10(a)(2).
    \9\ See Adoption of Revised Registration Form 8-R, 82 FR 19665, 
19665 (Apr. 28, 2017) (describing Form 8-R as designed to ``assess 
the applicant's fitness to engage in business as a derivatives 
professional''). See also Firm Application (Form 7-R), pp. 12-16 
(making various inquiries as to the criminal and disciplinary 
background of the firm and its principals), and p. 22 (requiring the 
applicant to certify that it would not be statutorily disqualified 
from registration under section 8a(2) or section 8a(3) of the Act), 
available at https://www.nfa.futures.org/registration-membership/templates-and-forms/Form7-R-entire.pdf (last retrieved June 1, 
2020).
    \10\ 7 U.S.C. 12a(5).
    \11\ 7 U.S.C. 4(c)(1).
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    Part 4 of the Commission's regulations governs, among other things, 
the operations and activities of CPOs.\12\ Those regulations implement 
the statutory authority provided to the Commission by the CEA and 
establish multiple registration exemptions and definitional exclusions 
for CPOs, as discussed above.\13\ Part 4 also contains regulations that 
establish the ongoing compliance obligations applicable to CPOs, 
whether registered or exempt, as well as to those persons operating in 
the commodity interest markets pursuant to an exclusion from that 
definition. These requirements pertain to the commodity pools that CPOs 
operate and advise, and among other things, dictate matters of customer 
protection, disclosure, and reporting to a CPO's commodity pool 
participants.
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    \12\ See 17 CFR pt. 4, generally.
    \13\ See, e.g., 17 CFR 4.13 (providing multiple registration 
exemptions to qualifying persons meeting the CPO definition).
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    The Commission has previously promulgated, pursuant to these 
statutory authorities, the various exemptions from registration as a 
CPO that are

[[Page 40879]]

enumerated in Regulation 4.13,\14\ and the Commission is today 
utilizing them to revise the basic eligibility criteria and amend the 
notice filing required to claim certain exemptions set forth in that 
regulation.\15\ As discussed above, persons seeking registration with 
the Commission, and their principals, are generally refused 
registration with the Commission on the basis that they have disclosed 
or are found to have in their backgrounds one of the statutory 
disqualifications enumerated in CEA section 8a(2). Conversely, prior to 
this Final Rule, persons claiming an exemption from CPO registration 
under Regulation 4.13 were not required to disclose any previous 
matters that might impact their eligibility or fitness for 
registration, or to otherwise meet any basic conduct standards beyond 
the substantive conditions of their claimed exemption. The Final Rule 
amendment seeks to close that regulatory gap by effectively prohibiting 
any person who has, or whose principals have, in their backgrounds a 
statutory disqualification listed in CEA section 8a(2) (Covered 
Statutory Disqualification, or CSD) from claiming a CPO exemption under 
Regulation 4.13. As a result of the Final Rule, persons who have a CSD 
in their background will generally be foreclosed from acting as a CPO, 
whether in a registered or exempt capacity, subject to limited 
exceptions discussed further below.
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    \14\ See 17 CFR pt. 4 (citing as statutory authority, 7 U.S.C. 
1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 23).
    \15\ The Commission notes that the title of the Final Rule, 
``Amendments to Compliance Requirements for Commodity Pool Operators 
and Commodity Trading Advisors,'' is consistent with the related 
notice of proposed rulemaking published in 2018, notwithstanding 
that the amendment adopted by the Final Rule does not have any 
effect on commodity trading advisors.
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b. The Commission's October 2018 Proposal, Request for Public Comment, 
and Recent Final Rules

    In response to information received from members of the public, as 
well as CFTC staff's own internal review of its regulatory regime, the 
Commission published for public comment in the Federal Register on 
October 18, 2018, a Notice of Proposed Rulemaking (NPRM, or the 
Proposal), proposing to adopt several regulatory amendments applicable 
to CPOs and commodity trading advisors.\16\ Commission staff had 
previously become aware of a number of statutorily disqualified CPOs 
operating commodity pools pursuant to the registration exemption 
formerly available in Regulation 4.13(a)(4), which the Commission 
rescinded in 2012.\17\ Since the passage of the Dodd-Frank Act, the 
Commission has proposed and adopted amendments to Regulation 4.13, 
which have, in general, been designed to identify, accurately and in a 
timely manner, the exempt CPOs operating in its markets, to incorporate 
additional registration exemptions where appropriate, and to facilitate 
customer protection by requiring annual notice filings. The Commission 
is adopting this Final Rule because it believes that requiring persons 
to attest to both their and their principals' lack of Covered Statutory 
Disqualifications through an additional representation in the notice 
filing required by Regulation 4.13(b)(1) will further enhance the 
customer protection of exempt pool participants, and more generally, 
promote the public interest.
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    \16\ Several of the proposed amendments were consistent with, or 
expansions of, relief that had been previously available through a 
staff advisory or through no-action and exemptive letters issued 
over the years by staff of the Commission's Division of Swap Dealer 
and Intermediary Oversight (DSIO) and its predecessors. See 
Registration and Compliance Requirements for Commodity Pool 
Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18, 
2018) (Proposal).
    \17\ After the rescission, such CPOs would have been required to 
modify their operations to comply with a different exemption under 
Regulation 4.13, cease their operations, or receive relief from the 
Commission permitting them to register and continue operating.
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    In the NPRM, the Commission included a proposed amendment to 
Regulation 4.13 that would have required any person claiming an 
exemption from CPO registration under Regulations 4.13(a)(1)-(a)(5) to 
represent that neither the person nor any of its principals is subject 
to any statutory disqualification under section 8a(2) or 8a(3) of the 
Act, unless such disqualification arises from a matter which was 
previously disclosed in connection with a previous application, if such 
registration was granted, or which was disclosed more than thirty days 
prior to the claim of this exemption (Proposed Regulation 
4.13(a)(6)).\18\ The Commission noted its belief then that ``it poses 
an undue risk from a customer protection standpoint for its regulations 
in their current form to permit statutorily disqualified persons or 
entities to legally operate exempt commodity pools, especially when 
those same persons would not be permitted to register with the 
Commission.'' \19\ Additionally, the Commission solicited comment on 
that particular proposed amendment, raising several specific questions 
for the public's consideration.\20\ In December 2019, the Commission 
published final amendments (2019 Final Rules) adopting several aspects 
of the Proposal with the general intent of simplifying the regulatory 
landscape for CPOs without reducing the customer protection and other 
benefits provided by those regulations.\21\ In describing the scope of 
the 2019 Final Rules, the Commission stated that certain aspects of the 
Proposal, including Proposed Regulation 4.13(a)(6), elicited a 
significant number of responsive and detailed public comments, and as a 
result, the Commission found that those proposed amendments required 
further consideration before they could be finalized.\22\
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    \18\ Proposal, 83 FR at 52906-07; see also Proposal, 83 FR at 
52927 (proposing to adopt the prohibition at paragraph (a)(6) of 
Regulation 4.13).
    \19\ Proposal, 83 FR at 52906.
    \20\ Proposal, 83 FR at 52916 (raising questions regarding the 
scope of the proposed prohibition and its potential impact on 
currently exempt CPOs, among several other issues).
    \21\ Registration and Compliance Requirements for Commodity Pool 
Operators and Commodity Trading Advisors: Registered Investment 
Companies, Business Development Companies, and Definition of 
Reporting Person, 84 FR 67343 (Dec. 10, 2019); and Registration and 
Compliance Requirements for Commodity Pool Operators (CPOs) and 
Commodity Trading Advisors: Family Offices and Exempt CPOs, 84 FR 
67355 (Dec. 10, 2019) (2019 Final Rules).
    \22\ 2019 Final Rules, 84 FR at 67357.
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    After additional consideration of Proposed Regulation 4.13(a)(6), 
as well as the ideas, questions, and suggestions received in public 
comments, the Commission has determined it appropriate to adopt, with 
specific modifications from the Proposal, the amendment, such that, 
subject to limited exceptions, persons subject to the Covered Statutory 
Disqualifications (i.e., those listed in CEA section 8a(2)) will 
generally no longer be able to claim CPO exemptions under Regulation 
4.13, absent a separate determination by the Commission (or its staff, 
pursuant to delegated authority) under CEA section 8a(2) or Regulation 
4.12(a), as more fully described below. The following sections describe 
the amendment as presented in the Proposal, respond to the substantive 
comments received, and finally, explain the amendment in its final form 
and how the Commission intends it to apply in the future.

II. Final Rules

a. Proposed Regulation 4.13(a)(6): A Proposal To Prohibit Statutory 
Disqualifications in CPOs Claiming Exemption Under Regulation 4.13

    In the Proposal, the Commission, for the first time, proposed that 
CPOs exempt under Regulation 4.13, and principals of the foregoing, who 
have statutory disqualifications in their backgrounds be subject to 
conduct

[[Page 40880]]

standards similar to those of their registered counterparts. The 
Commission has now determined to exercise its statutory authority to 
amend the Commission's CPO exemption regime, such that both registered 
and exempt CPOs will be required to represent that they and their 
respective principals are not subject to the Covered Statutory 
Disqualifications listed in the CEA. The Commission continues to 
believe that ``preserving the prohibition on statutory 
disqualifications . . . and applying it to exemptions under Sec.  4.13 
would provide a substantial customer protection benefit by prohibiting 
statutorily disqualified persons from operating and soliciting 
participants for investment in exempt commodity pools.'' \23\
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    \23\ Proposal, 83 FR at 52916.
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    Proposed Regulation 4.13(a)(6) would have required any person who 
desires to claim an exemption under paragraphs (a)(1), (a)(2), (a)(3), 
(a)(4), or (a)(5) of the section to represent that neither the person 
nor any of its principals is subject to any statutory disqualification 
under section 8a(2) or 8a(3) of the Act, unless such disqualification 
arises from a matter which was previously disclosed in connection with 
a previous application, if such registration was granted, or which was 
disclosed more than thirty days prior to the claim of this 
exemption.\24\ The Commission did not propose to require that 
representation from CPOs of Family Offices, which it concurrently 
proposed to exempt from CPO registration, because ``such CPOs would be 
prohibited from soliciting non-family members/clients to participate in 
their pool(s), necessarily limiting their contact with prospective 
participants drawn from the general public, and as a result, reducing 
the Commission's customer protection concerns in that context.'' \25\ 
The Commission stated its preliminary belief that this proposed 
approach ``addresses customer protection concerns regarding statutory 
disqualifications, while preserving flexibility in Commission 
regulations applicable to CPOs.'' \26\
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    \24\ Proposal, 83 FR at 52927. This language is nearly identical 
to the representation required by paragraph C.4. of Staff Advisory 
18-96. See Offshore Commodity Pools Relief for Certain Registered 
CPOs From Rules 4.21, 4.22, and 4.23(a)(10) and (a)(11) and From the 
Location of Books and Records Requirement of Rule 4.23, available at 
https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last 
visited Apr. 22, 2020).
    \25\ Proposal, 83 FR at 52906. The Commission formally adopted a 
CPO exemption for qualifying Family Offices in the 2019 Final Rules. 
See 2019 Final Rules, 84 FR at 67358, 67368.
    \26\ Proposal, 83 FR at 52906.
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    The Commission further explained that Proposed Regulation 
4.13(a)(6) would ``provide additional customer protection because 
statutorily disqualified, unregisterable persons would no longer be 
able to claim the CPO exemptions under Sec.  [Sec.  ] 4.13 (a)(1) 
through (a)(5).'' \27\ With respect to its future application, the 
Commission stated its intent that CPOs currently claiming an exemption 
under Regulation 4.13 would comply, ``as they renew their claims on an 
annual basis--i.e., existing claimants would be required to represent 
that neither they nor their principals are subject to statutory 
disqualifications under CEA sections 8a(2) or 8a(3), when they annually 
affirm their continued reliance on a Sec.  4.13 exemption next year.'' 
\28\ In contrast, ``CPOs filing new claims of a Sec.  4.13 exemption, 
however, would be required to comply with this prohibition upon filing, 
if and when the amendments are adopted as proposed, and become 
effective.'' \29\
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    \27\ Proposal, 83 FR at 52914.
    \28\ Proposal, 83 FR at 52907.
    \29\ Proposal, 83 FR at 52907.
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    The Commission requested comment generally on all aspects of the 
Proposal, and also solicited comment through targeted questions about 
each of the proposed amendments, including Proposed Regulation 
4.13(a)(6).\30\ In particular, the Commission requested comment on 
``the impact of adopting this provision on industry participants and 
currently exempt CPOs, and also, on what, if any, other statutory 
disqualifications should be permissible for exempt CPOs and their 
principals.'' \31\ The Commission also asked the following questions:
---------------------------------------------------------------------------

