Exemption From Registration for Certain Foreign Intermediaries, 78718-78742 [2020-23810]
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issuance of an order declaring a practice
in air transportation or the sale of air
transportation to be unfair or deceptive
to consumers under the authority of 49
U.S.C. 41712(a), and when a regulation
issued under the authority of section
41712 does not apply to the practice at
issue, then the Department shall
articulate in the order the basis for
concluding that the practice is unfair or
deceptive to consumers as defined in
this section.
(f) Formal enforcement proceedings.
When there are reasonable grounds to
believe that an airline or ticket agent has
violated 49 U.S.C. 41712, and efforts to
settle the matter have failed, the Office
of Aviation Consumer Protection may
issue a notice instituting an enforcement
proceeding before an administrative law
judge pursuant to 14 CFR 302.407. After
the issues have been formulated, if the
matter has not been resolved through
pleadings or otherwise, the parties will
receive reasonable written notice of the
time and place of the hearing as set forth
in 14 CFR 302.415.
Issued this 24th day of November, 2020, in
Washington, DC, under authority delegated
in 49 CFR 1.27(n).
Steven G. Bradbury,
General Counsel.
[FR Doc. 2020–26416 Filed 12–4–20; 8:45 am]
BILLING CODE 4910–9X–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 3
RIN 3038–AE46
DATES:
Exemption From Registration for
Certain Foreign Intermediaries
FOR FURTHER INFORMATION CONTACT:
The effective date for this Final
Rule is February 5, 2021.
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:
The Commodity Futures
Trading Commission (CFTC or
Commission) is adopting amendments
(Final Rule) revising the conditions set
forth in the Commission regulation
under which a person located outside of
the United States (each, a foreign
located person) engaged in the activity
of a commodity pool operator (CPO) in
connection with commodity interest
transactions on behalf of persons
located outside the United States
(collectively, an offshore commodity
pool or offshore pool) would qualify for
an exemption from CPO registration and
regulation with respect to that offshore
pool. The Final Rule provides that the
exemption under the applicable
Commission regulation for foreign
SUMMARY:
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located persons acting as a CPO (a nonU.S. CPO) on behalf of offshore
commodity pools may be claimed by
such non-U.S. CPOs on a pool-by-pool
basis. The Commission is also adopting
a provision clarifying that a non-U.S.
CPO may claim an exemption from
registration under the applicable
Commission regulation with respect to a
qualifying offshore commodity pool,
while maintaining another exemption
from CPO registration, relying on a CPO
exclusion, or even registering as a CPO,
with respect to its operation of other
commodity pools. Additionally, the
Commission is adopting a safe harbor by
which a non-U.S. CPO of an offshore
pool may rely upon that exemption, if
it satisfies several enumerated factors
related to its operation of the offshore
commodity pool. The Commission is
also adopting an amendment permitting
U.S. affiliates of a non-U.S. CPO to
contribute initial capital to such nonU.S. CPO’s offshore pools, without
affecting the eligibility of the non-U.S.
CPO for an exemption from registration
under the applicable Commission
regulation. The Commission is also
adopting amendments to the applicable
Commission regulation originally
proposed in 2016 that clarify whether
clearing of commodity interest
transactions through a registered futures
commission merchant (FCM) is required
as a condition of the registration
exemptions for foreign intermediaries,
and whether such exemption is
available for foreign intermediaries
acting on behalf of international
financial institutions.
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Joshua B. Sterling, Director, at 202–418–
6056, jsterling@cftc.gov; with respect to
the finalization of the 2016 Proposal:
Frank N. Fisanich, Chief Counsel, at
202–418–5949 or ffisanich@cftc.gov;
with respect to all other aspects of this
release: Amanda Lesher Olear, Deputy
Director, at 202–418–5283 or aolear@
cftc.gov; Pamela Geraghty, Associate
Director, at 202–418–5634 or
pgeraghty@cftc.gov; Elizabeth Groover,
Special Counsel, at 202–418–5985 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
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B. Recent Regulatory Proposals Related to
Commission Regulation 3.10(c)
C. The 2020 Proposal
II. Final Rule
A. General Comments in Response to the
2016 and 2020 Proposals
B. Reconsidering the 2016 Proposal and
Comments Received
1. The 2016 Proposal’s Amendments to
Commission Regulation 3.10(c)
2. Responsive Comments Received
Regarding the 2016 Proposal
3. Finalizing the 2016 Proposal
C. Pool-by-Pool Exemption
D. Utilizing the 3.10 Exemption Concurrent
With Other Regulatory Relief Available
to CPOs
E. The Safe Harbor for Non-U.S. CPOs With
Respect to Inadvertent U.S. Participants
in Their Offshore Pools
F. Exception for Initial Capital
Contributions by U.S. Affiliates of a NonU.S. CPO to Its Offshore Pools
1. U.S. ‘‘Controlling’’ Affiliates
2. The Timing of a U.S. Affiliate’s Capital
Contributions to an Offshore Pool
3. Additional Anti-Evasion Conditions:
The Marketing Prohibition and
Prohibiting ‘‘Bad Actor’’ U.S. Affiliates
4. Analysis Under Section 4(c) of the Act
G. Additional Relief for Commodity
Trading Advisors
H. Reorganization of Commission
Regulation 3.10(c)
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Costs and Benefits Related to Finalizing
the 2016 Proposal
2. Commission Regulation 3.10 (c)(5)(i):
Claiming the 3.10 Exemption on a Poolby-Pool Basis
3. Commission Regulation 3.10(c)(5)(iii):
Providing A Safe Harbor for Non-U.S.
CPOs Whose Offshore Pools May Have
Inadvertent U.S. Participants
4. Commission Regulation 3.10(c)(5)(iv):
Utilizing the 3.10 Exemption Concurrent
with Other Available Exclusions and
Exemptions
5. Commission Regulation 3.10(c)(5)(ii):
The Affiliate Contribution Exception
6. Section 15(a) Factors
D. Anti-Trust Considerations
I. Background
A. Statutory and Regulatory Background
Section 1a(11) of the Commodity
Exchange Act (CEA or Act) 1 defines the
term ‘‘commodity pool operator’’ as any
1 7 U.S.C. 1a(11). See also 17 CFR 1.3 (defining
‘‘commodity interest’’ to include, inter alia, any
contract for the purchase or sale of a commodity for
future delivery, and any swap as defined in the
CEA); Adaptation of Regulations to Incorporate
Swaps, 77 FR 66288, 66295 (Nov. 2, 2012)
(discussing the modification of the term
‘‘commodity interest’’ to include swaps). The Act is
found at 7 U.S.C. 1, et seq. (2018), and the
Commission’s regulations are found at 17 CFR Ch.
I (2020). Both are accessible through the
Commission’s website, https://www.cftc.gov.
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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. CEA section 1a(10)
defines a ‘‘commodity pool’’ as any
investment trust, syndicate, or similar
form of enterprise operated 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 With respect to CPOs,
the CEA also authorizes the
Commission, acting by rule or
regulation, to include within or exclude
from the term ‘‘commodity pool
operator’’ any person engaged in the
business of operating a commodity pool
if the Commission determines that the
rule or regulation will effectuate the
purposes of the CEA.5
Additionally, CEA section 4(c), in
relevant part with respect to the Final
Rule, 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 Act.6 CEA section 4(c)
authorizes the Commission to grant
exemptive relief if the Commission
determines, inter alia, that the
exemption would be consistent with the
‘‘public interest.’’ 7
To provide an exemption pursuant to
section 4(c) of the Act with respect to
registration as a CPO, the Commission
must determine that the agreements,
contracts, or transactions undertaken by
the exempt CPO should not require
registration, and that the exemption
from registration would be consistent
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27
U.S.C. 1a(38); 17 CFR 1.3 (defining ‘‘person’’
to include individuals, associations, partnerships,
corporations, and trusts).
3 7 U.S.C. 1a(10).
4 7 U.S.C. 6m(1).
5 7 U.S.C. 1a(11)(B).
6 7 U.S.C. 6(c)(1).
7 Conference Report, H.R. Report 102–978 at 8
(Oct. 2, 1992) (‘‘The goal of providing the
Commission with broad exemptive powers . . . is
to give the Commission a means of providing
certainty and stability to existing and emerging
markets so that financial innovation and market
development can proceed in an effective and
competitive manner.’’).
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with the public interest and the Act.8
The Commission must further
determine that the agreement, contract,
or transaction will be entered into solely
between appropriate persons, and that it
will not have a material adverse effect
on the ability of the Commission or any
contract market to discharge its
regulatory or self-regulatory duties
under the Act.9 The term ‘‘appropriate
person’’ as used in CEA section 4(c)
includes ‘‘a commodity pool formed or
operated by a person subject to
regulation under the Act.’’ 10 The
Commission has previously interpreted
the clause ‘‘subject to regulation under
the Act’’ as including persons who are
exempt from registration or excluded
from the definition of a registration
category.11
Part 3 of the Commission’s regulations
governs the registration of
intermediaries engaged in the offering
and selling of, and the provision of
advice concerning, all commodity
interest transactions. Commission
regulation 3.10 establishes the
procedure that intermediaries, including
CPOs, must use to register with the
Commission,12 and also sets forth
certain exemptions from registration.13
In particular, Commission regulation
3.10(c)(3)(i), discussed in further detail
below, provides, inter alia, that a person
engaged in the activity of a CPO,
commodity trading advisor (CTA), or
introducing broker (IB), in connection
with any commodity interest transaction
executed bilaterally or made on or
subject to the rules of any designated
contract market (DCM) or swap
execution facility (SEF), is not required
to register as a CPO, CTA, or IB (relief
referred to herein as the 3.10
Exemption), provided that:
1. The person is located outside the
United States, its territories, and
possessions (the United States or U.S.);
2. The person acts only on behalf of
persons located outside the United
States; and
3. The commodity interest transaction
is submitted for clearing through a
registered FCM.14
87
U.S.C. 6(c)(2)(A).
U.S.C. 6(c)(2)(B).
U.S.C. 6(c)(3)(E).
11 77 FR 30596, 30655 (May 23, 2012) (finding, in
the context of the eligible contract participant
definition, that ‘‘construing the phrase ‘formed and
operated by a person subject to regulation under the
[CEA]’ to refer to a person excluded from the CPO
definition, registered as a CPO or properly exempt
from CPO registration appropriately reflects
Congressional intent’’).
12 See, e.g., 17 CFR 3.10(a)(1)(i) (requiring the
filing of a Form 7–R with the National Futures
Association (NFA)).
13 17 CFR 3.10(c) (providing exemptions from
registration for certain persons).
14 17 CFR 3.10(c)(3)(i).
97
10 7
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78719
Commission regulation 3.10(c)(2)(i)
provides a similar exemption from
registration for a person located outside
the United States acting as an FCM.15
A person acting in accordance with
the 3.10 Exemption remains subject to
the antifraud provisions of, inter alia,
CEA section 4o,16 but is otherwise not
required to comply with those
provisions of the CEA or Commission
regulations applicable to any person
registered in the relevant intermediary
capacity,17 or persons required to be so
registered.18 Of particular relevance to
the amendments adopted herein
regarding non-U.S. CPOs, the 3.10
Exemption provides that it is available
to non-U.S. CPOs whose activities, in
connection with any commodity interest
transaction executed bilaterally or made
on or subject to the rules of any DCM
or SEF, are confined to acting on behalf
of offshore commodity pools.19 This
exemption was first adopted in 2007
(2007 Final Rule) and was based on a
long-standing no-action position
articulated by the Commission’s Office
of General Counsel in 1976.20
In adopting the 2007 Final Rule, the
Commission agreed with commenters
who cited its longstanding policy of
focusing ‘‘‘customer protection activities
upon domestic firms and upon firms
soliciting or accepting orders from
domestic users of the futures
markets.’ ’’ 21 The Commission further
stated that the protection of non-U.S.
customers of non-U.S. firms may be best
deferred to foreign regulators.22 The
Commission noted its understanding
that, pursuant to the terms of the 3.10
15 17
CFR 3.10(c)(2)(i).
U.S.C. 6o.
17 For purposes of this adopting release, the term
‘‘intermediary’’ includes persons acting in the
capacity of an FCM, IB, CPO, or CTA. For more
information, see ‘‘Intermediaries,’’ CFTC, available
at https://www.cftc.gov/IndustryOversight/
Intermediaries/index.htm.
18 17 CFR 3.10(c)(3)(ii). As market participants,
however, such persons remain subject to all other
applicable provisions of the CEA and the
Commission’s regulations promulgated thereunder.
See, e.g., 7 U.S.C. 9 (prohibiting manipulation by
any person with respect to a swap or futures
transaction).
19 17 CFR 3.10(c)(3)(i).
20 Exemption from Registration for Certain
Foreign Persons, 72 FR 63976, 63977 (Nov. 14,
2007) (2007 Final Rule). See also CFTC Staff
Interpretative Letter 76–21.
21 2007 Final Rule, 72 FR at 63977, quoting
Introducing Brokers and Associated Persons of
Introducing Brokers, Commodity Trading Advisors
and Commodity Pool Operators; Registration and
Other Regulatory Requirements, 48 FR 35248,
35261 (Aug. 3, 1983).
22 Id. The Commission also cited this policy
position in the initial proposal discussing what
ultimately would be adopted as Commission
regulation 3.10(c)(3)(i). Exemption from
Registration for Certain Foreign Persons, 72 FR
15637, 15638 (Apr. 2, 2007).
16 7
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Exemption, ‘‘[a]ny person seeking to act
in accordance with any of the foregoing
exemptions from registration should
note that the prohibition on contact
with U.S. customers applies to
solicitation as well as acceptance of
orders.’’ 23 Moreover, the Commission
stated that, ‘‘[if] a person located outside
the U.S. were to solicit prospective
customers located in the U.S. as well as
outside of the U.S., these exemptions
would not be available, even if the only
customers resulting from the efforts
were located outside the U.S.’’ 24
In 2010, the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(Dodd-Frank Act) 25 amended the
definitions of ‘‘commodity pool
operator’’ and ‘‘commodity pool’’ in the
CEA to include those persons operating
collective investment vehicles that
engage in swaps,26 which resulted in an
expansion of the universe of persons
captured within both statutory
definitions.27 When combined with the
rescission of Commission regulation
4.13(a)(4) in 2012,28 an increasing
number of non-U.S. CPOs were required
to either register with the Commission,
or claim an available exemption or
exclusion with respect to the operation
of their commodity pools, regardless of
whether such pools were offshore or
offered to U.S. participants.
B. Recent Regulatory Proposals Related
to Commission Regulation 3.10(c)
As discussed further below, on July
27, 2016, the Commission proposed to
amend Commission regulation 3.10(c)
(2016 Proposal) revising the conditions
under which the exemption from
intermediary registration would
apply.29 Generally, the 2016 Proposal
would permit a foreign located person
acting in the capacity of an FCM, IB,
CTA, or CPO, to utilize an exemption
from registration as such, provided that
the foreign located person, in
connection with any commodity interest
transaction, acts solely on behalf of (1)
23 2007
Final Rule, 72 FR at 63977–63978.
at 63978.
25 Public Law 111–203, H.R. 4173 (2010) (DoddFrank Act).
26 Section 721 of the Dodd-Frank Act.
27 See also Adaptation of Regulation to
Incorporate Swaps, 77 FR 66288 (Nov. 2, 2012)
(incorporating this expanded jurisdiction over
swaps into existing Commission regulations).
28 See Commodity Pool Operators and
Commodity Trading Advisors; Compliance
Obligations, 77 FR 11252, 11264 (Feb. 24, 2012).
Former Commission regulation 4.13(a)(4) provided
an exemption from registration as a CPO for
operators of commodity pools offered and sold to
sophisticated participants. See 17 CFR 4.13(a)(4)
(2010).
29 Exemption from Registration for Certain
Foreign Persons, 81 FR 51824 (Aug. 5, 2016) (2016
Proposal).
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24 Id.
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other foreign located persons, or (2)
international financial institutions (IFIs,
which were further defined in the 2016
Proposal’s proposed Commission
regulation (c)(6)). The proposed
amendments provided an exemption
from registration without regard to
whether such foreign located person
cleared the commodity interest
transaction.30 In response to the 2016
Proposal, the Commission received six
comments, most of which were
supportive of those proposed
amendments.31 The Commission,
however, did not finalize the 2016
Proposal at that time.
In 2018, the Commission proposed,
among other changes to its part 4
regulations, adding a new exemption
from CPO registration to Commission
regulation 4.13 (2018 Proposal) that
would formally incorporate the relief
provided by CFTC Staff Advisory 18–96
(Advisory 18–96) in the Commission’s
CPO regulatory provisions.32 In the
2018 Proposal, the Commission noted
that the proposed exemption based on
Advisory 18–96 was intended to be
claimed on a pool-by-pool basis, and
stated that ‘‘[t]his characteristic would
effectively differentiate the [proposed
exemption] from the relief currently
provided’’ under the 3.10 Exemption.33
The Commission received several
comments regarding the 2018 Proposal’s
discussion of the differences between
the proposed amendment to
Commission regulation 4.13 and the
existing 3.10 Exemption.34
For instance, one commenter noted
that the 3.10 Exemption ‘‘is widely
relied on around the world by non-U.S.
managers of offshore funds that are not
offered to U.S. investors but that may
trade in the U.S. commodity interest
markets.’’ 35 This commenter further
30 2016
Proposal, 81 FR at 51827.
public comment file for the 2016 Proposal
is available on the Commission’s website.
Comments for Proposed Rule 81 FR 51824,
available at https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=1724. See
infra pt. II.B. for additional discussion of the 2016
Proposal and Commission responses to those public
comments.
32 Registration and Compliance Requirements for
Commodity Pool Operators and Commodity
Trading Advisors, 83 FR 52902 (Oct. 18, 2018)
(2018 Proposal); CFTC Staff Advisory 18–96 (Apr.
11, 1996).
33 2018 Proposal, 83 FR at 52914.
34 The comment file for the 2018 Proposal is also
available on the Commission’s website. Comments
for Proposed Rule 83 FR 52902, available at https://
comments.cftc.gov/PublicComments/
CommentList.aspx?id=2925.
35 Comment Letter from the Asset Management
Group of the Securities Industry and Financial
Markets Association (SIFMA AMG), at 9 (Dec. 17,
2018), available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61922&SearchText=.
noted that ‘‘CPO registration for these
offshore entities with global operations
is not a viable option[,]’’ due to the
logistical and regulatory issues
involved.36 Another commenter stated
that, ‘‘it is critical to bear in mind that
the Commission . . . to our knowledge
has never addressed, the separate and
distinct question of whether an offshore
CPO may rely on Rule 3.10(c)(3)(i) with
respect to some of its offshore pools in
combination with relying on other
exemptions with respect to its other
pools.’’ 37 Several other commenters
expressed similar views and requested
that the Commission affirm CPOs’
ability to claim the 3.10 Exemption on
a pool-by-pool basis and to rely upon
that exemption in addition to other
exemptions, exclusions, or
registration.38
In 2019, the Commission withdrew
the portion of the 2018 Proposal related
to adopting the relief provided in
Advisory 18–96 as a CPO registration
exemption, and, in light of the
comments received in response to its
discussion of the 3.10 Exemption,
undertook an inquiry as to whether the
3.10 Exemption should be amended to
respond to the current CPO space and
the issues articulated by commenters.39
Based on the foregoing experience and
history, and in consideration of the
increasingly global nature of the
commodity pool space, the Commission
proposed certain amendments to the
3.10 Exemption on May 28, 2020, which
were subsequently published in the
Federal Register on June 12, 2020 (2020
Proposal).40
C. The 2020 Proposal
The 2020 Proposal consisted of
several proposed amendments to the
3.10 Exemption. Specifically, the
Commission proposed amendments to
the 3.10 Exemption such that non-U.S.
31 The
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36 Id.
at 12.
37 Comment
Letter from Fried, Frank, Harris,
Shriver, & Jacobson, LLP (Fried Frank), at 6 (Dec.
17, 2018), available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61920&SearchText=.
38 See, e.g., Comment Letter from Willkie, Farr,
and Gallagher, LLP (Willkie), at 6 (Dec. 17, 2018),
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61927&SearchText=; and
Comment Letter from Alternative Investment
Management Association (AIMA), at 6 (Dec. 17,
2018), available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61907&SearchText=.
39 Registration and Compliance Requirements for
Commodity Pool Operators (CPOs) and Commodity
Trading Advisors: Family Offices and Exempt
CPOs, 84 FR 67355, 67357 (Dec. 10, 2019).
40 Exemption from Registration for Certain
Foreign Persons Acting as Commodity Pool
Operators of Offshore Commodity Pools, 85 FR
35820 (Jun. 12, 2020) (2020 Proposal).
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CPOs may rely on that relief on a poolby-pool basis.41 The Commission also
proposed an amendment confirming
that the 3.10 Exemption, as revised, may
be utilized along with other exemptions
or exclusions available to CPOs
generally, or CPO registration.42 The
Commission further proposed a
conditional safe harbor for non-U.S.
CPOs who, by virtue of a pool’s
structure, cannot represent with
absolute certainty that there are no U.S.
participants in their operated offshore
pool.43 Finally, the Commission also
proposed to provide an exception from
the 3.10 Exemption’s prohibition on
U.S. participants, such that a U.S.
controlling affiliate could provide initial
capital to an offshore pool operated by
its affiliated non-U.S. CPO without
being considered a U.S. participant in
that offshore pool.44 In addition to the
substantive amendments to the 3.10
Exemption proposed for the first time as
part of the 2020 Proposal, the
Commission also reopened the comment
period associated with the 2016
Proposal for a period of 60 days.45
II. Final Rule
After considering all of the comments
received, and for the reasons stated by
the Commission herein, the Commission
is amending Commission regulation
3.10(c), in a manner generally consistent
with the 2016 and 2020 Proposals, with
certain adjustments resulting from
commenters’ suggestions and after
additional consideration of the
proposed regulatory text. The
Commission will first generally
summarize the public comments
received addressing both the 2016 and
2020 Proposals. Then, in addition to the
rulemaking history of Commission
regulation 3.10(c) set forth above, the
Commission will briefly explain the
2016 Proposal, respond to all of the
relevant public comments received, and
detail the amendments derived from the
2016 Proposal adopted in the Final
Rule.46 The Commission will then
discuss the remaining 2020 Proposal
amendments with respect to non-U.S.
CPOs operating offshore pools pursuant
to the 3.10 Exemption, summarize the
3.10 Exemption amendments being
adopted, respond to the relevant public
comments received, and explain the
substance and rationale of any
adjustments in approach from the 2020
Proposal to what the Commission is
41 2020
Proposal, 85 FR at 35822.
Proposal, 85 FR at 35824.
43 2020 Proposal, 85 FR at 35823.
44 2020 Proposal, 85 FR at 35825.
45 2020 Proposal, 85 FR at 35826–35827.
46 See infra pt. II.B.
42 2020
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adopting in the Final Rule today.47
Finally, the Commission will explain its
efforts to reconcile proposed
amendments from both the 2016 and
2020 Proposals, which includes a nonsubstantive reorganization of
Commission regulation 3.10(c).48
A. General Comments in Response to
the 2016 and 2020 Proposals
The Commission requested comment
generally on all aspects of the 2020
Proposal, and specifically asked
questions about potential additional
conditions or limitations to the
proposed relief that might be
incorporated during finalization.49 The
comment period for the 2020 Proposal,
along with the reopened comment
period for the 2016 Proposal, expired on
August 11, 2020, and the Commission
received four relevant comment letters:
One from an individual, one from a
foreign intergovernmental organization,
one submitted jointly by five industry
professional and trade associations
(collectively, the Industry Groups), and
one submitted by an asset manager that
operates globally.50 Two of those
comment letters also provided new or
additional comments with respect to the
2016 Proposal.51 Finally, Commission
staff also hosted one ex parte meeting to
discuss aspects of the 2020 Proposal
with an Industry Group.52
The comments received by the
Commission were, in general, strongly
supportive of the 2020 Proposal.53
Commenters largely agreed with the
proposed amendments, positing that, if
47 See
infra pts. II.C–G.
infra pt. II.H.
49 2020 Proposal, 85 FR at 35826 (asking three
questions regarding the conditions of the proposed
exception from the 3.10 Exemption for initial
capital investments in a non-U.S. CPO’s offshore
pool by a U.S. controlling affiliate). See also id. at
35827 (asking, with respect to the 2016 Proposal,
an additional question about the clearing of
transactions otherwise covered by the 3.10
Exemption).
50 The Commission received a total of five
comment letters, one of which was either spam or
otherwise not substantively relevant to the 2020
Proposal in any respect. For relevant comments on
the 2020 Proposal, see Comment Letter from Mr.
Chris Barnard (Aug. 11, 2020) (Barnard); Comment
Letter from the European Stability Mechanism
(Aug. 6, 2020) (ESM); Joint Comment Letter from
AIMA, SIFMA AMG, the Investment Advisers
Association (IAA), Investment Company Institute
Global (ICI Global), and the Managed Funds
Association (MFA) (Aug. 11, 2020) (Industry Group
Letter), and Comment Letter from the Vanguard
Group (Aug. 11, 2020) (Vanguard).
51 Industry Group Letter, at 12–13, and ESM, at
1–3.
52 The complete comment file for the 2020
Proposal can be found on the Commission’s
website. Comments for Proposed Rule 85 FR 35820,
available at https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=3122.
53 Industry Group Letter, at 2; Vanguard, at 2;
Barnard, at 2; ESM, at 1.
48 See
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adopted, the 2020 Proposal ‘‘would
simplify compliance by eliminating the
potential need for the CFTC to require
registration and oversight of non-U.S.
CPOs whose pools have no U.S.
investors.’’ 54 The Industry Groups also
‘‘applaud[ed] the Commission’s actions
in turning its attention to the
increasingly global nature of the asset
management space and proposing rule
changes that will better align the
express terms of its regulations with
both the Commission’s policy goals and
current global practices.’’ 55 Although
offering support for the 2020 Proposal
overall, commenters also suggested
additional regulatory edits with respect
to several specific issues raised by that
release, and provided responses to the
questions posed by the Commission.56
As noted above, the Commission
requested comment generally on the
2020 Proposal, but also posed several
targeted questions about potential
additional conditions for the proposed
exception regarding the initial capital
contributions of U.S. controlling
affiliates in a non-U.S. CPO’s offshore
pool (Affiliate Contribution
Exception).57 In addition to commenting
generally on the 2020 Proposal, the
Industry Groups submitted the sole
comment letter specifically responding
to those questions. The Industry Groups
stated that they do not support
additional conditions on the Affiliate
Contribution Exception, and that they
believe such limitations ‘‘would not
provide any additional protection to
U.S. investors, customers, or the U.S.
commodity interest markets.’’ 58 For
instance, the Commission queried
whether the Affiliate Contribution
Exception should more explicitly be
intended for ‘‘seeding purposes,’’
including whether it should ‘‘be
conditioned on the investment being
limited in time to one, two, or three
years, after which time the investments
of the controlling affiliate must be
reduced to a de minimis amount of the
pool’s capital, such as 3 or 5
percent?’’ 59 Alternatively, the Industry
Groups suggested a defined ‘‘purpose’’
for affiliate contributions, ‘‘for the
purpose of establishing, or providing
ongoing support to, the pool.’’ 60
Regarding the nature of controlling
affiliates, the Commission also queried
54 Barnard,
at 2.
Group Letter, at 1.
56 See, e.g., Vanguard, at 2–3; Industry Group
Letter, at 2–15, app. A.
57 2020 Proposal, 85 FR at 35826. See infra pt. II.F
for a more detailed discussion on the Affiliate
Contribution Exception adopted in the Final Rule.
58 Industry Group Letter, at 17.
59 2020 Proposal, 85 FR at 35826.
60 Industry Group Letter, at 17.
55 Industry
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whether the Affiliate Contribution
Exception should ‘‘be limited to entities
or persons that are otherwise financial
institutions that are regulated in the
United States to provide investor
protections?’’ 61 The Commission
additionally inquired whether the
Affiliate Contribution Exception should
‘‘only be available to U.S. controlling
affiliates regulated by the Securities and
Exchange Commission, a federal
banking regulator, or an insurance
regulator?’’ 62 The Industry Groups
stated that they do not believe any
benefit would result from ‘‘limiting the
affiliates that contribute capital to
regulated entities’’ because it would
further introduce the Commission ‘‘into
the decision-making process for
commercial decisions and resource
allocation of global organizations,’’ and
‘‘also prevent the use of common
practices for this type of funding,
including holding companies and trust
companies.’’ 63 One commenter also
stated that a U.S. affiliate should not be
required to ‘‘be regulated in the United
States in order to qualify’’ for the
Affiliate Contribution Exception.64
The Commission also noted in the
2020 Proposal that one of the rationales
behind the Affiliate Contribution
Exception is the affiliate’s likely ability
to demand that the non-U.S. CPO
provide it with information necessary to
assess the offshore pool’s operations and
performance.65 Because it may not be
possible to ascertain with certainty
whether such information must be
provided to a U.S. controlling affiliate
under laws applicable to the non-U.S.
CPO, the Commission queried in the
2020 Proposal whether the Affiliate
Contribution Exception should be
‘‘conditioned on there being an
obligation on the non-U.S. CPO that is
legally binding in its home jurisdiction
to provide the U.S. controlling affiliate
with information regarding the
operation of the offshore pool by the
affiliated non-U.S. CPO?’’ 66 The
Industry Groups noted that ‘‘an
organization’s decision to contribute
capital to support the operations of an
offshore CPO is a commercial business
decision, not an investment decision of
the type that Part 4 information
addresses.’’ 67 Therefore, the Industry
Groups stated, there is ‘‘no need for the
Commission to determine what type of
information global business
61 2020
Proposal, 85 FR at 35826.
63 Industry
Group Letter, at 18.
at 2.
65 2020 Proposal, 85 FR at 35826.
66 Id.
67 Industry Group Letter, at 18.
64 Vanguard,
21:21 Dec 04, 2020
B. Reconsidering the 2016 Proposal and
Comments Received
In addition to reopening the comment
period with respect to the 2016
Proposal, the Commission queried
specifically whether Commission
regulation 3.10 should require
commodity interest transactions of
foreign located persons or IFIs that are
required or intended to be cleared on a
registered derivatives clearing
organization (DCO) to be submitted for
clearing through an FCM registered in
accordance with section 4d of the Act,
unless such foreign located person or IFI
is itself a clearing member of such
registered DCO.69 As mentioned above,
the Commission received two additional
comments relevant to the 2016 Proposal
as a result of the reopening of the 2016
Proposal’s comment period. After a brief
explanation of the 2016 Proposal, the
Commission will discuss and address
these additional comments, along with
the public comments originally received
in 2016, and outline the Final Rule
amendments resulting from the 2016
Proposal below.
1. The 2016 Proposal’s Amendments to
Commission Regulation 3.10(c)
At the time the 2016 Proposal was
published, and until the Final Rule’s
amendments become effective,
Commission regulation 3.10(c)(2)–(c)(3)
generally provides an exemption from
registration, subject to specific
conditions, for certain foreign located
persons acting as intermediaries
(collectively, Foreign Intermediaries)
with respect to persons also located
outside the U.S., even though such
transactions may be executed
bilaterally, or on or subject to the rules
of a DCM or SEF.70 With respect to
activities involving commodity interest
transactions executed bilaterally, or
made on or subject to the rules of any
DCM or SEF, Commission regulation
3.10(c)(3)(i) provides an exemption from
registration as a CPO, CTA, or IB, where
the person is a foreign located person,
68 Id. (noting that ‘‘requiring this exception to be
conditioned on there being a legally binding
obligation in the non-U.S. CPO’s home jurisdiction
would create unnecessary non-U.S. legal analysis
on the part of the affiliate’’).
69 2020 Proposal, 85 FR at 35827.
70 17 CFR 3.10(c)(2)–(c)(3). See supra pt. I.A.
62 Id.
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organizations will need to exercise their
business judgment in this regard or for
the Commission otherwise to intervene
in the organization’s decision-making
process.’’ 68 The Commission did not
receive any comments supporting the
additional limitations for which the
Commission specifically solicited
public feedback in the 2020 Proposal.
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acting only on behalf of other foreign
located persons, and the commodity
interest transaction is submitted for
clearing through a registered FCM.71
Commission regulation 3.10(c)(2)(i)
currently provides a similar exemption
from registration for any Foreign
Intermediary acting as an FCM.72
Pursuant to the 2016 Proposal, the
Commission proposed to amend
Commission regulations 3.10(c)(2) and
(c)(3) to revise the conditions under
which those exemptions from
registration would apply.73 Specifically,
the 2016 Proposal’s amendments would
permit a Foreign Intermediary to be
eligible for an exemption from
registration, if the Foreign Intermediary,
in connection with a commodity
interest transaction, only acts on behalf
of (1) foreign located persons, or (2)
IFIs,74 without regard to whether such
persons or institutions clear such
commodity interest transaction.75 It was
the Commission’s intention in 2016—
and remains so now—to promulgate
regulations consistent with its
longstanding policy of focusing its
customer protection activities upon
domestic firms, and upon firms
soliciting or accepting orders from
domestic participants.76
2. Responsive Comments Received
Regarding the 2016 Proposal
In response to the 2016 Proposal, the
Commission originally received six
comments 77 and subsequently received
71 17
CFR 3.10(c)(3)(i).
CFR 3.10(c)(2)(i).
73 2016 Proposal.
74 For purposes of the 2016 Proposal, the
Commission defined IFIs as those multinational
institutions defined in the Commission’s previous
rulemakings and staff no-action letters, i.e.,
International Monetary Fund, International Bank for
Reconstruction and Development, European Bank
for Reconstruction and Development, International
Development Association, International Finance
Corporation, Multilateral Investment Guarantee
Agency, African Development Bank, African
Development Fund, Asian Development Bank,
Inter-American Development Bank, Bank for
Economic Cooperation and Development in the
Middle East and North Africa, Inter-American
Investment Corporation, Council of Europe
Development Bank, Nordic Investment Bank,
Caribbean Development Bank, European Investment
Bank and European Investment Fund (the
International Bank for Reconstruction and
Development, International Finance Corporation,
and Multilateral Investment Guarantee Agency are
parts of the World Bank Group). 2016 Proposal, 81
FR at 51825, citing Further Definition of ‘‘Swap
Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major
Swap Participant,’’ ‘‘Major Security-Based Swap
Participant,’’ and ‘‘Eligible Contract Participant,’’ 77
FR 30596, 30692, n.1180 (May 23, 2012) (Entities
Final Rule).
75 2016 Proposal, 81 FR at 51826.
76 Id.
77 The original six comments were submitted by:
AIMA; the CME Group, Inc. (CME); IAA; MFA; and
two individuals unaffiliated with any registrant or
72 17
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two additional comments,78 as a result
of reopening the comment period
pursuant to the 2020 Proposal. AIMA,
CME, MFA, and the Industry Groups
commented that the 2016 Proposal
would improve market efficiency and
increase liquidity in U.S. markets by
eliminating the regulatory burden
associated with Commission registration
imposed on Foreign Intermediaries
acting solely on behalf of other foreign
located persons.79 In particular, MFA
also commented that foreign located
persons would generally not have any
expectation that a Foreign Intermediary
would be subject to Commission
oversight.80 The CME also noted that the
proposed amendments would positively
impact the likelihood of productive
cooperation concerning the regulation of
derivatives across all jurisdictions going
forward.81 One individual commented
that Foreign Intermediaries should be
required to register with the
Commission no matter the
circumstance.82 The other individual
did not address the 2016 Proposal in
any manner. Regarding the two
additional comment letters received
after the 2020 Proposal, the Industry
Groups and ESM were both strongly
supportive of the Commission finalizing
amendments from the 2016 Proposal;
additionally, ESM requested that it be
explicitly included in the definition of
‘‘international financial institution.’’ 83
derivatives industry organization. Comments for
Proposed Rule 81 FR 51824, available at https://
comments.cftc.gov/PublicComments/
CommentList.aspx?id=1724. See specifically,
Comment Letter from AIMA (Sept. 6, 2016) (AIMA),
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61002&SearchText=;
Comment Letter from CME (Aug. 23, 2016) (CME),
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=60997&SearchText=;
Comment Letter from IAA (Sept. 6, 2016) (IAA),
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61003&SearchText=;
Comment Letter from MFA (Sept. 2, 2016) (MFA),
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61000&SearchText=.
78 The two additional 2020 comment letters
addressing the 2016 Proposal are the jointly
submitted Industry Group Letter and the comment
letter from ESM, described above as a foreign
intergovernmental organization. Comments for
Proposed Rule 85 FR 35820, available at https://
comments.cftc.gov/PublicComments/
CommentList.aspx?id=3122. See supra pt. II.A.
79 AIMA, at 1; CME, at 1–2; MFA, at 1; Industry
Group Letter, at 12–13.
80 MFA, at 1.
81 CME, at 2.
82 Comment Letter from ‘‘Jean Publieee’’ (Aug. 8,
2016), available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=60987&SearchText=.
83 Industry Group Letter, at 13; ESM, at 2.
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3. Finalizing the 2016 Proposal
After considering all of the comments,
the Commission is finalizing its
amendments to Commission regulation
3.10(c) from the 2016 Proposal, with
two modifications. First, the
Commission originally proposed to
amend the language of the exemptions
to remove the requirement that any
commodity interest transaction shall be
submitted for clearing through a
registered FCM.84 In doing so, the
Commission recognized that not all
commodity interest transactions are
subject to a clearing requirement under
the CEA or Commission regulations, or
even available for clearing by any
DCO.85 However, by removing the
clearing condition, the Commission
inadvertently failed to reiterate that
those transactions that are required to be
cleared must be cleared by a clearing
member of the relevant DCO. The
proposed removal of such language may
have had the unintended consequence
of leading some market participants to
misconstrue the Commission’s purpose
as an intention to permit unregistered
foreign located persons to become
clearing members on a DCO to clear
commodity interest transactions on
behalf of customers that were also
foreign located persons. Thus, the Final
Rule provides that the exemptions from
registration in Commission regulation
3.10(c) are conditioned on (1) clearing
on a DCO any commodity interest
transaction that is required or intended
to be cleared on a registered DCO; and
(2) an additional requirement that such
transactions must be cleared through a
registered FCM, unless the Foreign
Intermediary’s customer is a clearing
member of the relevant DCO.
Second, the Commission is modifying
the definition of ‘‘international financial
institution’’ proposed in 2016 to be
consistent with the definition of U.S.
person recently adopted by the
Commission in its final cross-border
rules for swap dealers (SDs) and major
swap participants (MSPs) (Cross-Border
Final Rule), which generally excludes
IFIs from the definition of U.S. person.86
Consistent with the Cross-Border Final
Rule, the Commission is defining the
term ‘‘international financial
institutions’’ in Commission regulation
3.10(c) to include the International
Monetary Fund, the International Bank
for Reconstruction and Development,
the Inter-American Development Bank,
84 2016
Proposal, 81 FR at 51826.
85 Id.
86 Cross-Border Application of the Registration
Thresholds and Certain Requirements Applicable to
Swap Dealers and Major Swap Participants, 85 FR
56924, 56937–38 (Cross-Border Final Rule).
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the Asian Development Bank, the
African Development Bank, the United
Nations, the IFIs that are defined in 22
U.S.C. 262r(c)(2), those institutions that
are defined as ‘‘multilateral
development banks’’ in the European
Union’s regulation on ‘‘OTC derivatives,
central counterparties and trade
repositories,’’ 87 their agencies and
pension plans, and any other similar
international organizations, and their
agencies and pension plans.88
The IFI definition adopted by the
Final Rule also includes two additional
institutions identified in CFTC Staff
Letters 17–34 89 and 18–13.90 In CFTC
Staff Letter 17–34, Commission staff
provided relief from CFTC margin
requirements to swaps between SDs and
ESM,91 and in CFTC Staff Letter 18–13,
Commission staff identified the North
American Development Bank as an
additional entity that should be
87 Cross-Border Final Rule, 85 FR at 56937–
56938; Regulation (EU) No 648/2012 of the
European Parliament and of the Council on OTC
Derivative Transactions, Central Counterparties and
Trade Repositories, Article 1(5(a)) (July 4, 2012),
available at https://eur-lex.europa.eu/legal-content/
EN/TXT/?uri=CELEX:32012R0648. Article 1(5(a))
references Section 4.2 of Part 1 of Annex VI to
Directive 2006/48/EC, available at https://eurlex.europa.eu/legal-content/EN/TXT/
?uri=CELEX%3A32006L0048. The definitions
overlap, but together they include the following:
The International Monetary Fund, International
Bank for Reconstruction and Development,
European Bank for Reconstruction and
Development, International Development
Association, International Finance Corporation,
Multilateral Investment Guarantee Agency, African
Development Bank, African Development Fund,
Asian Development Bank, Inter-American
Development Bank, Bank for Economic Cooperation
and Development in the Middle East and North
Africa, Inter-American Investment Corporation,
Council of Europe Development Bank, Nordic
Investment Bank, Caribbean Development Bank,
European Investment Bank and European
Investment Fund. As noted above, the International
Bank for Reconstruction and Development, the
International Development Association, the
International Finance Corporation, and the
Multilateral Investment Guarantee Agency are parts
of the World Bank Group.
88 See infra new Commission regulation
3.10(c)(1)(iii) (adopting a formal IFI definition for
purposes of applying the exemptions otherwise
established by that provision).
89 CFTC Staff Letter No. 17–34 (Jul, 24, 2017),
available at https://www.cftc.gov/sites/default/files/
idc/groups/public/@lrlettergeneral/documents/
letter/17-34.pdf. See also CFTC Staff Letter No. 19–
22 (Oct. 16, 2019), available at https://
www.cftc.gov/csl/19-22/download.
90 CFTC Staff Letter No. 18–13 (May 16, 2018),
available at https://www.cftc.gov/csl/18-13/
download.
91 CFTC Staff Letter No. 17–34. In addition, in
May 2020, the Commission adopted an amendment
to Commission regulation 23.151 to exclude ESM
from the definition of ‘‘financial end user,’’ which
will have the effect of excluding swaps between
certain SDs and ESM from the Commission’s
uncleared swap margin requirements. Margin
Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 85 FR 27674
(May 11, 2020).
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considered an IFI for purposes of
applying the SD and MSP definitions.92
The Commission concludes that it is
appropriate to include these two entities
in the IFI definition adopted by the
Final Rule because the status of both
entities as multinational organizations
formed for public purposes is the same
as that of the other already identified
IFIs. Therefore, new Commission
regulation 3.10(c)(1)(iii) lists specific
IFIs, with these two additions. The IFI
definition also includes a catch-all for
‘‘any other similar international
organizations, and their agencies and
pension plans,’’ which the Commission
intends to extend the definition to any
of the entities discussed above that are
not explicitly listed in the definition.
As the Commission recognized in the
2016 Proposal, IFIs are operated to
satisfy public purposes and have as
their members sovereign nations from
around the world. Although such
institutions may have headquarters or
another significant presence in the
United States, the Commission
recognizes that the unique attributes
and multinational status of these
institutions do not warrant treating
them as domestic persons for purposes
of the intermediary registration
exemptions in Commission regulation
3.10(c). The status of IFIs as
multinational member agencies leads
the Commission to recognize a need to
mitigate restraints on the ability of IFIs
to enter into transactions in all member
countries in conjunction with
promoting global economic
development and fulfilling other public
purposes. The Commission has
determined that this purpose is better
served by defining ‘‘international
financial institution’’ to be consistent
with the Cross-Border Final Rule
because the list of IFIs as proposed in
the 2016 Proposal was limited to a
specified list and may have required
amendment from time to time.
C. Pool-by-Pool Exemption
The 2020 Proposal would amend the
3.10 Exemption such that non-U.S.
CPOs could avail themselves of the
relief thereunder on a pool-by-pool
basis, by specifying that the availability
of the 3.10 Exemption would be
determined by whether all of the
participants in a particular offshore
commodity pool are located outside the
United States.93 The Commission stated
its preliminary belief that this
amendment would appropriately focus
Commission oversight on those pools
that solicit and/or accept persons
located in the United States as pool
participants.94 The Commission further
noted several developments in the
pooled investment space since the
original adoption of the 3.10 Exemption
that, in the Commission’s preliminary
opinion, also supported the
amendments in the 2020 Proposal.95
Specifically, the Commission observed
that Congress in 2010, through the
Dodd-Frank Act, expanded the
Commission’s jurisdiction to include
swaps and rolling spot retail foreign
exchange transactions, and that, when
combined with the rescission or
revision of certain CPO exemptions and
exclusions, this expanded authority
resulted in a significant increase in the
number of entities captured within the
definition of CPO.96
In considering the propriety of the
pool-by-pool exemption set forth in the
2020 Proposal, the Commission also
noted the increasing globalization of the
commodity pool industry, observing
that, in contrast with the pool industry
at the time of the original adoption of
Commission regulation 3.10(c)(3)(i),
several of today’s largest CPOs, when
measured by assets under management,
are located outside the United States.97
The Commission noted further that
these larger CPOs typically operate
many different commodity pools
simultaneously, including some pools
for U.S. investors and other pools for
investors outside of the United States.98
Therefore, the Commission
preliminarily concluded that the 3.10
Exemption should be amended to reflect
the Commission’s regulatory interests in
such an integrated international
investment management environment,
which the Commission preliminarily
believed would be accomplished
through the 2020 Proposal.99
The Commission received one
comment explicitly addressing the
proposed pool-by-pool availability of
the 3.10 Exemption in the 2020
Proposal.100 The Industry Groups stated
their strong support for ‘‘the revised
structure of the 3.10 Exemption that the
Commission has proposed, which
clearly and expressly provides for
94 2020
Proposal, 85 FR at 35823.
101 Industry
95 Id.
Staff Letter 18–13. See also CFTC Staff
Letter 17–59 (Nov. 17, 2017) (providing no-action
relief from the swap clearing requirement of section
2(h)(1) of the CEA), available at https://
www.cftc.gov/csl/17-59/download.
93 2020 Proposal, 85 FR at 35822–35823.
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96 Id.
97 Id.
99 Id.
100 Industry Group Letter, at 10. See also
Vanguard, at 2 (expressing support for the 2020
Proposal in general and the substantive comments
from the Industry Groups); Barnard, at 2 (expressing
support for the 2020 Proposal generally).
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Group Letter, at 10.
quoting 2020 Proposal, 85 FR at 35822.
103 Id. at 11.
104 2020 Proposal, 85 FR at 35831 (proposing
Commission regulation 3.10(c)(3)(ii) to provide this
relief on a pool-by-pool basis to qualifying non-U.S.
CPOs for their offshore pools). See infra new
Commission regulation 3.10(c)(5)(i) (retaining that
proposed language and updating solely to reflect
the adoption of defined terms from the 2016
Proposal, including ‘‘foreign located person’’).
102 Id.,
98 Id.
92 CFTC
reliance on the exemption on a pool-bypool basis.’’ 101 The Industry Groups
further stated their agreement with the
Commission’s preliminary belief that
the proposed amendments ‘‘ ‘better
reflect the current state of operations of
CPOs’ and more clearly align the text of
the rule with the Commission’s policy
goals.’’ 102 They also noted their belief
that ‘‘[t]he intention to permit an
exempt or registered non-U.S. offshore
CPO to rely on the 3.10 Exemption on
a pool-by-pool basis is crystal clear,
both in the language of the proposed
amendment and the Release.’’ 103
After considering the comments
received, the Commission has
determined to finalize the 2020 Proposal
so that non-U.S. CPOs may utilize the
3.10 Exemption for their offshore
commodity pools on a pool-by-pool
basis. As such, the Commission is
amending the 3.10 Exemption for nonU.S. CPOs, as proposed, to specify that
its availability would be determined, in
part, by whether all of the participants
in a particular offshore pool are foreign
located persons.104 Permitting non-U.S.
CPOs to rely upon the relief provided by
the 3.10 Exemption on a pool-by-pool
basis will further allow the Commission
to focus its resources on the oversight of
CPOs operating pools offered and sold
to participants located in the U.S., i.e.,
the Commission’s primary customary
protection mandate. Therefore, the
Commission concludes that the Final
Rule properly tailors the 3.10
Exemption to address the increasingly
global nature of the investment
management space since 2007, without
compromising the Commission’s
mission of protecting U.S. pool
participants and effectively regulating
CPOs managing U.S. assets.
For the reasons stated above, the
Commission determines that amending
the 3.10 Exemption to provide relief
from registration to non-U.S. CPOs for
their offshore pools on a pool-by-pool
basis is an appropriate exercise of its
exemptive authority under CEA section
4(c). The persons involved in the
transactions subject to the exemptive
relief provided herein are ‘‘appropriate
persons,’’ as discussed in the 2020
Proposal, because the term ‘‘appropriate
person’’ as used in CEA section 4(c)
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includes ‘‘a commodity pool formed or
operated by a person subject to
regulation under the Act.’’ 105 The
Commission has previously interpreted
the clause ‘‘subject to regulation under
the Act’’ as including persons who are
exempt from registration or excluded
from the definition of a registration
category.106 Consistent with its
preliminary belief in the 2020 Proposal,
the Commission believes that clearly
enabling non-U.S. CPOs to avoid the
additional organizational complexity
associated with separately organizing
their offshore and domestic facing
commodity pool businesses may result
in more non-U.S. CPOs undertaking to
design and offer pools for persons in the
United States. Moreover, this could, in
turn, result in a greater diversity of
commodity pools offered and/or sold to
persons in the United States, and this
increased competition amongst
commodity pools and their CPOs could
broadly foster additional innovation in
the commodity pool space, already one
of the more dynamic sectors regulated
by the Commission. Further, this
potential for increased competition and
variation in commodity pools and CPOs
resulting from the Final Rule will
further promote the vibrancy of the U.S.
commodity interest markets.
The Commission concludes that the
amendments adopted herein will not
have a material adverse effect on the
ability of the Commission or any DCM
to discharge their duties under the Act,
because non-U.S. CPOs relying on the
3.10 Exemption, as amended by the
Final Rule, with respect to their offshore
commodity pools will remain subject to
the statutory and regulatory obligations
imposed on all participants in the U.S.
commodity interest markets.107 This
conclusion is consistent with section
4(d) of the Act, which provides that any
exemption granted pursuant to CEA
section 4(c) will not affect the authority
of the Commission to conduct
investigations in order to determine
compliance with the requirements or
conditions of such exemption or to take
enforcement action for any violation of
any provision of the Act or any rule,
105 7
U.S.C. 6(c)(3)(E).
FR at 30655 (finding, in the context of the
eligible contract participant definition, that
construing the phrase ‘‘formed and operated by a
person subject to regulation under the [CEA]’’ to
refer to a person excluded from the CPO definition,
registered as a CPO or properly exempt from CPO
registration appropriately reflects Congressional
intent).
107 See, e.g., 7 U.S.C. 9 (prohibiting the use or
employment of any manipulative or deceptive
device in connection with any swap or contract of
sale of any commodity in interstate commerce, or
for future delivery on or subject to the rules of any
registered entity).
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106 77
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regulation or order thereunder caused
by the failure to comply with or satisfy
such conditions or requirements.108
Further, to the extent a non-U.S. CPO
operates both offshore and domestic
commodity pools, these amendments to
the 3.10 Exemption do not restrict or
negatively affect the Commission’s
statutory and regulatory authority
applicable to the commodity pool and
intermediary activities of the non-U.S.
CPO involving persons located in the
United States. Rather, this aspect of the
Final Rule simply reflects the
Commission focusing its regulatory
resources on U.S. pool participants and
the firms soliciting them for trading
commodity interests, which are squarely
within its customer protection
mandate.109 Finally, under the Final
Rule, the Commission retains the
authority to take enforcement action
against any non-U.S. CPO claiming the
3.10 Exemption based on its activities
within the U.S. commodity interest
markets, consistent with the
Commission’s authority regarding
market participants generally.
regulations. This contrasts with the
language in Commission regulation
4.13(f), for example, which states that
the filing of a notice of exemption from
registration under that section will not
affect the ability of a person to qualify
for exclusion from the definition of the
term ‘‘commodity pool operator’’ under
§ 4.5 in connection with its operation of
another trading vehicle that is not
covered under § 4.13.114 In the 2020
Proposal, the Commission stated its
preliminary belief that non-U.S. CPOs
relying on the 3.10 Exemption should
have the ability to rely on other
regulatory exemptions or exclusions
that they qualify for, just like any other
CPO.115 The Commission noted that it
independently developed the terms
under which CPOs of U.S. commodity
pools may claim registration relief, and
the fact that a non-U.S. CPO operates
both offshore and U.S. commodity pools
does not undermine the rationale
providing the foundation for other
regulatory relief available to CPOs
generally.116 The Commission therefore
preliminarily concluded that a non-U.S.
CPO relying upon the 3.10 Exemption
D. Utilizing the 3.10 Exemption
Concurrent With Other Regulatory Relief for one or more of its offshore pools
should not, by virtue of that reliance, be
Available to CPOs
foreclosed from utilizing other relief
As discussed above, the Commission
generally available to CPOs of U.S.
proposed that the 3.10 Exemption for
pools.117
non-U.S. CPOs be available on a poolThe Commission received one
by-pool basis. Consistent with those
comment regarding the ability to
proposed amendments, and to address
combine the 3.10 Exemption with either
the concerns articulated by commenters registration or other available CPO
110
to the 2018 Proposal,
the Commission exemptions or exclusions. The Industry
also proposed to explicitly provide that
Groups strongly supported this aspect of
a non-U.S. CPO may claim the 3.10
the 2020 Proposal because it ‘‘clearly
Exemption for its offshore pool(s), while and expressly provides for reliance on
such non-U.S. CPO also claims another
the [3.10 E]xemption on a pool-by-pool
registration exemption or regulatory
basis and also, in a separate provision,
exclusion with respect to other pools it
expressly acknowledges the ability to
operates, e.g., the de minimis exemption combine or ‘stack’ exemptions.’’ 118
under Commission regulation
They did, however, suggest removing
4.13(a)(3),111 an exclusion from the CPO
from the proposed amendment the
definition under Commission regulation
specific references to Commission
4.5,112 or registers with respect to such
regulations 4.13 and 4.5, so as to better
113
pools.
As noted in the 2020 Proposal
align the provision with the
and confirmed by the responsive
Commission’s stated intentions in the
comments received, the Commission
2020 Proposal, i.e., to permit the 3.10
understands that this practice is known
Exemption to be broadly combinable
colloquially as the ability to ‘‘stack’’
with other available exemptions or
exemptions.
exclusions, or registration.119
Absent the finalization of this
After considering the comments
amendment, the 3.10 Exemption would
received, and for the reasons stated in
not have a provision that expressly
contemplates its simultaneous use with
114 17 CFR 4.13(f).
other exemptions or exclusions
115 2020 Proposal, 85 FR at 35825.
available under other Commission
116 Id.
108 7
U.S.C. 6(d).
109 2020 Proposal, 85 FR at 35823.
110 See, e.g., AIMA, at 6; Willkie, at 6.
111 17 CFR 4.13(a)(3).
112 17 CFR 4.5.
113 2020 Proposal, 85 FR at 35824–25. See infra
new Commission regulation 3.10(c)(5)(iv).
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117 Id.
118 Industry
Group Letter, at 10.
at 12 (citing the 2020 Proposal, 85 FR at
25824–25, and stating that the Commission
repeatedly describes the provision ‘‘as permitting
simultaneous reliance on different exemptions or
registration, giving examples of such exemptions,
but without limiting the exemptions in question’’).
119 Id.
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the 2020 Proposal, the Commission is
adopting the proposed amendment
permitting the 3.10 Exemption to be
maintained concurrently with CPO
registration and/or other exemptions or
exclusions otherwise available to the
claiming non-U.S. CPO. The
Commission agrees that it is not
necessary for the exclusions and
exemptions available under
Commission regulations 4.5 and 4.13 to
be explicitly enumerated therein.
Although the relief provided by
Commission regulations 4.5 and 4.13 is
the predominant means by which
commodity pools are operated without
the registration of a CPO, those
provisions are not the sole source of
such relief available to CPOs for their
pools. Therefore, the Final Rule adopts
the provision permitting the ‘‘stacking’’
of the 3.10 Exemption with either
registration or other available relief from
CPO regulation by the Commission,
without the specific references to
Commission regulations 4.5 and 4.13.120
E. The Safe Harbor for Non-U.S. CPOs
With Respect to Inadvertent U.S.
Participants in Their Offshore Pools
The 2020 Proposal also proposed a
safe harbor for non-U.S. CPOs that have
taken reasonable actions designed to
minimize the possibility that
participation units in the operated
offshore pool are being offered or sold
to persons located in the United States.
The Commission understands that some
non-U.S. CPOs may not be able to
represent with absolute certainty that
they are acting only on behalf of foreign
located persons invested in their
offshore pools, as such non-U.S. CPOs
may not have complete visibility into
the ultimate beneficial ownership of
their offshore pool participation units.
Pursuant to the proposed safe harbor, a
non-U.S. CPO would be permitted to
engage in the U.S. commodity interest
markets on behalf of an offshore pool for
which it cannot represent with absolute
certainty that all of the pool participants
are offshore, as required by the 3.10
Exemption, provided that such non-U.S.
CPO meets the following conditions:
1. The offshore pool’s offering
materials and any underwriting or
distribution agreements include clear,
written prohibitions on the offshore
pool’s offering to participants located in
the United States and on U.S.
ownership of the offshore pool’s
participation units;
2. The offshore pool’s constitutional
documents and offering materials: (a)
Are reasonably designed to preclude
persons located in the United States
from participating therein, and (b)
include mechanisms reasonably
designed to enable the non-U.S. CPO to
exclude any persons located in the
United States who attempt to participate
in the offshore pool notwithstanding
those prohibitions;
3. The non-U.S. CPO exclusively uses
non-U.S. intermediaries for the
distribution of participations in the
offshore pool;
4. The non-U.S. CPO uses reasonable
investor due diligence methods at the
time of sale to preclude persons located
in the United States from participating
in the offshore pool; and
5. The offshore pool’s participation
units are directed and distributed to
participants outside the United States,
including by means of listing and
trading such units on secondary markets
organized and operated outside of the
United States, and in which the nonU.S. CPO has reasonably determined
participation by persons located in the
United States is unlikely.
With respect to this proposed safe
harbor, the Commission stated its
preliminary expectation that a non-U.S.
intermediary would include a non-U.S.
branch or office of a U.S. entity, or a
non-U.S. affiliate of a U.S. entity,
provided that the distribution takes
place exclusively outside of the United
States.121
The Commission also stated its
preliminary belief that satisfying the
criteria of the proposed safe harbor
would serve as an indication that a nonU.S. CPO is exercising sufficient
diligence with respect to those
circumstances within its control to
minimize the possibility of engaging
with persons located in the United
States concerning the offered offshore
pool.122 Moreover, the Commission
stated its preliminary belief that, if a
non-U.S. CPO meets the five factors in
the proposed safe harbor, the likely
absence of U.S. participants is
sufficiently ensured so as to allow
reliance on the 3.10 Exemption.123 As
with any of the Commission’s other
registration exemptions available to
CPOs generally, the Commission
expressed in the 2020 Proposal its
expectation that non-U.S. CPOs
claiming the 3.10 Exemption would
maintain adequate documentation to
demonstrate compliance with the terms
of the safe harbor.124
The Commission received only one
comment regarding the proposed safe
121 2020
Proposal, 85 FR at 35824.
122 Id.
120 See infra new Commission regulation
3.10(c)(5)(iv).
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123 Id.
124 Id.
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harbor. The commenter supported it,
saying that ‘‘[t]he proposed safe harbor
provides adequate provisions that will
simplify compliance with no loss of
regulatory amenity.’’ 125
Accordingly, upon consideration of
the comments, and consistent with the
rationale expressed in the 2020
Proposal, the Commission is adopting
the safe harbor as proposed. The
Commission believes, as it did in the
2020 Proposal, that this amendment is
an appropriate exercise of the
Commission’s exemptive authority
under CEA section 4(c). The persons
involved in the transactions subject to
the exemptive relief provided herein are
‘‘appropriate persons,’’ as discussed in
the 2020 Proposal, because the term
‘‘appropriate person’’ as used in CEA
section 4(c) includes ‘‘a commodity pool
formed or operated by a person subject
to regulation under the Act.’’ 126 The
Commission has previously interpreted
the clause ‘‘subject to regulation under
the Act’’ as including persons who are
exempt from registration or excluded
from the definition of a registration
category.127 This safe harbor may
promote responsible economic or
financial innovation and fair
competition in the U.S. commodity
interest markets generally, thereby
increasing their vibrancy and
liquidity.128 The safe harbor adopted
herein permits a non-U.S. CPO of an
offshore pool, by taking defined steps
designed to mitigate the risk of U.S.
participation in the offshore pool, to
continue to qualify for the 3.10
Exemption, and thus, avoid being
regulated both by its regulatory
authority in its home jurisdiction and by
the Commission. This effectively places
the non-U.S. CPO on an equal footing
with those domestic CPOs solely
regulated by the Commission because
each is generally subject to a single,
appropriate regulatory regime with
respect to the operation of its
commodity pools. Additionally, the
presence and activity of additional
offshore pools with trading strategies
developed outside the United States
creates a diversity of viewpoint in the
U.S. commodity interest markets, which
could encourage innovation and
competition by domestic CPOs as well.