    \30\ Proposal, 83 FR at 52916.
    \31\ Proposal, 83 FR at 52916.
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    (1) What are the concerns and benefits associated with the 
expansion of the prohibition on statutory disqualifications to the CPO 
registration exemptions set forth in Sec.  [Sec.  ] 4.13(a)(1), (a)(2), 
(a)(3), and (a)(5), or proposed to be set forth in Sec.  4.13(a)(4)?
    (2) Do the limited exceptions that would permit certain statutory 
disqualifications successfully address any unintended consequences of 
adding the prohibition to Sec.  4.13, while still providing a base 
level of customer protection by preventing statutorily disqualified 
individuals from legally operating exempt commodity pools?
    (3) Generally, how should the Commission handle the implementation 
of the statutory disqualification prohibition?
    (4) Specifically, how should the prohibition apply to current 
claimants under Sec.  4.13? How much time should the Commission allow 
for filing updated exemption claims subject to the prohibition?
    (5) How much time should the Commission allow for an exempt CPO to 
replace statutorily disqualified principals, in order to maintain 
eligibility for a Sec.  4.13 exemption? \32\
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    \32\ Proposal, 83 FR at 52916.
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    The discussion below outlines the public comments received in 
response to the Proposal, focusing on the substantive comments received 
regarding Proposed Regulation 4.13(a)(6). The Commission will also 
explain how it has taken those comments into consideration, via 
specific adjustments to the Commission's approach in adopting the new 
statutory disqualification representation as a condition of receiving 
exemptive relief under Regulation 4.13.

b. General Comments

    The Commission received 28 individual comment letters responsive to 
the NPRM: Six from legal and market professional groups; 13 from law 
firms; seven from individual family offices; one from a government-
sponsored enterprise (GSE) actively involved in the housing industry; 
and one from the National Futures Association (NFA), a registered 
futures association,\33\ who through delegation by the Commission, 
assists Commission staff in administering its CPO regulatory 
program.\34\ Additionally, Commission

[[Page 40881]]

staff participated in multiple ex parte meetings concerning the 
Proposal.\35\ Seven of the comment letters provided comment 
specifically on Proposed Regulation 4.13(a)(6).
---------------------------------------------------------------------------

    \33\ See 7 U.S.C. 21.
    \34\ Comments were submitted by the following entities: Alscott, 
Inc.* (Dec. 7, 2018); Alternative Investment Management Association 
(AIMA) (Letter 1: Dec. 17, 2018, and Letter 2: Oct. 7, 2019); 
Buchanan, Ingersoll, and Rooney, PC * (Dec. 12, 2018); Commodore 
Management Company * (Dec. 12, 2018); Dechert, LLP (Dechert) (Dec. 
17, 2018); Freddie Mac (Dec. 17, 2018); Fried, Frank, Harris, 
Shriver, & Jacobson, LLP (Fried Frank) (Dec. 17, 2018); Investment 
Adviser Association (IAA) (Dec. 17, 2018); Kramer, Levin, Naftalis, 
& Frankel, LLP * (Dec. 17, 2018); LBCW Investments * (Dec. 5, 2018); 
Managed Funds Association (MFA) (Dec. 14, 2018); Marshall Street 
Capital * (Dec. 13, 2018); McDermott, Will, & Emery, LLP * (Dec. 17, 
2018); McLaughlin & Stern, LLP * (Dec. 5, 2018); Moreland Management 
Company * (Dec. 13, 2018); Morgan, Lewis, & Bockius, LLP * (Dec. 18, 
2018); NFA (Dec. 17, 2018); New York City Bar Association, the 
Committee on Futures and Derivatives (NYC Bar Derivatives Committee) 
(Jan. 4, 2019); Norton, Rose, Fulbright US, LLP * (Dec. 17, 2018); 
Perkins Coie, LLP :* (Dec. 17, 2018); the Private Investor 
Coalition, Inc. (PIC) (Nov. 28, 2018); Ridama Capital * (Dec. 13, 
2018); Schiff Hardin, LLP (two offices) * (Dec. 13 and 17, 2018); 
the Securities Industry and Financial Management Association Asset 
Management Group (SIFMA AMG) (Letter 1: Dec. 17, 2018, and Letter 2: 
Sept. 13, 2019); Vorpal, LLC * (Dec. 17, 2018); Willkie, Farr, and 
Gallagher, LLP (Willkie) (Dec. 11, 2018); and Wilmer Hale, LLP 
(Wilmer Hale) (Dec. 7, 2018). Those entities marked with an `` *'' 
submitted substantively identical, brief comments, specifically 
supporting the detailed comments and suggested edits submitted to 
the Commission by PIC.
    \35\ See ``Comments for Proposed Rule 83 FR 52902,'' available 
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2925 
(last retrieved May 4, 2020).
---------------------------------------------------------------------------

    Commenters generally understood the customer protection goals of 
the Commission, and many supported the amendment; other commenters 
opposed it and raised several questions regarding its implementation. 
Dechert, for instance, opposed Proposed Regulation 4.13(a)(6), stating 
that the Commission should not extend to exempt CPOs a prohibition 
generally applicable only to registered CPOs.\36\ Dechert further 
commented that the proposed amendment would impose one of the most 
costly aspects of registration, that of principal classification and 
screening, on CPOs that are intended to be exempt from 
registration.\37\ SIFMA AMG additionally opposed Proposed Regulation 
4.13(a)(6) and expressed the need for the Commission's consumer 
protection goals to be balanced appropriately with compliance burdens 
and costs.\38\
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    \36\ Dechert, at 7 (arguing that the Commission has generally 
determined it does not need to apply as close regulatory oversight 
to exempt CPOs as it does for registered CPOs, and that it is 
inconsistent with that conclusion for the Commission to apply this 
prohibition to exempt CPOs).
    \37\ Dechert, at 7-8. Dechert emphasized the difficulty in 
determining who is and is not a principal of a CPO, pointing out 
that some types of principal do not involve a ``bright line test,'' 
but rather a ``facts-and-circumstances analysis.'' Id.
    \38\ SIFMA AMG, at 17. SIFMA AMG also requested that the 
Commission consider performing a study to determine if the 
prohibition against statutory disqualifications was actually needed 
in the population of exempt CPOs. Id.
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    Commenters also compared the process surrounding Proposed 
Regulation 4.13(a)(6) to the Commission's registration processes 
currently outlined in part 3 of its regulations. Dechert and other 
commenters requested more detail on how the proposed amendment would 
operate and how exceptions would be considered or accepted.\39\ 
Although the majority of comments indicated that their submitters 
understood the Commission's intention in proposing the prohibition on 
statutory disqualifications, Dechert expressed confusion as to whether 
Proposed Regulation 4.13(a)(6) was intended to require disclosure of 
such disqualifications, or whether it was actually designed to bar 
disqualified CPOs from relying on an exemption entirely.\40\
---------------------------------------------------------------------------

    \39\ Dechert, at 11-12; see also IAA, at 11, and AIMA, at 9-10.
    \40\ Dechert, at 9.
---------------------------------------------------------------------------

    Some commenters cited a lack of clarity on process and other 
significant uncertainties associated with the proposed amendment, and a 
couple of commenters requested that the Commission reconsider and/or 
re-propose it.\41\ Alternatively, Dechert requested that the Commission 
develop processes regarding: (a) The identification and screening of 
principals; (b) disputing a determination by CFTC or NFA to bar a 
person from claiming exemption under Regulation 4.13; (c) the 
``disclosure exception;'' and (d) the winding down of operations for 
affected CPOs in a manner that minimizes market disruption and any 
disadvantages to pool participants.\42\ MFA shared this concern, 
requesting clarity on the timing of disclosure for CPOs already exempt 
under a Regulation 4.13 exemption and pointing out the lack of 
procedure specified in the Proposal.\43\ MFA further suggested that the 
Commission consider adopting regulations that would establish a clear 
process for currently exempt CPOs to update their disclosures of 
statutory disqualifications to the Commission or NFA, including the 
disclosure of violations of requirements of other regulators.\44\
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    \41\ Dechert, at 12; SIFMA AMG, at 17.
    \42\ Dechert, at 11. IAA also requested that the Commission 
develop a hearing process for denying persons the CPO exemptions, 
based on a statutory prohibition. IAA, at 11. See also AIMA, at 9.
    \43\ MFA, at 4.
    \44\ MFA, at 4.
---------------------------------------------------------------------------

    Several commenters were concerned about the scope of Proposed 
Regulation 4.13(a)(6), including that offenses enumerated in CEA 
section 8a(3) would be considered statutory disqualifications.\45\ 
AIMA, for instance, explained that the disqualifications listed under 
that statutory paragraph, in particular, provide the Commission grounds 
only for potentially disallowing registration, rather than an automatic 
bar to registration.\46\ Consequently, AIMA requested that any required 
representation include only offenses under CEA section 8a(2), or that 
the Commission exclude from consideration offenses listed in CEA 
section 8a(3)(B) and generally limit the incorporation of offenses in 
CEA section 8a(3) to those that are no more than ten years old.\47\ MFA 
similarly pointed out that even recordkeeping violations would need to 
be disclosed pursuant to CEA section 8a(3)(A); MFA also questioned the 
breadth and meaning of CEA section 8a(3)(M) disqualifications, known 
only in the statute as ``other good cause.'' \48\
---------------------------------------------------------------------------

    \45\ See, e.g., Dechert, at 8 (stating that the statutory 
disqualifications impacting a person's eligibility for exemption are 
very broad).
    \46\ AIMA, at 10.
    \47\ AIMA, at 10.
    \48\ MFA, at 4. See also SIFMA AMG, at 19 (arguing that offenses 
under CEA section 8a(3) are much less serious, more remote in time, 
or may be difficult to verify at the time a claim for exemption is 
filed); AIMA, at 10 (stating that including CEA section 8a(3) would 
be too broad, as it lists as disqualifying: Misdemeanor offenses 
regardless of age, regulatory offenses routinely cleared by NFA in 
administering the Commission's registration process for CPOs, and 
the ``amorphous `other good cause''').
---------------------------------------------------------------------------

    Like AIMA, IAA and SIFMA AMG similarly requested that the 
representation cover only offenses listed under CEA section 8a(2).\49\ 
SIFMA AMG additionally requested clarification from the Commission that 
a person would not be ``statutorily disqualified'' pursuant to a 
violation under CEA section 8a(3), unless and until the person receives 
a hearing and the Commission has made the filing with respect to the 
conduct at issue required by that statutory provision.\50\ Dechert 
requested that the Commission further limit the scope of Proposed 
Regulation 4.13(a)(6), such that the provision would only effectively 
prohibit statutory disqualifications involving instances of fraud and 
similar offenses involving commodities, securities, and other financial 
instruments, like CEA section 8a(2)(D).\51\ Additionally, Dechert 
requested that the Commission also consider: (a) Applying Proposed 
Regulation 4.13(a)(6) to only the person itself claiming the CPO 
exemption, rather than both the claimant and principals, and (b) 
grandfathering exempt CPOs currently in existence, in conjunction with 
the proposed amendment's adoption.\52\
---------------------------------------------------------------------------

    \49\ IAA, at 11; SIFMA AMG, at 19.
    \50\ SIFMA AMG, at 20.
    \51\ Dechert, at 11 (stating that, as the prohibition was 
proposed, any violations of the CEA ``could require disclosure of a 
Statutory Disqualification'' and may prohibit a person from claiming 
a CPO exemption in Regulation 4.13).
    \52\ Dechert, at 11.
---------------------------------------------------------------------------

    IAA also requested that the Commission not require compliance with 
the proposed amendment from registered investment advisers (RIAs) 
because those entities are already subject to the statutory 
disqualification regime under the Investment Advisers Act of 1940 (IA 
Act), which, the IAA argued, Proposed Regulation 4.13(a)(6) would 
duplicate.\53\ SIFMA AMG also supported a carve-out for RIAs, 
explaining that RIAs are subject to a robust statutory disqualification 
regime under the IA Act, are required to disclose disciplinary events 
on their

[[Page 40882]]

Forms ADV, and are also subject to fiduciary duties to their 
clients.\54\
---------------------------------------------------------------------------

    \53\ IAA, at 10.
    \54\ SIFMA AMG, at 18. SIFMA AMG stated that accepting the SEC's 
statutory disqualification and disclosure regime for RIAs as 
substituted compliance for purposes of relying on the CPO exemptions 
under Regulation 4.13 would eliminate unnecessary costs without 
sacrificing the Commission's customer protection goals, and would 
also count as harmonization of SEC and CFTC regulations. Id.
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    NFA generally supported Proposed Regulation 4.13(a)(6) and agreed 
with the Commission's underlying rationale.\55\ NFA provided comments 
specifically regarding the two exceptions the Commission proposed: (a) 
If the statutory disqualification was previously disclosed in relation 
to a registration application, which was later granted, or (b) if the 
statutory disqualification was disclosed within the previous 30 
days.\56\ NFA stated that the exception for disqualifications disclosed 
within 30 days would not be practical, and was further inappropriate to 
apply to CPOs exempt from registration under Regulation 4.13, because 
such persons, in contrast to registered CPOs, generally have no ongoing 
obligation to update Commission registration forms if they should 
become inaccurate.\57\ Thus, NFA stated, there is no mechanism 
requiring this population of exempt CPOs to update the Commission or 
NFA as to new or recent statutory disqualifications to which they or 
their principals may be subject.\58\ As a result, NFA suggested that 
the Commission either abandon this exception entirely, or limit its 
application to persons that are already registered with the Commission 
and extend the amount of time.\59\ SIFMA AMG likewise raised questions 
about how currently exempt CPOs that are not registered with the 
Commission would update the Commission or NFA as to new statutory 
disqualifications, suggesting that the Commission accept updates by 
RIAs to their Forms ADV as substituted compliance for such 
disclosures.\60\
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    \55\ NFA, at 2.
    \56\ NFA, at 2 (stating that the source of the second exception 
stems from the ongoing obligation of registered CPOs claiming Staff 
Advisory 18-96 and/or exemptive relief under Regulation 4.7 to 
update their registration forms whenever something occurs to make 
them inaccurate, like the recent commission of a statutory 
disqualification by the registrant or one of its principals).
    \57\ NFA, at 2.
    \58\ NFA, at 2.
    \59\ NFA, at 3 (explaining that 30 days is simply not enough 
time to evaluate new statutory disqualifications and/or determine if 
a registration action or ineligibility determination for exemption 
is necessary as a result, but failing to specify an alternative 
amount of time that would be sufficient).
    \60\ SIFMA AMG, at 19-20.
---------------------------------------------------------------------------

    Still other commenters expressed concern over the timing of 
compliance with Proposed Regulation 4.13(a)(6). AIMA requested that the 
Commission allow at least 12 months for persons with such statutory 
disqualifications to come into compliance, so that the issue of whether 
those disqualifications should be a bar to claiming a CPO registration 
exemption could be determined.\61\ Similarly, Willkie requested that 
the Commission provide sufficient time for industry to absorb a 
significant rule change like this one, suggested that the effectiveness 
of the provision coincide with the annual update filings typically due 
in the first quarter of each year, and requested further that the 
Commission generally clarify the process around the proposed 
prohibition.\62\ IAA also requested that the Commission delay 
compliance with the proposed prohibition to allow CPOs to adjust their 
operations, in case of disqualified principals in their entities.\63\
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    \61\ AIMA, at 10.
    \62\ Willkie, at 8.
    \63\ IAA, at 12.
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c. The Final Rule: New Regulation 4.13(b)(1)(iii) and Responses to 
Specific Comments

    After carefully considering Proposed Regulation 4.13(a)(6) as well 
as all of the public comments received, the Commission has determined 
it to be an appropriate exercise of its authorities under the CEA to 
finalize and adopt the proposed amendment with substantive adjustments 
responsive to those comments. The Commission will additionally provide 
guidance herein regarding the Final Rule's implementation. The 
Commission believes that, in conjunction with the substantive and 
procedural clarifications and the compliance schedule discussed below, 
the Final Rule will facilitate compliance by exempt CPOs with new 
Regulation 4.13(b)(1)(iii), while also minimizing costs associated with 
implementing the amendment.\64\
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    \64\ Further, the Commission has determined that moving forward 
with the Final Rule, rather than re-proposing this amendment as 
requested by a few commenters, is an appropriate and acceptable 
course of action, consistent with the Commission's regulatory 
policies and goals, particularly given the substantive adjustments 
made in direct response to public comments and the provision of 
additional compliance time and guidance.
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i. Prohibition v. Disclosure: Clarifying the Consequences of New 
Regulation 4.13(b)(1)(iii)
    The Final Rule's amendment to Regulation 4.13 prohibits a person 
who has, or whose principals have, in their backgrounds a Covered 
Statutory Disqualification from claiming a CPO exemption thereunder, as 
opposed to requiring the disclosure of such disqualifications. As the 
Commission has previously stated, there is an undue risk posed to 
potential customers in the commodity interest markets, when a person 
can act as a CPO, including soliciting participants and accepting 
capital contributions in the name of its operated pool, without meeting 
the basic conduct standards set forth in the CEA. To address that risk, 
the Commission wishes to eliminate this inconsistent treatment between 
exempt and registered CPOs (and the principals thereof), in which 
certain persons may, by claiming an exemption from CPO registration, 
avoid the CEA's basic conduct requirements established for all persons 
registering as intermediaries with the Commission. The Commission 
understands that several commenters were generally opposed to 
prohibiting statutorily disqualified persons from claiming an exemption 
from CPO registration under Regulation 4.13.\65\ After further 
consideration of the Proposal, the comments, and regulatory policy 
goals, the Commission believes that, for the purpose of ensuring its 
customer protection goals are met, it is important that all persons 
falling within the CPO definition not be subject to the most serious 
statutory disqualifications, prior to operating or soliciting 
participants for participation in their pools. The Commission finds 
this regulatory outcome of the Final Rule appropriate because, as 
discussed further below, persons claiming an exemption under Regulation 
4.13 are exempt from the various regulatory obligations resulting from 
operating in a registered capacity.
---------------------------------------------------------------------------

    \65\ See, e.g., Dechert, at 7; SIFMA AMG, at 17.
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    Dechert commented that with respect to exempt CPOs, ``the CFTC has 
generally determined it does not need to apply as close regulatory 
oversight . . . as it does for registered CPOs.'' \66\ The Commission 
does not consider the Final Rule to be inconsistent with that 
statement. The Commission notes that, notwithstanding the Final Rule's 
amendment to Regulation 4.13, exempt CPOs will continue to be exempt 
from registration, and as a result, from the compliance obligations 
applicable to CPOs registered or required to be registered, which are 
primarily set forth in part 4 of the Commission's regulations. Each 
determination to exempt certain persons from CPO registration is 
inextricably linked to the eligibility criteria of the regulatory 
exemption being claimed. The Commission has previously concluded

[[Page 40883]]

that such eligible persons generally implicate fewer of the 
Commission's regulatory and oversight interests, which supports the 
provision of a regulatory exemption from registration under those 
circumstances.\67\ The Commission therefore believes it appropriate to 
recognize the unique regulatory status of exempt CPOs, but also to 
ensure that the Final Rule's amendment applies as intended and in a 
logical fashion.
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    \66\ Dechert, at 7.
    \67\ See, e.g., 17 CFR 4.13(a)(3)(ii) (requiring CPOs claiming 
this exemption to comply with one of two de minimis thresholds for 
commodity interest trading in their exempt pool(s)).
---------------------------------------------------------------------------