125 Barnard,
at 2.
U.S.C. 6(c)(3)(E).
127 77 FR at 30655 (finding, in the context of the
eligible contract participant definition, that
construing the phrase ‘‘formed and operated by a
person subject to regulation under the [CEA]’’ to
refer to a person excluded from the CPO definition,
registered as a CPO or properly exempt from CPO
registration appropriately reflects Congressional
intent).
128 7 U.S.C. 6(c).
126 7
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Moreover, providing a safe harbor
enabling non-U.S. CPOs to utilize the
3.10 Exemption, subject to appropriate
conditions minimizing possible U.S.
participants in the covered offshore
pools, may result in more non-U.S.
CPOs and their offshore pools choosing
to trade in the U.S. commodity interest
markets, which adds liquidity to those
markets and thereby promotes more
efficient price discovery therein.
Importantly, the adoption of the safe
harbor will not have a material adverse
effect on the ability of the Commission
to discharge its regulatory duties under
the Act. Pursuant to CEA section 4(d),
the Commission expressly retains the
statutory authority to conduct
investigations in order to determine
compliance with the requirements or
conditions of such exemption, or to take
enforcement action for any violation of
any provision of the CEA or any rule,
regulation, or order thereunder caused
by the failure to comply with or satisfy
such conditions or requirements,
notwithstanding this amendment.129
Finally, as noted above, the Commission
retains the authority to take enforcement
action against any non-U.S. CPO
claiming the 3.10 Exemption based on
their activities within the U.S.
commodity interest markets. Nothing in
the Final Rule, including the adoption
of this safe harbor, negatively affects or
restricts the Commission’s statutory and
regulatory authority applicable to the
commodity pool and intermediary
activities of a non-U.S. CPO involving
persons located in the United States.
Therefore, the Commission concludes
that the safe harbor, as adopted herein,
is an appropriate exercise of its
authority pursuant to section 4(c) of the
Act.130
F. Exception for Initial Capital
Contributions by U.S. Affiliates of a
Non-U.S. CPO to Its Offshore Pools
The 2020 Proposal also proposed an
Affiliate Contribution Exception,
providing that initial capital contributed
by a non-U.S. CPO’s U.S. controlling
affiliate to the non-U.S. CPO’s offshore
commodity pool would not affect the
eligibility of the non-U.S. CPO for the
3.10 Exemption with respect to that
offshore pool.131 To that end, despite its
initial capital contribution(s), the U.S.
controlling affiliate would not be
considered a ‘‘participant’’ for purposes
of determining whether all of the
offshore pool’s participants are located
outside of the United States, as required
129 7
U.S.C. 6(d).
infra new Commission regulation
3.10(c)(5)(iii).
131 2020 Proposal, 85 FR at 35825–35826.
130 See
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by the 3.10 Exemption.132 The
Commission noted that the term
‘‘control’’ in this proposed provision: (1)
Was intended to provide a meaningful
degree of protection and transparency
with respect to the controlling affiliate’s
contribution of initial capital to the nonU.S. CPO’s offshore commodity pool;
and (2) would be defined, consistent
with part 49 of its regulations, as the
possession, direct or indirect, of the
power to direct or cause the direction of
the management and policies of a
person, whether through the ownership
of voting shares, by contract, or
otherwise.133 As discussed in more
detail below, the Commission proposed
multiple conditions and limitations to
the Affiliate Contribution Exception: (1)
The U.S. affiliate must ‘‘control,’’ as
defined in Commission regulation
49.2(a)(4), the non-U.S. CPO of the
offshore pool; (2) only contributions
considered to be ‘‘initial capital
contributions,’’ i.e., those made at or
near the inception of an offshore
commodity pool, are covered by the
exception; (3) interests in the U.S.
affiliate are not being marketed as an
investment or asset that provides
exposure to the U.S. commodity interest
markets; and (4) the U.S. affiliate must
not be subject to a statutory
disqualification, ongoing registration
suspension or bar, prohibition on acting
as a principal, or trading ban with
respect to the U.S. commodity interest
markets.134
The Commission received two
comment letters addressing and
discussing the Affiliate Contribution
Exception in the 2020 Proposal. Both
commenters generally supported the
Commission’s proposed Affiliate
Contribution Exception. Vanguard
strongly supported this aspect of the
2020 Proposal, but stated its belief that
‘‘two changes would enhance the
Proposal, consistent with the
Commission’s mandate to protect U.S.
commodity pool participants.’’ 135 The
Industry Groups also strongly supported
the proposed Affiliate Contribution
Exception. This approach, the Industry
Groups explained, as reflected in the
Commission’s own staff relief letters
and certain regulatory provisions,
‘‘recognizes that these [affiliate] capital
contributions are not ‘investments’
132 Id.
at 35825.
(explaining that this definition of ‘‘control’’
stems from Commission regulation 49.2(a)(4) and
was recently incorporated into the Commission’s
approach in the cross-border regulation of SDs); Id.
at 35832 (proposing Commission regulation
3.10(c)(3)(iii)).
134 2020 Proposal, 85 FR at 35825, 35831–35832.
135 Vanguard, at 2. The two changes urged by
Vanguard are discussed in more detail below.
133 Id.
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78727
made for the purpose of seeking returns
from a pooled vehicle,’’ and that prior
Commission staff letters have previously
recognized that capital contributions to
a pool by the CPO’s U.S. affiliate or the
CPO’s U.S. principals do not constitute
‘‘participation’’ in the pool that would
otherwise require the protections of the
Commission’s CPO regulatory program
in 17 CFR part 4.136
Specifically, the Industry Groups
noted that the proposed approach
recognizes that affiliate contributions
‘‘reflect ‘commercial’ business
decisions’’ to further the CPO’s business
goals and support the CPO’s innovation
and investment opportunities.137 Both
comment letters also recommended that,
in finalizing the 2020 Proposal, the
Commission adopt certain modifications
that would generally expand the
proposed availability of the Affiliate
Contribution Exception.138 The
Commission will now explain the
proposed conditions, responsive
comments, and finally, the approach it
is taking in the Final Rule, including the
Commission’s analysis pursuant to CEA
section 4(c).
1. U.S. ‘‘Controlling’’ Affiliates
In the 2020 Proposal, the Commission
proposed to permit U.S. controlling
affiliates to contribute initial capital to
offshore pools operated by their
affiliated non-U.S. CPOs, because it
preliminarily believed that the control
typically exercised by a U.S. controlling
affiliate over its non-U.S. CPO affiliate
should provide a meaningful degree of
protection and transparency with
respect to the U.S. controlling affiliate’s
contribution of initial capital to a nonU.S. CPO’s offshore commodity pool.139
For purposes of determining what
constitutes a ‘‘controlling affiliate,’’ as
that term was used in the 2020
Proposal,140 the Commission used the
definition of ‘‘affiliate’’ set forth in
Commission regulation 4.7(a)(1)(i),
which defines an ‘‘affiliate’’ as a person
that directly or indirectly through one or
more persons, controls, is controlled by,
or is under common control with the
specified person,141 and the definition
of ‘‘control’’ as set forth in Commission
regulation 49.2(a)(4), which defines
‘‘control’’ as the possession, direct or
indirect, of the power to direct or cause
the direction of the management and
136 Industry
Group Letter, at 5.
Group Letter, at 5.
138 Industry Group Letter, at 2–3; Vanguard, at 2.
139 2020 Proposal, 85 FR at 35825.
140 The proposed Affiliate Contribution Exception
referred to the qualifying contributing affiliate as
‘‘the control affiliate.’’ See, e.g., 2020 Proposal, 85
FR at 35832.
141 17 CFR 4.7(a)(1)(i).
137 Industry
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policies of a person, whether through
the ownership of voting securities, by
contract, or otherwise.142
The Commission further noted that
the majority of a registered CPO’s
compliance obligations focus on
customer protection through a variety of
disclosures regarding a person’s
participation in a pool, which
information a controlling affiliate would
likely already be in a position to obtain,
independent of the Commission’s
regulations.143 The Commission
preliminarily believed that a controlling
person would have the corporate or
other legal authority to require the
controlled non-U.S. CPO to provide
information equivalent to that required
by the Commission, such as detailed
information about the non-U.S. CPO’s
finances, management, and operations,
and more relevant to the proposed
amendment, access to investment and
performance information for the
offshore pool.144 Based on that
understanding, the Commission
preliminarily concluded that, due to the
fundamentally different features of the
relationship between a controlling
affiliate and a non-U.S. CPO, as
compared with that between an outside
investor and that CPO, initial capital
contributions by a U.S. controlling
affiliate to an offshore pool operated by
an affiliated non-U.S. CPO do not raise
the same customer protection concerns
as investments in those pools by
unaffiliated persons located in the
United States.145
As noted above, both responsive
comments supported the general
concept of the proposed Affiliate
Contribution Exception. Although the
commenters agreed that employing the
definition of ‘‘affiliate’’ from
Commission regulation 4.7(a)(1)(i) for
this purpose is appropriate, they both
opposed the additional proposed
condition of ‘‘control,’’ as defined in
Commission regulation 49.2(a)(4).146
Vanguard recommended that the
Commission not require that the U.S.
affiliate contributing capital to an
offshore pool managed by a non-U.S.
CPO ‘‘be a controlling affiliate of the
non-U.S. CPO or be regulated in the
United States in order to qualify for’’ the
142 17
CFR 49.2(a)(4).
Proposal, 85 FR at 35825, citing 17 CFR
4.22(c)(8) (providing that a registered CPO need not
distribute an annual report to pools operated by
persons controlling, controlled by, or under
common control with the CPO, provided that
information regarding the underlying pool is
contained in the investor pool’s annual financial
statement).
144 2020 Proposal, 85 FR at 35825.
145 Id.
146 Vanguard, at 2; Industry Group Letter, at 5.
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143 2020
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Affiliate Contribution Exception.147
Likewise, the Industry Groups
specifically recommended that the
Affiliate Contribution Exception be
applicable to offshore pool
contributions by all affiliates, as defined
in Commission regulation 4.7(a)(1)(i),
rather than just controlling affiliates,
and further stated their belief that
limiting the exception to contributions
from controlling affiliates serves no
regulatory need for the Commission.148
Additionally, the Industry Groups
stated that the Commission’s motivation
in requiring such control, that the U.S.
controlling affiliate would therefore
have access to any and all information
on the non-U.S. CPO and the offshore
pool otherwise required for participants
by virtue of 17 CFR part 4, was
misplaced because, they argued, capital
contributions to a pool by affiliates of its
CPO ‘‘reflect commercial business
decisions intended for the purpose of
supporting the organization’s business
operations.’’ 149 The Industry Groups
emphasized, moreover, that limiting the
Affiliate Contribution Exception to
controlling affiliates is ‘‘neither
necessary nor appropriate to ensure that
global organizations can obtain the
information they need for commercial
decision-making.’’ 150 They stated that
requiring control in the Affiliate
Contribution Exception ‘‘would in no
way further the protection of U.S.
investors,’’ because affiliate
contributions to an offshore pool are
‘‘not properly viewed as participant
investments requiring Part 4
protection[s].’’ 151 The Industry Groups
also argued that the proposed condition
would ‘‘prevent many global
organizations from being able to rely on
the exemption in circumstances that do
not present any of the concerns’’ raised
in the 2020 Proposal.152 Finally, the
Industry Groups stated that ‘‘there is no
basis for requiring the entity directly
contributing capital to control the [nonU.S.] CPO,’’ as long as all of the entities
involved remain, ‘‘under [the] common
147 Vanguard, at 2 (citing other 17 CFR part 4
regulations as provisions that ‘‘acknowledge that a
CPO’s affiliate that contributes capital to offshore
pools does not need to receive the information that
is otherwise provided by a CPO to other investors
for their protection’’).
148 Industry Group Letter, at 5–6 (stating that,
‘‘[a]s proposed, the [Affiliate Contribution
Exception] would be available only to contributions
by those entities in an organizational structure that
are upstream of the CPO, and would exclude
contributions from all other affiliates’’).
149 Id. at 6.
150 Id. (noting further that this proposed condition
does not ‘‘accurately reflect the realities of
enterprise decision-making and information flow’’).
151 Industry Group Letter, at 8.
152 Id. at 7–8.
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control of an entity responsible for the
success of the enterprise.’’ 153
After further consideration of the
proposed Affiliate Contribution
Exception and the comments received,
the Commission does not believe that
requiring the U.S. affiliate to ‘‘control’’
the non-U.S. CPO is necessary to
address the Commission’s stated policy
concerns. The definition of ‘‘affiliate’’ in
Commission regulation 4.7(a)(1)(i)
already incorporates the idea of
‘‘control,’’ 154 which is substantively
identical to that in Commission
regulation 49.2(a)(4).155 Therefore, as
noted by commenters, control is already
required between or among related
entities for those entities to be
considered ‘‘affiliates’’ under
Commission regulation 4.7(a)(1)(i), as
‘‘control’’ is inherent to that ‘‘affiliate’’
definition.
Because control is a fundamental
element of the relationship between a
U.S. affiliate and non-U.S. CPO, and
therefore is incorporated into the
proposed Affiliate Contribution
Exception due to its reference to
Commission regulation 4.7(a)(1)(i), the
Commission believes that including an
additional reference to ‘‘control’’ from
Commission regulation 49.2(a)(4) is
redundant and unnecessary to ensure
there is ‘‘a meaningful degree of
protection and transparency,’’ or
adequate information and disclosure
flowing between those entities. Upon
consideration of the comments and the
Commission’s concerns delineated in
the 2020 Proposal about sufficient
information regarding an offshore pool
investment being available to a
contributing U.S. affiliate, the
153 Id.
at 6.
CFR 4.7(a)(1)(i).
155 When the Commission proposed the definition
of ‘‘affiliate’’ in Commission regulation 4.7, which
it later adopted without modification, it stated that
the definition was identical to that in the Securities
and Exchange Commission’s (SEC’s) Regulation D.
Exemption for Commodity Pool Operators With
Respect to Offerings to Qualified Eligible
Participants; Exemption for Commodity Trading
Advisors With Respect to Advising Qualified
Eligible Clients, 65 FR 11253, 11256 (Mar. 2, 2000)
(stating that the proposed definition is based upon
the ‘‘affiliate’’ definition in Rule 501 of Regulation
D under the Securities Act of 1933.); 17 CFR
230.501(b). The definition of ‘‘affiliate’’ in
Regulation D is identical to that in SEC Rule 405
of Regulation C. Revision of Certain Exemptions
From Registration for Transactions Involving
Limited Offers or Sales, 47 FR 11251, 11255 (Mar.
16, 1982); 17 CFR 230.405. Rule 405 of Regulation
C, in turn, defines ‘‘control’’ as used in the
definition of ‘‘affiliate’’ in both Regulation D and—
pertinent to this Final Rule—Commission
regulation 4.7(a)(1)(i), as the possession, direct or
indirect, of the power to direct or cause the
direction of the management and policies of a
person, whether through the ownership of voting
securities, by contract, or otherwise. 17 CFR
203.405, control.
154 17
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Commission believes that such U.S.
affiliate does not have to control the
non-U.S. CPO, as contemplated by the
2020 Proposal, for the Commission to be
reasonably confident that the U.S.
affiliate has a meaningful degree of
visibility into the operations of the nonU.S. CPO and the offshore pool, absent
the protections provided by part 4 of the
Commission’s regulations. Therefore,
the Commission concludes in the Final
Rule that it is not necessary for the U.S.
affiliate to be a controlling affiliate,
provided that ‘‘control,’’ as articulated
by the affiliate definition in Commission
regulation 4.7(a)(1)(i), is present.156
In arriving at this conclusion, the
Commission reflected upon the nature
and characteristics of the types of
relationships generally included within
the definition of ‘‘affiliate’’ under
Commission regulation 4.7(a)(1)(i), as
incorporated in both the 2020 Proposal
and the Final Rule. As explained above,
entities meet the definition of ‘‘affiliate’’
in Commission regulation 4.7(a)(1)(i)
primarily by virtue of the control in
their relationships to one another; this
obviates the need for the Commission,
through its regulations or otherwise, to
mandate the provision of information to
the contributing affiliate.
For instance, if the U.S. affiliate
controls the non-U.S. CPO, as discussed
in the 2020 Proposal, the U.S. affiliate
would have the direct authority to
obtain any information it needs related
to its capital contribution to the offshore
pool operated by its controlled non-U.S.
CPO. Alternatively, if a U.S. affiliate is
controlled by the non-U.S. CPO of an
offshore pool, as a corporate subsidiary,
in the Commission’s experience, the
U.S. affiliate typically has increased
access to information about the
operations of its parent, as compared to
a third-party participant, because the
controlled U.S. affiliate may obtain such
information as needed, and otherwise
has the ability to access internal
information regarding its parent’s
operations, including information
regarding an offshore pool. Moreover,
where the U.S. affiliate and the non-U.S.
CPO are under common control of a
third entity, that third-party controlling
affiliate, due to its interest in the
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156 2020
Proposal, 85 FR at 35825. The
Commission notes that, in the 2020 Proposal, this
discussion focused on the relationship between a
‘‘U.S. controlling affiliate’’ and the non-U.S. CPO
because the Commission believed that, for purposes
of the proposed Affiliate Contribution Exception,
the control that a U.S. controlling affiliate is able
to exercise with respect to the operations of the
non-U.S. CPO and its offshore pools provides
adequate assurances that the U.S. controlling
affiliate is able to obtain and act upon the
information relevant to its participation in the nonU.S. CPO’s offshore pool. Id. at 35825–35826.
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continued viability of the U.S. affiliate,
the non-U.S. CPO, and the enterprise as
a whole, would, in the Commission’s
experience, ensure that its controlled
U.S. affiliate was in possession of any
and all relevant information regarding
the offshore pool necessary to assess the
propriety of the U.S. affiliate
contributing initial capital to that
vehicle. In each instance, the U.S.
affiliate, regardless of whether it is
controlling, controlled by, or under
common control with a non-U.S. CPO of
an offshore pool, would have a
mechanism to obtain information
regarding the operations of that offshore
pool, independent of the Commission’s
regulatory requirements under 17 CFR
part 4. This conclusion is also
consistent with the Commission’s
determination to exempt certain
affiliated pool participants from the
disclosure and reporting requirements
in part 4 of its regulations, based on
similar analyses of the nature of those
contributions and of the relationships
between such affiliated participants and
the CPO.157
Based on the foregoing, the
Commission concludes that the general
nature of such affiliate relationships
assuages its stated concerns in the 2020
Proposal in the context of the Affiliate
Contribution Exception. The
Commission believes that where the
U.S. affiliate contributing initial capital
to the offshore pool controls, is
controlled by, or is under common
control with, the offshore pool’s nonU.S. CPO, consistent with the ‘‘affiliate’’
definition in Commission regulation
4.7(a)(1)(i), this provides such U.S.
affiliate with sufficient access to the
information it needs about the non-U.S.
CPO or the offshore pool to make
properly informed decisions regarding
any initial capital contributions to that
offshore pool. Thus, the Commission
concludes that such U.S. affiliate of a
non-U.S. CPO contributing to its
offshore pool should be eligible for the
Affiliate Contribution Exception,
provided the other conditions are met.
The Final Rule therefore adopts the
Affiliate Contribution Exception,
without additionally requiring that the
157 See, e.g., 17 CFR 4.21(a)(2) (stating that, for
purposes of distributing disclosure documents to
prospective participants, a CPO is not required to
distribute to a commodity pool operated by a pool
operator that is the same as, or that controls, is
controlled by, or is under common control with, the
pool operator of the offered pool); 17 CFR 4.22(c)(8)
(providing that, for purposes of the Annual Report
distribution requirement, the term ‘‘participant’’
does not include a commodity pool operated by a
pool operator that is the same as, or that controls,
is controlled by, or is under common control with
the pool operator of a pool in which the commodity
pool is invested).
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78729
U.S. affiliate control the affiliated nonU.S. CPO, and without reference to
Commission regulation 49.2(a)(4).158
2. The Timing of a U.S. Affiliate’s
Capital Contributions to an Offshore
Pool
In the 2020 Proposal, the Commission
also stated its preliminary intent to limit
the Affiliate Contribution Exception to
capital contributed by a U.S. controlling
affiliate at or near the inception of a
non-U.S. CPO’s offshore pool.159 The
Commission explained that such initial
capital contributions generally result
from commercial decisions by the U.S.
controlling affiliate, typically in
conjunction and coordination with the
non-U.S. CPO, to support the offshore
pool until such time as it has an
established performance history for
solicitation purposes, notwithstanding
that the affiliate’s capital may remain
invested for the life of the offshore
pool.160 Limiting the Affiliate
Contribution Exception to initial capital
contributions, the Commission
preliminarily believed, is appropriate to
ensure that the capital is being
contributed in an effort to support the
operations of the offshore pool at a time
when its viability is being tested, rather
than as a mechanism for the U.S.
controlling affiliate to generate returns
for its own investors.161
The Commission also discussed in the
2020 Proposal whether such
contributions should be time-limited in
any regard. The Commission
acknowledged a staff letter issued by the
Division of Swap Dealer and
Intermediary Oversight (DSIO), wherein
DSIO staff determined that a limitation
on how long U.S. contributions could
remain invested in an offshore pool
without the non-U.S. CPO registering as
such was appropriate, because some of
the U.S. derived capital came from U.S.
natural persons employed by the nonU.S. CPO’s affiliated U.S. investment
advisers.162 In the 2020 Proposal, the
Commission preliminarily concluded
that imposing a similar time limit on the
proposed Affiliate Contribution
Exception was not necessary, where the
initial capital contributions are derived
not from natural person employees, but
rather from the corporate funds of the
contributing affiliate.163
158 See infra new Commission regulation
3.10(c)(5)(ii).
159 2020 Proposal, 85 FR at 35826.
160 Id.
161 Id.
162 Id. at 35825, citing CFTC Staff Letter 15–46
(May 8, 2015), available at https://www.cftc.gov/csl/
15-46/download.
163 2020 Proposal, 85 FR at 35825.
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In response, the Industry Groups
commented that the Commission’s
rationale supporting the Affiliate
Contribution Exception ‘‘applies equally
to affiliate support provided at other
points in a pool’s life cycle, and that
limiting the [exception] to ‘initial’
contributions would thus reduce the
effectiveness of the exemption without
serving any U.S. investor protection
purpose.’’ 164 Vanguard supported the
Commission’s belief that any
contribution of capital by a U.S. affiliate
should be done to support the
operations of an offshore pool at a time
when its viability is being tested.165
However, Vanguard noted that limiting
contributions to ‘‘at or near a pool’s
inception’’ would have the unintended
consequence of ‘‘limiting [an] affiliate’s
ability to support its non-U.S. CPO,’’
and accordingly, recommended that the
Commission not limit the Affiliate
Contribution Exception to initial capital
contributions.166
Additionally, the Industry Groups
stated that there are ‘‘many situations in
the life of an offshore pool, after the
initial startup period, where it is
beneficial, and may be essential, to the
pool’s viability and to its participants
for the CPO or its affiliates to provide
additional support for the pool.’’ 167 The
Industry Groups noted that there are
matters beyond a CPO’s control ‘‘such as
shareholder redemption activity and
market disruptions’’ that make it
important for the offshore pool to have
continued access to affiliate capital
support.168 Alternatively, the Industry
Groups stated that they would not be
opposed to the Commission including
in the Affiliate Contribution Exception a
specific ‘‘purpose’’ provision, to ensure
it is used ‘‘properly’’ or in good faith;
their suggested language would require
that, ‘‘ ‘contributions of the affiliate will
be for the purpose of establishing, or
providing ongoing support to, the
[offshore] pool to attract or retain nonU.S. investors and will not be used as
a mechanism for the U.S. affiliate to
generate returns for its own
investors.’ ’’ 169
After considering the comments
received, the Commission is limiting the
Affiliate Contribution Exception to
initial capital contributions to an
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164 Industry
Group Letter, at 8.
165 Vanguard, at 3.
166 Id.
167 Industry Group Letter, at 8–9 (describing
regulatory and business reasons, such as limits on
owner concentration, investment diversification,
internal guidelines, ensuring qualified purchaser
status, or seeding a new share class for an existing
offshore pool).
168 Industry Group Letter, at 9.
169 Id.
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offshore pool by U.S. affiliates of the
pool’s non-U.S. CPO, as proposed.
Specifically, commenters confirmed the
Commission’s preliminary belief that
affiliates commonly support offshore
pools by making capital contributions at
or near the pool’s inception to facilitate
the establishment of performance
history for solicitation purposes,
although the affiliate’s capital may
remain invested as long as the offshore
pool operates. The Commission was
clear in the 2020 Proposal that it was
comfortable excepting from regulation,
via the proposed Affiliate Contribution
Exception, those capital contributions
from a non-U.S. CPO’s U.S. affiliate to
an offshore pool that are contributed ‘‘at
or near a pool’s inception’’ for the
specific purposes of generating
performance history resulting from
innovative or new trading programs.170
The Commission stated that, consistent
with its authority under CEA section
4(c), the Commission intended the
proposed Affiliate Contribution
Exception to allow such non-U.S. CPOs
to test novel trading programs or
otherwise engage in proof of concept
testing in the collective investment
industry that might otherwise not be
possible due to a lack of a performance
history for the offshore pool.171
Conversely, commenters have
recommended expanding the time frame
for affiliate capital contributions to
permit them at any point during an
offshore pool’s existence, such that
affiliate contributions may be made for
a variety of reasons, other than testing
a novel trading strategy or establishing
a performance history for solicitation
purposes.172 Such circumstances would
permit a U.S. affiliate to provide
ongoing support to an offshore pool,
either to facilitate the offshore pool’s
ongoing operations in times of distress,
or to attract and retain participants later
in the offshore pool’s lifecycle, well
beyond its inception. The Commission
has concerns that expanding the time
frame for the Affiliate Contribution
Exception in this manner could result in
a U.S. affiliate being used by its
affiliated non-U.S. CPO to financially
support an otherwise poorly performing
or even failing offshore pool, which
could, in turn, adversely affect the
financial condition of (and potentially
result in the failure of) the U.S. affiliate,
and ultimately, cause harm to the U.S.
financial system and investors.
Moreover, the Commission believes
that it would be difficult to craft a
regulatory provision that appropriately
170 2020
Proposal, 85 FR at 35826.
171 Id.
172 See,
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expands the time frame and/or
circumstances under which U.S.
affiliates would be permitted to make
capital contributions to an offshore
pool, without rendering the Affiliate
Contribution Exception overbroad or
impermissibly vague. As noted above,
commenters suggested rule text
requiring that, ‘‘ ‘contributions of the
affiliate will be for the purpose of
establishing, or providing ongoing
support to, the [offshore] pool to attract
or retain non-U.S. investors and will not
be used as a mechanism for the U.S.
affiliate to generate returns for its own
investors.’ ’’ 173 This suggested language,
in the Commission’s opinion, provides
such minimal limitations on the
circumstances under which a U.S.
affiliate could contribute capital to an
offshore pool (with the only prohibition
being the outright evasive generation of
profits for investors in the U.S. affiliate),
as to render the limitation meaningless
in practice. As noted above, the
Commission intended the proposed
Affiliate Contribution Exception to be
available for specific purposes related to
the start-up or inception of an offshore
pool, and to generating performance
history for its new trading program or
strategy. The Commission finds that
broadening the exception’s purpose as
suggested by commenters could result
in undue risk from offshore pools
flowing back onto U.S. shores, and thus,
to U.S. investors. Therefore, the
Commission declines to broaden the
time frame, and is adopting the Affiliate
Contribution Exception as proposed,
with the limitation to initial capital
contributions by U.S. affiliates.174
The Industry Groups also suggested
that the Commission consider clarifying
that, for purposes of the 3.10
Exemption, including the Affiliate
Contribution Exception, when the
Commission or one of its regulations
refers to a ‘‘pool,’’ it should generally be
construed as also referring to series, subfunds, and/or segregated portfolios of
business organizations that provide
statutory ring-fencing of assets and
liabilities for each series, sub-fund, or
segregated portfolio.175 The Commission
notes that the 2020 Proposal did not
173 Id.
174 Any non-U.S. CPO contemplating accepting
additional capital contributions for an offshore pool
from one or more of its U.S. affiliates outside the
period of initial capitalization would have to
separately qualify for, rely upon, or claim other
relief from registration as a CPO with the
Commission. Any such investment would not be
eligible for this Affiliate Contribution Exception.
175 Industry Group Letter, at 11, n. 25 (noting that,
despite the different terminology between domestic
series trusts and ‘‘segregated portfolios,’’ the latter
is an analogous corporate structure frequently used
in jurisdictions outside of the United States).
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address the treatment of series, subfunds, and/or segregated portfolios of
structures that provide limited liability
amongst such subdivisions.
Furthermore, the Commission notes
that, to date, it has not revised the
definition of the term ‘‘pool’’ in
Commission regulation 4.10(d) to
recognize such subdivisions as
individual pools, nor did the
Commission propose such amendment
in the 2020 Proposal.176 Finally, given
that the term ‘‘pool’’ is used throughout
the Commission’s regulations, the
Commission believes that it would be
more appropriate to address the issue of
how a pool may be organized more
globally within its regulations, which it
is unable to accomplish through this
Final Rule.177 Therefore, the
Commission is not adopting a definition
of ‘‘pool’’ for purposes of the 3.10
Exemption.