    Dechert further noted that, as an alternative to Proposed 
Regulation 4.13(a)(6) and to CPO registration generally, the Commission 
has multiple authorities it might employ and rely upon with respect to 
CPOs exempt under Regulation 4.13, citing the anti-fraud authority in 
CEA section 4o, as well as the recordkeeping and special call 
authorities in Regulation 4.13(c)(1).\68\ Although the Commission 
agrees that exempt CPOs are subject to these authorities, which the 
Commission may employ on an as-needed basis, none of them is equivalent 
to or establishes a basic conduct standard applicable to CPOs exempt 
under Regulation 4.13. Moreover, each of the cited provisions is most 
useful to the Commission where a discrete issue has been identified 
that requires the Commission to act; in contrast, the Commission 
intends new Regulation 4.13(b)(1)(iii) to apply prophylactically, 
providing a foundational level of customer protection to exempt pool 
participants. Therefore, the Commission believes that this approach to 
remedying the fundamental customer protection risk discussed above is 
appropriate, notwithstanding the logistical and regulatory concerns 
asserted by commenters regarding the implementation of new Regulation 
4.13(b)(1)(iii).\69\
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    \68\ Dechert, at 7.
    \69\ As discussed in further detail below, the Final Rule will 
address those concerns by removing the proposed reference to the 
disqualifications in CEA section 8a(3) in the required 
representation and also by providing a meaningful period of time for 
compliance by currently exempt CPOs.
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ii. Scope of the Final Rule: Which statutory disqualifications will be 
grounds for prohibiting a claim to a CPO exemption?
    After consideration of the comments received regarding the 
statutory disqualifications that would be grounds for prohibiting a 
person from seeking to claim a CPO exemption, the Commission has 
determined not to include those violations enumerated in CEA section 
8a(3) in the Covered Statutory Disqualifications. The Commission finds 
persuasive commenters' arguments that the offenses listed in CEA 
section 8a(3), in the context of Regulation 4.13, warrant different 
treatment than those offenses listed in CEA section 8a(2).\70\ The 
Commission notes that due to their characteristics, CEA section 8a(3) 
offenses (unlike those enumerated in CEA section 8a(2)) serve as a bar 
to registration with the Commission, only after a hearing is conducted 
to formally find both that the disqualification has occurred, and that 
the disqualification should prevent a person from registering with the 
Commission.\71\ The Commission further believes that limiting the 
Covered Statutory Disqualifications that would result in a person being 
unable to rely upon Regulation 4.13 is consistent with the Commission's 
longstanding view that persons claiming an exemption from CPO 
registration generally implicate fewer of its regulatory concerns than 
those persons registered or required to be registered as CPOs.
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    \70\ See CEA section 8a(3), 7 U.S.C. 12a(3) (enumerating various 
disqualifications including: Any violations of CEA or Commission 
regulations; any violations of the Securities Act of 1933, the 
Securities Exchange Act of 1934, the IA Act, the Investment Company 
Act of 1940, among other federal statutes, as well as any similar 
state statutes and any related regulations; any failure to supervise 
that results in persons subject to such supervision violating the 
CEA or Commission regulations; willfully making materially false 
statements or omissions of fact in Commission reports, applications, 
disqualification proceedings, and other Commission proceedings; 
being subject to a denial, suspension, or expulsion order from a 
registered entity, registered futures association, or other self-
regulatory organization; having a principal who has been or could be 
refused registration; and where there is other good cause).
    \71\ This process should be contrasted with that of CEA section 
8a(2), the offenses of which may serve as the Commission's 
justification, upon notice, but without a hearing to refuse to 
register, to register conditionally, or to suspend or place 
restrictions upon the registration, of any person. 7 U.S.C. 12a(2). 
For persons already registered with the Commission, offenses under 
CEA section 8a(2) may also be cited by the Commission during such a 
hearing as may be appropriate to revoke the registration of any 
person. Id.
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    The Commission notes further that Regulation 4.13 was designed to 
provide registration relief to CPOs with relatively limited activities 
in the commodity interest markets. Specifically, exempt CPOs are 
subject to substantive limitations impacting their exempt pools' 
commodity interest footprint or trading strategy, the types of pool 
participants they may solicit for investment in those exempt pools, as 
well as the exempt pools' overall size and marketing activities. The 
terms of the regulatory exemptions consequently cause the operations 
and activities of these exempt CPOs to be more narrowly circumscribed 
than those of registered CPOs. The Commission believes, as a result, 
that new Regulation 4.13(b)(1)(iii) should be tailored to the most 
serious offenses, which can trigger a statutory disqualification 
without a prior hearing, i.e., those listed in CEA section 8a(2).
    Commenters also expressed confusion regarding the procedural 
implications of including the statutory disqualifications in CEA 
section 8a(3), particularly the hearing requirement, and how they might 
be incorporated into a new prohibition process under Regulation 4.13. 
IAA specifically requested that the Commission adopt a ``reasonable 
person standard,'' with respect to a person's knowledge of statutory 
disqualifications, similar to Rule 506(d) of Regulation D, as adopted 
by the Securities and Exchange Commission (SEC).\72\ The Commission 
believes, however, that limiting the representation in new Regulation 
4.13(b)(1)(iii) to those offenses listed in CEA section 8a(2) will 
generally allow for effective implementation and will adequately 
address the Commission's customer protection concerns.
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    \72\ IAA, at 11 (requesting for disqualifications not to apply 
``if the entity did not know, and, in the exercise of reasonable 
care, could not have known that a disqualification exists,'' and 
citing 17 CFR 230.506(d)(2)(ii)-(iv) as example).
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    By focusing only on the offenses listed in CEA section 8a(2), the 
Commission is removing from the representation's purview those 
disqualifications that do not necessarily serve as a general bar to 
registration because they require a formal procedural hearing before 
they can impact a person's registration status with the Commission. By 
narrowing the scope of Covered Statutory Disqualifications in this 
manner, the Commission is also recognizing its historical position that 
the commodity interest activities of exempt CPOs generally implicate 
fewer of the Commission's regulatory concerns. As a result, the 
Commission believes that new Regulation 4.13(b)(1)(iii) will 
appropriately bar persons subject to the CSDs from claiming exemption 
under Regulation 4.13, without the adoption of additional procedural 
requirements and without the adoption of a ``reasonable person'' 
standard, which may be difficult to apply in this circumstance. As 
such, the Commission believes that the Final Rule will still ensure 
that persons with the most egregious and recent offenses are unable to 
solicit and accept funds for participations in commodity pools, even if 
they are

[[Page 40884]]

exempt, thereby strengthening overall confidence in pooled investment 
vehicles engaged in limited commodity interest trading.
iii. The Representation Requirement Under New Regulation 
4.13(b)(1)(iii) and Retaining One of the Proposed Exceptions
    The Final Rule will amend the notice requirement in Regulation 4.13 
to require a representation that neither the person nor any of its 
principals has in their backgrounds a Covered Statutory 
Disqualification, subject to one limited exception discussed below.\73\ 
The Commission intends for this representation to be a threshold 
requirement for any persons claiming an exemption subject to the notice 
requirement in Regulation 4.13. If a person cannot truthfully make the 
required representation regarding the person and its principals, then 
that person will not qualify for an exemption from CPO registration. As 
discussed in detail above, the representation in its final form has 
been narrowed in scope to the CSDs, i.e., those offenses listed in CEA 
section 8a(2). Additionally, consistent with the Proposal, Family 
Offices relying on the new exemption in Regulation 4.13(a)(6), which 
are not subject to the notice filing requirement, will therefore also 
not be required to make the new representation. The Commission 
concludes that this is an appropriate regulatory outcome because Family 
Offices, by definition and by the substantive requirements of that 
exemption, only serve ``family clients,'' and thus, generally pose 
little customer protection risk to the investing public.
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    \73\ See infra new Regulation 4.13(b)(1)(iii).
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    Proposed Regulation 4.13(a)(6) contained two exceptions: Unless 
such disqualification arises from a matter which was previously 
disclosed in connection with a previous application, if such 
registration was granted, or which was disclosed more than thirty days 
prior to the claim of this exemption.\74\ As mentioned above, NFA 
commented that the second exception ``appears premised on the idea that 
the person claiming the exemption would be under an obligation, and 
have a method, to report an existing statutory disqualification to the 
Commission or NFA,'' and therefore, if the Commission or NFA did not 
act on it within thirty days, then the statutory disqualification would 
have no effect on the person.\75\ NFA further pointed out that ``unlike 
entities claiming relief under Advisory 18-96 and Regulation 4.7, which 
are registered and under an affirmative obligation to notify the 
Commission and NFA by updating their [registration forms] if they 
become subject to a statutory disqualification after they become 
registered, the vast majority of persons seeking an exemption under 
Regulation 4.13 are not [so] registered.'' \76\
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    \74\ Proposal, 83 FR at 52927. As discussed above, this language 
is derived from other relief containing similar prohibitions. See 
supra pt. II.A.
    \75\ NFA, at 2.
    \76\ NFA, at 2 (suggesting therefore that the Commission 
``either eliminate this exception or limit it to persons that are 
currently registered'').
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    The Commission agrees with NFA's description of how the second 
proposed exception was intended to apply, and also with NFA's assertion 
that many persons claiming a Regulation 4.13 exemption are not 
registered with the Commission in another capacity, meaning they have 
neither filed, nor have they any ongoing obligation to update, 
registration forms with the Commission or NFA. After considering these 
comments, the Commission is therefore not adopting the second proposed 
exception. As a result, the remaining exception in new Regulation 
4.13(b)(1)(iii) adopted by this Final Rule will apply to the Covered 
Statutory Disqualifications that have been previously disclosed by the 
person or its principal in prior registration applications that were 
granted. The Commission believes that this result maintains the 
strength of the amendment, while permitting flexibility for 
circumstances where the Commission has affirmatively determined that a 
CSD in a person's background should not impede that person's ability to 
register.
iv. Principal Classification and Treatment of RIAs
    The Commission also received other substantive and procedural 
questions in response to Proposed Regulation 4.13(a)(6). Several 
commenters, for instance, claimed that it would be very burdensome for 
persons claiming exemption under Regulation 4.13 to identify, classify, 
and examine the principals within their business entities, and that 
requiring them to do so was effectively subjecting exempt CPOs to the 
most significant costs of intermediary registration with the 
Commission.\77\ Regulation 3.1(a) defines the term ``principal,'' by 
providing examples of who would be considered principals in a variety 
of legal entity structures, e.g., sole proprietorship, limited 
liability company, limited partnership, or corporation.\78\ 
Consistently though, the ``principal'' definition is, generally 
speaking, limited to those individuals and entities within the CPO who 
have either management authority and responsibilities, or significant 
power derived from stock ownership or capital contributions. Principals 
usually include, therefore, managing members, company presidents, 
corporate executives, chief compliance officers, and any legal person 
who is a ten percent or more shareholder of the person.\79\ Dechert 
explained that ``certain aspects of the [Commission's principal] 
definition . . . do not create a bright-line test, but rather require a 
facts-and-circumstances analysis.'' \80\ Dechert further asserted that 
``the principal classification and screening process creates the 
majority of the work necessary to register CPOs and CTAs, and is 
costly,'' requested that the Commission provide guidance ``as to how an 
exempt CPO could conduct such processes,'' and also asked that the 
Commission ``establish[ ] a process for disagreement by the CFTC or NFA 
with an exempt CPO's determination.'' \81\
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    \77\ See, e.g., Dechert, at 7-8.
    \78\ 17 CFR 3.1(a). Additionally, Regulation 4.10(e)(1) also 
uses that ``principal'' definition for purposes of the Commission's 
part 4 regulations. 17 CFR 4.10(e)(1). NFA Registration Rule 101(t) 
is similar in design, and defines principal, in pertinent part, as 
``a proprietor of a sole proprietorship; a general partner of a 
partnership; a director, president, chief executive officer, chief 
financial officer or a person in charge of a business unit, division 
or function subject to regulation by the Commission of a 
corporation, limited liability company, or limited liability 
partnership; a manager, managing member, or member vested with 
management authority for a limited liability company or limited 
liability partnership; or a chief compliance officer.'' NFA 
Registration Rule 101(t), available at https://www.nfa.futures.org/rulebook/rules.aspx?RuleID=RULE%20101&Section=8 (last retrieved Apr. 
7, 2020).
    \79\ 17 CFR 3.1(a)(1)-(a)(3). Regulation 3.1(a)(4) additionally 
defines as a principal any person who employs a trust, proxy, 
contract, or other device to avoid becoming a ten percent or more 
shareholder for the purpose of evading being deemed a principal of 
the entity. 17 CFR 3.1(a)(4).
    \80\ Dechert, at 8 (citing ``the head of business unit, division 
or function subject to CFTC regulation'' as an example). Regulation 
3.1(a)(1) includes in the ``principal'' definition, regardless of 
the entity's legal structure, any person in charge of a principal 
business unit, division or function subject to regulation by the 
Commission. 17 CFR 3.1(a)(1).
    \81\ Dechert, at 8 and 11.
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    The Commission believes that preventing persons who have one or 
more statutorily disqualified principals from operating as exempt CPOs 
will generally increase the customer protection provided to 
participants in exempt pools, particularly because of the decision-
making authority such principals may exercise regarding the operations 
of an exempt CPO and its exempt pool(s). The Commission also notes that 
several hundred CPOs currently maintain registration simultaneously 
with one or more CPO

[[Page 40885]]

exemptions, due to the nature of the various commodity pools they 
operate. The Commission believes that such exempt CPOs may be slightly 
advantaged because they will likely spend less time identifying and 
classifying principals than persons or entities who have no prior 
contact with commodity interest markets or the Commission, or who only 
operate pools pursuant to one or more exemptions from registration. 
Registered CPOs, who may be also claiming a CPO exemption, will have 
already gone through those processes for purposes of applying for 
registration with respect to their non-exempt commodity pools. Further, 
such CPOs would also be much less likely to have to remove and replace 
principals with Covered Statutory Disqualifications. In the event such 
an otherwise registered CPO or a principal thereof did have a CSD, it 
would likely fall under the exception discussed above for CSDs 
identified by the person and/or principal in a prior approved 
application for registration, in light of their existing status as a 
registrant and the obligation to disclose such offenses as they occur.
    With respect to persons claiming a CPO exemption under Regulation 
4.13 for the first time, and persons who are exempt CPOs and not also 
registered with the Commission, the Commission understands that such 
persons will possibly be required to devote time and resources to 
determining who in their organization is a principal and whether any of 
them has a Covered Statutory Disqualification in their background. Some 
classes of principals under the Commission's regulations may involve a 
factual analysis to determine status. The Commission continues to 
believe, however, that most persons will be able to determine their 
principals relatively easily, due to the standard forms of business 
organization typically used by exempt CPOs and the detailed definitions 
provided by the Commission in its regulations.\82\ In particular, 
Regulation 3.1 details the roles, titles, ownership, and 
responsibilities that can give rise to a person being a ``principal'' 
of a registrant, which the Commission believes reduces the challenges 
associated with identifying principals within an organization such as 
an exempt CPO. As discussed above, the Commission also believes that 
some persons claiming Regulation 4.13 exemptions may have already been 
required to identify their principals as part of their registration 
with the Commission as a CPO with respect to the operation of one or 
more other pools. The Commission believes that the substantive changes 
made in this Final Rule address the Commission's concerns about 
providing some customer protection to participants in pools operated by 
an exempt CPO, while permitting flexibility and facilitating compliance 
with Regulation 4.13 through additional compliance time. Therefore, the 
Commission is adopting new Regulation 4.13(b)(1)(iii), such that the 
required representation covers both persons claiming the exemption and 
their principal(s).
---------------------------------------------------------------------------

    \82\ 17 CFR 3.1(a).
---------------------------------------------------------------------------

    The Commission also received several requests for the Commission to 
exclude RIAs from the proposed amendment, on the basis that such RIAs 
are already subject to robust conduct requirements in the IA Act, 
which, commenters argue, the new representation would only serve to 
duplicate.\83\ Though the Commission agrees with commenters that RIAs 
are subject to conduct requirements under the IA Act, the Commission is 
declining to exclude RIAs from the scope of new Regulation 
4.13(b)(1)(iii). IA Act section 203(e) covers censures, denials, or 
suspensions of registration for investment advisers and provides the 
SEC the authority to censure, limit, suspend, or revoke the 
registration of any investment adviser, if, after notice and 
opportunity for a hearing, certain statutory disqualifications of the 
adviser or persons associated with it are proven and such adverse 
action is in the public interest.\84\ The Commission finds that the 
statutory disqualification regime of the IA Act differs materially from 
the corresponding provisions in the CEA. Of particular relevance to the 
Final Rule, the IA Act does not specify any statutory disqualifications 
that bar investment advisers from registration in a manner similar to 
the mechanism in CEA section 8a(2), i.e., without a procedural hearing 
or order.
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    \83\ See, e.g., IAA, at 10; SIFMA AMG, at 18.
    \84\ IA Act section 203(e), 15 U.S.C. 80b-3(e).
---------------------------------------------------------------------------

    The Commission notes that preserving its independent authority to 
determine which persons should be permitted to operate commodity pools 
in its markets subject to an exemption is consistent with the 
Commission's independent assessment of RIAs seeking registration with 
the Commission regarding their commodity interest activities. Under 
those circumstances, notwithstanding the RIA's registration with the 
SEC, the Commission assesses the registration application of the RIA 
under the terms of the CEA and the Commission's regulations promulgated 
thereunder, which reflect the unique regulatory concerns associated 
with intermediaries in the commodity interest markets. Although the 
Commission recognizes that most RIAs would not present any cause for 
reservation in permitting them to operate in the commodity interest 
markets, the Commission believes that retaining the ability to engage 
in an independent assessment regarding an RIA's fitness to act as an 
exempt CPO best serves its customer protection interests. Therefore, 
the Commission is not adopting the suggestion to exclude RIAs from the 
scope of new Regulation 4.13(b)(1)(iii).\85\
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    \85\ The Commission notes, however, that the majority of RIAs, 
based on their registration status with the SEC, should be able to 
easily comply with the representation regarding Covered Statutory 
Disqualifications required by amended Regulation 4.13.
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v. Persons With Covered Statutory Disqualifications May Seek Individual 
Exemptive Letter Relief or Apply for CPO Registration
    As explained herein, the Commission believes that the adoption of 
this representation regarding the Covered Statutory Disqualifications 
for persons, and their principals, claiming exemption under Regulation 
4.13 is generally necessary to protect the participants in exempt 
commodity pools; however, the Commission recognizes that there may be 
facts and circumstances, pursuant to which permitting such disqualified 
CPOs and principals to operate exempt commodity pools may not be 
inconsistent with the Commission's customer protection concerns. The 
Commission notes its authority under Regulation 4.12(a) to ``exempt any 
person or any class or classes of persons from any provision of this 
part 4, if it finds that the exemption is not contrary to the public 
interest and the purposes of the provisions from which exemption is 
sought.'' \86\ The Commission has, by rule, delegated that authority to 
the Director of DSIO.\87\ Pursuant to that delegated authority and 
Regulation 140.99, those persons who have a Covered Statutory 
Disqualification, but nonetheless believe that it should not negatively 
affect their ability to claim a CPO exemption, may seek, on an 
individual or firm-by-firm basis, exemptive letter relief from the

[[Page 40886]]

representation adopted by this Final Rule by presenting the facts and 
legal rationale demonstrating that such exemptive letter relief would 
be consistent with the public interest and not contrary to the specific 
purposes of Regulation 4.13(b)(1), i.e., providing some customer 
protection to exempt pool participants.\88\ The Commission notes that 
it expects the granting of such requests to be infrequent and supported 
by a strong factual and legal basis, so as to avoid undermining the 
purposes of the Final Rule.
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    \86\ 17 CFR 4.12(a).
    \87\ 17 CFR 140.93 (delegating the authority in Regulation 
4.12(a) to the DSIO Director, further facilitating the issuance of 
exemptive letter relief with respect to provisions in 17 CFR part 
4). As with all Commission delegations to staff generally: (1) The 
relevant Division Director (in this case, DSIO) may submit such a 
request regarding the delegated matter to the Commission for its 
consideration; and (2) the Commission may, at its election, exercise 
the delegated authority to consider such a request for relief. See 
17 CFR 140.93(b)-(c).
    \88\ 17 CFR 140.99(a)(1) (defining an exemptive letter as ``a 
written grant of relief issued by the staff of a Division of the 
Commission from the applicability of a specific provision of the Act 
or of a rule, regulation or order issued thereunder by the 
Commission''). Such exemptive letters are typically issued subject 
to conditions determined by Commission staff to be necessary or 
appropriate, and further, these letters are subject to Commission 
review prior to issuance.
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    The Commission further advises that, at any time, even if a CPO is 
unsuccessful in its request for such exemptive letter relief, persons 
with CSDs may submit an application for CPO registration, in which any 
and all statutory disqualifications would be disclosed as required by 
Forms 7-R and 8-R, and reviewed through the existing registration 
process.\89\ Utilizing this existing process allows for the detailed 
analysis of each disqualification, and all of the facts related 
thereto, specifically with respect to the propriety of the Commission 
permitting such person to register as a CPO, and/or to list a principal 
with any such disqualifications in its background. This assessment 
further includes determining whether any conditions or restrictions 
might sufficiently mitigate the customer protection risks posed by the 
statutorily disqualified person or principals.\90\ Should the 
determination be made to permit the registration, such persons would be 
subject to the Commission's ongoing oversight regarding their commodity 
pool operations, and subject to all statutory and regulatory 
obligations applicable to registered CPOs and their principals. The 
Commission believes that these existing procedures for seeking 
individualized exemptive letter relief under part 4 of the Commission's 
regulations, as well as the registration process, present appropriate 
methods for considering alternative outcomes, where appropriate, from 
the prohibition of Covered Statutory Disqualifications in exempt CPOs 
adopted herein.
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    \89\ See, e.g., 17 CFR 3.10.
    \90\ 7 U.S.C. 12a(2) (providing that the Commission has the 
authority to condition, restrict, or suspend the registration of any 
person under the Act). See also 17 CFR 3.60 (establishing the 
Commission's regulatory procedure to deny, condition, suspend, 
revoke, or place restrictions upon registration pursuant to sections 
8a(2), 8a(3), and 8a(4) of the Act). The Commission has delegated 
the implementation of its registration authority to NFA. Performance 
of Registration Functions by National Futures Association, 49 FR 
39593 (Oct. 9, 1984) (delegating by Commission Order the 
registration function to NFA with respect to futures commission 
merchants, CPOs, commodity trading advisors, and the associated 
persons thereof).
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vi. Timeframe for Exempt CPO Compliance With New Regulation 
4.13(b)(1)(iii)
    The Commission also received and considered multiple comments 
regarding the exact timing of the effective and compliance dates 
regarding Proposed Regulation 4.13(a)(6). As stated above, the 
Commission anticipates that the changes in approach employed in this 
Final Rule should reduce the analysis required in order to comply. 
Nonetheless, the Commission believes it appropriate to facilitate 
persons claiming an exemption under Regulation 4.13 in transitioning 
and adjusting to the application of new Regulation 4.13(b)(1)(iii). 
Although the Final Rule will be effective within 60 days of 
publication, the Commission has determined not to mandate compliance 
with the additional representation required by new Regulation 
4.13(b)(1)(iii) for CPOs currently relying on an exemption in 
Regulation 4.13, as of that effective date. The Commission is 
establishing for these particular CPOs a compliance date of March 1, 
2021, which coincides with the deadline for persons filing annual 
reaffirmation notices under Regulation 4.13(b)(1) in the upcoming 2021 
filing cycle.
    Although the Commission is declining to ``grandfather'' existing 
exempt CPOs with respect to the Final Rule, because it believes doing 
so may dilute any positive effect on customer protection the amendment 
would have, persons currently claiming an exemption from CPO 
registration may continue to do so, while identifying, classifying, and 
checking the backgrounds of the claiming person and its principals. The 
additional compliance period will allow currently exempt CPOs to 
continue operating their exempt pools, while they conduct the necessary 
inquiries regarding the claimant and principals (if they have not 
already been required to do so due to being otherwise registered).
    On the other hand, persons claiming a Regulation 4.13 exemption for 
the first time on or after the Final Rule's effective date will not be 
provided additional compliance time. Publication of the Final Rule 
serves as notice to such persons that, to successfully claim an 
exemption from CPO registration, they will be thereafter required to 
identify their principals, conduct background checks, and represent 
that neither the person nor its principals are subject to the Covered 
Statutory Disqualifications, unless such offenses were disclosed in a 
registration application already approved by the Commission or NFA. The 
Commission believes this distinction between existing and new claimants 
under Regulation 4.13 is reasonable because persons establishing a new 
exempt CPO generally would have the opportunity to identify and check 
principals as part of the start-up process for the CPO and pool 
business, and prior to operating an exempt pool for the first time.