3. Additional Anti-Evasion Conditions:
The Marketing Prohibition and
Prohibiting ‘‘Bad Actor’’ U.S. Affiliates
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The Commission acknowledged in the
2020 Proposal that the proposed
Affiliate Contribution Exception could
result in evasion of the Commission’s
regulations generally with respect to
offshore pools.178 As an example, the
Commission described a situation where
a U.S. controlling affiliate could invest
in its affiliated non-U.S. CPO’s offshore
commodity pool, and then solicit
persons located in the United States for
investment in the U.S. controlling
affiliate, in an effort to provide such
U.S. investors with indirect exposure to
the offshore pool.179 The Commission
then stated its preliminary belief that,
under those circumstances, the
Commission would consider such
practices as constituting evasion of the
Commission’s CPO regulations, and
would thus render the non-U.S. CPO
ineligible for the 3.10 Exemption.180
The Commission therefore proposed an
‘‘anti-evasion’’ requirement in the
Affiliate Contribution Exception that,
interests in the U.S. controlling affiliate
are not marketed as providing access to
trading in commodity interest markets
176 17 CFR 4.10(d)(1) (defining ‘‘pool’’ as any
investment trust, syndicate or similar form of
enterprise operated for the purpose of trading
commodity interests).
177 See Administrative Procedure Act, Public Law
404, 60 Stat. 237, ch. 324, sections 1–12 (1946)
(APA); codified by Public Law 89–554 (1966) at 5
U.S.C. 551–559, 701–706, 1305, 3105, 3344, 5372,
7521 (2011). Specifically, see APA, 5 U.S.C. 553(b).
178 2020 Proposal, 85 FR at 35826.
179 Id.
180 Id.
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in the United States, its territories or
possessions.181
In the 2020 Proposal, the Commission
further stated its preliminary belief that
U.S. controlling affiliates who are barred
from participating in the U.S.
commodity interest markets should not
be permitted to utilize the Affiliate
Contribution Exception as a method to
gain indirect access to those markets via
an affiliated non-U.S. CPO’s offshore
pool, which would undermine the
efficacy of such a bar.182 Therefore, the
Commission also proposed to limit the
Affiliate Control Exception to U.S.
controlling affiliates, which themselves
and their principals are not subject to a
statutory disqualification, ongoing
registration suspension or bar,
prohibition on acting as a principal, or
trading ban with respect to participating
in commodity interest markets in the
United States, its territories or
possessions.183
Regarding the Commission’s concerns
about the Affiliate Contribution
Exception being used to evade other of
the Commission’s part 4 regulatory
protections, the Industry Groups
concluded that the ‘‘anti-evasion
condition of the [2020] Proposal,’’
prohibiting the marketing of interests in
the U.S. affiliate as providing access to
trading in U.S. commodity interest
markets, addresses this concern and ‘‘is
well-tailored to achieve its purpose.’’ 184
The Industry Groups did suggest,
however, that the Commission could
also ‘‘specify in the rule text, or in the
final adopting release, that only
affiliated entities, and not natural
person affiliates, are contemplated by
the [Affiliate Contribution
Exception].’’ 185 The Commission agrees
that it would further its intention of
limiting the Affiliate Contribution
Exception to juridical persons, rather
than natural persons, as stated in the
2020 Proposal, to specifically limit the
availability of that provision to entities,
and not natural persons, in the
regulatory text. As discussed in the 2020
Proposal, the Commission declined to
propose a limit on the time in which
capital contributions from U.S. affiliates
can remain in the offshore pool because
181 Id. at 35832 (proposing Commission regulation
3.10(c)(3)(iii)(B)). If interests in a U.S. entity
including an affiliate of a CPO are marketed to U.S.
persons as providing access to trading in
commodity interest markets outside the United
States, its territories or possessions, then that entity
may be required to register with the Commission
pursuant to Commission regulation 30.4(c). 17 CFR
30.4(c).
182 2020 Proposal, 85 FR at 35826.
183 Id. at 35832 (proposing Commission regulation
3.10(c)(3)(iii)(A)).
184 Industry Group Letter, at 7.
185 Id.
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78731
it was envisioning such contributions
deriving from entity affiliates rather
than natural persons.186 For the reasons
stated in the 2020 Proposal, the
Commission is therefore adopting, as
proposed, but with the additional
limitation suggested by commenters, the
‘‘anti-evasion’’ requirement designed to
prohibit evasive conduct, in which U.S.
participant capital could be solicited for
investment in the U.S. affiliate,
providing indirect exposure to the
offshore pool.187
With respect to the proposed
condition prohibiting those U.S.
controlling affiliates that are subject to
a statutory disqualification, ongoing
registration suspension or bar,
prohibition on acting as a principal, or
trading ban with respect to participating
in commodity interest markets in the
United States from relying on the
Affiliate Contribution Exception, the
Industry Groups stated that the
proposed condition goes far beyond its
purpose as stated by the Commission.188
The Industry Groups explained that the
‘‘regulatory purpose is to keep out
affiliates that are barred from
participating in the U.S. commodity
interest markets,’’ but the proposed
condition ‘‘applies to the vague and far
broader universe of persons that are
‘subject to a statutory
disqualification.’ ’’ 189 Consequently, the
Industry Groups recommended that the
Commission remove any reference to
statutory disqualification in this
provision, for the purpose of eliminating
confusion, and that the Commission
focus this condition on prohibiting
‘‘entities that are in fact barred from
participating in the U.S. commodity
interest markets,’’ from utilizing the
Affiliate Contribution Exception.190
The Commission agrees that including
statutory disqualifications in this
provision does not further its goal of
mitigating the risk that persons no
longer permitted to participate in the
U.S. commodity interest markets
directly use the Affiliate Contribution
Exception to access such markets
through indirect means. The
Commission notes that the issue of
statutory disqualifications is related to
registration with the Commission and
generally concerns judgments regarding
fitness to intermediate transactions on
behalf of third parties.191 Those
concerns are not present in the context
186 2020
Proposal, 85 FR at 35825.
infra new Commission regulation
3.10(c)(5)(ii)(C).
188 Industry Group Letter, at 10.
189 Id.
190 Id.
191 See 7 U.S.C. 12a(2) and 12a(3).
187 See
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of the Affiliate Contribution Exception,
where the Commission is more focused
on foreclosing a potential loophole that
could permit persons that are barred or
prohibited from trading in the U.S.
commodity interest markets to do so
indirectly via offshore pool investments.
Therefore, in response to commenters
and to more clearly tailor this provision
to the rationale the Commission
articulated in the 2020 Proposal, the
Commission is adopting the Affiliate
Contribution Exception with the
condition that the affiliate and its
principals are not barred or suspended
from participating in commodity
interest markets in the United States, its
territories or possessions.192
4. Analysis Under Section 4(c) of the
Act
Consistent with its authority under
section 4(c) of the Act, the Commission
concludes that providing the Affiliate
Contribution Exception, subject to the
conditions included in the Final Rule as
detailed above, could result in increased
economic or financial innovation by
non-U.S. CPOs and their offshore pools
participating in the U.S. commodity
interest markets. The persons involved
in the transactions subject to the
exemptive relief provided herein are
‘‘appropriate persons,’’ as discussed in
the 2020 Proposal, because the term
‘‘appropriate person’’ as used in CEA
section 4(c) includes a commodity pool
formed or operated by a person subject
to regulation under the Act.193 The
Commission has previously interpreted
the clause ‘‘subject to regulation under
the Act’’ as including persons who are
exempt from registration or excluded
from the definition of a registration
category.194 The Commission continues
to believe that enabling U.S. affiliates to
provide initial capital to offshore pools
operated by affiliated non-U.S. CPOs
could provide such non-U.S. CPOs with
the ability to test novel trading
programs, or otherwise engage in proof
of concept testing with respect to
innovations in the collective investment
industry that might otherwise not be
possible, due to a lack of a performance
history for the offered pool.
Additionally, the adoption of the
Affiliate Contribution Exception will
not have a material adverse effect on the
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192 See
infra new Commission regulation
3.10(c)(5)(ii)(B).
193 7 U.S.C. 6(c)(3)(E).
194 77 FR at 30655 (finding, in the context of the
eligible contract participant definition, that
construing the phrase ‘‘formed and operated by a
person subject to regulation under the [CEA]’’ to
refer to a person excluded from the CPO definition,
registered as a CPO or properly exempt from CPO
registration appropriately reflects Congressional
intent).
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ability of the Commission to discharge
its regulatory duties under the CEA. The
U.S. affiliates contributing initial capital
to offshore pools operated by their
affiliated non-U.S. CPO will typically
have access to the information and
disclosures necessary for such U.S.
affiliate to independently evaluate the
propriety of its contribution to a specific
offshore pool, absent the protections
typically provided by part 4 of the
Commission’s regulations. Based on its
analysis above, the Commission
concludes that the contributions subject
to the Affiliate Contribution Exception
are distinguishable from offshore pool
contributions sourced from the general
public in the United States that
otherwise make such offshore pool
ineligible for the 3.10 Exemption. Also,
pursuant to CEA section 4(d), the
Commission expressly retains the
statutory authority to conduct
investigations in order to determine
compliance with the requirements or
conditions of such exemption, or to take
enforcement action for any violation of
any provision of the CEA or any rule,
regulation, or order thereunder caused
by the failure to comply with or satisfy
such conditions or requirements,
notwithstanding this amendment.195
Further, the Commission retains the
authority to take enforcement action
against any non-U.S. CPO claiming the
3.10 Exemption based on its activities
within the U.S. commodity interest
markets, and nothing in the Final Rule,
including the adoption of the Affiliate
Contribution Exception, negatively
affects or restricts the Commission’s
statutory and regulatory authority
applicable to the commodity pool and
intermediary activities of a non-U.S.
CPO involving persons located in the
United States. For the reasons stated in
the 2020 Proposal and the analysis
provided in this Final Rule, the
Commission concludes that it is
appropriate to provide the Affiliate
Contribution Exception from the U.S.
participant prohibition in the 3.10
Exemption, pursuant to section 4(c) of
the Act.
G. Additional Relief for Commodity
Trading Advisors
The Industry Groups recommended
that the Commission adopt relief for
non-U.S. CTAs, substantially similar to
that proposed for non-U.S. CPOs in the
2020 Proposal, because, they argued,
‘‘[t]he regulatory goals in the 2020
Release apply equally to CTAs.’’ 196
Specifically, the Industry Groups
requested that the Commission amend
195 7
U.S.C. 6(d).
Group Letter, at 13.
196 Industry
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Commission regulation 3.10(c) to
‘‘permit non-U.S. CTAs to claim the
relief under Commission regulation
3.10(c) on an account-by-account basis
. . . and [to] simultaneously rely on
registration or other exemptions or
exclusions for CTA activities on behalf
of U.S. investors, in the same manner as
the proposed amendments provide for
CPOs.’’ 197 They argued that this
amendment would also make it clear
that a non-U.S. CTA providing advice to
an offshore pool operated pursuant to
the 3.10 Exemption would be eligible
for relief from registration with the
Commission.198 In support of their
arguments, the Industry Groups cited
multiple instances of the Commission
and its staff historically permitting the
‘‘stacking’’ of statutory and regulatory
exemptions with registration for CTAs,
and stated that ‘‘the Commission’s focus
on [commodity trading] advice to U.S.
investors [is] well established in the
Commission’s regulatory
framework.’’ 199
Despite these comments, the
Commission is not adopting the
suggested amendments to Commission
regulation 3.10(c) regarding the
activities of non-U.S. CTAs. The 2020
Proposal, which dealt primarily with
amendments impacting the operations
of CPOs, did not contemplate or discuss
any such comparable modifications to
Commission regulation 3.10(c) with
respect to the activities of non-U.S.
CTAs on behalf of foreign located
persons.200 The 2020 Proposal also did
not query whether the amendments
impacting non-U.S. CPOs and their
offshore pools should likewise be
extended to include any of the activities
of non-U.S. CTAs; nor did it address or
consider the regulatory impact, positive
or negative, such policy choices could
have on the Commission’s regulatory
program for CTAs. Under these
circumstances, the Commission does
not believe that the public would have
had sufficient notice regarding the issue
of adopting parallel provisions for nonU.S. CTAs, such that the public could
provide meaningful comment as
required by the Administrative
Procedure Act.201 Therefore, the
197 Id.
198 Id.
199 Id.
at 13–14.
Commission is adopting as final herein
other amendments to Commission regulation
3.10(c) applicable to non-U.S. CTAs consistent with
the 2016 Proposal. The Commission notes that
those amendments broadly applied to non-U.S. IBs,
non-U.S. CPOs, and non-U.S. CTAs, and did not
impact or alter the specific conditions of eligibility
for non-U.S. CTAs relying on the exemptive relief
in that regulation.
201 APA, 5 U.S.C. 553(b)–(c). The Commission
notes that it does not disagree with the Industry
200 The
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Commission declines to amend revised
Commission regulation 3.10(c)(4) in a
manner that would substantively alter
or change the relief currently provided
by that regulation to qualifying non-U.S.
CTAs.
H. Reorganization of Commission
Regulation 3.10(c)
As recognized by certain commenters,
and as mentioned above, adopting the
Final Rule as proposed in both the 2020
Proposal and the 2016 Proposal requires
modification of the rule text as
presented in each proposal. Thus, the
Final Rule reorganizes that provision to
accommodate the adopted changes and
to increase the regulation’s overall
readability and clarity. Other than the
changes specifically explained in this
adopting release, this reorganization is
not intended to make substantive
changes to the regulatory obligations of
any affected market participant.
Commission regulation 3.10(c), as
adopted in the Final Rule, is
reorganized. New paragraph 3.10(c)(1)
now provides certain definitions of
terms that are used throughout the
remainder of paragraph (c), including:
‘‘covered transaction,’’ defined to mean
a commodity interest 202 transaction
executed bilaterally or made on or
subject to the rules of any DCM or
registered SEF; ‘‘foreign located
person,’’ defined to mean a person
located outside the United States, its
territories, or possessions; and
‘‘international financial institution,’’ the
definition of which is discussed above
in section II.B.3. The remainder of
paragraph (c) is organized so that its
enumerated sub-paragraphs refer to
registration exemptions available to
each type of intermediary. Thus, new
paragraph 3.10(c)(2) sets forth
exemptions applicable to market
participants engaged in the activities of
an FCM; new paragraph 3.10(c)(3) sets
forth exemptions applicable to those
persons engaged in the activities of an
IB; new paragraph 3.10(c)(4) refers to an
exemption for CTAs; and new paragraph
3.10(c)(5) provides an exemption for
CPOs, and contains the conditions
thereto and related provisions discussed
above. Finally, new paragraph 3.10(c)(6)
contains the rule text previously
presented in Commission regulation
3.10(c)(5).
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires Federal agencies, when
promulgating regulations, to consider
whether the rules they propose will
have a significant economic impact on
a substantial number of small entities. If
the rules are determined to have a
significant economic impact, such
agencies must provide a regulatory
flexibility analysis regarding such
economic impact. 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.203
The Final Rule adopted by the
Commission today would affect FCMs,
IBs, CTAs, and CPOs. The Commission
has established certain definitions of
‘‘small entities’’ to be used by the
Commission in evaluating the impact of
its rules on such entities in accordance
with the requirements of the RFA.204
The Commission has previously
determined that FCMs are not small
entities for purposes of the RFA.
Therefore, the RFA does not apply to
FCMs.205
With respect to CPOs, the
Commission previously has determined
that a CPO is a small entity for purposes
of the RFA, if it meets the criteria for an
exemption from registration under
Commission regulation 4.13(a)(2).206
With respect to small CPOs operating
pursuant to Commission regulation
4.13(a)(2), the Commission has
concluded that, should the amendments
to the 3.10 Exemption be adopted as
final, certain of those small CPOs may
choose to operate additional pools
outside the United States, which could
provide additional opportunities to
develop their operations not currently
available to them.207 The Commission
notes, however, that such small CPOs
203 5
U.S.C. 601, et seq.
e.g., Policy Statement and Establishment
of Definitions of ‘‘Small Entities’’ for Purposes of
the Regulatory Flexibility Act, 47 FR 18618, 18620
(Apr. 30, 1982).
205 Id.
206 Id. at 18619–20. Commission 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. 17 CFR 4.13(a)(2).
207 2020 Proposal, 85 FR at 35827.
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204 See,
Groups’ characterization of the Commission’s or its
staff’s past positions with respect to the ‘‘stacking’’
of statutory and/or regulatory exemptions from CTA
registration, or their combination with registration
as such, being permissible. The Commission is,
however, declining to adopt in revised Commission
regulation 3.10(c)(4) relief for non-U.S. CTAs,
comparable to that adopted herein for non-U.S.
CPOs, without a prior published rulemaking
proposal raising, addressing, and soliciting public
comment on that specific policy question.
202 ‘‘Commodity interest’’ is defined in
Commission regulation 1.3. 17 CFR 1.3, commodity
interest.
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would remain subject to the total
limitations on aggregate gross capital
contributions and pool participants set
forth in Commission regulation
4.13(a)(2) because that exemption is
based on the entirety of the CPO’s pool
operations. Because investment vehicles
operated under the 3.10 Exemption
remain commodity pools under the
CEA, the Commission does not believe
that the Final Rule will result in a
significant economic impact on a
substantial number of small CPOs.
Further, the Commission notes that the
Final Rule would impose no new
obligation, significant or otherwise, on
any affected small CPO. Accordingly,
the Chairman, on behalf of the
Commission, hereby certifies pursuant
to 5 U.S.C. 605(b) that the Final Rule
will not have a significant impact on a
substantial number of small entities
with respect to CPOs.
With respect to CTAs and IBs, the
Commission has found it appropriate to
consider whether such registrants
should be deemed small entities for
purposes of the RFA on a case-by-case
basis, in the context of the particular
Commission regulation at issue.208 As
certain of these registrants may be small
entities for purposes of the RFA, the
Commission considered whether these
amendments would have a significant
economic impact on such registrants.209
By combining amendments from the
2016 and 2020 Proposals, the Final Rule
will clarify in what circumstances
certain foreign located persons acting in
the capacity of an IB or CTA are exempt
from registration under Commission
regulation 3.10(c), in connection with
commodity interest transactions solely
on behalf of other foreign located
persons. The Final Rule thus would not
impose any new burdens on these
market participants. Rather, to the
extent that the Final Rule provides an
exemption from generally required
intermediary registration, the
Commission believes it is reasonable to
infer that operating pursuant to the
exemption, as amended by the Final
Rule, will be less burdensome to such
participants. The Commission does not,
therefore, expect IBs or CTAs that are
small entities to incur any additional
costs as a result of the Final Rule
amendments. Accordingly, the
Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C.
605(b) that the Final Rule will not have
208 See 47 FR at 18620 (CTAs); and Introducing
Brokers and Associated Persons of Introducing
Brokers, Commodity Trading Advisors and
Commodity Pool Operators; Registration and Other
Regulatory Requirements, 48 FR 35248, 35276 (Aug.
3, 1983) (IBs).
209 2016 Proposal, 81 FR at 51826.
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a significant impact on a substantial
number of small entities with respect to
IBs and CTAs.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) imposes certain requirements on
Federal agencies, including the
Commission, in connection with their
conducting or sponsoring any collection
of information, as defined by the
PRA.210 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. In the 2020 Proposal,
the Commission preliminarily
determined that the proposed
amendments, if adopted, would not
impose any new recordkeeping or
information collection requirements, or
other collections of information that
require approval of the Office of
Management and Budget (OMB) under
the PRA.211
The Commission invited the public
and other interested parties to comment
on any aspect of the information
collection requirements discussed in the
2020 Proposal.212 The Commission did
not receive any such comments. The
Commission similarly invited the public
and other interested parties to comment
on any aspect of the reporting burdens
under the 2016 Proposal,213 but also did
not receive any such comments.
Therefore, the Commission concludes
that the Final Rule, by adopting
amendments to Commission regulation
3.10(c) derived from both the 2016
Proposal and the 2020 Proposal, does
not impose any new recordkeeping or
information collection requirements, or
other collections of information that
require OMB approval under the PRA.
C. Cost-Benefit Considerations
Section 15(a) of the Act requires the
Commission to consider the costs and
benefits of its actions before issuing new
regulations under the CEA.214 Section
15(a) of the Act further specifies that the
costs and benefits shall be evaluated in
light of five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness and
financial integrity of the futures
markets; (3) price discovery; (4) sound
risk management practices; and (5) other
public interest considerations. The
Commission may, in its discretion, give
greater weight to any of the five
210 44
U.S.C. 3501, et seq.
Proposal, 85 FR at 35827.
211 2020
215 2016 Proposal, 81 FR at 51827; 2020 Proposal,
85 FR at 35827.
216 2016 Proposal, 81 FR at 51826.
217 See supra pt. II.B.3.
212 Id.
213 2016
214 7
Proposal, 81 FR at 51827.
U.S.C. 19(a).
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enumerated areas of concern, and may,
in its discretion, determine that,
notwithstanding its costs, a particular
rule is necessary or appropriate to
protect the public interest, or to
effectuate any of the provisions or to
accomplish any of the purposes of the
CEA. The Commission invited public
comment on the cost-benefit
considerations in both the 2016 and
2020 Proposals, but received no
comments on those analyses.215
As discussed above, pursuant to the
2016 Proposal, the Commission
proposed to amend Commission
regulations 3.10(c)(2) and (c)(3) to revise
the conditions under which those
exemptions from registration would
apply. Specifically, the 2016 Proposal
would permit a Foreign Intermediary to
be eligible for an exemption from
registration, if the Foreign Intermediary,
in connection with a commodity
interest transaction, only acts on behalf
of (1) foreign located persons, or (2) IFIs,
without regard to whether such persons
or institutions clear such commodity
interest transaction.216 The Final Rule
adopts the exemptions as proposed in
the 2016 Proposal, but clarifies that
commodity interest transactions effected
by Foreign Intermediaries on behalf of
foreign located persons that are required
or intended to be cleared on a registered
DCO, must be cleared through a
registered FCM, unless the foreign
located person is a clearing member of
the DCO (and thus may clear for
itself).217
As described above, the Commission
is adopting several amendments to
Commission regulation 3.10(c).
Specifically, the Commission is
amending the 3.10 Exemption such that
non-U.S. CPOs may rely on that relief
on a pool-by-pool basis through new
Commission regulation 3.10(c)(5)(i).
Next, new Commission regulation
3.10(c)(5)(ii) contains the finalized
Affiliate Contribution Exception, which
makes it clear that a non-U.S. CPO’s
eligibility for the 3.10 Exemption is
unaffected by initial capital
contributions from a U.S. affiliate of the
non-U.S. CPO to the non-U.S. CPO’s
offshore pools, provided certain
conditions are met. The Commission is
also adding new Commission regulation
3.10(c)(5)(iii), which establishes a
conditional safe harbor permitting nonU.S. CPOs, who cannot represent with
absolute certainty that there are no U.S.
participants in their offshore pools, to
nonetheless utilize the 3.10 Exemption
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for those offshore pools. Finally, the
Commission is adopting Commission
regulation 3.10(c)(5)(iv), which
explicitly permits a non-U.S. CPO
utilizing the 3.10 Exemption for one or
more offshore pools to register as a CPO,
claim an available exemption from CPO
registration, claim an exclusion from the
CPO definition, or claim other available
relief from CPO regulation, with respect
to other pools it operates. These
regulatory amendments adopted by the
Final Rule grant non-U.S. CPOs relief
that will likely generate costs and
benefits. The baseline against which
these costs and benefits are compared is
the regulatory status quo set forth in
current Commission regulation
3.10(c)(3).
The consideration of costs and
benefits below is based on the
understanding that the markets function
internationally, with many transactions
involving U.S. firms taking place across
international boundaries; with some
Commission registrants being organized
outside of the United States; with some
leading industry members typically
conducting operations both within and
outside the United States; and with
industry members commonly following
substantially similar business practices
wherever located. Where the
Commission does not specifically refer
to matters of location, the discussion of
costs and benefits below refers to the
effects of this proposal on all activity
subject to the proposed amended
regulations, whether by virtue of the
activity’s physical location in the
United States or by virtue of the
activity’s connection with activities in
or effect on U.S. commerce under CEA
section 2(i).218
1. Costs and Benefits Related to
Finalizing the 2016 Proposal
Pursuant to the Final Rule, the
Commission has recognized that not all
commodity interest transactions are
required to be cleared.219 This aspect of
the Final Rule should provide the
benefit of reducing inefficiencies in the
commodity interest activities of foreign
located persons by eliminating
confusion over whether the relevant
exemption from registration is
dependent on clearing commodity
interest transactions through a
registered FCM. With respect to
commodity interest transactions that are
required or intended to be cleared by a
registered DCO, the Final Rule should
provide the benefit of increased market
efficiency by clearly delineating that
such transactions must be cleared
218 7
U.S.C. 2(i).
supra pt. II.B.3.
219 See
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through a registered FCM, unless the
Foreign Intermediary’s customer is a
member of the DCO (and thus, may clear
for itself). The Commission further
believes that the legal certainty
provided by this aspect of the Final Rule
may increase participation in the U.S.
commodity interest markets by foreign
located persons, and thus, ensure
greater depth in such markets accessed
by U.S. persons. The Commission has
not identified any additional costs
attributable to this aspect of the Final
Rule.
2. Commission Regulation 3.10(c)(5)(i):
Claiming the 3.10 Exemption on a Poolby-Pool Basis
Pursuant to the Final Rule, a non-U.S.
CPO will be able to claim the 3.10
Exemption with respect to its qualifying
offshore pools, while registering as a
CPO or claiming another CPO
exemption or exclusion for its other
pools that do not qualify for the 3.10
Exemption because they are either
domiciled in the U.S., or they solicit
and/or accept as participants persons
located within the United States. Absent
this amendment, such non-U.S. CPOs
face some costs and compliance burdens
associated with the operation of their
offshore pools,220 despite the
Commission’s historical focus on
prioritizing customer protection with
respect to persons located in the United
States. For example, certain registered
U.S. and non-U.S. CPOs file selfexecuting notices pursuant to Advisory
18–96 with respect to their offshore
pools. The Advisory provides
compliance relief with respect to all of
the pool-based disclosures required
under the Commission’s regulations, as
well as many of the reporting and
recordkeeping obligations that
otherwise would apply to registered
CPOs, with the exception of the
requirement to file Form CPO–PQR
under Commission regulation 4.27.221
The relief pursuant to Advisory 18–96
also allows qualifying, registered U.S.
CPOs to maintain their offshore pool’s
original books and records at its offshore
location, rather than at the CPO’s main
business office in the United States.222
Currently, based on the notices filed
pursuant to Advisory 18–96, the
Commission is aware of 23 non-U.S.
CPOs that operate 84 offshore pools and
20 U.S. CPOs that operate 88 offshore
pools. In total, 43 CPOs file Advisory
18–96 notices. However, the
220 Such
costs vary widely because certain
registered CPOs may be eligible for significant
compliance relief for their pools pursuant to
Advisory 18–96.
221 Advisory 18–96, at 1–2.
222 Id.
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Commission believes that there are
likely a number of registered non-U.S.
CPOs that do not list their offshore
pools with the Commission, and
therefore, do not claim relief under
Advisory 18–96. Although these notices
must be filed by hardcopy, the
Commission believes the administrative
costs are low.223 CPOs must employ at
least one employee to manage and file
the one-time notice under Advisory 18–
96. For a notice under Advisory 18–96
to be effective, the CPO must provide,
among other things, businessidentifying and contact information;
representations that the CPO and its
principals are not statutorily
disqualified; enumerated rules from
which the CPO seeks relief; and contact
information for person(s) who will
maintain the offshore books and
records.224
Pursuant to the Final Rule, the current
23 registered non-U.S. CPOs that file
Advisory 18–96 notices will be able to
delist their offshore pools and no longer
file Advisory 18–96 notices claiming
relief for the 84 offshore pools. Upon
delisting such pools, those registered
non-U.S. CPOs would no longer have to
include their offshore pools in their
Form CPO–PQR filings, which will
result in a relatively substantial cost
savings for those non-U.S. CPOs and
their offshore pool operations. The 20
U.S. CPOs, however, currently claiming
relief under Advisory 18–96 will
continue to do so because they remain
ineligible for the 3.10 Exemption, due to
their location in the United States, and
as such, are not directly impacted by the
Final Rule.
Currently, any registered CPO may
avoid the requirement to list its offshore
pools with the Commission by
establishing a separate, foreigndomiciled non-U.S. CPO for all of the
operated offshore pools qualifying for
the 3.10 Exemption. The Commission
believes that the Final Rule will
effectively eliminate this incentive to
establish a separately organized CPO
solely for the purpose of operating
offshore pools that qualify for the 3.10
Exemption. The costs associated with
establishing a non-U.S. CPO vary,
depending on the operating size and
structure of the registered CPO and its
pools, and the jurisdiction where the
non-U.S. CPO is formed. For instance,
these incentives to establish additional
223 Exemptions Available to CPOs, NFA, available
at https://www.nfa.futures.org/members/cpo/cpoexemptions.html (noting that, while CPOs must
generally claim exemptions electronically through
NFA’s Exemption System, ‘‘[e]xemptions pursuant
to CFTC Advisory No. 18–96 must be filed with
NFA in hardcopy’’).
224 Advisory 18–96, at 1.
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CPOs may be affected by the financial
outlay required to establish foreigndomiciled CPOs given that set-up costs,
e.g., costs to pay staff and experts;
expenses for business licenses and
registrations; costs to draft operational
and disclosure documents; fees to
establish technological services, would
be expected to vary by jurisdiction.
Therefore, although the Commission
believes that there are costs associated
with establishing a separate, foreigndomiciled non-U.S. CPO, the
Commission finds that such costs may
vary widely and are highly dependent
on the organization and footprint of the
registered CPO and its operated pools,
as well as the relevant jurisdiction
where the additional non-U.S. CPO
would be formed.
The Commission believes, however,
that permitting non-U.S. CPOs to claim
the 3.10 Exemption on a pool-by-pool
basis pursuant to the Final Rule will
likely result in CPO complexes
generally saving the costs associated
with forming and maintaining separate
CPOs to operate the other pools in its
structure, thereby reducing unnecessary
complexity in overall corporate
structure and pool operations.
Amending the 3.10 Exemption such that
non-U.S. CPOs may claim the
exemption on a pool-by-pool basis, the
Commission believes, will eliminate a
large portion of the compliance costs
associated with CFTC-registered, nonU.S. CPOs’ offshore pool operations,
which, by their very characteristics,
implicate fewer of the Commission’s
regulatory interests.225 The Commission
notes that this reduction only relates to
U.S. compliance costs, as the Final Rule
has no impact on the costs non-U.S.
CPOs incur related to foreign regulatory
regimes. As mentioned above, the
Commission concludes that targeting its
CPO oversight in this manner
appropriately recognizes the
increasingly global nature of the asset
management industry.