III. Related Matters

a. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that Federal 
agencies, in promulgating regulations, consider whether the regulations 
they propose will have a significant economic impact on a substantial 
number of small entities, and if so, to provide a regulatory 
flexibility analysis regarding the economic impact on those 
entities.\91\ Each Federal agency is required to conduct an initial and 
final regulatory flexibility analysis for each rule of general 
applicability for which the agency issues a general notice of proposed 
rulemaking. The regulatory amendments adopted herein affect only 
persons registered or required to be registered as CPOs and persons 
claiming exemptions from registration as such. The Commission 
previously has determined that a CPO is a small entity for purposes of 
the RFA, if it meets the criteria for an exemption from registration 
under Regulation 4.13(a)(2).\92\ Such CPOs will generally continue to 
qualify for the exemption from registration, though the Commission 
believes that such exempt CPOs claiming Regulation 4.13(a)(2) may incur 
some costs as a result of the Final Rule. Like most other exempt CPOs, 
they will also be required to identify their principals and affirm that 
neither they nor the claiming entity

[[Page 40887]]

have in their backgrounds a Covered Statutory Disqualification. The 
Commission notes that this requirement will apply equally to all 
persons filing a notice of exemption under Regulation 4.13, after the 
effective date of the Final Rule, and that all CPOs currently claiming 
an exemption, including those that are small entities for RFA purposes, 
are subject to the guidance herein, requiring them to comply with new 
Regulation 4.13(b)(1)(iii) by March 1, 2021. The Commission did not 
receive any comments on its analysis of the application of the RFA to 
the Proposal or Proposed Regulation 4.13(a)(6).
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    \91\ 5 U.S.C. 601, et seq.
    \92\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619-20 (Apr. 30, 1982). Regulation 4.13(a)(2) exempts 
a person from registration as a CPO when: (1) None of the pools 
operated by that person has more than 15 participants at any time, 
and (2) when excluding certain sources of funding, the total gross 
capital contributions the person receives for units of participation 
in all of the pools it operates or intends to operate do not, in the 
aggregate, exceed $400,000. See 17 CFR 4.13(a)(2). As of April 20, 
2020, there are approximately 313 entities claiming this exemption.
---------------------------------------------------------------------------

    The costs of new Regulation 4.13(b)(1)(iii), which are expected to 
vary depending on the size and complexity of the CPO in question, will 
generally be incurred once by exempt CPOs: Either at the compliance 
date required by the Final Rule, or at the formation of a new exempt 
CPO after the Final Rule is effective. The Commission believes further 
that, as small entities which are typically less complex 
organizationally, CPOs exempt under Regulation 4.13(a)(2) may 
potentially have an easier time identifying, classifying, and verifying 
the backgrounds of their principals. As such, the Commission believes 
that such small CPOs will incur, in general, lower costs, especially 
when compared to other types of exempt CPOs that are more likely to 
employ complex business structures or have more principals to identify 
and review.\93\ If an exempt CPO or its principal has a Covered 
Statutory Disqualification in its background, the Commission recognizes 
that such person could be significantly impacted, as the person would 
therefore likely be required to replace the disqualified principal to 
continue operating, or under some circumstances, may be required to 
even wind up and cease operating their pool(s) as an exempt CPO.
---------------------------------------------------------------------------

    \93\ Persons claiming an exemption under Regulation 4.13(a)(3), 
for example, include persons operating complex pooled investment 
vehicle structures that typically have at least several principals 
operating the CPO and pools.
---------------------------------------------------------------------------

    Throughout this Final Rule, the Commission has evaluated and taken 
into consideration the amendment's impact on small exempt CPOs. Though 
the Commission lacks sufficient data to predict exactly how many exempt 
CPOs may ultimately be required to cease pool operations by virtue of 
the Final Rule, the Commission expects very few CPOs exempt under 
Regulation 4.13(a)(2) will be required to cease operations as a result. 
The current number of exempt CPOs that are also small entities is 
relatively low (approximately 313), and the costs of new Regulation 
4.13(b)(1)(iii) are generally limited in occurrence, as discussed 
above. Finally, the Commission is also providing guidance in the Final 
Rule that provides additional time for certain affected persons to 
comply and incur costs resulting from this amendment, as an effort to 
mitigate disruption to these businesses. Therefore, the Commission 
concludes that the Final Rule does 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 regulation adopted by 
the Commission in the Final Rule will not have a significant economic 
impact on a substantial number of small entities.

b. Paperwork Reduction Act

    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.\94\ Under the PRA, 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). 
The Commission believes that as adopted, the Final Rule results in a 
collection of information within the meaning of the PRA, as discussed 
below. As such, the publication of a PRA notice soliciting comment 
regarding the Commission's estimated burden calculation for new 
Regulation 4.13(b)(1)(iii) will be required.
---------------------------------------------------------------------------

    \94\ See 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

    As discussed in the Proposal, the Commission's proposed regulations 
would have impacted or amended two collections of information for which 
the Commission has previously received control numbers from OMB: 
Collections 3038-0005 and 3038-0023.\95\ In the 2019 Final Rules, the 
Commission adopted amendments to 17 CFR part 4, submitted those final 
amendments for OMB approval, and amended those information collections 
to reflect the regulatory changes adopted by that final rulemaking.\96\ 
Significantly, because Proposed Regulation 4.13(a)(6) was initially 
proposed as a substantive requirement to be applicable to any person 
who desires to claim an exemption under paragraphs (a)(1), (a)(2), 
(a)(3), (a)(4), or (a)(5) in this section, the Commission never 
considered the proposed amendment in the context of the PRA or those 
collections of information. In the Proposal, the Commission invited the 
public and other Federal agencies to comment on any aspect of the 
information collection requirements discussed therein.\97\ The 
Commission did not receive any such comments.
---------------------------------------------------------------------------

    \95\ Proposal, 83 FR at 52918.
    \96\ See 2019 Final Rules, 84 FR at 67348; 84 FR at 67353.
    \97\ Proposal, 83 FR at 52920.
---------------------------------------------------------------------------

    As discussed above, the Final Rule adopts new Regulation 
4.13(b)(1)(iii), which requires a person filing a notice of exemption 
under Regulation 4.13(b)(1) to represent that neither the claimant nor 
any of its principals has in their backgrounds a Covered Statutory 
Disqualification that would require disclosure, if the claimant sought 
registration with the Commission. Because Proposed Regulation 
4.13(a)(6) did not require any additional information to be provided as 
part of the notice filed to claim an exemption under Regulation 4.13, 
the Commission did not account in the Proposal for any PRA burden 
associated with an additional representation in the notice filing 
required under Regulation 4.13(b)(1). Therefore, concurrent with the 
Final Rule, the Commission is updating the estimated burden associated 
with Regulation 4.13(b)(1), as amended by this Final Rule, and seeking 
public comment on those estimates in a PRA notice, separately published 
in this Federal Register.

c. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA.\98\ Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the CEA section 15(a) considerations.
---------------------------------------------------------------------------

    \98\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

i. General Costs and Benefits
    The baseline for the Commission's consideration of the costs and 
benefits of the Final Rule is the regulatory status quo, as determined 
by the CEA and the Commission's existing regulations. The Commission 
has endeavored to assess the costs and benefits of the Final Rule

[[Page 40888]]

in quantitative terms wherever possible. Where estimation or 
quantification is not feasible, however, the Commission has provided 
its assessment in qualitative terms.
    The Commission notes that the consideration of costs and benefits 
below is based on the understanding that the markets function 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries; with some Commission registrants 
being organized outside of the United States; with leading industry 
members commonly following substantially similar business practices 
wherever located. Therefore, the below discussion of costs and benefits 
refers to the effects of the Final Rule on all activity covered by the 
amended regulations. Consequently, the Commission notes that some 
entities affected by the Final Rule are located outside of the United 
States.
ii. Brief Overview of the Final Rule
    The Final Rule adds new paragraph (b)(1)(iii) to the annual notice 
filing requirement in Regulation 4.13(b)(1), which will, once 
effective, require all persons filing a notice of exemption under 
Regulation 4.13 to represent that neither they nor their principals 
have in their backgrounds a Covered Statutory Disqualification, unless 
such disqualification arises from a matter which was disclosed in 
connection with a previous application for registration, if such 
registration was granted. The Commission intends for CPOs claiming a 
notice of exemption as of the Final Rule's effective date to first make 
this representation in the 2021 reaffirmation of the exemption, i.e., 
March 1, 2021. The Commission believes that the adjustments to the 
Final Rule, discussed in detail above, as well as its guidance 
establishing an extended compliance period for currently exempt CPOs, 
address the majority of public comments received in response to 
Proposed Regulation 4.13(a)(6). The Commission concludes therefore that 
these efforts appropriately balance the Commission's regulatory 
interests with the costs of compliance to affected persons. New 
Regulation 4.13(b)(1)(iii) will effectively prohibit Covered Statutory 
Disqualifications, i.e., those listed in CEA section 8a(2), in persons 
filing a notice of exemption under Regulation 4.13, as well as in their 
principals, in a more tailored manner than the proposed amendment. As a 
result, the Commission believes the Final Rule addresses the 
Commission's customer protection concerns with respect to the exempt 
CPO population, while still reducing the regulatory burdens for exempt 
CPOs and their commodity pools.
ii. Benefits and Costs of the Final Rule
    The Commission believes that prohibiting persons who are 
statutorily disqualified under CEA section 8a(2), or who employ 
principals so disqualified, from claiming exemptions under Regulation 
4.13 will result in several benefits. As discussed in further detail 
above and in the Proposal, the Commission has concerns that ``pool 
participants may be exposed to risk posed by regulations permitting the 
operation of an offered [exempt] pool by a person who, generally, would 
not otherwise be permitted to register with the Commission.'' \99\ The 
Commission has noted that, ``even if the activities of a CPO do not 
rise to a level warranting Commission oversight through registration, a 
prospective participant should be able to be confident that a 
collective investment vehicle using commodity interests is not operated 
by a person,'' who, for example, has previously been the subject of an 
injunction relating to fraud or embezzlement.\100\
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    \99\ See Proposal, 83 FR at 52921.
    \100\ Proposal, 83 FR at 52921-22 (citing 7 U.S.C. 12a(2)(C)(ii) 
as an example of a disqualification proposed to be prohibited by 
this amendment).
---------------------------------------------------------------------------

    Prior to the Final Rule, persons claiming an exemption from CPO 
registration under Regulation 4.13 generally were not required to meet 
any basic conduct standards, in contrast to persons registered or 
required to register as CPOs with the Commission.\101\ The Final Rule 
remedies that regulatory gap by requiring that a person filing a notice 
of exemption from CPO registration under Regulation 4.13 meets 
substantively similar basic conduct standards as a person registered or 
required to be registered as a CPO. The Commission expects that 
correcting this regulatory inconsistency will increase overall investor 
confidence by setting a standard applicable to the vast majority of 
exempt CPOs operating pooled investment vehicles in the commodity 
interest markets. The result of the Final Rule will be that persons 
and/or principals who have a Covered Statutory Disqualification not 
previously disclosed in a prior approved application for registration 
will generally be prohibited from operating or soliciting the public 
for investment in exempt pools, or from serving as a principal of an 
exempt CPO.
---------------------------------------------------------------------------

    \101\ See supra pt. II.c.i for additional historical and legal 
discussion.
---------------------------------------------------------------------------

    Because the Final Rule will require such CPOs to assess themselves 
and their principals for any CEA section 8a(2) disqualifications, the 
Commission believes that once it is fully implemented, new Regulation 
4.13(b)(1)(iii) may provide reasonable assurance that persons subject 
to the Covered Statutory Disqualifications are not soliciting exempt 
pool participants and/or managing their capital via exempt pools. 
Moreover, the Commission expects that both prospective and actual 
participants in pools operated by exempt CPOs will experience enhanced 
customer protection by removing statutorily disqualified CPOs and/or 
principals thereof from the commodity interest markets. The Commission 
believes further that those participants will likely, as a result, also 
experience improved overall confidence in the exempt commodity pool 
space.
    The Commission understands that the Final Rule could also result in 
potentially substantial costs to persons filing a notice of exemption 
under Regulation 4.13(b)(1). In the Proposal, the Commission further 
identified and described ``costs associated with either divesting from 
commodity interests held within a collective investment vehicle, or in 
completely winding up a commodity pool's operations,'' that could 
result from Proposed Regulation 4.13(a)(6).\102\ In addition to these 
``wind-up'' costs, the Commission understands that principal 
identification and classification processes will likely result in costs 
to each affected exempt CPO, and that those costs will vary based on 
the overall structure of the CPO, the number of principals it employs, 
and other circumstances unique to its pool operations. Although these 
potential costs were a point of significant concern for several 
commenters, and the Commission specifically solicited comment in the 
Proposal on the ``impact of adopting [Proposed Regulation 4.13(a)(6)] 
on industry participants and currently exempt CPOs,'' commenters did 
not provide specific data or estimates quantifying the actual costs of 
compliance resulting from the proposed amendment.\103\
---------------------------------------------------------------------------