The Commission also does not
anticipate that non-U.S. CPOs will
experience any increased costs
associated with claiming the 3.10
Exemption on a pool-by-pool basis. The
3.10 Exemption has never required a
filing or notice to claim the relief it
provides, and that remains true under
the Final Rule. Prior to the Final Rule,
the terms of the 3.10 Exemption
required a non-U.S. CPO to
continuously monitor the operations of
its offshore pools to ensure that they are
neither offered nor sold to any
participants located in the United
States. Under the terms of the Final
225 See
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Rule, and with the exception of the safe
harbor discussed below, the 3.10
Exemption will continue to require such
non-U.S. CPOs to monitor their offshore
pool operations to ensure compliance
with the 3.10 Exemption, as amended
by the Final Rule.
The Commission believes that the
Final Rule may result in some loss of
information available to the public,
specifically regarding offshore pools
operated by registered non-U.S. CPOs,
because such offshore pools will no
longer be required to be listed with the
Commission. Consequently, the offshore
pools’ existence and identifying
information will no longer be publicly
disclosed on NFA’s BASIC database,
once the non-U.S. CPO claims the 3.10
Exemption for such offshore pools. The
Commission concludes that this loss of
information will likely have a minimal
practical effect on the investing public
because persons located within the
United States are typically not
permitted by non-U.S. CPOs to
participate in offshore pools, consistent
with the conditions of the 3.10
Exemption, as amended by the Final
Rule.
3. Commission Regulation 3.10(c)(5)(iii):
Providing a Safe Harbor for Non-U.S.
CPOs Whose Offshore Pools May Have
Inadvertent U.S. Participants
As explained previously, the
Commission is adopting Commission
regulation 3.10(c)(5)(iii), which
establishes a safe harbor for those nonU.S. CPOs, who, due to the structure of
their offshore pools, cannot represent
with absolute certainty that there are no
U.S. participants; the safe harbor
requires that such non-U.S. CPOs take
specifically enumerated actions to
minimize the possibility that U.S.
persons are participating in the offshore
pool.226 Commission regulation
3.10(c)(5)(iii), as adopted, benefits nonU.S. CPOs by making the registration
relief provided under the 3.10
Exemption more widely available and
by recognizing the informational
limitations inherent in certain pool
structures. Therefore, the Commission
believes that this safe harbor could
result in more non-U.S. CPOs relying
upon the 3.10 Exemption with respect
to more offshore pools. At this time, the
Commission lacks sufficient information
to estimate or quantify the number of
non-U.S. CPOs and offshore pools that
may claim relief under Commission
regulation 3.10(c)(5)(iii), because the
Commission does not currently receive
the information necessary to determine
226 See infra new Commission regulation
3.10(c)(5)(iii)(A)–(F).
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which offshore pools currently listed
with the Commission are offered and
sold solely to offshore participants, and
what subset of those pools may have
participation units traded in the
secondary market. Given, however, that
exchange-traded commodity pools
currently comprise less than 1% of the
total number of pools listed with the
Commission, the Commission believes,
it is reasonable to estimate the number
of offshore pools operated in a similar
manner to be equally small.
The Commission believes that nonU.S. CPOs that would be eligible for
registration relief under the safe harbor
in Commission regulation 3.10(c)(5)(iii)
will avail themselves of that relief. This
could result in the Commission
receiving less information regarding the
operation of such offshore pools. As
noted above, the Commission believes
that the amount of information lost as a
result of the deregistration of such nonU.S. CPOs and associated delisting of
their eligible offshore pools would be
minimal, due to the expected small
number of qualifying non-U.S. CPOs
and offshore pools, relative to the total
population of registered CPOs and listed
pools.
The Commission also anticipates that
there may be some inadvertent U.S.
participants in offshore pools, who
would lose the customer protections
afforded by part 4 of the Commission’s
regulations, should a non-U.S. CPO
decide to delist its offshore pools and
claim relief under the 3.10 Exemption in
reliance on this safe harbor. The
Commission believes that its
enumerated conditions, however,
should result in a small number of U.S.
participants being impacted. Moreover,
the Commission believes that such U.S.
participants, to the extent that they are
aware that they are participating in what
is known to be an offshore pool through
the purchase of units sold in an offshore
secondary market, may not expect to
benefit from the customer protection
provisions in part 4 of the Commission’s
regulations, but would instead expect to
rely upon the regulatory protections of
the offshore pool’s home jurisdiction.
4. Commission Regulation 3.10(c)(5)(iv):
Utilizing the 3.10 Exemption
Concurrent With Other Available
Exclusions and Exemptions
As explained above, the Commission
is also adding Commission regulation
3.10(c)(5)(iv), such that non-U.S. CPOs
may rely upon the 3.10 Exemption
concurrent with other exemptions and
exclusions, or, alternatively, CPO
registration. The Commission believes
that Commission regulation
3.10(c)(5)(iv) therefore benefits non-U.S.
PO 00000
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CPOs due to its consistent treatment of
CPOs of pools that are operated in a
substantively identical manner,
regardless of where the CPO is based.
The Commission also anticipates that
this amendment will benefit the nonU.S. CPO industry generally by
providing regulatory certainty with
respect to the ability of all non-U.S.
CPOs to simultaneously rely upon the
3.10 Exemption and other applicable
exclusions and exemptions under the
Commission’s regulations. This
amendment is consistent with other
provisions of the Commission’s CPO
regulatory program, where the
Commission explicitly permits CPOs to
claim more than one type of exemption
or exclusion, or to register with respect
to the variety of commodity pools that
they operate.227
The Commission further believes that
by clarifying the permissibility of using
Commission regulation 4.13
exemptions, for example, in conjunction
with the 3.10 Exemption, non-U.S.
CPOs may be more likely to claim the
relief under Commission regulation 4.13
for their pools that limit their
commodity interest exposure to a de
minimis amount, rather than registering
and listing those pools. The
Commission concludes that clearly
establishing the availability of other
exemptions and exclusions, or
alternatively, registration with respect to
the operation of certain pools offered or
sold to persons within the United
States, will further enable the
Commission to more efficiently deploy
its resources in the oversight of CPOs
and commodity pools that it has
determined more fully implicate its
regulatory concerns and interests under
the CEA.
If more non-U.S. CPOs claim
exemptions under Commission
regulation 4.13(a)(3), for example, for
some of their U.S. facing pools as a
result of the 2020 Proposal, this could
result in pools that were previously
listed and associated with a CPO
registration being delisted. Under these
circumstances, the Commission would,
as a result, no longer receive financial
reporting with respect to those pools,
including on Form CPO–PQR. Because
these commodity pools would, in fact,
already be operated consistent with an
existing exemption or exclusion, and
because the Commission has previously
determined that pools operated in such
a manner generally do not require a
registered CPO, the Commission
concludes that any resulting loss of
insight into such pools and their CPOs
is consistent with the Commission’s
227 See,
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overall regulatory policy, and therefore,
will likely have minimal negative
impact on the public.228
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5. Commission Regulation 3.10(c)(5)(ii):
The Affiliate Contribution Exception
The Commission is also adopting
amendments permitting non-U.S. CPOs
to rely upon the 3.10 Exemption for the
operation of an offshore pool, even if an
affiliate within the United States
provides initial capital for the offshore
pool, pursuant to the Affiliate
Contribution Exception. Absent the
relief provided by Commission
regulation 3.10(c)(5)(ii), a non-U.S. CPO
of an offshore pool receiving initial
capital from an affiliate within the
United States would generally be
required to register as a CPO and list
that pool with the Commission, unless
another exemption or exclusion was
available. As a registered CPO with
respect to that offshore pool, the nonU.S. CPO would then be required to
comply with the compliance obligations
set forth in part 4 of the Commission’s
regulations.
As discussed previously, the
Commission has concluded that
participation in an offshore pool by a
U.S. affiliate does not raise the same
regulatory concerns as an investment in
the same pool by an unaffiliated
participant located within the United
States.229 In addition to the reasons
outlined above, the Commission
believes that the Affiliate Contribution
Exception will provide regulatory relief
for a small number of currentlyregistered CPOs. As mentioned above,
based on the number of claims filed
under Advisory 18–96, there are 23 nonU.S. CPOs that operate 84 offshore
commodity pools. The Commission is
unaware, however, of whether any of
the offshore pools operated by those
non-U.S. CPOs actually received initial
capital contributions from a U.S.
affiliate, in part, because the
Commission does not collect such
information. Nevertheless, because of
the small number of claims by non-U.S.
CPOs under Advisory 18–96, the
Commission believes that the number of
these CPOs that would be eligible for
relief under the Affiliate Contribution
Exception would likely be less than the
23. The Commission believes that there
may be an unknown number of
registered non-U.S. CPOs that have
228 The Commission notes that it retains special
call authority with respect to those CPOs claiming
an exemption from registration pursuant to
Commission regulation 4.13, which enables the
Commission to obtain additional information
regarding the operation of commodity pools by such
exempt CPOs. See 17 CFR 4.13(c)(iii).
229 See supra pt. II.F.
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never listed their offshore pools with
the Commission, and hence, did not
seek relief under the Advisory.
Therefore, the total number of non-U.S.
CPOs utilizing this provision could also
be higher. In addition, as a result of the
Commission being unaware of the
current number of offshore pools
operated by a non-U.S. CPO receiving
seed capital from a U.S. affiliate, it is
unable to predict how many pools will
utilize the Affiliate Contribution
Exception in the future.
The Commission also believes that the
Affiliate Contribution Exception will
result in reduced costs for non-U.S.
CPOs by removing initial capital
investments by U.S. affiliates in offshore
pools from the analysis for 3.10
Exemption eligibility, and by
eliminating any registration and
compliance costs for such pools. This
amendment will, however, result in U.S.
affiliates not being able to rely upon the
protections provided by CPO
registration and by part 4 of the
Commission’s regulations, with respect
to their initial capital investments in an
offshore pool operated by their affiliated
non-U.S. CPO.230 The Commission
believes that this loss will likely be
mitigated by a U.S. affiliate’s ability to
obtain whatever information regarding
the offshore pool a U.S. affiliate may
deem material to its investment, by
virtue of its relationship with the nonU.S. CPO as affiliated entities.
Moreover, the Commission believes this
approach is consistent with the
Commission’s focus on protecting U.S.
investors participating in commodity
pools.
In the event a non-U.S. CPO has listed
one or more offshore pools with the
Commission due to the fact that the
offshore pool received initial capital
contributions from a U.S. affiliate, and
such non-U.S. CPO determines to delist
the offshore pool in question and
instead rely upon the 3.10 Exemption by
virtue of the Affiliate Contribution
Exception, the Commission will no
longer receive financial reporting with
respect to such offshore pool, including
on Form CPO–PQR. Because the
Commission has determined that initial
capital contributions by a U.S. affiliate
do not raise the same customer
protection concerns as capital received
from other unaffiliated U.S.
participants, however, the Commission
concludes that any loss of insight into
such offshore pools and their non-U.S.
CPOs resulting from the Affiliate
230 For example, a U.S. affiliate would not be able
to rely upon the Commission’s part 4 regulations to
require its affiliated non-U.S. CPO to provide the
affiliate with disclosures and reporting generally
mandated by those rules.
PO 00000
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78737
Contribution Exception is generally
consistent with the Commission’s
overall regulatory policy concerning
CPOs and commodity pools.
6. Section 15(a) Factors
a. Protection of Market Participants and
the Public
The Commission believes that the
Final Rule will not have a material
negative effect on the protection of
market participants and the public. The
Commission will continue to receive
identifying information from U.S. CPOs
operating offshore pools and pools
offered to U.S. investors. Regarding a
non-U.S. CPO whose offshore pools
receive initial capital contributions from
an affiliate in the United States, the
Commission believes that although
those offshore pools may no longer be
subject to part 4 of the Commission’s
regulations, such U.S. affiliates, by
virtue of their relationship with the nonU.S. CPO, are generally not as
dependent upon the customer
protections provided by the
Commission’s regulations. The
Commission comes to this conclusion
on the basis of its detailed analysis
above of ‘‘affiliate’’ relationships
generally, finding that, where a U.S.
affiliate is controlled by, controlling, or
under common control with the nonU.S. CPO of an offshore pool, as set
forth in Commission regulation
4.7(a)(1)(i), the U.S. affiliate typically
has access to information and
disclosures that allow it to make an
informed decision regarding its initial
capital contributions to that offshore
pool, even in the absence of express
regulatory requirements from the
Commission. The Commission also
anticipates that some U.S. participants
in offshore pools operated pursuant to
the adopted safe harbor may lose the
customer protections afforded by part 4
of the Commission’s regulations;
however, the Commission believes that
the number of impacted U.S
participants will be small, due to the
specific criteria required for reliance
upon the safe harbor and the small
number of exchange-traded commodity
pools, generally. With respect to those
aspects of the Final Rule that are
derived from the 2016 Proposal, the
Commission believes that the Final Rule
will foster the protection of market
participants and the public by providing
greater legal certainty with respect to
the commodity interest activities of
persons located outside the U.S.
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b. Efficiency, Competitiveness and
Financial Integrity of the Futures
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
will benefit the efficiency,
competitiveness and financial integrity
of the futures markets because, among
other things, the Final Rule will
effectively eliminate the current
incentive to establish a separately
organized CPO solely for the purpose of
operating offshore pools that qualify for
the 3.10 Exemption. As discussed
above, permitting non-U.S. CPOs to
claim the 3.10 Exemption on a pool-bypool basis pursuant to the Final Rule
will likely result in CPO complexes
generally saving the costs associated
with forming and maintaining separate
CPOs to operate the other pools in their
structure, thereby reducing unnecessary
complexity in overall corporate
structure and pool operations. The
Commission believes this reduction in
the complexity of CPO operations,
specifically with respect to offshore
pool operations, will positively affect
the general financial integrity of market
participants, and as discussed further
above, may lead to more pools operated
by non-U.S. CPOs being offered to U.S.
participants, increasing competition and
depth in U.S. commodity interest
markets.
Additionally, the Commission
believes that the adoption of the
Affiliate Contribution Exception, the
safe harbor, as well as the amendments
from the 2016 Proposal, by the Final
Rule clarifies Commission regulation
3.10(c), including the 3.10 Exemption,
making the provision overall easier to
understand and apply, providing
additional flexibility in light of the
increasingly global nature of the asset
management industry as a whole, and
likely, increasing the number of nonU.S. CPOs and offshore pools able to
participate in the U.S. commodity
interest markets without additional
requirements. For these reasons, the
Commission believes the Final Rule will
have a positive impact on the efficiency,
competitiveness and financial integrity
of the futures markets, as contemplated
by CEA section 15(a)(2)(B).
c. 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. The
Commission believes that the legal
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certainty provided by the amendments
to the registration exemptions in the
Final Rule may increase participation in
the U.S. commodity interest markets by
foreign located persons, and thus,
ensure greater depth in such markets
accessed by persons in the U.S. Thus,
the Commission believes that the Final
Rule, in its totality, will result in deeper
commodity interest markets in the
United States, which facilitates the price
discovery function thereof.
d. Sound Risk Management Practices
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, as
specifically related to non-U.S. CPOs,
will not have a significant impact on the
practice of sound risk management
because the manner in which various
funds, operators, and advisors organize,
register, or claim relief from such
regulation has only a small influence on
how market participants manage their
risks overall. The Commission believes,
however, that the Final Rule, through
the legal certainty provided by the
amendments to these registration
exemptions may increase participation
in the U.S. commodity interest markets
by foreign located persons, and thus,
ensure greater depth in such markets
accessed by persons in the U.S. The
greater depth in such markets in turn
will facilitate sound risk management.
e. 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 has not identified any
other public interest considerations
impacted by the Final Rule beyond
those identified as part of its analysis
supporting the Commission’s exercise of
its authority under section 4(c) of the
Act.
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.231 The
231 7
PO 00000
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Frm 00040
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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 2016 and 2020 Proposals
implicate any other specific public
interest to be protected by the antitrust
laws, and it received no comments
addressing this issue.
The Commission has considered the
Final Rule to determine whether its
amendments are anticompetitive and
has identified no anticompetitive
effects. Because the Commission has
determined the Final Rule amendments
are not anticompetitive and have 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 3
Consumer protection, Definitions,
Foreign futures, Foreign options,
Registration requirements.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission amends 17 CFR
part 3 as follows:
PART 3—REGISTRATION
1. The authority citation for part 3
continues to read as follows:
■
Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a,
2, 6a, 6b, 6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k,
6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, 21, and 23.
2. In § 3.10, revise paragraph (c) to
read as follows:
■
§ 3.10 Registration of futures commission
merchants, retail foreign exchange dealers,
introducing brokers, commodity trading
advisors, commodity pool operators, swap
dealers, major swap participants, and
leverage transaction merchants.
*
*
*
*
*
(c) Exemption from registration for
certain persons—(1) Definitions. For
purposes of this paragraph (c), the
following terms shall have the meanings
set forth below.
(i) Covered transaction means a
commodity interest transaction, as
defined in § 1.3 of this chapter, executed
bilaterally or made on or subject to the
rules of any designated contract market
or registered swap execution facility.
(ii) Foreign located person means a
person located outside the United
States, its territories, or possessions.
(iii) International financial institution
means the International Monetary Fund,
the International Bank for
Reconstruction and Development, the
Inter-American Development Bank, the
Asian Development Bank, the African
Development Bank, the United Nations,
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the European Stability Mechanism, the
North American Development Bank,
those institutions defined as
‘‘international financial institutions’’ in
22 U.S.C. 262r(c)(2), those institutions
defined as ‘‘multilateral development
banks’’ in Article 1(5(a)) of Regulation
(EU) No. 648/2012 of the European
Parliament and of the Council on OTC
Derivative Transactions, Central
Counterparties and Trade Repositories,
their agencies and pension plans, and
any other similar international
organizations, and their agencies and
pension plans.
(2) Exempt futures commission
merchants—(i) Proprietary accounts. A
person trading solely for proprietary
accounts, as defined in § 1.3 of this
chapter, is not required to register as a
futures commission merchant; provided,
that such person remains subject to all
other provisions of the Act and of the
rules, regulations and orders
thereunder.
(ii) Foreign located persons. (A) A
foreign located person engaging in the
activity of a futures commission
merchant, as defined in § 1.3 of this
chapter, in connection with any covered
transaction only on behalf of foreign
located persons or international
financial institutions is not required to
register in such capacity; provided, that
if any such covered transaction is
required or intended to be cleared on a
registered derivatives clearing
organization and the foreign located
person or international financial
institution that is party to the covered
transaction is not a clearing member of
such registered derivatives clearing
organization, the covered transaction is
submitted for clearing through a futures
commission merchant registered in
accordance with section 4d of the Act.
(B) A foreign located person acting in
accordance with paragraph (c)(2)(ii)(A)
of this section is not required to comply
with those provisions of the Act and of
the rules, regulations and orders
thereunder applicable solely to any
registered futures commission merchant
or any person required to be so
registered.
(3) Exempt introducing brokers—(i)
Foreign located persons. (A) A foreign
located person engaged in the activity of
an introducing broker, as defined in
§ 1.3 of this chapter, in connection with
any covered transaction only on behalf
of foreign located persons or
international financial institutions is not
required to register in such capacity;
provided, that if any such covered
transaction is required or intended to be
cleared on a registered derivatives
clearing organization and the foreign
located person or international financial
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institution that is party to the covered
transaction is not a clearing member of
such registered derivatives clearing
organization, the covered transaction is
submitted for clearing through a futures
commission merchant registered in
accordance with section 4d of the Act.
(B) A foreign located person acting in
accordance with paragraph (c)(3)(i)(A)
of this section is not required to comply
with those provisions of the Act and of
the rules, regulations and orders
thereunder applicable solely to any
registered introducing broker or any
person required to be so registered.
(ii) Exempt foreign brokers. (A) A
foreign located person that is exempt
from registration as a futures
commission merchant in accordance
with § 30.10 of this chapter is not
required to register as an introducing
broker in accordance with section 4d of
the Act if:
(1) Such person is affiliated with a
futures commission merchant registered
in accordance with section 4d of the
Act;
(2) Such person introduces, on a fullydisclosed basis in accordance with
§ 1.57 of this chapter, any institutional
customer, as defined in § 1.3 of this
chapter, to a registered futures
commission merchant for the purpose of
trading on a designated contract market;
(3) Such person’s affiliated futures
commission merchant has filed with the
National Futures Association (Attn: Vice
President, Compliance) an
acknowledgement that the affiliated
futures commission merchant will be
jointly and severally liable for any
violations of the Act or the
Commission’s regulations committed by
such person in connection with those
introducing activities, whether or not
the affiliated futures commission
merchant submits for clearing any
trades resulting from those introducing
activities; and
(4) Such person does not solicit any
person located in the United States, its
territories or possessions for trading on
a designated contract market, nor does
such person handle the customer funds
of any person located in the United
States, its territories or possessions for
the purpose of trading on any
designated contract market.
(B) For the purposes of this paragraph,
a person shall be affiliated with a
futures commission merchant if such a
person owns 50 percent or more of the
futures commission merchant, is owned
50 percent or more by the futures
commission merchant, or is owned 50
percent or more by a third person that
also owns 50 percent or more of the
futures commission merchant.
PO 00000
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(4) Exempt commodity trading
advisors. (i) A foreign located person
engaging in the activity of a commodity
trading advisor, as defined in § 1.3 of
this chapter, in connection with any
covered transaction only on behalf of
foreign located persons or international
financial institutions is not required to
register in such capacity; provided, that
if any such covered transaction is
required or intended to be cleared on a
registered derivatives clearing
organization and the foreign located
person or international financial
institution that is party to the covered
transaction is not a clearing member of
such registered derivatives clearing
organization, the covered transaction is
submitted for clearing through a futures
commission merchant registered in
accordance with section 4d of the Act.
(ii) A foreign located person acting in
accordance with paragraph (c)(4)(i) of
this section remains subject to section
4o of the Act, but otherwise is not
required to comply with those
provisions of the Act and of the rules,
regulations and orders thereunder
applicable solely to any registered
commodity trading advisor or any
person required to be so registered.
(5) Exempt commodity pool operators.
(i) A foreign located person engaged in
the activity of a commodity pool
operator, as defined in § 1.3 of this
chapter, in connection with any covered
transaction is not required to register in
such capacity, when such covered
transactions are executed on behalf of a
commodity pool, the participants of
which are all foreign located persons or
international financial institutions;
provided, that if any such covered
transaction is required or intended to be
cleared on a registered derivatives
clearing organization and the
commodity pool that is party to the
covered transaction is not a clearing
member of such registered derivatives
clearing organization, the covered
transaction is submitted for clearing
through a futures commission merchant
registered in accordance with section 4d
of the Act.
(ii) With respect to paragraph (c)(5)(i)
of this section, initial capital
contributed to a commodity pool by an
affiliate, as defined by § 4.7(a)(1)(i) of
this chapter, of the pool’s commodity
pool operator shall not be considered for
purposes of determining whether such
commodity pool operator is executing
commodity interest transactions on
behalf of a commodity pool, the
participants of which are all foreign
located persons; provided, that:
(A) The affiliate is not a natural
person;
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(B) The affiliate and its principals are
not barred or suspended from
participating in commodity interest
markets in the United States, its
territories or possessions; and
(C) Interests in the affiliate are not
marketed as providing access to trading
in commodity interest markets in the
United States, its territories or
possessions.
(iii) A commodity pool operated by a
foreign located person shall be
considered to be operated in accordance
with the terms of paragraph (c)(5)(i) of
this section, if:
(A) The commodity pool is organized
and operated outside of the United
States, its territories or possessions;
(B) The commodity pool’s offering
materials and any underwriting or
distribution agreements include clear,
written prohibitions on the commodity
pool’s offering to participants located in
the United States and on U.S.
ownership of the commodity pool’s
participation units;
(C) The commodity pool’s
constitutional documents and offering
materials:
(1) are reasonably designed to
preclude persons located in the United
States from participating therein; and
(2) include mechanisms reasonably
designed to enable its operator to
exclude any persons located in the
United States that attempt to participate
in the offshore pool, notwithstanding
those prohibitions;
(D) The commodity pool operator
exclusively uses non-U.S.
intermediaries for the distribution of
participations in the commodity pool;
(E) The commodity pool operator uses
reasonable investor due diligence
methods at the time of sale to preclude
persons located in the United States
from participating in the commodity
pool; and
(F) The commodity pool’s
participation units are directed and
distributed to participants outside the
United States, including by means of
listing and trading such units on
secondary markets organized and
operated outside of the United States,
and in which the commodity pool
operator has reasonably determined
participation by persons located in the
United States is unlikely.
(iv) Utilizing the relief under
paragraph (c)(5)(i) of this section for a
qualifying commodity pool will not
affect the ability of a person to register
with the Commission as a commodity
pool operator, or to qualify for, rely
upon, or claim other relief from
regulation as such by the Commission,
with respect to the operation of
commodity pools or trading vehicles not
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otherwise eligible for the relief offered
in this section.
(v) A person acting in accordance
with paragraph (c)(5)(i) of this section
remains subject to section 4o of the Act,
but otherwise is not required to comply
with those provisions of the Act and of
the rules, regulations and orders
thereunder applicable solely to any
person registered in such capacity, or
any person required to be so registered.
(6) Associated persons of swap
dealers. In determining whether a
person is a swap dealer, the activities of
a registered swap dealer with respect to
which such person is an associated
person shall not be considered.
*
*
*
*
*
Issued in Washington, DC, on October 22,
2020, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Exemption From
Registration for Certain Foreign
Intermediaries—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—Statement of Support of
Chairman Heath P. Tarbert
When the Commission considered the
proposal to amend the registration exemption
for foreign commodity pool operators
(CPOs),1 I noted that, in his second inaugural
address in 1893, President Grover Cleveland
remarked ‘‘[u]nder our scheme of government
the waste of public money is a crime against
the citizen.’’ 2 The CFTC is a taxpayer-funded
agency, and Congress expects us to deploy
our resources to serve the needs of American
taxpayers. That is why as Chairman and
Chief Executive, I have sought to revisit our
agency’s regulations where there does not
appear to be a clear connection to furthering
1 Exemption From Registration for Certain
Foreign Persons Acting as Commodity Pool
Operators of Offshore Commodity Pools, 85 FR
35820 (June 12, 2020).
2 Statement of Chairman Heath P. Tarbert in
Support of Amending the Registration Exemption
for Foreign CPOs (May 28, 2020), available at:
https://www.cftc.gov/PressRoom/
SpeechesTestimony/tarbertstatement052820b. See
Second Inaugural Address of Grover Cleveland
(Mar. 4, 1893), reprinted in American History
Through Its Greatest Speeches: A Documentary
History of the United States 278 (Courtney Smith,
et al., eds. 2016).
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Sfmt 4700
the interests of the United States or our
citizens.3
The CFTC’s framework for regulating
foreign commodity CPOs protects U.S.
investors who put their money in commodity
investment funds run from outside the
United States. But, in some instances, the
only benefit of CFTC regulation of offshore
CPOs is to foreign investors. There is no
statutory mandate for the CFTC to regulate
pools never offered or sold to U.S. investors.
To do so absent a compelling reason would
be—in President Cleveland’s words—a waste
of public money.
Consequently, I am pleased to support
today’s final rule to amend the exemption for
CPOs in regulation 3.10(c) (3.10 Exemption).
The final rule eliminates the potential need
for the CFTC to require the registration and
oversight of non-U.S. CPOs whose pools have
no U.S. investors. The final rule additionally
exempts U.S.-based affiliates of pool
sponsors who put seed money into offshore
funds that have only foreign investors. In so
doing, the final rule provides much-needed
regulatory flexibility for non-U.S. CPOs
operating offshore commodity pools, without
compromising the CFTC’s mission to protect
U.S. investors.
Exemption for Foreign CPOs Sponsoring
Funds Without U.S. Investors
The final rule amends the conditions under
which a foreign CPO, in connection with
commodity interest transactions on behalf of
persons located outside the United States,
will qualify for an exemption from CPO
registration and regulation with respect to an
offshore pool. Specifically, through
amendments to our regulation 3.10(c), a nonU.S. CPO will be able to operate pools offered
to U.S. persons as either a registered or
exempt CPO, while simultaneously claiming
the 3.10 Exemption with respect to its
qualifying offshore commodity pools.4
Absent a compelling reason, the CFTC
should be focused on U.S. markets and U.S.
investors, and refrain from extending our
reach outside the United States.5 The
3 See Statement of Chairman Heath P. Tarbert in
Support of Amending the Registration Exemption
for Foreign CPOs, supra note 2.
4 The final rule adds a safe harbor as new
regulation 3.10(c)(3)(iv) for non-U.S. CPOs that have
taken what the Commission preliminarily believes
are reasonable steps designed to ensure that
participation units in the operated offshore pool are
not being offered or sold to persons located in the
United States.
5 For example, section 2(i) of the Commodity
Exchange Act provides that the swap provisions of
Title VII of the Dodd-Frank Act shall not apply to
activities outside the United States unless those
activities (1) have a direct and significant
connection with activities in, or effect on,
commerce of the United States; or (2) contravene
such rules or regulations as the Commission may
prescribe or promulgate as are necessary or
appropriate to prevent the evasion of Title VII. In
interpreting this provision, the Commission has
taken the position that ‘‘[r]ather than exercising its
authority with respect to swap activities outside the
United States, the Commission will be guided by
international comity principles and will focus its
authority on potential significant risks to the U.S.
financial system.’’ Cross-Border Application of the
Registration Thresholds and Certain Requirements
Applicable to Swap Dealers and Major Swap
Participants, 85 FR 56924, 56928 (Sep. 14, 2020).
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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Rules and Regulations
protection of non-U.S. customers of non-U.S.
firms is best left to foreign regulators with the
relevant jurisdiction and mandate.6
Therefore, I believe it is appropriate for the
final rule to allow foreign CPOs to rely on the
3.10 Exemption for their foreign commodity
pools when they have no U.S. investors.
Where a foreign CPO does have U.S.
investors, other exemptions or exclusions
from registration might be available.
Unfortunately, under a strict construction
of the current rule, if a foreign CPO has one
fund with U.S. investors, then the foreign
CPO must register all its funds or rely on
some other exemption besides the 3.10
Exemption. This ‘‘all or nothing’’ reading of
the rule has produced two competing
consequences—neither of which makes for
good regulatory policy. First, if the CPO
chooses to register with respect to all its
funds, the CFTC ends up regulating some
foreign-based funds without any U.S.
investors. Second, if the CPO refuses to
register for any of its funds, then U.S.
investors are effectively denied the liquidity
and investment opportunities offered by
foreign commodity pools.
In the last decade, statutory and regulatory
developments have produced a growing
mismatch between the Commission’s stated
policy purposes underlying the 3.10
Exemption (that focus the CFTC’s resources
on the protection of U.S. persons) and the
strict construction of the 3.10 Exemption
(that leads to its ‘‘all or nothing’’
application). To address this mismatch, the
final rule amends the 3.10 Exemption to align
the plain text of the exemption with our
longstanding policy goal of regulating foreign
CPOs only when they offer their funds to
U.S. investors. In effect, the Commission’s
walk finally conforms to our talk.7
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Affiliate Investment Exemption
The final rule also permits U.S. affiliates of
a non-U.S. CPO to contribute capital to that
CPO’s offshore pools as part of the initial
capitalization without rendering the non-U.S.
CPO ineligible for the 3.10 Exemption. In
other words, the final rule allows a U.S.
affiliate of a foreign CPO to invest in the
offshore fund without triggering registration
requirements because of the nature of the
relationship between the affiliate and the
non-U.S. CPO.
It is hard to imagine how an entity that
controls, is controlled by, or is under
6 The Commission also cited this policy position
in the initial proposal for what ultimately became
Commission regulation 3.10(c)(3)(i). See 72 FR
15637, 15638 (Apr. 2, 2007).
7 Apart from policy incoherence inside the CFTC,
the mismatch has also caused confusion among
CPOs and their investors. A number of foreign CPOs
have not adopted the strict ‘‘all or nothing’’ reading
of the 3.10 Exemption, but have instead quite
sensibly latched on to the Commission’s stated
policy behind the rule to conclude that a foreign
CPO may rely on the current 3.10 Exemption for
non-U.S. pools with only non-U.S. investors even
if the foreign CPO operates other non-U.S. pools
with U.S. investors. Given that the confusion
largely stems from the Commission’s own doing, I
would not support any enforcement action against
foreign CPOs whose interpretation followed the
spirit, if not the letter, of the 3.10 Exemption.
Furthermore, today’s final rule conforms to their
reading.
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21:21 Dec 04, 2020
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common control with, a given foreign CPO
could lack a sufficient degree of transparency
with respect to its own contribution of initial
capital to an offshore commodity pool run by
that very same foreign CPO. In short, a U.S.
affiliate’s initial investment in its affiliated
non-U.S. CPO’s offshore pool does not raise
the same investor protection concerns as
similar investments in the same pool by
unaffiliated persons located in the United
States. In many cases, moreover, the affiliate
is itself regulated by other U.S. regulators—
for instance, state insurance departments in
the case of insurance companies that wish to
deploy their own general account assets as
they best see fit, in keeping with their
separate regulatory regimes. Accordingly, I
see no reason to deploy the limited, taxpayerfunded resources of the CFTC to protect U.S.
affiliates of foreign CPOs who are far better
positioned than us to safeguard their own
interests.
Appendix 3—Supporting Statement of
Commissioner Brian Quintenz
I am pleased to support today’s final rule
that expands an existing exemption from
registration for foreign commodity pool
operators (CPOs) trading on U.S. markets on
behalf of foreign investors. Building on
previously granted staff no-action relief, the
final rule creates new possibilities for fund
managers, appropriately focuses the
Commission’s resources and customer
protection activities upon domestic firms and
U.S. customers, and provides for simplified
compliance. For example, the final rule
permits non-U.S. CPOs to claim the
exemption on a pool-by-pool basis, which I
believe is appropriate given that many large,
foreign CPOs operate both U.S. and non-U.S.
pools. The final rule also permits a foreign
fund manager to satisfy the exemption’s
requirement that its pool does not contain
funds of U.S. customers by complying with
certain safe harbors, such as fund
documentation requirements. In doing so, the
final rule recognizes that the manner in
which fund interests are sold in the real
world often makes it impossible for a fund
manager to make a blanket attestation that
there is no U.S. investment in a given
commodity pool.
Finally, for the first time, the final rule
would permit U.S. affiliates of foreign pools
to contribute initial capital to those pools.
Allowing U.S. affiliates to contribute seed
money to offshore pools operated by their
affiliated non-U.S. CPOs should facilitate
innovation and fund development by
enabling those offshore pools to establish a
performance history for solicitation purposes.
Appendix 4—Statement of
Commissioner Dan M. Berkovitz
I am voting for the final rule amending
regulation 3.10(c) (‘‘Final Rule’’). Regulation
3.10(c) provides an exemption from
registration to foreign persons who operate
commodity pools (‘‘CPOs’’) located outside of
the United States. The Final Rule makes
pragmatic adjustments to certain conditions
for claiming the exemption that will allow
the Commission to focus its limited resources
on protecting U.S. persons who participate in
commodity pools, rather than on commodity
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Fmt 4700
Sfmt 4700
78741
pools operated outside the U.S. in which
non-U.S. persons participate.
A fundamental goal of the Commission’s
registration and regulation of CPOs is the
protection of U.S. customers.1 The CFTC has
long held that CPOs trading commodity
interests in our markets are not required to
register as CPOs if they are located offshore
and only operate pools for non-U.S. persons.2
In 2007, the Commission codified the
exemption in regulation 3.10(c).
The Final Rule: (i) Exempts non-U.S. CPOs
from registration and regulation with respect
to individual commodity pools that do not
solicit from U.S. persons or have U.S.
investors; 3 (ii) provides that this exemption
for some pools may be used with other
exemptions or exclusions; and (iii) provides
a safe harbor to non-U.S. CPOs in the event
that U.S. persons inadvertently become
participants in the offshore pools, provided
that a number of conditions are met to
minimize that possibility. Lastly, the Final
Rule permits U.S. affiliates of non-U.S. CPOs
to contribute ‘‘initial capital’’ to exempt
offshore pools without being treated as
‘‘participants’’ in the pools themselves if
certain conditions are satisfied.
In my statement for the proposed
amendments to regulation 3.10(c), I noted
some concern that the U.S. affiliate provision
might result in persons in the U.S.
investing—either knowingly or
unknowingly—in unregulated foreign
commodity pools if they invested in the U.S.
affiliates. The proposal included specific
‘‘anti-evasion’’ provisions that would prevent
certain ‘‘bad actors’’ from using the
exemption and prohibit the marketing of the
U.S. affiliate as a vehicle for U.S. commodity
interest investments.4 At my request, several
questions regarding potential abuse of the
U.S. affiliate provision were included in the
proposed rule.
The letters commenting on the proposed
rule generally expressed support. A joint
letter from asset management industry
associations addressed the questions in the
proposal regarding the U.S. affiliate provision
and provided rationales in support thereof.
The letter explained that the initial capital
investments from U.S. affiliates intended to
help demonstrate fund performance or
facilitate fund operations, for example, are
not the types of investments that need the
full array of customer protections provided
for individual commodity pool investors.
1 The regulation of CPOs also facilitates the
Commission’s ability to oversee the derivative
markets, manage systemic risks, and fulfill its
mandate to ensure safe trading practices. See, e.g.,
Commodity Pool Operators and Commodity
Trading Advisors: Compliance Obligations, 77 FR
11252, 11253, 11275 (Feb. 24, 2012), upheld by
Investment Company Institute v. CFTC, 720 F.3d
370 (D.C. Cir. 2013).
2 See CFTC Staff Interpretative Letter 76–21 (Aug.
15, 1976).
3 The CPO would need to register and comply
with CFTC regulations with regard to any other
commodity pools it operates that do solicit funds
from U.S. persons.
4 As noted in section II.F.3 of the Final Rule, if
the U.S. affiliate is marketed as providing access to
commodity interests traded outside the United
States, then the affiliate would be subject to the
registration regime provided for such entities in
part 30 of the Commission’s regulations.
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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Rules and Regulations
Furthermore, comment letters explained
how the conditions in the U.S. affiliate
provision, coupled with the anti-evasion
provisions (with some modifications),
balance the flexibility needed by CPOs to
make prudent capital allocation decisions
with preventive measures reducing the
likelihood of abuse. While it is possible that
some less than forthright actors could
attempt to use the regulation 3.10(c)
exemption to skirt the CPO registration
requirements when soliciting commodity
interest investments from U.S. persons, the
Final Rule has appropriate restrictions that
will facilitate enforcement when necessary.
In conclusion, the Final Rule makes
prudent, limited amendments that reduce the
burdens on the Commission’s limited
resources while maintaining the necessary
protections intended for U.S. commodity
pool participants. I would like to thank the
commenters for their contribution to
improving the Final Rule and the CFTC staff
for working with my office to address my
concerns.
[FR Doc. 2020–23810 Filed 12–2–20; 4:15 pm]
BILLING CODE 6351–01–P
PENSION BENEFIT GUARANTY
CORPORATION
29 CFR Part 4044
Allocation of Assets in SingleEmployer Plans; Valuation of Benefits
and Assets; Expected Retirement Age
Pension Benefit Guaranty
Corporation.
ACTION: Final rule.
AGENCY:
This rule amends the Pension
Benefit Guaranty Corporation’s
regulation on Allocation of Assets in
Single-Employer Plans by substituting a
new table for determining expected
retirement ages for participants in
pension plans undergoing distress or
involuntary termination with valuation
dates falling in 2021. This table is
needed to compute the value of early
retirement benefits and, thus, the total
value of benefits under a plan.
DATES: This rule is effective January 1,
2021.
FOR FURTHER INFORMATION CONTACT:
Gregory Katz (katz.gregory@pbgc.gov),
Attorney, Regulatory Affairs Division,
Office of the General Counsel, Pension
Benefit Guaranty Corporation, 1200 K
Street NW, Washington, DC 20005, 202–
229–3829. (TTY users may call the
Federal relay service toll-free at 1–800–
877–8339 and ask to be connected to
202–229–3829.)
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SUMMARY:
VerDate Sep<11>2014
21:21 Dec 04, 2020
Jkt 253001
The
Pension Benefit Guaranty Corporation
(PBGC) administers the pension plan
termination insurance program under
title IV of the Employee Retirement
Income Security Act of 1974 (ERISA).
PBGC’s regulation on Allocation of
Assets in Single-Employer Plans (29
CFR part 4044) sets forth (in subpart B)
the methods for valuing plan benefits of
terminating single-employer plans
covered under title IV. Guaranteed
benefits and benefit liabilities under a
plan that is undergoing a distress
termination must be valued in
accordance with subpart B of part 4044.
In addition, when PBGC terminates an
underfunded plan involuntarily
pursuant to ERISA section 4042(a), it
uses the subpart B valuation rules to
determine the amount of the plan’s
underfunding.
Under § 4044.51(b) of the asset
allocation regulation, early retirement
benefits are valued based on the annuity
starting date, if a retirement date has
been selected, or the expected
retirement age, if the annuity starting
date is not known on the valuation date.
Sections 4044.55 through 4044.57 set
forth rules for determining the expected
retirement ages for plan participants
entitled to early retirement benefits.
Appendix D of part 4044 contains tables
to be used in determining the expected
early retirement ages.
Table I in appendix D (Selection of
Retirement Rate Category) is used to
determine whether a participant has a
low, medium, or high probability of
retiring early. The determination is
based on the year a participant would
reach ‘‘unreduced retirement age’’ (i.e.,
the earlier of the normal retirement age
or the age at which an unreduced
benefit is first payable) and the
participant’s monthly benefit at
unreduced retirement age. The table
applies only to plans with valuation
dates in the current year and is updated
annually by PBGC to reflect changes in
the cost of living, etc.
Tables II–A, II–B, and II–C (Expected
Retirement Ages for Individuals in the
Low, Medium, and High Categories
respectively) are used to determine the
expected retirement age after the
probability of early retirement has been
determined using Table I. These tables
establish, by probability category, the
expected retirement age based on both
the earliest age a participant could retire
under the plan and the unreduced
retirement age. This expected retirement
age is used to compute the value of the
SUPPLEMENTARY INFORMATION:
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Fmt 4700
Sfmt 4700
early retirement benefit and, thus, the
total value of benefits under the plan.
This document amends appendix D to
replace Table I–20 with Table I–21 to
provide an updated correlation,
appropriate for calendar year 2021,
between the amount of a participant’s
benefit and the probability that the
participant will elect early retirement.
Table I–21 will be used to value benefits
in plans with valuation dates during
calendar year 2021.
PBGC has determined that notice of,
and public comment on, this rule are
impracticable, unnecessary, and
contrary to the public interest. PBGC’s
update of appendix D for calendar year
2021 is routine. If a plan has a valuation
date in 2021, the plan administrator
needs the updated table being
promulgated in this rule to value
benefits. Accordingly, PBGC finds that
the public interest is best served by
issuing this table expeditiously, without
an opportunity for notice and comment,
and that good cause exists for making
the table set forth in this amendment
effective less than 30 days after
publication to allow the use of the
proper table to estimate the value of
plan benefits for plans with valuation
dates in early 2021.
PBGC has determined that this action
is not a ‘‘significant regulatory action’’
under the criteria set forth in Executive
Order 12866 and Executive Order
13771.
Because no general notice of proposed
rulemaking is required for this
regulation, the Regulatory Flexibility
Act of 1980 does not apply (5 U.S.C.
601(2)).
List of Subjects in 29 CFR Part 4044
Employee benefit plans, Pension
insurance.
In consideration of the foregoing, 29
CFR part 4044 is amended as follows:
PART 4044—ALLOCATION OF
ASSETS IN SINGLE–EMPLOYER
PLANS
1. The authority citation for part 4044
continues to read as follows:
■
Authority: 29 U.S.C. 1301(a), 1302(b)(3),
1341, 1344, 1362.
2. Appendix D to part 4044 is
amended by removing Table I–20 and
adding in its place Table I–21 to read as
follows:
■
Appendix D to Part 4044—Tables Used
To Determine Expected Retirement Age
E:\FR\FM\07DER1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 235 (Monday, December 7, 2020)]
[Rules and Regulations]
[Pages 78718-78742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23810]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 3
RIN 3038-AE46
Exemption From Registration for Certain Foreign Intermediaries
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
is adopting amendments (Final Rule) revising the conditions set forth
in the Commission regulation under which a person located outside of
the United States (each, a foreign located person) engaged in the
activity of a commodity pool operator (CPO) in connection with
commodity interest transactions on behalf of persons located outside
the United States (collectively, an offshore commodity pool or offshore
pool) would qualify for an exemption from CPO registration and
regulation with respect to that offshore pool. The Final Rule provides
that the exemption under the applicable Commission regulation for
foreign located persons acting as a CPO (a non-U.S. CPO) on behalf of
offshore commodity pools may be claimed by such non-U.S. CPOs on a
pool-by-pool basis. The Commission is also adopting a provision
clarifying that a non-U.S. CPO may claim an exemption from registration
under the applicable Commission regulation with respect to a qualifying
offshore commodity pool, while maintaining another exemption from CPO
registration, relying on a CPO exclusion, or even registering as a CPO,
with respect to its operation of other commodity pools. Additionally,
the Commission is adopting a safe harbor by which a non-U.S. CPO of an
offshore pool may rely upon that exemption, if it satisfies several
enumerated factors related to its operation of the offshore commodity
pool. The Commission is also adopting an amendment permitting U.S.
affiliates of a non-U.S. CPO to contribute initial capital to such non-
U.S. CPO's offshore pools, without affecting the eligibility of the
non-U.S. CPO for an exemption from registration under the applicable
Commission regulation. The Commission is also adopting amendments to
the applicable Commission regulation originally proposed in 2016 that
clarify whether clearing of commodity interest transactions through a
registered futures commission merchant (FCM) is required as a condition
of the registration exemptions for foreign intermediaries, and whether
such exemption is available for foreign intermediaries acting on behalf
of international financial institutions.
DATES: The effective date for this Final Rule is February 5, 2021.
FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, at 202-
418-6056, [email protected]; with respect to the finalization of the
2016 Proposal: Frank N. Fisanich, Chief Counsel, at 202-418-5949 or
[email protected]; with respect to all other aspects of this release:
Amanda Lesher Olear, Deputy Director, at 202-418-5283 or
[email protected]; Pamela Geraghty, Associate Director, at 202-418-5634
or [email protected]; Elizabeth Groover, Special Counsel, at 202-418-
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. Recent Regulatory Proposals Related to Commission Regulation
3.10(c)
C. The 2020 Proposal
II. Final Rule
A. General Comments in Response to the 2016 and 2020 Proposals
B. Reconsidering the 2016 Proposal and Comments Received
1. The 2016 Proposal's Amendments to Commission Regulation
3.10(c)
2. Responsive Comments Received Regarding the 2016 Proposal
3. Finalizing the 2016 Proposal
C. Pool-by-Pool Exemption
D. Utilizing the 3.10 Exemption Concurrent With Other Regulatory
Relief Available to CPOs
E. The Safe Harbor for Non-U.S. CPOs With Respect to Inadvertent
U.S. Participants in Their Offshore Pools
F. Exception for Initial Capital Contributions by U.S.
Affiliates of a Non-U.S. CPO to Its Offshore Pools
1. U.S. ``Controlling'' Affiliates
2. The Timing of a U.S. Affiliate's Capital Contributions to an
Offshore Pool
3. Additional Anti-Evasion Conditions: The Marketing Prohibition
and Prohibiting ``Bad Actor'' U.S. Affiliates
4. Analysis Under Section 4(c) of the Act
G. Additional Relief for Commodity Trading Advisors
H. Reorganization of Commission Regulation 3.10(c)
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Costs and Benefits Related to Finalizing the 2016 Proposal
2. Commission Regulation 3.10 (c)(5)(i): Claiming the 3.10
Exemption on a Pool-by-Pool Basis
3. Commission Regulation 3.10(c)(5)(iii): Providing A Safe
Harbor for Non-U.S. CPOs Whose Offshore Pools May Have Inadvertent
U.S. Participants
4. Commission Regulation 3.10(c)(5)(iv): Utilizing the 3.10
Exemption Concurrent with Other Available Exclusions and Exemptions
5. Commission Regulation 3.10(c)(5)(ii): The Affiliate
Contribution Exception
6. Section 15(a) Factors
D. Anti-Trust Considerations
I. Background
A. Statutory and Regulatory Background
Section 1a(11) of the Commodity Exchange Act (CEA or Act) \1\
defines the term ``commodity pool operator'' as any
[[Page 78719]]
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. CEA section 1a(10) defines a ``commodity pool'' as any
investment trust, syndicate, or similar form of enterprise operated 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\ With respect to CPOs, the CEA
also authorizes the Commission, acting by rule or regulation, to
include within or exclude from the term ``commodity pool operator'' any
person engaged in the business of operating a commodity pool if the
Commission determines that the rule or regulation will effectuate the
purposes of the CEA.\5\
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\1\ 7 U.S.C. 1a(11). See also 17 CFR 1.3 (defining ``commodity
interest'' to include, inter alia, any contract for the purchase or
sale of a commodity for future delivery, and any swap as defined in
the CEA); Adaptation of Regulations to Incorporate Swaps, 77 FR
66288, 66295 (Nov. 2, 2012) (discussing the modification of the term
``commodity interest'' to include swaps). The Act is found at 7
U.S.C. 1, et seq. (2018), and the Commission's regulations are found
at 17 CFR Ch. I (2020). Both are accessible through the Commission's
website, https://www.cftc.gov.
\2\ 7 U.S.C. 1a(38); 17 CFR 1.3 (defining ``person'' to include
individuals, associations, partnerships, corporations, and trusts).
\3\ 7 U.S.C. 1a(10).
\4\ 7 U.S.C. 6m(1).
\5\ 7 U.S.C. 1a(11)(B).
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Additionally, CEA section 4(c), in relevant part with respect to
the Final Rule, 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 Act.\6\ CEA
section 4(c) authorizes the Commission to grant exemptive relief if the
Commission determines, inter alia, that the exemption would be
consistent with the ``public interest.'' \7\
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\6\ 7 U.S.C. 6(c)(1).
\7\ Conference Report, H.R. Report 102-978 at 8 (Oct. 2, 1992)
(``The goal of providing the Commission with broad exemptive powers
. . . is to give the Commission a means of providing certainty and
stability to existing and emerging markets so that financial
innovation and market development can proceed in an effective and
competitive manner.'').
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To provide an exemption pursuant to section 4(c) of the Act with
respect to registration as a CPO, the Commission must determine that
the agreements, contracts, or transactions undertaken by the exempt CPO
should not require registration, and that the exemption from
registration would be consistent with the public interest and the
Act.\8\ The Commission must further determine that the agreement,
contract, or transaction will be entered into solely between
appropriate persons, and that it will not have a material adverse
effect on the ability of the Commission or any contract market to
discharge its regulatory or self-regulatory duties under the Act.\9\
The term ``appropriate person'' as used in CEA section 4(c) includes
``a commodity pool formed or operated by a person subject to regulation
under the Act.'' \10\ The Commission has previously interpreted the
clause ``subject to regulation under the Act'' as including persons who
are exempt from registration or excluded from the definition of a
registration category.\11\
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\8\ 7 U.S.C. 6(c)(2)(A).
\9\ 7 U.S.C. 6(c)(2)(B).
\10\ 7 U.S.C. 6(c)(3)(E).
\11\ 77 FR 30596, 30655 (May 23, 2012) (finding, in the context
of the eligible contract participant definition, that ``construing
the phrase `formed and operated by a person subject to regulation
under the [CEA]' to refer to a person excluded from the CPO
definition, registered as a CPO or properly exempt from CPO
registration appropriately reflects Congressional intent'').
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Part 3 of the Commission's regulations governs the registration of
intermediaries engaged in the offering and selling of, and the
provision of advice concerning, all commodity interest transactions.
Commission regulation 3.10 establishes the procedure that
intermediaries, including CPOs, must use to register with the
Commission,\12\ and also sets forth certain exemptions from
registration.\13\ In particular, Commission regulation 3.10(c)(3)(i),
discussed in further detail below, provides, inter alia, that a person
engaged in the activity of a CPO, commodity trading advisor (CTA), or
introducing broker (IB), in connection with any commodity interest
transaction executed bilaterally or made on or subject to the rules of
any designated contract market (DCM) or swap execution facility (SEF),
is not required to register as a CPO, CTA, or IB (relief referred to
herein as the 3.10 Exemption), provided that:
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\12\ See, e.g., 17 CFR 3.10(a)(1)(i) (requiring the filing of a
Form 7-R with the National Futures Association (NFA)).
\13\ 17 CFR 3.10(c) (providing exemptions from registration for
certain persons).
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1. The person is located outside the United States, its
territories, and possessions (the United States or U.S.);
2. The person acts only on behalf of persons located outside the
United States; and
3. The commodity interest transaction is submitted for clearing
through a registered FCM.\14\
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\14\ 17 CFR 3.10(c)(3)(i).
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Commission regulation 3.10(c)(2)(i) provides a similar exemption
from registration for a person located outside the United States acting
as an FCM.\15\
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\15\ 17 CFR 3.10(c)(2)(i).
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A person acting in accordance with the 3.10 Exemption remains
subject to the antifraud provisions of, inter alia, CEA section 4o,\16\
but is otherwise not required to comply with those provisions of the
CEA or Commission regulations applicable to any person registered in
the relevant intermediary capacity,\17\ or persons required to be so
registered.\18\ Of particular relevance to the amendments adopted
herein regarding non-U.S. CPOs, the 3.10 Exemption provides that it is
available to non-U.S. CPOs whose activities, in connection with any
commodity interest transaction executed bilaterally or made on or
subject to the rules of any DCM or SEF, are confined to acting on
behalf of offshore commodity pools.\19\ This exemption was first
adopted in 2007 (2007 Final Rule) and was based on a long-standing no-
action position articulated by the Commission's Office of General
Counsel in 1976.\20\
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\16\ 7 U.S.C. 6o.
\17\ For purposes of this adopting release, the term
``intermediary'' includes persons acting in the capacity of an FCM,
IB, CPO, or CTA. For more information, see ``Intermediaries,'' CFTC,
available at https://www.cftc.gov/IndustryOversight/Intermediaries/index.htm.
\18\ 17 CFR 3.10(c)(3)(ii). As market participants, however,
such persons remain subject to all other applicable provisions of
the CEA and the Commission's regulations promulgated thereunder.
See, e.g., 7 U.S.C. 9 (prohibiting manipulation by any person with
respect to a swap or futures transaction).
\19\ 17 CFR 3.10(c)(3)(i).
\20\ Exemption from Registration for Certain Foreign Persons, 72
FR 63976, 63977 (Nov. 14, 2007) (2007 Final Rule). See also CFTC
Staff Interpretative Letter 76-21.
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In adopting the 2007 Final Rule, the Commission agreed with
commenters who cited its longstanding policy of focusing ```customer
protection activities upon domestic firms and upon firms soliciting or
accepting orders from domestic users of the futures markets.' '' \21\
The Commission further stated that the protection of non-U.S. customers
of non-U.S. firms may be best deferred to foreign regulators.\22\ The
Commission noted its understanding that, pursuant to the terms of the
3.10
[[Page 78720]]
Exemption, ``[a]ny person seeking to act in accordance with any of the
foregoing exemptions from registration should note that the prohibition
on contact with U.S. customers applies to solicitation as well as
acceptance of orders.'' \23\ Moreover, the Commission stated that,
``[if] a person located outside the U.S. were to solicit prospective
customers located in the U.S. as well as outside of the U.S., these
exemptions would not be available, even if the only customers resulting
from the efforts were located outside the U.S.'' \24\
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\21\ 2007 Final Rule, 72 FR at 63977, quoting Introducing
Brokers and Associated Persons of Introducing Brokers, Commodity
Trading Advisors and Commodity Pool Operators; Registration and
Other Regulatory Requirements, 48 FR 35248, 35261 (Aug. 3, 1983).
\22\ Id. The Commission also cited this policy position in the
initial proposal discussing what ultimately would be adopted as
Commission regulation 3.10(c)(3)(i). Exemption from Registration for
Certain Foreign Persons, 72 FR 15637, 15638 (Apr. 2, 2007).
\23\ 2007 Final Rule, 72 FR at 63977-63978.
\24\ Id. at 63978.
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In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) \25\ amended the definitions of ``commodity pool
operator'' and ``commodity pool'' in the CEA to include those persons
operating collective investment vehicles that engage in swaps,\26\
which resulted in an expansion of the universe of persons captured
within both statutory definitions.\27\ When combined with the
rescission of Commission regulation 4.13(a)(4) in 2012,\28\ an
increasing number of non-U.S. CPOs were required to either register
with the Commission, or claim an available exemption or exclusion with
respect to the operation of their commodity pools, regardless of
whether such pools were offshore or offered to U.S. participants.
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\25\ Public Law 111-203, H.R. 4173 (2010) (Dodd-Frank Act).
\26\ Section 721 of the Dodd-Frank Act.
\27\ See also Adaptation of Regulation to Incorporate Swaps, 77
FR 66288 (Nov. 2, 2012) (incorporating this expanded jurisdiction
over swaps into existing Commission regulations).
\28\ See Commodity Pool Operators and Commodity Trading
Advisors; Compliance Obligations, 77 FR 11252, 11264 (Feb. 24,
2012). Former Commission regulation 4.13(a)(4) provided an exemption
from registration as a CPO for operators of commodity pools offered
and sold to sophisticated participants. See 17 CFR 4.13(a)(4)
(2010).
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B. Recent Regulatory Proposals Related to Commission Regulation 3.10(c)
As discussed further below, on July 27, 2016, the Commission
proposed to amend Commission regulation 3.10(c) (2016 Proposal)
revising the conditions under which the exemption from intermediary
registration would apply.\29\ Generally, the 2016 Proposal would permit
a foreign located person acting in the capacity of an FCM, IB, CTA, or
CPO, to utilize an exemption from registration as such, provided that
the foreign located person, in connection with any commodity interest
transaction, acts solely on behalf of (1) other foreign located
persons, or (2) international financial institutions (IFIs, which were
further defined in the 2016 Proposal's proposed Commission regulation
(c)(6)). The proposed amendments provided an exemption from
registration without regard to whether such foreign located person
cleared the commodity interest transaction.\30\ In response to the 2016
Proposal, the Commission received six comments, most of which were
supportive of those proposed amendments.\31\ The Commission, however,
did not finalize the 2016 Proposal at that time.
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\29\ Exemption from Registration for Certain Foreign Persons, 81
FR 51824 (Aug. 5, 2016) (2016 Proposal).
\30\ 2016 Proposal, 81 FR at 51827.
\31\ The public comment file for the 2016 Proposal is available
on the Commission's website. Comments for Proposed Rule 81 FR 51824,
available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1724. See infra pt. II.B. for additional
discussion of the 2016 Proposal and Commission responses to those
public comments.
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In 2018, the Commission proposed, among other changes to its part 4
regulations, adding a new exemption from CPO registration to Commission
regulation 4.13 (2018 Proposal) that would formally incorporate the
relief provided by CFTC Staff Advisory 18-96 (Advisory 18-96) in the
Commission's CPO regulatory provisions.\32\ In the 2018 Proposal, the
Commission noted that the proposed exemption based on Advisory 18-96
was intended to be claimed on a pool-by-pool basis, and stated that
``[t]his characteristic would effectively differentiate the [proposed
exemption] from the relief currently provided'' under the 3.10
Exemption.\33\ The Commission received several comments regarding the
2018 Proposal's discussion of the differences between the proposed
amendment to Commission regulation 4.13 and the existing 3.10
Exemption.\34\
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\32\ Registration and Compliance Requirements for Commodity Pool
Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18,
2018) (2018 Proposal); CFTC Staff Advisory 18-96 (Apr. 11, 1996).
\33\ 2018 Proposal, 83 FR at 52914.
\34\ The comment file for the 2018 Proposal is also available on
the Commission's website. Comments for Proposed Rule 83 FR 52902,
available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2925.
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For instance, one commenter noted that the 3.10 Exemption ``is
widely relied on around the world by non-U.S. managers of offshore
funds that are not offered to U.S. investors but that may trade in the
U.S. commodity interest markets.'' \35\ This commenter further noted
that ``CPO registration for these offshore entities with global
operations is not a viable option[,]'' due to the logistical and
regulatory issues involved.\36\ Another commenter stated that, ``it is
critical to bear in mind that the Commission . . . to our knowledge has
never addressed, the separate and distinct question of whether an
offshore CPO may rely on Rule 3.10(c)(3)(i) with respect to some of its
offshore pools in combination with relying on other exemptions with
respect to its other pools.'' \37\ Several other commenters expressed
similar views and requested that the Commission affirm CPOs' ability to
claim the 3.10 Exemption on a pool-by-pool basis and to rely upon that
exemption in addition to other exemptions, exclusions, or
registration.\38\
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\35\ Comment Letter from the Asset Management Group of the
Securities Industry and Financial Markets Association (SIFMA AMG),
at 9 (Dec. 17, 2018), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61922&SearchText=.