    \102\ Proposal, 83 FR at 52923 (though the Commission noted that 
it ``lacks sufficient data to determine how many CPOs might be 
required to cease operating commodity pools pursuant to the 
exemptions . . . due to the presence of statutorily disqualified 
[persons or] principals'').
    \103\ Proposal, 83 FR at 52916.
---------------------------------------------------------------------------

    Despite the lack of information from commenters regarding potential 
or actual costs to affected persons, the Commission nonetheless 
considered those public comments, and strove to balance those costs 
with its regulatory and policy goals in a way that benefits market 
participants, customers, and the

[[Page 40889]]

general public interest. By narrowing the scope of the Covered 
Statutory Disqualifications in new Regulation 4.13(b)(1)(iii) to those 
listed in CEA section 8a(2), the Commission believes that the Final 
Rule strikes an appropriate regulatory balance between customer 
protection concerns and increased regulatory requirements. This 
adjustment means the required representation will target the most 
serious offenses warranting the statutory disqualifications listed in 
the CEA within the general population of exempt CPOs, including their 
principals. Moreover, the Final Rule further reduces procedural 
confusion by limiting the CSDs to those disqualifications that would 
serve as a bar to registration with the Commission, absent an 
additional hearing or proceeding. Finally, by providing guidance herein 
that extends the compliance period for persons currently relying upon a 
claim of exemption under Regulation 4.13(b)(1), the Commission wishes 
to facilitate compliance with the Final Rule. Specifically, the 
Commission intends this guidance to mitigate the risk of business 
interruption by providing affected persons with additional time to 
assess themselves and their principals, and to identify and address any 
CSDs that are found. The Commission is employing this tailored and 
gradual approach for the Final Rule and its implementation to, among 
other things, generally moderate costs to affected persons caused by 
new Regulation 4.13(b)(1)(iii).
iii. Section 15(a) Considerations
1. Protection of Market Participants and the Public
    The Commission considered whether the Final Rule will have any 
detrimental effect on the customer protections of the Commission's 
regulatory regime and has concluded that the Final Rule will generally 
have a positive effect on the protection of market participants and the 
public. Through new Regulation 4.13(b)(1)(iii), the Commission is 
remedying an inconsistency, in which a person who may be prohibited by 
the CEA from conducting activities requiring registration could 
nonetheless engage in those activities by claiming a CPO registration 
exemption instead. The Final Rule will ensure that persons filing a 
notice of exemption under Regulation 4.13(b)(1), as amended, and 
persons registered or required to be registered as CPOs with the 
Commission will be treated similarly--in either instance, all such 
persons must be able to represent that they and their principals are, 
at a minimum, not disqualified under CEA section 8a(2), prior to 
soliciting the public for investment in, or otherwise operating a 
commodity pool. The Commission believes that basic conduct standards 
applicable to CPOs, regardless of registration status, will improve 
customer protection within the Commission's CPO regulatory program.
2. Efficiency, Competitiveness, and Financial Integrity of Markets
    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of efficiency, 
competitiveness, and financial integrity considerations. The Commission 
believes that the Final Rule may positively impact the efficiency, 
competitiveness, and financial integrity of the commodity interest 
markets. The Final Rule will require all persons filing a notice under 
amended Regulation 4.13(b)(1) to represent that neither they nor their 
principals have in their backgrounds a Covered Statutory 
Disqualification. To the extent that disqualified persons are prevented 
from being an exempt CPO or from serving as a principal of an exempt 
CPO, as a result of new Regulation 4.13(b)(1)(iii), the Commission 
expects such disqualified persons (and principals) would either exit 
the commodity interest markets, or at least, discontinue operating in 
the exempt commodity pool space. Therefore, because it will ultimately 
cause the removal of entities, persons, and principals disqualified 
under CEA section 8a(2) from the exempt commodity pool space, the 
Commission believes that the Final Rule could have a positive impact on 
the efficiency, competitiveness, and financial integrity of the 
commodity interest markets overall.
3. Price Discovery
    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of price discovery 
considerations. For the reasons noted above, the Commission believes 
that the Final Rule generally results in limited, discrete changes to 
regulatory processes and filings that will not have a significant 
impact on price discovery.
4. Sound Risk Management
    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate 
a regulation in light of sound risk management practices. The 
Commission believes that the Final Rule will not have a significant 
impact on the practice of sound risk management because the manner in 
which various CPOs, pooled investment vehicles, and their respective 
principals organize, register, or claim an exemption from such 
registration has only a small influence on how such market participants 
manage their risks overall.
5. Other Public Interest Considerations
    Section 15(a)(2)(E) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of other public 
interest considerations. The Commission did not identify any additional 
public interest considerations not already discussed above.

d. Anti-Trust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under CEA section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of the CEA.\104\ The Commission believes that 
the public interest to be protected by the antitrust laws is generally 
to protect competition. The Commission requested comment on whether the 
Proposal implicated any other specific public interest to be protected 
by the antitrust laws and received no comments addressing this issue.
---------------------------------------------------------------------------

    \104\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission has considered the Final Rule to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
Because the Commission has determined the Final Rule is not 
anticompetitive and has no anticompetitive effects, the Commission has 
not identified any less anticompetitive means of achieving the purposes 
of the CEA.

List of Subjects in 17 CFR Part 4

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

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 4 as follows:

[[Page 40890]]

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, 
and 23.


0
2. Amend Sec.  4.13 by:
0
a. Revising paragraph (b)(1)(ii); and
0
b. Redesignating paragraph (b)(1)(iii) as (b)(1)(iv), and adding new 
paragraph (b)(1)(iii).
    The addition and revision read as follows:


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

* * * * *
    (b)(1) * * *
    (ii) Specify the paragraph number pursuant to which the person is 
filing the notice (i.e., Sec.  4.13(a)(1), (2), (3), or (5)) and 
represent that the pool will be operated in accordance with the 
criteria of that paragraph;
    (iii) Represent that neither the person nor any of its principals 
has in its background a statutory disqualification that would require 
disclosure under section 8a(2) of the Act if such person sought 
registration, unless such disqualification arises from a matter which 
was disclosed in connection with a previous application for 
registration, where such registration was granted; and
* * * * *

    Issued in Washington, DC, on June 5, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

Appendices to Registration and Compliance Requirements for Commodity 
Pool Operators and Commodity Trading Advisors: Prohibiting Exemptions 
Under Regulation 4.13 on Behalf of Persons Subject to Certain Statutory 
Disqualifications--Commission Voting Summary, Chairman's Statement, and 
Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Supporting Statement of Chairman Heath P. Tarbert

    As Robert Louis Stevenson aptly put it, ``Everybody, sooner or 
later, sits down to a banquet of consequences.'' \1\
---------------------------------------------------------------------------

    \1\ While this is the popular rendering of Stevenson's quote, it 
appears to be apocryphal. Stevenson apparently used the phrase 
``game of consequences.'' See Spurious Quotations, The Robert Louis 
Stevenson Archive, https://www.robert-louis-stevenson.org/richard-dury-archive/nonquotes.htm. Regardless whether Stevenson referred to 
a banquet or a game, his point was the same: Everyone must face the 
consequences of his or her actions. That is true for life generally, 
and for the derivatives markets specifically.
---------------------------------------------------------------------------

    Today we are focused on the consequences of bad acts that result 
in ``statutory disqualification'' under the Commodity Exchange Act 
(``CEA''). These acts include the most serious types of financial 
crimes, such as embezzlement, theft, extortion, fraud, 
misappropriation, and bribery. Once an individual is statutorily 
disqualified, the CFTC may deny or revoke his or her registration. 
The same is true for corporate entities.
    It stands to reason that someone who has been statutorily 
disqualified--and thus has no right to register with the CFTC--would 
be precluded from managing other people's money and positions in the 
derivatives markets the CFTC regulates. But currently, this is not 
exactly the case. As it turns out, a statutorily disqualified person 
who wishes to operate a fund that trades derivatives may simply 
claim one of the exemptions from registration as a commodity pool 
operator (``CPO'') under CFTC Rule 4.13. Although each of these 
exemptions has a number of conditions, the absence of statutory 
disqualification is not currently among them.
    Today's final rule closes this loophole for bad actors. Under 
our rule as amended, a CPO claiming a registration exemption would 
be required to certify that neither the CPO nor any of its 
principals has in its background conduct that would result in 
automatic statutory disqualification under the CEA. I believe this 
rule will enhance customer protections and public confidence in the 
integrity of the derivatives markets by ensuring that bad actors 
cannot gain access to the funds of innocent, third-party investors 
simply by filing an exemption claim.\2\
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    \2\ The Commission has adopted a registration exemption for CPOs 
that meet the definition of ``family office'' under the Securities 
and Exchange Commission's regulations governing investment advisers. 
84 FR 67,368 (Dec. 10, 2019). Section 409 of the Dodd-Frank Act 
excluded family offices from the definition of ``investment 
adviser'' subject to the Investment Advisers Act. Given the clear 
legislative intent to remove family offices from regulation, it 
would be inappropriate for the CFTC to exert its own oversight over 
such offices. As Congress recognized in the Dodd-Frank Act, 
regulatory oversight over family offices would be a wasteful use of 
taxpayer funds, as such offices are owned and controlled by a single 
wealthy family. Given their affluence and familial ties, these 
investors generally neither desire nor need investor protections 
designed for the retail public at large. Consistent with this 
approach, today's prohibition on statutory disqualification does not 
apply to CPOs that are family offices. That said, we cannot allow 
bad actors to operate a family office in a way that adversely 
affects the market as a whole--for example, by engaging in 
manipulative or deceptive transactions through the family office. To 
that end, I have asked the Division of Swap Dealer and Intermediary 
Oversight to conduct a special call to determine how many family 
office managers would be prohibited from claiming the exemption if 
they were covered by this rule.
---------------------------------------------------------------------------

    In so doing, we also strike a balance between bad acts that 
warrant automatic disqualification and other behavior that requires 
the opportunity for a hearing before the subject is disqualified. 
Because the CEA itself makes this kind of distinction in the context 
of registration, the Commission believes that lesser offenses \3\ 
warrant different treatment than recent and more serious offenses in 
the context of registration exemptions. Thus, today's prohibition on 
statutory disqualification does not include offenses for which the 
CEA itself requires a hearing prior to disqualification.
---------------------------------------------------------------------------

    \3\ This includes offenses that are less recent (e.g., felony 
convictions that are more than ten years old) or are less relevant 
to a person's fitness to handle customer funds (e.g., convictions 
for felonies that do not involve financial wrongdoing). See, e.g., 
CEA Section 8a(3)(D).
---------------------------------------------------------------------------

    I am comfortable with this exclusion, both because it is 
consistent with legislative intent and because CPOs relying on a 
Rule 4.13 registration exemption generally do not manage the money 
and derivatives positions of the retail public at large. Rather, 
these CPOs are limited by the terms of their exemption to small 
pools of select participants, pools limited to sophisticated 
investors, pools with de minimis derivatives positions, and the 
like.\4\
---------------------------------------------------------------------------