\36\ Id. at 12.
\37\ Comment Letter from Fried, Frank, Harris, Shriver, &
Jacobson, LLP (Fried Frank), at 6 (Dec. 17, 2018), available at
https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61920&SearchText=.
\38\ See, e.g., Comment Letter from Willkie, Farr, and
Gallagher, LLP (Willkie), at 6 (Dec. 17, 2018), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61927&SearchText=; and Comment Letter from
Alternative Investment Management Association (AIMA), at 6 (Dec. 17,
2018), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61907&SearchText=.
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In 2019, the Commission withdrew the portion of the 2018 Proposal
related to adopting the relief provided in Advisory 18-96 as a CPO
registration exemption, and, in light of the comments received in
response to its discussion of the 3.10 Exemption, undertook an inquiry
as to whether the 3.10 Exemption should be amended to respond to the
current CPO space and the issues articulated by commenters.\39\ Based
on the foregoing experience and history, and in consideration of the
increasingly global nature of the commodity pool space, the Commission
proposed certain amendments to the 3.10 Exemption on May 28, 2020,
which were subsequently published in the Federal Register on June 12,
2020 (2020 Proposal).\40\
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\39\ Registration and Compliance Requirements for Commodity Pool
Operators (CPOs) and Commodity Trading Advisors: Family Offices and
Exempt CPOs, 84 FR 67355, 67357 (Dec. 10, 2019).
\40\ Exemption from Registration for Certain Foreign Persons
Acting as Commodity Pool Operators of Offshore Commodity Pools, 85
FR 35820 (Jun. 12, 2020) (2020 Proposal).
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C. The 2020 Proposal
The 2020 Proposal consisted of several proposed amendments to the
3.10 Exemption. Specifically, the Commission proposed amendments to the
3.10 Exemption such that non-U.S.
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CPOs may rely on that relief on a pool-by-pool basis.\41\ The
Commission also proposed an amendment confirming that the 3.10
Exemption, as revised, may be utilized along with other exemptions or
exclusions available to CPOs generally, or CPO registration.\42\ The
Commission further proposed a conditional safe harbor for non-U.S. CPOs
who, by virtue of a pool's structure, cannot represent with absolute
certainty that there are no U.S. participants in their operated
offshore pool.\43\ Finally, the Commission also proposed to provide an
exception from the 3.10 Exemption's prohibition on U.S. participants,
such that a U.S. controlling affiliate could provide initial capital to
an offshore pool operated by its affiliated non-U.S. CPO without being
considered a U.S. participant in that offshore pool.\44\ In addition to
the substantive amendments to the 3.10 Exemption proposed for the first
time as part of the 2020 Proposal, the Commission also reopened the
comment period associated with the 2016 Proposal for a period of 60
days.\45\
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\41\ 2020 Proposal, 85 FR at 35822.
\42\ 2020 Proposal, 85 FR at 35824.
\43\ 2020 Proposal, 85 FR at 35823.
\44\ 2020 Proposal, 85 FR at 35825.
\45\ 2020 Proposal, 85 FR at 35826-35827.
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II. Final Rule
After considering all of the comments received, and for the reasons
stated by the Commission herein, the Commission is amending Commission
regulation 3.10(c), in a manner generally consistent with the 2016 and
2020 Proposals, with certain adjustments resulting from commenters'
suggestions and after additional consideration of the proposed
regulatory text. The Commission will first generally summarize the
public comments received addressing both the 2016 and 2020 Proposals.
Then, in addition to the rulemaking history of Commission regulation
3.10(c) set forth above, the Commission will briefly explain the 2016
Proposal, respond to all of the relevant public comments received, and
detail the amendments derived from the 2016 Proposal adopted in the
Final Rule.\46\ The Commission will then discuss the remaining 2020
Proposal amendments with respect to non-U.S. CPOs operating offshore
pools pursuant to the 3.10 Exemption, summarize the 3.10 Exemption
amendments being adopted, respond to the relevant public comments
received, and explain the substance and rationale of any adjustments in
approach from the 2020 Proposal to what the Commission is adopting in
the Final Rule today.\47\ Finally, the Commission will explain its
efforts to reconcile proposed amendments from both the 2016 and 2020
Proposals, which includes a non-substantive reorganization of
Commission regulation 3.10(c).\48\
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\46\ See infra pt. II.B.
\47\ See infra pts. II.C-G.
\48\ See infra pt. II.H.
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A. General Comments in Response to the 2016 and 2020 Proposals
The Commission requested comment generally on all aspects of the
2020 Proposal, and specifically asked questions about potential
additional conditions or limitations to the proposed relief that might
be incorporated during finalization.\49\ The comment period for the
2020 Proposal, along with the reopened comment period for the 2016
Proposal, expired on August 11, 2020, and the Commission received four
relevant comment letters: One from an individual, one from a foreign
intergovernmental organization, one submitted jointly by five industry
professional and trade associations (collectively, the Industry
Groups), and one submitted by an asset manager that operates
globally.\50\ Two of those comment letters also provided new or
additional comments with respect to the 2016 Proposal.\51\ Finally,
Commission staff also hosted one ex parte meeting to discuss aspects of
the 2020 Proposal with an Industry Group.\52\
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\49\ 2020 Proposal, 85 FR at 35826 (asking three questions
regarding the conditions of the proposed exception from the 3.10
Exemption for initial capital investments in a non-U.S. CPO's
offshore pool by a U.S. controlling affiliate). See also id. at
35827 (asking, with respect to the 2016 Proposal, an additional
question about the clearing of transactions otherwise covered by the
3.10 Exemption).
\50\ The Commission received a total of five comment letters,
one of which was either spam or otherwise not substantively relevant
to the 2020 Proposal in any respect. For relevant comments on the
2020 Proposal, see Comment Letter from Mr. Chris Barnard (Aug. 11,
2020) (Barnard); Comment Letter from the European Stability
Mechanism (Aug. 6, 2020) (ESM); Joint Comment Letter from AIMA,
SIFMA AMG, the Investment Advisers Association (IAA), Investment
Company Institute Global (ICI Global), and the Managed Funds
Association (MFA) (Aug. 11, 2020) (Industry Group Letter), and
Comment Letter from the Vanguard Group (Aug. 11, 2020) (Vanguard).
\51\ Industry Group Letter, at 12-13, and ESM, at 1-3.
\52\ The complete comment file for the 2020 Proposal can be
found on the Commission's website. Comments for Proposed Rule 85 FR
35820, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3122.
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The comments received by the Commission were, in general, strongly
supportive of the 2020 Proposal.\53\ Commenters largely agreed with the
proposed amendments, positing that, if adopted, the 2020 Proposal
``would simplify compliance by eliminating the potential need for the
CFTC to require registration and oversight of non-U.S. CPOs whose pools
have no U.S. investors.'' \54\ The Industry Groups also ``applaud[ed]
the Commission's actions in turning its attention to the increasingly
global nature of the asset management space and proposing rule changes
that will better align the express terms of its regulations with both
the Commission's policy goals and current global practices.'' \55\
Although offering support for the 2020 Proposal overall, commenters
also suggested additional regulatory edits with respect to several
specific issues raised by that release, and provided responses to the
questions posed by the Commission.\56\
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\53\ Industry Group Letter, at 2; Vanguard, at 2; Barnard, at 2;
ESM, at 1.
\54\ Barnard, at 2.
\55\ Industry Group Letter, at 1.
\56\ See, e.g., Vanguard, at 2-3; Industry Group Letter, at 2-
15, app. A.
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As noted above, the Commission requested comment generally on the
2020 Proposal, but also posed several targeted questions about
potential additional conditions for the proposed exception regarding
the initial capital contributions of U.S. controlling affiliates in a
non-U.S. CPO's offshore pool (Affiliate Contribution Exception).\57\ In
addition to commenting generally on the 2020 Proposal, the Industry
Groups submitted the sole comment letter specifically responding to
those questions. The Industry Groups stated that they do not support
additional conditions on the Affiliate Contribution Exception, and that
they believe such limitations ``would not provide any additional
protection to U.S. investors, customers, or the U.S. commodity interest
markets.'' \58\ For instance, the Commission queried whether the
Affiliate Contribution Exception should more explicitly be intended for
``seeding purposes,'' including whether it should ``be conditioned on
the investment being limited in time to one, two, or three years, after
which time the investments of the controlling affiliate must be reduced
to a de minimis amount of the pool's capital, such as 3 or 5 percent?''
\59\ Alternatively, the Industry Groups suggested a defined ``purpose''
for affiliate contributions, ``for the purpose of establishing, or
providing ongoing support to, the pool.'' \60\
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\57\ 2020 Proposal, 85 FR at 35826. See infra pt. II.F for a
more detailed discussion on the Affiliate Contribution Exception
adopted in the Final Rule.
\58\ Industry Group Letter, at 17.
\59\ 2020 Proposal, 85 FR at 35826.
\60\ Industry Group Letter, at 17.
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Regarding the nature of controlling affiliates, the Commission also
queried
[[Page 78722]]
whether the Affiliate Contribution Exception should ``be limited to
entities or persons that are otherwise financial institutions that are
regulated in the United States to provide investor protections?'' \61\
The Commission additionally inquired whether the Affiliate Contribution
Exception should ``only be available to U.S. controlling affiliates
regulated by the Securities and Exchange Commission, a federal banking
regulator, or an insurance regulator?'' \62\ The Industry Groups stated
that they do not believe any benefit would result from ``limiting the
affiliates that contribute capital to regulated entities'' because it
would further introduce the Commission ``into the decision-making
process for commercial decisions and resource allocation of global
organizations,'' and ``also prevent the use of common practices for
this type of funding, including holding companies and trust
companies.'' \63\ One commenter also stated that a U.S. affiliate
should not be required to ``be regulated in the United States in order
to qualify'' for the Affiliate Contribution Exception.\64\
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\61\ 2020 Proposal, 85 FR at 35826.
\62\ Id.
\63\ Industry Group Letter, at 18.
\64\ Vanguard, at 2.
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The Commission also noted in the 2020 Proposal that one of the
rationales behind the Affiliate Contribution Exception is the
affiliate's likely ability to demand that the non-U.S. CPO provide it
with information necessary to assess the offshore pool's operations and
performance.\65\ Because it may not be possible to ascertain with
certainty whether such information must be provided to a U.S.
controlling affiliate under laws applicable to the non-U.S. CPO, the
Commission queried in the 2020 Proposal whether the Affiliate
Contribution Exception should be ``conditioned on there being an
obligation on the non-U.S. CPO that is legally binding in its home
jurisdiction to provide the U.S. controlling affiliate with information
regarding the operation of the offshore pool by the affiliated non-U.S.
CPO?'' \66\ The Industry Groups noted that ``an organization's decision
to contribute capital to support the operations of an offshore CPO is a
commercial business decision, not an investment decision of the type
that Part 4 information addresses.'' \67\ Therefore, the Industry
Groups stated, there is ``no need for the Commission to determine what
type of information global business organizations will need to exercise
their business judgment in this regard or for the Commission otherwise
to intervene in the organization's decision-making process.'' \68\ The
Commission did not receive any comments supporting the additional
limitations for which the Commission specifically solicited public
feedback in the 2020 Proposal.
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\65\ 2020 Proposal, 85 FR at 35826.
\66\ Id.
\67\ Industry Group Letter, at 18.
\68\ Id. (noting that ``requiring this exception to be
conditioned on there being a legally binding obligation in the non-
U.S. CPO's home jurisdiction would create unnecessary non-U.S. legal
analysis on the part of the affiliate'').
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B. Reconsidering the 2016 Proposal and Comments Received
In addition to reopening the comment period with respect to the
2016 Proposal, the Commission queried specifically whether Commission
regulation 3.10 should require commodity interest transactions of
foreign located persons or IFIs that are required or intended to be
cleared on a registered derivatives clearing organization (DCO) to be
submitted for clearing through an FCM registered in accordance with
section 4d of the Act, unless such foreign located person or IFI is
itself a clearing member of such registered DCO.\69\ As mentioned
above, the Commission received two additional comments relevant to the
2016 Proposal as a result of the reopening of the 2016 Proposal's
comment period. After a brief explanation of the 2016 Proposal, the
Commission will discuss and address these additional comments, along
with the public comments originally received in 2016, and outline the
Final Rule amendments resulting from the 2016 Proposal below.
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\69\ 2020 Proposal, 85 FR at 35827.
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1. The 2016 Proposal's Amendments to Commission Regulation 3.10(c)
At the time the 2016 Proposal was published, and until the Final
Rule's amendments become effective, Commission regulation 3.10(c)(2)-
(c)(3) generally provides an exemption from registration, subject to
specific conditions, for certain foreign located persons acting as
intermediaries (collectively, Foreign Intermediaries) with respect to
persons also located outside the U.S., even though such transactions
may be executed bilaterally, or on or subject to the rules of a DCM or
SEF.\70\ With respect to activities involving commodity interest
transactions executed bilaterally, or made on or subject to the rules
of any DCM or SEF, Commission regulation 3.10(c)(3)(i) provides an
exemption from registration as a CPO, CTA, or IB, where the person is a
foreign located person, acting only on behalf of other foreign located
persons, and the commodity interest transaction is submitted for
clearing through a registered FCM.\71\ Commission regulation
3.10(c)(2)(i) currently provides a similar exemption from registration
for any Foreign Intermediary acting as an FCM.\72\
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\70\ 17 CFR 3.10(c)(2)-(c)(3). See supra pt. I.A.
\71\ 17 CFR 3.10(c)(3)(i).
\72\ 17 CFR 3.10(c)(2)(i).
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Pursuant to the 2016 Proposal, the Commission proposed to amend
Commission regulations 3.10(c)(2) and (c)(3) to revise the conditions
under which those exemptions from registration would apply.\73\
Specifically, the 2016 Proposal's amendments would permit a Foreign
Intermediary to be eligible for an exemption from registration, if the
Foreign Intermediary, in connection with a commodity interest
transaction, only acts on behalf of (1) foreign located persons, or (2)
IFIs,\74\ without regard to whether such persons or institutions clear
such commodity interest transaction.\75\ It was the Commission's
intention in 2016--and remains so now--to promulgate regulations
consistent with its longstanding policy of focusing its customer
protection activities upon domestic firms, and upon firms soliciting or
accepting orders from domestic participants.\76\
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\73\ 2016 Proposal.
\74\ For purposes of the 2016 Proposal, the Commission defined
IFIs as those multinational institutions defined in the Commission's
previous rulemakings and staff no-action letters, i.e.,
International Monetary Fund, International Bank for Reconstruction
and Development, European Bank for Reconstruction and Development,
International Development Association, International Finance
Corporation, Multilateral Investment Guarantee Agency, African
Development Bank, African Development Fund, Asian Development Bank,
Inter-American Development Bank, Bank for Economic Cooperation and
Development in the Middle East and North Africa, Inter-American
Investment Corporation, Council of Europe Development Bank, Nordic
Investment Bank, Caribbean Development Bank, European Investment
Bank and European Investment Fund (the International Bank for
Reconstruction and Development, International Finance Corporation,
and Multilateral Investment Guarantee Agency are parts of the World
Bank Group). 2016 Proposal, 81 FR at 51825, citing Further
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,''
``Major Swap Participant,'' ``Major Security-Based Swap
Participant,'' and ``Eligible Contract Participant,'' 77 FR 30596,
30692, n.1180 (May 23, 2012) (Entities Final Rule).
\75\ 2016 Proposal, 81 FR at 51826.
\76\ Id.
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2. Responsive Comments Received Regarding the 2016 Proposal
In response to the 2016 Proposal, the Commission originally
received six comments \77\ and subsequently received
[[Page 78723]]
two additional comments,\78\ as a result of reopening the comment
period pursuant to the 2020 Proposal. AIMA, CME, MFA, and the Industry
Groups commented that the 2016 Proposal would improve market efficiency
and increase liquidity in U.S. markets by eliminating the regulatory
burden associated with Commission registration imposed on Foreign
Intermediaries acting solely on behalf of other foreign located
persons.\79\ In particular, MFA also commented that foreign located
persons would generally not have any expectation that a Foreign
Intermediary would be subject to Commission oversight.\80\ The CME also
noted that the proposed amendments would positively impact the
likelihood of productive cooperation concerning the regulation of
derivatives across all jurisdictions going forward.\81\ One individual
commented that Foreign Intermediaries should be required to register
with the Commission no matter the circumstance.\82\ The other
individual did not address the 2016 Proposal in any manner. Regarding
the two additional comment letters received after the 2020 Proposal,
the Industry Groups and ESM were both strongly supportive of the
Commission finalizing amendments from the 2016 Proposal; additionally,
ESM requested that it be explicitly included in the definition of
``international financial institution.'' \83\
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\77\ The original six comments were submitted by: AIMA; the CME
Group, Inc. (CME); IAA; MFA; and two individuals unaffiliated with
any registrant or derivatives industry organization. Comments for
Proposed Rule 81 FR 51824, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1724. See specifically, Comment
Letter from AIMA (Sept. 6, 2016) (AIMA), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61002&SearchText=; Comment Letter from CME (Aug.
23, 2016) (CME), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60997&SearchText=; Comment Letter
from IAA (Sept. 6, 2016) (IAA), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61003&SearchText=; Comment Letter from MFA
(Sept. 2, 2016) (MFA), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61000&SearchText=.
\78\ The two additional 2020 comment letters addressing the 2016
Proposal are the jointly submitted Industry Group Letter and the
comment letter from ESM, described above as a foreign
intergovernmental organization. Comments for Proposed Rule 85 FR
35820, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3122. See supra pt. II.A.
\79\ AIMA, at 1; CME, at 1-2; MFA, at 1; Industry Group Letter,
at 12-13.
\80\ MFA, at 1.
\81\ CME, at 2.
\82\ Comment Letter from ``Jean Publieee'' (Aug. 8, 2016),
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60987&SearchText=.
\83\ Industry Group Letter, at 13; ESM, at 2.
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3. Finalizing the 2016 Proposal
After considering all of the comments, the Commission is finalizing
its amendments to Commission regulation 3.10(c) from the 2016 Proposal,
with two modifications. First, the Commission originally proposed to
amend the language of the exemptions to remove the requirement that any
commodity interest transaction shall be submitted for clearing through
a registered FCM.\84\ In doing so, the Commission recognized that not
all commodity interest transactions are subject to a clearing
requirement under the CEA or Commission regulations, or even available
for clearing by any DCO.\85\ However, by removing the clearing
condition, the Commission inadvertently failed to reiterate that those
transactions that are required to be cleared must be cleared by a
clearing member of the relevant DCO. The proposed removal of such
language may have had the unintended consequence of leading some market
participants to misconstrue the Commission's purpose as an intention to
permit unregistered foreign located persons to become clearing members
on a DCO to clear commodity interest transactions on behalf of
customers that were also foreign located persons. Thus, the Final Rule
provides that the exemptions from registration in Commission regulation
3.10(c) are conditioned on (1) clearing on a DCO any commodity interest
transaction that is required or intended to be cleared on a registered
DCO; and (2) an additional requirement that such transactions must be
cleared through a registered FCM, unless the Foreign Intermediary's
customer is a clearing member of the relevant DCO.
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\84\ 2016 Proposal, 81 FR at 51826.
\85\ Id.
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Second, the Commission is modifying the definition of
``international financial institution'' proposed in 2016 to be
consistent with the definition of U.S. person recently adopted by the
Commission in its final cross-border rules for swap dealers (SDs) and
major swap participants (MSPs) (Cross-Border Final Rule), which
generally excludes IFIs from the definition of U.S. person.\86\
Consistent with the Cross-Border Final Rule, the Commission is defining
the term ``international financial institutions'' in Commission
regulation 3.10(c) to include the International Monetary Fund, the
International Bank for Reconstruction and Development, the Inter-
American Development Bank, the Asian Development Bank, the African
Development Bank, the United Nations, the IFIs that are defined in 22
U.S.C. 262r(c)(2), those institutions that are defined as
``multilateral development banks'' in the European Union's regulation
on ``OTC derivatives, central counterparties and trade repositories,''
\87\ their agencies and pension plans, and any other similar
international organizations, and their agencies and pension plans.\88\
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\86\ Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to Swap Dealers and Major Swap
Participants, 85 FR 56924, 56937-38 (Cross-Border Final Rule).
\87\ Cross-Border Final Rule, 85 FR at 56937-56938; Regulation
(EU) No 648/2012 of the European Parliament and of the Council on
OTC Derivative Transactions, Central Counterparties and Trade
Repositories, Article 1(5(a)) (July 4, 2012), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648.
Article 1(5(a)) references Section 4.2 of Part 1 of Annex VI to
Directive 2006/48/EC, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0048. The definitions overlap, but
together they include the following: The International Monetary
Fund, International Bank for Reconstruction and Development,
European Bank for Reconstruction and Development, International
Development Association, International Finance Corporation,
Multilateral Investment Guarantee Agency, African Development Bank,
African Development Fund, Asian Development Bank, Inter-American
Development Bank, Bank for Economic Cooperation and Development in
the Middle East and North Africa, Inter-American Investment
Corporation, Council of Europe Development Bank, Nordic Investment
Bank, Caribbean Development Bank, European Investment Bank and
European Investment Fund. As noted above, the International Bank for
Reconstruction and Development, the International Development
Association, the International Finance Corporation, and the
Multilateral Investment Guarantee Agency are parts of the World Bank
Group.
\88\ See infra new Commission regulation 3.10(c)(1)(iii)
(adopting a formal IFI definition for purposes of applying the
exemptions otherwise established by that provision).
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The IFI definition adopted by the Final Rule also includes two
additional institutions identified in CFTC Staff Letters 17-34 \89\ and
18-13.\90\ In CFTC Staff Letter 17-34, Commission staff provided relief
from CFTC margin requirements to swaps between SDs and ESM,\91\ and in
CFTC Staff Letter 18-13, Commission staff identified the North American
Development Bank as an additional entity that should be
[[Page 78724]]
considered an IFI for purposes of applying the SD and MSP
definitions.\92\ The Commission concludes that it is appropriate to
include these two entities in the IFI definition adopted by the Final
Rule because the status of both entities as multinational organizations
formed for public purposes is the same as that of the other already
identified IFIs. Therefore, new Commission regulation 3.10(c)(1)(iii)
lists specific IFIs, with these two additions. The IFI definition also
includes a catch-all for ``any other similar international
organizations, and their agencies and pension plans,'' which the
Commission intends to extend the definition to any of the entities
discussed above that are not explicitly listed in the definition.
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\89\ CFTC Staff Letter No. 17-34 (Jul, 24, 2017), available at
https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf. See also CFTC Staff
Letter No. 19-22 (Oct. 16, 2019), available at https://www.cftc.gov/csl/19-22/download.
\90\ CFTC Staff Letter No. 18-13 (May 16, 2018), available at
https://www.cftc.gov/csl/18-13/download.
\91\ CFTC Staff Letter No. 17-34. In addition, in May 2020, the
Commission adopted an amendment to Commission regulation 23.151 to
exclude ESM from the definition of ``financial end user,'' which
will have the effect of excluding swaps between certain SDs and ESM
from the Commission's uncleared swap margin requirements. Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants, 85 FR 27674 (May 11, 2020).
\92\ CFTC Staff Letter 18-13. See also CFTC Staff Letter 17-59
(Nov. 17, 2017) (providing no-action relief from the swap clearing
requirement of section 2(h)(1) of the CEA), available at https://www.cftc.gov/csl/17-59/download.
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As the Commission recognized in the 2016 Proposal, IFIs are
operated to satisfy public purposes and have as their members sovereign
nations from around the world. Although such institutions may have
headquarters or another significant presence in the United States, the
Commission recognizes that the unique attributes and multinational
status of these institutions do not warrant treating them as domestic
persons for purposes of the intermediary registration exemptions in
Commission regulation 3.10(c). The status of IFIs as multinational
member agencies leads the Commission to recognize a need to mitigate
restraints on the ability of IFIs to enter into transactions in all
member countries in conjunction with promoting global economic
development and fulfilling other public purposes. The Commission has
determined that this purpose is better served by defining
``international financial institution'' to be consistent with the
Cross-Border Final Rule because the list of IFIs as proposed in the
2016 Proposal was limited to a specified list and may have required
amendment from time to time.
C. Pool-by-Pool Exemption
The 2020 Proposal would amend the 3.10 Exemption such that non-U.S.
CPOs could avail themselves of the relief thereunder on a pool-by-pool
basis, by specifying that the availability of the 3.10 Exemption would
be determined by whether all of the participants in a particular
offshore commodity pool are located outside the United States.\93\ The
Commission stated its preliminary belief that this amendment would
appropriately focus Commission oversight on those pools that solicit
and/or accept persons located in the United States as pool
participants.\94\ The Commission further noted several developments in
the pooled investment space since the original adoption of the 3.10
Exemption that, in the Commission's preliminary opinion, also supported
the amendments in the 2020 Proposal.\95\ Specifically, the Commission
observed that Congress in 2010, through the Dodd-Frank Act, expanded
the Commission's jurisdiction to include swaps and rolling spot retail
foreign exchange transactions, and that, when combined with the
rescission or revision of certain CPO exemptions and exclusions, this
expanded authority resulted in a significant increase in the number of
entities captured within the definition of CPO.\96\
---------------------------------------------------------------------------
\93\ 2020 Proposal, 85 FR at 35822-35823.
\94\ 2020 Proposal, 85 FR at 35823.
\95\ Id.
\96\ Id.
---------------------------------------------------------------------------
In considering the propriety of the pool-by-pool exemption set
forth in the 2020 Proposal, the Commission also noted the increasing
globalization of the commodity pool industry, observing that, in
contrast with the pool industry at the time of the original adoption of
Commission regulation 3.10(c)(3)(i), several of today's largest CPOs,
when measured by assets under management, are located outside the
United States.\97\ The Commission noted further that these larger CPOs
typically operate many different commodity pools simultaneously,
including some pools for U.S. investors and other pools for investors
outside of the United States.\98\ Therefore, the Commission
preliminarily concluded that the 3.10 Exemption should be amended to
reflect the Commission's regulatory interests in such an integrated
international investment management environment, which the Commission
preliminarily believed would be accomplished through the 2020
Proposal.\99\
---------------------------------------------------------------------------
\97\ Id.
\98\ Id.
\99\ Id.
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The Commission received one comment explicitly addressing the
proposed pool-by-pool availability of the 3.10 Exemption in the 2020
Proposal.\100\ The Industry Groups stated their strong support for
``the revised structure of the 3.10 Exemption that the Commission has
proposed, which clearly and expressly provides for reliance on the
exemption on a pool-by-pool basis.'' \101\ The Industry Groups further
stated their agreement with the Commission's preliminary belief that
the proposed amendments `` `better reflect the current state of
operations of CPOs' and more clearly align the text of the rule with
the Commission's policy goals.'' \102\ They also noted their belief
that ``[t]he intention to permit an exempt or registered non-U.S.
offshore CPO to rely on the 3.10 Exemption on a pool-by-pool basis is
crystal clear, both in the language of the proposed amendment and the
Release.'' \103\
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\100\ Industry Group Letter, at 10. See also Vanguard, at 2
(expressing support for the 2020 Proposal in general and the
substantive comments from the Industry Groups); Barnard, at 2
(expressing support for the 2020 Proposal generally).
\101\ Industry Group Letter, at 10.
\102\ Id., quoting 2020 Proposal, 85 FR at 35822.
\103\ Id. at 11.
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After considering the comments received, the Commission has
determined to finalize the 2020 Proposal so that non-U.S. CPOs may
utilize the 3.10 Exemption for their offshore commodity pools on a
pool-by-pool basis. As such, the Commission is amending the 3.10
Exemption for non-U.S. CPOs, as proposed, to specify that its
availability would be determined, in part, by whether all of the
participants in a particular offshore pool are foreign located
persons.\104\ Permitting non-U.S. CPOs to rely upon the relief provided
by the 3.10 Exemption on a pool-by-pool basis will further allow the
Commission to focus its resources on the oversight of CPOs operating
pools offered and sold to participants located in the U.S., i.e., the
Commission's primary customary protection mandate. Therefore, the
Commission concludes that the Final Rule properly tailors the 3.10
Exemption to address the increasingly global nature of the investment
management space since 2007, without compromising the Commission's
mission of protecting U.S. pool participants and effectively regulating
CPOs managing U.S. assets.
---------------------------------------------------------------------------
\104\ 2020 Proposal, 85 FR at 35831 (proposing Commission
regulation 3.10(c)(3)(ii) to provide this relief on a pool-by-pool
basis to qualifying non-U.S. CPOs for their offshore pools). See
infra new Commission regulation 3.10(c)(5)(i) (retaining that
proposed language and updating solely to reflect the adoption of
defined terms from the 2016 Proposal, including ``foreign located
person'').
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For the reasons stated above, the Commission determines that
amending the 3.10 Exemption to provide relief from registration to non-
U.S. CPOs for their offshore pools on a pool-by-pool basis is an
appropriate exercise of its exemptive authority under CEA section 4(c).
The persons involved in the transactions subject to the exemptive
relief provided herein are ``appropriate persons,'' as discussed in the
2020 Proposal, because the term ``appropriate person'' as used in CEA
section 4(c)
[[Page 78725]]
includes ``a commodity pool formed or operated by a person subject to
regulation under the Act.'' \105\ The Commission has previously
interpreted the clause ``subject to regulation under the Act'' as
including persons who are exempt from registration or excluded from the
definition of a registration category.\106\ Consistent with its
preliminary belief in the 2020 Proposal, the Commission believes that
clearly enabling non-U.S. CPOs to avoid the additional organizational
complexity associated with separately organizing their offshore and
domestic facing commodity pool businesses may result in more non-U.S.
CPOs undertaking to design and offer pools for persons in the United
States. Moreover, this could, in turn, result in a greater diversity of
commodity pools offered and/or sold to persons in the United States,
and this increased competition amongst commodity pools and their CPOs
could broadly foster additional innovation in the commodity pool space,
already one of the more dynamic sectors regulated by the Commission.