    \4\ The rule also excludes statutory disqualifications that were 
previously disclosed to the Commission in a registration 
application, if the Commission chose to permit registration 
notwithstanding the disqualification. This exclusion is relevant 
because a CPO may be registered with the CFTC with respect to 
certain pools that it manages and claim a registration exemption 
with respect to other pools.
---------------------------------------------------------------------------

    In addition to protecting customers from bad actors and 
enhancing the integrity of the derivatives profession, this rule 
also furthers the CFTC's strategic goal of ``being tough on those 
who break the rules.'' \5\ No longer will financial wrongdoers be 
able to use registration exemptions as a loophole to avoid the full 
consequences of their actions. For these reasons, I am pleased we 
are acting to finalize this rule.
---------------------------------------------------------------------------

    \5\ See Draft CFTC 2020-2024 Strategic Plan, 85 FR 29,935 (May 
19, 2020), https://www.govinfo.gov/content/pkg/FR-2020-05-19/pdf/2020-10676.pdf.
---------------------------------------------------------------------------

    Finally, it is worth remembering that sound regulation of the 
U.S. derivatives markets stems from a robust federal framework that 
the CFTC primarily administers, complemented and strengthened by an 
equally robust regime of self-regulation. A central pillar of that 
regime is the National Futures Association (``NFA''), the main self-
regulatory organization for CPOs. NFA's strong support for this rule 
is just one of countless actions that demonstrate their steadfast 
commitment to the integrity of the derivatives community.\6\
---------------------------------------------------------------------------

    \6\ See NFA Comment Letter on Registration and Compliance 
Requirements for Commodity Pool Operators and Commodity Trading 
Advisors (Dec. 17, 2018).

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[[Page 40891]]

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I am pleased to support today's final rule amending the 
procedures for certain commodity pool operators (CPOs) to claim an 
exemption from registration.\1\ It is sound policy to prevent a firm 
from claiming a registration exemption if the entity or its 
principals are ``statutorily disqualified'' under section 8a(2) of 
the Commodity Exchange Act, when the same disqualification would 
prevent them from registering with the Commission. The 
disqualification applicable under today's amendment covers some of 
the most serious offenses under the Act, including fraud. While an 
exempt CPO is more limited in its activities than a registered CPO, 
for example, no pool has more than 15 participants \2\ or the CPO's 
commodity interest activity must remain below certain initial margin 
and notional amount thresholds,\3\ an exempt CPO still manages money 
for the public. I therefore agree with today's amendment that the 
firm should be held to one of the most fundamental customer 
protection standards under the Commodity Exchange Act.
---------------------------------------------------------------------------

    \1\ Amended Commission regulation 4.13(b)(1)(iii) (17 CFR 
4.13(b)(1)(iii)).
    \2\ Commission regulation 4.13(a)(2).
    \3\ Commission regulation 4.13(a)(3).
---------------------------------------------------------------------------

    I thank the Commission's staff for their work on this 
rulemaking, in particular for their thoughtful responses to issues 
that had been raised by commenters.

Appendix 4--Concurring Statement of Commissioner Rostin Behnam

    I support today's adoption of a final rule (the ``Final Rule'') 
requiring any person that files with the CFTC a notice claiming an 
exemption from registration as a commodity pool operator (``CPO'') 
under Regulation 4.13 of the Commodity Exchange Act (``CEA'' or the 
``Act'') to affirmatively represent that neither the claimant nor 
any of the CPO's principals has in its background any statutory 
disqualifications listed in section 8a(2) of the CEA, which are 
required to be disclosed as a part of a CPO registration application 
with the Commission. Beyond closing a regulatory gap that allows 
certain persons that would generally fail to meet the CEA's basic 
conduct requirements to nevertheless claim an exemption from CPO 
registration, the Final Rule invigorates the Commission's stance as 
an active regulator with respect to the most diverse registration 
category within our jurisdiction. As I have said before, CPOs (and 
commodity trading advisors or ``CTAs'') are often identifiable by 
variable organizational structures, investment focus, participation, 
and solicitation, as well as complexity in how they are regulated 
within our authority.\1\ These factors demand that when we act, we 
do so with a laser focus on customer protections. I am pleased that 
this Final Rule aggressively advances customer protection in a 
tangible way.
---------------------------------------------------------------------------

    \1\ Rostin Behnam, Statement of Concurrence by CFTC Commissioner 
Rostin Behnam: Amendments to Registration and Compliance 
Requirements for Commodity Pool Operators and Commodity Trading 
Advisors, Nov. 25, 2019, https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement112519.
---------------------------------------------------------------------------

    I believe it is fully within our statutory duty to provide, at 
the very least, a foundational level of security on which customers, 
regardless of their experience and aptitude, can rely when parsing 
and considering what can seem like an endless amount of important 
information and fine print. Today's Final Rule provides that footing 
for exempt commodity pool participants by generally prohibiting 
persons who have, or whose principals have, in their backgrounds any 
of the statutory disqualifications listed in CEA section 8a(2)--
which are generally egregious, recent in time, and based upon a 
previous finding or order by the Commission, a court, or another 
governmental body--from soliciting and accepting funds for 
participation in commodity pools, even if they are exempt.
    I am pleased that the Final Rule and its preamble address the 
significant number of responsive public comments, especially those 
seeking clarity on process and procedure. Last fall, when the 
Commission finalized several amendments to Part 4 of the regulations 
addressing various registration and compliance requirements for CPOs 
and CTAs, I commended, among other things, its decision to not move 
forward at that time on the part of the proposal that led to today's 
Final Rule.\2\ That decision has led to a more thoughtful 
consideration of the comments received, the practicalities of the 
proposal, and the Commission's need to fulfill its regulatory goals 
while remaining true to the Act. To that end, I appreciate that the 
Final Rule preserves the Commission's direct and delegated 
authorities under CEA section 8a(2) and Regulation 4.12(a) to 
ultimately evaluate fitness for registration--or exemption, as the 
facts may dictate.
---------------------------------------------------------------------------

    \2\ Id.
---------------------------------------------------------------------------

Appendix 5--Statement of Commissioner Dan M. Berkovitz

    I support today's final rule to prohibit commodity pool 
operators (``CPOs'') or their principals who are subject to 
statutory disqualification under Section 8a(2) from claiming an 
exemption from registration. This rule narrows a loophole in our CPO 
registration framework and strengthens the Commission's regulations 
to protect customers and market integrity.
    Section 8a(2) of the Commodity Exchange Act (``CEA'') lists the 
offenses for which the Commission may refuse, suspend, or condition 
registration without a prior hearing. These offenses include major 
violations of a number of laws and regulations governing financial 
markets, including felony convictions for embezzlement, theft, 
extortion, and fraud.\1\ Today's rule will ensure that persons who 
are restricted under Section 8a(2) from operating in registered 
activities cannot escape such restrictions by engaging in activities 
that are exempt from registration.
---------------------------------------------------------------------------

    \1\ CEA Section 8a(2)(D)(iii).
---------------------------------------------------------------------------

    Although to a large degree this rule closes an existing loophole 
in our regulations, it perpetuates a glaring deficiency by failing 
to hold CPOs of family offices or their principals to the same 
standards of conduct as other exempt CPOs. The risks to market 
integrity presented by this omission are compounded by another 
recent rulemaking exempting CPOs of family offices from a 
requirement to notify the Commission if they claim an exemption from 
registration.\2\ Thus, under this set of new rules completed today, 
CPOs of family offices are exempt from registration, exempt from 
providing notice that they are using an exemption, and exempt from 
the statutory disqualifications that generally apply to all other 
CPOs. This triad of exemptions for CPOs of family offices leaves the 
Commission uniquely unaware of the activities and integrity of these 
entities.
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    \2\ Final Rule, Registration and Compliance Requirements for 
Commodity Pool Operators (CPOs) and Commodity Trading Advisors: 
Family Offices and Exempt CPOs, 84 FR 67355 (Dec. 10, 2019).
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    As I noted in my dissent on the final rule that exempted CPOs of 
family offices from notifying the Commission that they are claiming 
an exemption, family offices today are not ``mom and pop'' 
operations that invest small sums in commodities, but rather large 
and sophisticated asset management enterprises established by and 
for mega-millionaires and billionaires.\3\ The Commission justified 
these exemptions on the grounds that related family members in these 
``sophisticated'' entities do not need the customer protections that 
the CFTC otherwise applies to CPO activities. However, regardless of 
whether this assessment is accurate, customer protection is just one 
of several objectives of the Commission's CPO regulations. The 
regulation of CPOs facilitates the Commission's oversight of the 
derivative markets, management of systemic risks, and mandate to 
ensure safe trading practices.\4\ There is no basis to conclude that 
the activities of large family office CPOs pose less of a concern in 
these areas than the activities of other exempt or non-exempt CPOs.
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    \3\ Dissenting Statement of Commissioner Dan M. Berkovitz: 
Rulemaking to Provide Exemptive Relief for Family Office CPOs: 
Customer Protection Should be More Important than Relief for 
Billionaires, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement112519.
    \4\ See, e.g., Commodity Pool Operators and Commodity Trading 
Advisors: Compliance Obligations, 77 FR 11252, 11253, 11275 (Feb. 
24, 2012); upheld in Investment Company Institute v. CFTC, 720 F.3d 
370 (D.C. Cir. 2013). In Section 4l of the CEA, Congress declared, 
``the activities of commodity trading advisors and commodity pool 
operators are affected with a national interest in that, among other 
things . . . their operations are directed toward and cause the 
purchase and sale of commodities for future delivery . . . and the 
foregoing transactions occur in such volume as to affect 
substantially transactions in contract markets.'' 7 U.S.C. 6l.
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    The regulatory principle here is straightforward. We are not 
only responsible for monitoring market participants that pose risk 
to customers, but also those who pose risk to the integrity of our 
markets. Individuals who commit felonies or other serious violations 
affecting the integrity of financial markets should not be permitted 
to trade in CFTC markets, particularly without at least some 
supervision and oversight. If a

[[Page 40892]]

CPO of a family office or one of its principals has engaged in 
conduct serious enough to be subject to the disqualification 
provisions of Section 8a(2), such as fraud or misappropriation, then 
it should seek registration with the Commission and be subject to 
our oversight.
    However, I am pleased that at my request, the CFTC staff will be 
making a special call to CPOs of family offices to determine how 
many, if any, are subject to statutory disqualification under 
Section 8a(2). The Commission currently has no information in this 
regard. I have consistently supported basing our regulatory 
decisions on the best available data. The data we will obtain from 
this special call will inform our judgment about whether further 
action is necessary to protect customers and the market.
    I also am pleased that the Commission has declined to exclude 
registered investment advisers from the scope of this rule. The 
Securities and Exchange Commission has a different statutory 
disqualification regime. Registrants should abide by CFTC rules when 
they operate in our markets.
    Going forward, the Commission should propose similar 
restrictions on the claiming of exemptions by statutorily 
disqualified commodity trading advisors. While this rule narrows one 
of the gaps in our Part 4 regulatory framework, this additional 
significant gap remains and should be closed.
    I would like to thank the staff of the Division of Swap Dealer 
and Intermediary Oversight for working with my office to incorporate 
some of our comments and proposed revisions to this rule. As a 
matter of course, a collaborative rulemaking process that takes into 
account the input from all five Commissioners will produce better 
regulations.

[FR Doc. 2020-12607 Filed 7-7-20; 8:45 am]
BILLING CODE 6351-01-P

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