Further, this potential for increased competition and variation in
commodity pools and CPOs resulting from the Final Rule will further
promote the vibrancy of the U.S. commodity interest markets.
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\105\ 7 U.S.C. 6(c)(3)(E).
\106\ 77 FR at 30655 (finding, in the context of the eligible
contract participant definition, that construing the phrase ``formed
and operated by a person subject to regulation under the [CEA]'' to
refer to a person excluded from the CPO definition, registered as a
CPO or properly exempt from CPO registration appropriately reflects
Congressional intent).
---------------------------------------------------------------------------
The Commission concludes that the amendments adopted herein will
not have a material adverse effect on the ability of the Commission or
any DCM to discharge their duties under the Act, because non-U.S. CPOs
relying on the 3.10 Exemption, as amended by the Final Rule, with
respect to their offshore commodity pools will remain subject to the
statutory and regulatory obligations imposed on all participants in the
U.S. commodity interest markets.\107\ This conclusion is consistent
with section 4(d) of the Act, which provides that any exemption granted
pursuant to CEA section 4(c) will not affect the authority of the
Commission to conduct investigations in order to determine compliance
with the requirements or conditions of such exemption or to take
enforcement action for any violation of any provision of the Act or any
rule, regulation or order thereunder caused by the failure to comply
with or satisfy such conditions or requirements.\108\ Further, to the
extent a non-U.S. CPO operates both offshore and domestic commodity
pools, these amendments to the 3.10 Exemption do not restrict or
negatively affect the Commission's statutory and regulatory authority
applicable to the commodity pool and intermediary activities of the
non-U.S. CPO involving persons located in the United States. Rather,
this aspect of the Final Rule simply reflects the Commission focusing
its regulatory resources on U.S. pool participants and the firms
soliciting them for trading commodity interests, which are squarely
within its customer protection mandate.\109\ Finally, under the Final
Rule, the Commission retains the authority to take enforcement action
against any non-U.S. CPO claiming the 3.10 Exemption based on its
activities within the U.S. commodity interest markets, consistent with
the Commission's authority regarding market participants generally.
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\107\ See, e.g., 7 U.S.C. 9 (prohibiting the use or employment
of any manipulative or deceptive device in connection with any swap
or contract of sale of any commodity in interstate commerce, or for
future delivery on or subject to the rules of any registered
entity).
\108\ 7 U.S.C. 6(d).
\109\ 2020 Proposal, 85 FR at 35823.
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D. Utilizing the 3.10 Exemption Concurrent With Other Regulatory Relief
Available to CPOs
As discussed above, the Commission proposed that the 3.10 Exemption
for non-U.S. CPOs be available on a pool-by-pool basis. Consistent with
those proposed amendments, and to address the concerns articulated by
commenters to the 2018 Proposal,\110\ the Commission also proposed to
explicitly provide that a non-U.S. CPO may claim the 3.10 Exemption for
its offshore pool(s), while such non-U.S. CPO also claims another
registration exemption or regulatory exclusion with respect to other
pools it operates, e.g., the de minimis exemption under Commission
regulation 4.13(a)(3),\111\ an exclusion from the CPO definition under
Commission regulation 4.5,\112\ or registers with respect to such
pools.\113\ As noted in the 2020 Proposal and confirmed by the
responsive comments received, the Commission understands that this
practice is known colloquially as the ability to ``stack'' exemptions.
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\110\ See, e.g., AIMA, at 6; Willkie, at 6.
\111\ 17 CFR 4.13(a)(3).
\112\ 17 CFR 4.5.
\113\ 2020 Proposal, 85 FR at 35824-25. See infra new Commission
regulation 3.10(c)(5)(iv).
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Absent the finalization of this amendment, the 3.10 Exemption would
not have a provision that expressly contemplates its simultaneous use
with other exemptions or exclusions available under other Commission
regulations. This contrasts with the language in Commission regulation
4.13(f), for example, which states that the filing of a notice of
exemption from registration under that section will not affect the
ability of a person to qualify for exclusion from the definition of the
term ``commodity pool operator'' under Sec. 4.5 in connection with its
operation of another trading vehicle that is not covered under Sec.
4.13.\114\ In the 2020 Proposal, the Commission stated its preliminary
belief that non-U.S. CPOs relying on the 3.10 Exemption should have the
ability to rely on other regulatory exemptions or exclusions that they
qualify for, just like any other CPO.\115\ The Commission noted that it
independently developed the terms under which CPOs of U.S. commodity
pools may claim registration relief, and the fact that a non-U.S. CPO
operates both offshore and U.S. commodity pools does not undermine the
rationale providing the foundation for other regulatory relief
available to CPOs generally.\116\ The Commission therefore
preliminarily concluded that a non-U.S. CPO relying upon the 3.10
Exemption for one or more of its offshore pools should not, by virtue
of that reliance, be foreclosed from utilizing other relief generally
available to CPOs of U.S. pools.\117\
---------------------------------------------------------------------------
\114\ 17 CFR 4.13(f).
\115\ 2020 Proposal, 85 FR at 35825.
\116\ Id.
\117\ Id.
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The Commission received one comment regarding the ability to
combine the 3.10 Exemption with either registration or other available
CPO exemptions or exclusions. The Industry Groups strongly supported
this aspect of the 2020 Proposal because it ``clearly and expressly
provides for reliance on the [3.10 E]xemption on a pool-by-pool basis
and also, in a separate provision, expressly acknowledges the ability
to combine or `stack' exemptions.'' \118\ They did, however, suggest
removing from the proposed amendment the specific references to
Commission regulations 4.13 and 4.5, so as to better align the
provision with the Commission's stated intentions in the 2020 Proposal,
i.e., to permit the 3.10 Exemption to be broadly combinable with other
available exemptions or exclusions, or registration.\119\
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\118\ Industry Group Letter, at 10.
\119\ Id. at 12 (citing the 2020 Proposal, 85 FR at 25824-25,
and stating that the Commission repeatedly describes the provision
``as permitting simultaneous reliance on different exemptions or
registration, giving examples of such exemptions, but without
limiting the exemptions in question'').
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After considering the comments received, and for the reasons stated
in
[[Page 78726]]
the 2020 Proposal, the Commission is adopting the proposed amendment
permitting the 3.10 Exemption to be maintained concurrently with CPO
registration and/or other exemptions or exclusions otherwise available
to the claiming non-U.S. CPO. The Commission agrees that it is not
necessary for the exclusions and exemptions available under Commission
regulations 4.5 and 4.13 to be explicitly enumerated therein. Although
the relief provided by Commission regulations 4.5 and 4.13 is the
predominant means by which commodity pools are operated without the
registration of a CPO, those provisions are not the sole source of such
relief available to CPOs for their pools. Therefore, the Final Rule
adopts the provision permitting the ``stacking'' of the 3.10 Exemption
with either registration or other available relief from CPO regulation
by the Commission, without the specific references to Commission
regulations 4.5 and 4.13.\120\
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\120\ See infra new Commission regulation 3.10(c)(5)(iv).
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E. The Safe Harbor for Non-U.S. CPOs With Respect to Inadvertent U.S.
Participants in Their Offshore Pools
The 2020 Proposal also proposed a safe harbor for non-U.S. CPOs
that have taken reasonable actions designed to minimize the possibility
that participation units in the operated offshore pool are being
offered or sold to persons located in the United States. The Commission
understands that some non-U.S. CPOs may not be able to represent with
absolute certainty that they are acting only on behalf of foreign
located persons invested in their offshore pools, as such non-U.S. CPOs
may not have complete visibility into the ultimate beneficial ownership
of their offshore pool participation units. Pursuant to the proposed
safe harbor, a non-U.S. CPO would be permitted to engage in the U.S.
commodity interest markets on behalf of an offshore pool for which it
cannot represent with absolute certainty that all of the pool
participants are offshore, as required by the 3.10 Exemption, provided
that such non-U.S. CPO meets the following conditions:
1. The offshore pool's offering materials and any underwriting or
distribution agreements include clear, written prohibitions on the
offshore pool's offering to participants located in the United States
and on U.S. ownership of the offshore pool's participation units;
2. The offshore pool's constitutional documents and offering
materials: (a) Are reasonably designed to preclude persons located in
the United States from participating therein, and (b) include
mechanisms reasonably designed to enable the non-U.S. CPO to exclude
any persons located in the United States who attempt to participate in
the offshore pool notwithstanding those prohibitions;
3. The non-U.S. CPO exclusively uses non-U.S. intermediaries for
the distribution of participations in the offshore pool;
4. The non-U.S. CPO uses reasonable investor due diligence methods
at the time of sale to preclude persons located in the United States
from participating in the offshore pool; and
5. The offshore pool's participation units are directed and
distributed to participants outside the United States, including by
means of listing and trading such units on secondary markets organized
and operated outside of the United States, and in which the non-U.S.
CPO has reasonably determined participation by persons located in the
United States is unlikely.
With respect to this proposed safe harbor, the Commission stated
its preliminary expectation that a non-U.S. intermediary would include
a non-U.S. branch or office of a U.S. entity, or a non-U.S. affiliate
of a U.S. entity, provided that the distribution takes place
exclusively outside of the United States.\121\
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\121\ 2020 Proposal, 85 FR at 35824.
---------------------------------------------------------------------------
The Commission also stated its preliminary belief that satisfying
the criteria of the proposed safe harbor would serve as an indication
that a non-U.S. CPO is exercising sufficient diligence with respect to
those circumstances within its control to minimize the possibility of
engaging with persons located in the United States concerning the
offered offshore pool.\122\ Moreover, the Commission stated its
preliminary belief that, if a non-U.S. CPO meets the five factors in
the proposed safe harbor, the likely absence of U.S. participants is
sufficiently ensured so as to allow reliance on the 3.10
Exemption.\123\ As with any of the Commission's other registration
exemptions available to CPOs generally, the Commission expressed in the
2020 Proposal its expectation that non-U.S. CPOs claiming the 3.10
Exemption would maintain adequate documentation to demonstrate
compliance with the terms of the safe harbor.\124\
---------------------------------------------------------------------------
\122\ Id.
\123\ Id.
\124\ Id.
---------------------------------------------------------------------------
The Commission received only one comment regarding the proposed
safe harbor. The commenter supported it, saying that ``[t]he proposed
safe harbor provides adequate provisions that will simplify compliance
with no loss of regulatory amenity.'' \125\
---------------------------------------------------------------------------
\125\ Barnard, at 2.
---------------------------------------------------------------------------
Accordingly, upon consideration of the comments, and consistent
with the rationale expressed in the 2020 Proposal, the Commission is
adopting the safe harbor as proposed. The Commission believes, as it
did in the 2020 Proposal, that this amendment is an appropriate
exercise of the Commission's exemptive authority under CEA section
4(c). The persons involved in the transactions subject to the exemptive
relief provided herein are ``appropriate persons,'' as discussed in the
2020 Proposal, because the term ``appropriate person'' as used in CEA
section 4(c) includes ``a commodity pool formed or operated by a person
subject to regulation under the Act.'' \126\ The Commission has
previously interpreted the clause ``subject to regulation under the
Act'' as including persons who are exempt from registration or excluded
from the definition of a registration category.\127\ This safe harbor
may promote responsible economic or financial innovation and fair
competition in the U.S. commodity interest markets generally, thereby
increasing their vibrancy and liquidity.\128\ The safe harbor adopted
herein permits a non-U.S. CPO of an offshore pool, by taking defined
steps designed to mitigate the risk of U.S. participation in the
offshore pool, to continue to qualify for the 3.10 Exemption, and thus,
avoid being regulated both by its regulatory authority in its home
jurisdiction and by the Commission. This effectively places the non-
U.S. CPO on an equal footing with those domestic CPOs solely regulated
by the Commission because each is generally subject to a single,
appropriate regulatory regime with respect to the operation of its
commodity pools. Additionally, the presence and activity of additional
offshore pools with trading strategies developed outside the United
States creates a diversity of viewpoint in the U.S. commodity interest
markets, which could encourage innovation and competition by domestic
CPOs as well.
---------------------------------------------------------------------------
\126\ 7 U.S.C. 6(c)(3)(E).
\127\ 77 FR at 30655 (finding, in the context of the eligible
contract participant definition, that construing the phrase ``formed
and operated by a person subject to regulation under the [CEA]'' to
refer to a person excluded from the CPO definition, registered as a
CPO or properly exempt from CPO registration appropriately reflects
Congressional intent).
\128\ 7 U.S.C. 6(c).
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[[Page 78727]]
Moreover, providing a safe harbor enabling non-U.S. CPOs to utilize
the 3.10 Exemption, subject to appropriate conditions minimizing
possible U.S. participants in the covered offshore pools, may result in
more non-U.S. CPOs and their offshore pools choosing to trade in the
U.S. commodity interest markets, which adds liquidity to those markets
and thereby promotes more efficient price discovery therein.
Importantly, the adoption of the safe harbor will not have a material
adverse effect on the ability of the Commission to discharge its
regulatory duties under the Act. Pursuant to CEA section 4(d), the
Commission expressly retains the statutory authority to conduct
investigations in order to determine compliance with the requirements
or conditions of such exemption, or to take enforcement action for any
violation of any provision of the CEA or any rule, regulation, or order
thereunder caused by the failure to comply with or satisfy such
conditions or requirements, notwithstanding this amendment.\129\
Finally, as noted above, the Commission retains the authority to take
enforcement action against any non-U.S. CPO claiming the 3.10 Exemption
based on their activities within the U.S. commodity interest markets.
Nothing in the Final Rule, including the adoption of this safe harbor,
negatively affects or restricts the Commission's statutory and
regulatory authority applicable to the commodity pool and intermediary
activities of a non-U.S. CPO involving persons located in the United
States. Therefore, the Commission concludes that the safe harbor, as
adopted herein, is an appropriate exercise of its authority pursuant to
section 4(c) of the Act.\130\
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\129\ 7 U.S.C. 6(d).
\130\ See infra new Commission regulation 3.10(c)(5)(iii).
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F. Exception for Initial Capital Contributions by U.S. Affiliates of a
Non-U.S. CPO to Its Offshore Pools
The 2020 Proposal also proposed an Affiliate Contribution
Exception, providing that initial capital contributed by a non-U.S.
CPO's U.S. controlling affiliate to the non-U.S. CPO's offshore
commodity pool would not affect the eligibility of the non-U.S. CPO for
the 3.10 Exemption with respect to that offshore pool.\131\ To that
end, despite its initial capital contribution(s), the U.S. controlling
affiliate would not be considered a ``participant'' for purposes of
determining whether all of the offshore pool's participants are located
outside of the United States, as required by the 3.10 Exemption.\132\
The Commission noted that the term ``control'' in this proposed
provision: (1) Was intended to provide a meaningful degree of
protection and transparency with respect to the controlling affiliate's
contribution of initial capital to the non-U.S. CPO's offshore
commodity pool; and (2) would be defined, consistent with part 49 of
its regulations, as the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
person, whether through the ownership of voting shares, by contract, or
otherwise.\133\ As discussed in more detail below, the Commission
proposed multiple conditions and limitations to the Affiliate
Contribution Exception: (1) The U.S. affiliate must ``control,'' as
defined in Commission regulation 49.2(a)(4), the non-U.S. CPO of the
offshore pool; (2) only contributions considered to be ``initial
capital contributions,'' i.e., those made at or near the inception of
an offshore commodity pool, are covered by the exception; (3) interests
in the U.S. affiliate are not being marketed as an investment or asset
that provides exposure to the U.S. commodity interest markets; and (4)
the U.S. affiliate must not be subject to a statutory disqualification,
ongoing registration suspension or bar, prohibition on acting as a
principal, or trading ban with respect to the U.S. commodity interest
markets.\134\
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\131\ 2020 Proposal, 85 FR at 35825-35826.
\132\ Id. at 35825.
\133\ Id. (explaining that this definition of ``control'' stems
from Commission regulation 49.2(a)(4) and was recently incorporated
into the Commission's approach in the cross-border regulation of
SDs); Id. at 35832 (proposing Commission regulation
3.10(c)(3)(iii)).
\134\ 2020 Proposal, 85 FR at 35825, 35831-35832.
---------------------------------------------------------------------------
The Commission received two comment letters addressing and
discussing the Affiliate Contribution Exception in the 2020 Proposal.
Both commenters generally supported the Commission's proposed Affiliate
Contribution Exception. Vanguard strongly supported this aspect of the
2020 Proposal, but stated its belief that ``two changes would enhance
the Proposal, consistent with the Commission's mandate to protect U.S.
commodity pool participants.'' \135\ The Industry Groups also strongly
supported the proposed Affiliate Contribution Exception. This approach,
the Industry Groups explained, as reflected in the Commission's own
staff relief letters and certain regulatory provisions, ``recognizes
that these [affiliate] capital contributions are not `investments' made
for the purpose of seeking returns from a pooled vehicle,'' and that
prior Commission staff letters have previously recognized that capital
contributions to a pool by the CPO's U.S. affiliate or the CPO's U.S.
principals do not constitute ``participation'' in the pool that would
otherwise require the protections of the Commission's CPO regulatory
program in 17 CFR part 4.\136\
---------------------------------------------------------------------------
\135\ Vanguard, at 2. The two changes urged by Vanguard are
discussed in more detail below.
\136\ Industry Group Letter, at 5.
---------------------------------------------------------------------------
Specifically, the Industry Groups noted that the proposed approach
recognizes that affiliate contributions ``reflect `commercial' business
decisions'' to further the CPO's business goals and support the CPO's
innovation and investment opportunities.\137\ Both comment letters also
recommended that, in finalizing the 2020 Proposal, the Commission adopt
certain modifications that would generally expand the proposed
availability of the Affiliate Contribution Exception.\138\ The
Commission will now explain the proposed conditions, responsive
comments, and finally, the approach it is taking in the Final Rule,
including the Commission's analysis pursuant to CEA section 4(c).
---------------------------------------------------------------------------
\137\ Industry Group Letter, at 5.
\138\ Industry Group Letter, at 2-3; Vanguard, at 2.
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1. U.S. ``Controlling'' Affiliates
In the 2020 Proposal, the Commission proposed to permit U.S.
controlling affiliates to contribute initial capital to offshore pools
operated by their affiliated non-U.S. CPOs, because it preliminarily
believed that the control typically exercised by a U.S. controlling
affiliate over its non-U.S. CPO affiliate should provide a meaningful
degree of protection and transparency with respect to the U.S.
controlling affiliate's contribution of initial capital to a non-U.S.
CPO's offshore commodity pool.\139\ For purposes of determining what
constitutes a ``controlling affiliate,'' as that term was used in the
2020 Proposal,\140\ the Commission used the definition of ``affiliate''
set forth in Commission regulation 4.7(a)(1)(i), which defines an
``affiliate'' as a person that directly or indirectly through one or
more persons, controls, is controlled by, or is under common control
with the specified person,\141\ and the definition of ``control'' as
set forth in Commission regulation 49.2(a)(4), which defines
``control'' as the possession, direct or indirect, of the power to
direct or cause the direction of the management and
[[Page 78728]]
policies of a person, whether through the ownership of voting
securities, by contract, or otherwise.\142\
---------------------------------------------------------------------------
\139\ 2020 Proposal, 85 FR at 35825.
\140\ The proposed Affiliate Contribution Exception referred to
the qualifying contributing affiliate as ``the control affiliate.''
See, e.g., 2020 Proposal, 85 FR at 35832.
\141\ 17 CFR 4.7(a)(1)(i).
\142\ 17 CFR 49.2(a)(4).
---------------------------------------------------------------------------
The Commission further noted that the majority of a registered
CPO's compliance obligations focus on customer protection through a
variety of disclosures regarding a person's participation in a pool,
which information a controlling affiliate would likely already be in a
position to obtain, independent of the Commission's regulations.\143\
The Commission preliminarily believed that a controlling person would
have the corporate or other legal authority to require the controlled
non-U.S. CPO to provide information equivalent to that required by the
Commission, such as detailed information about the non-U.S. CPO's
finances, management, and operations, and more relevant to the proposed
amendment, access to investment and performance information for the
offshore pool.\144\ Based on that understanding, the Commission
preliminarily concluded that, due to the fundamentally different
features of the relationship between a controlling affiliate and a non-
U.S. CPO, as compared with that between an outside investor and that
CPO, initial capital contributions by a U.S. controlling affiliate to
an offshore pool operated by an affiliated non-U.S. CPO do not raise
the same customer protection concerns as investments in those pools by
unaffiliated persons located in the United States.\145\
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\143\ 2020 Proposal, 85 FR at 35825, citing 17 CFR 4.22(c)(8)
(providing that a registered CPO need not distribute an annual
report to pools operated by persons controlling, controlled by, or
under common control with the CPO, provided that information
regarding the underlying pool is contained in the investor pool's
annual financial statement).
\144\ 2020 Proposal, 85 FR at 35825.
\145\ Id.
---------------------------------------------------------------------------
As noted above, both responsive comments supported the general
concept of the proposed Affiliate Contribution Exception. Although the
commenters agreed that employing the definition of ``affiliate'' from
Commission regulation 4.7(a)(1)(i) for this purpose is appropriate,
they both opposed the additional proposed condition of ``control,'' as
defined in Commission regulation 49.2(a)(4).\146\ Vanguard recommended
that the Commission not require that the U.S. affiliate contributing
capital to an offshore pool managed by a non-U.S. CPO ``be a
controlling affiliate of the non-U.S. CPO or be regulated in the United
States in order to qualify for'' the Affiliate Contribution
Exception.\147\ Likewise, the Industry Groups specifically recommended
that the Affiliate Contribution Exception be applicable to offshore
pool contributions by all affiliates, as defined in Commission
regulation 4.7(a)(1)(i), rather than just controlling affiliates, and
further stated their belief that limiting the exception to
contributions from controlling affiliates serves no regulatory need for
the Commission.\148\
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\146\ Vanguard, at 2; Industry Group Letter, at 5.
\147\ Vanguard, at 2 (citing other 17 CFR part 4 regulations as
provisions that ``acknowledge that a CPO's affiliate that
contributes capital to offshore pools does not need to receive the
information that is otherwise provided by a CPO to other investors
for their protection'').
\148\ Industry Group Letter, at 5-6 (stating that, ``[a]s
proposed, the [Affiliate Contribution Exception] would be available
only to contributions by those entities in an organizational
structure that are upstream of the CPO, and would exclude
contributions from all other affiliates'').
---------------------------------------------------------------------------
Additionally, the Industry Groups stated that the Commission's
motivation in requiring such control, that the U.S. controlling
affiliate would therefore have access to any and all information on the
non-U.S. CPO and the offshore pool otherwise required for participants
by virtue of 17 CFR part 4, was misplaced because, they argued, capital
contributions to a pool by affiliates of its CPO ``reflect commercial
business decisions intended for the purpose of supporting the
organization's business operations.'' \149\ The Industry Groups
emphasized, moreover, that limiting the Affiliate Contribution
Exception to controlling affiliates is ``neither necessary nor
appropriate to ensure that global organizations can obtain the
information they need for commercial decision-making.'' \150\ They
stated that requiring control in the Affiliate Contribution Exception
``would in no way further the protection of U.S. investors,'' because
affiliate contributions to an offshore pool are ``not properly viewed
as participant investments requiring Part 4 protection[s].'' \151\ The
Industry Groups also argued that the proposed condition would ``prevent
many global organizations from being able to rely on the exemption in
circumstances that do not present any of the concerns'' raised in the
2020 Proposal.\152\ Finally, the Industry Groups stated that ``there is
no basis for requiring the entity directly contributing capital to
control the [non-U.S.] CPO,'' as long as all of the entities involved
remain, ``under [the] common control of an entity responsible for the
success of the enterprise.'' \153\
---------------------------------------------------------------------------
\149\ Id. at 6.
\150\ Id. (noting further that this proposed condition does not
``accurately reflect the realities of enterprise decision-making and
information flow'').
\151\ Industry Group Letter, at 8.
\152\ Id. at 7-8.
\153\ Id. at 6.
---------------------------------------------------------------------------
After further consideration of the proposed Affiliate Contribution
Exception and the comments received, the Commission does not believe
that requiring the U.S. affiliate to ``control'' the non-U.S. CPO is
necessary to address the Commission's stated policy concerns. The
definition of ``affiliate'' in Commission regulation 4.7(a)(1)(i)
already incorporates the idea of ``control,'' \154\ which is
substantively identical to that in Commission regulation
49.2(a)(4).\155\ Therefore, as noted by commenters, control is already
required between or among related entities for those entities to be
considered ``affiliates'' under Commission regulation 4.7(a)(1)(i), as
``control'' is inherent to that ``affiliate'' definition.
---------------------------------------------------------------------------
\154\ 17 CFR 4.7(a)(1)(i).
\155\ When the Commission proposed the definition of
``affiliate'' in Commission regulation 4.7, which it later adopted
without modification, it stated that the definition was identical to
that in the Securities and Exchange Commission's (SEC's) Regulation
D. Exemption for Commodity Pool Operators With Respect to Offerings
to Qualified Eligible Participants; Exemption for Commodity Trading
Advisors With Respect to Advising Qualified Eligible Clients, 65 FR
11253, 11256 (Mar. 2, 2000) (stating that the proposed definition is
based upon the ``affiliate'' definition in Rule 501 of Regulation D
under the Securities Act of 1933.); 17 CFR 230.501(b). The
definition of ``affiliate'' in Regulation D is identical to that in
SEC Rule 405 of Regulation C. Revision of Certain Exemptions From
Registration for Transactions Involving Limited Offers or Sales, 47
FR 11251, 11255 (Mar. 16, 1982); 17 CFR 230.405. Rule 405 of
Regulation C, in turn, defines ``control'' as used in the definition
of ``affiliate'' in both Regulation D and--pertinent to this Final
Rule--Commission regulation 4.7(a)(1)(i), as the possession, direct
or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership
of voting securities, by contract, or otherwise. 17 CFR 203.405,
control.
---------------------------------------------------------------------------
Because control is a fundamental element of the relationship
between a U.S. affiliate and non-U.S. CPO, and therefore is
incorporated into the proposed Affiliate Contribution Exception due to
its reference to Commission regulation 4.7(a)(1)(i), the Commission
believes that including an additional reference to ``control'' from
Commission regulation 49.2(a)(4) is redundant and unnecessary to ensure
there is ``a meaningful degree of protection and transparency,'' or
adequate information and disclosure flowing between those entities.
Upon consideration of the comments and the Commission's concerns
delineated in the 2020 Proposal about sufficient information regarding
an offshore pool investment being available to a contributing U.S.
affiliate, the
[[Page 78729]]
Commission believes that such U.S. affiliate does not have to control
the non-U.S. CPO, as contemplated by the 2020 Proposal, for the
Commission to be reasonably confident that the U.S. affiliate has a
meaningful degree of visibility into the operations of the non-U.S. CPO
and the offshore pool, absent the protections provided by part 4 of the
Commission's regulations. Therefore, the Commission concludes in the
Final Rule that it is not necessary for the U.S. affiliate to be a
controlling affiliate, provided that ``control,'' as articulated by the
affiliate definition in Commission regulation 4.7(a)(1)(i), is
present.\156\
---------------------------------------------------------------------------
\156\ 2020 Proposal, 85 FR at 35825. The Commission notes that,
in the 2020 Proposal, this discussion focused on the relationship
between a ``U.S. controlling affiliate'' and the non-U.S. CPO
because the Commission believed that, for purposes of the proposed
Affiliate Contribution Exception, the control that a U.S.
controlling affiliate is able to exercise with respect to the
operations of the non-U.S. CPO and its offshore pools provides
adequate assurances that the U.S. controlling affiliate is able to
obtain and act upon the information relevant to its participation in
the non-U.S. CPO's offshore pool. Id. at 35825-35826.
---------------------------------------------------------------------------
In arriving at this conclusion, the Commission reflected upon the
nature and characteristics of the types of relationships generally
included within the definition of ``affiliate'' under Commission
regulation 4.7(a)(1)(i), as incorporated in both the 2020 Proposal and
the Final Rule. As explained above, entities meet the definition of
``affiliate'' in Commission regulation 4.7(a)(1)(i) primarily by virtue
of the control in their relationships to one another; this obviates the
need for the Commission, through its regulations or otherwise, to
mandate the provision of information to the contributing affiliate.
For instance, if the U.S. affiliate controls the non-U.S. CPO, as
discussed in the 2020 Proposal, the U.S. affiliate would have the
direct authority to obtain any information it needs related to its
capital contribution to the offshore pool operated by its controlled
non-U.S. CPO. Alternatively, if a U.S. affiliate is controlled by the
non-U.S. CPO of an offshore pool, as a corporate subsidiary, in the
Commission's experience, the U.S. affiliate typically has increased
access to information about the operations of its parent, as compared
to a third-party participant, because the controlled U.S. affiliate may
obtain such information as needed, and otherwise has the ability to
access internal information regarding its parent's operations,
including information regarding an offshore pool. Moreover, where the
U.S. affiliate and the non-U.S. CPO are under common control of a third
entity, that third-party controlling affiliate, due to its interest in
the continued viability of the U.S. affiliate, the non-U.S. CPO, and
the enterprise as a whole, would, in the Commission's experience,
ensure that its controlled U.S. affiliate was in possession of any and
all relevant information regarding the offshore pool necessary to
assess the propriety of the U.S. affiliate contributing initial capital
to that vehicle. In each instance, the U.S. affiliate, regardless of
whether it is controlling, controlled by, or under common control with
a non-U.S. CPO of an offshore pool, would have a mechanism to obtain
information regarding the operations of that offshore pool, independent
of the Commission's regulatory requirements under 17 CFR part 4. This
conclusion is also consistent with the Commission's determination to
exempt certain affiliated pool participants from the disclosure and
reporting requirements in part 4 of its regulations, based on similar
analyses of the nature of those contributions and of the relationships
between such affiliated participants and the CPO.\157\
---------------------------------------------------------------------------
\157\ See, e.g., 17 CFR 4.21(a)(2) (stating that, for purposes
of distributing disclosure documents to prospective participants, a
CPO is not required to distribute to a commodity pool operated by a
pool operator that is the same as, or that controls, is controlled
by, or is under common control with, the pool operator of the
offered pool); 17 CFR 4.22(c)(8) (providing that, for purposes of
the Annual Report distribution requirement, the term ``participant''
does not include a commodity pool operated by a pool operator that
is the same as, or that controls, is controlled by, or is under
common control with the pool operator of a pool in which the
commodity pool is invested).
---------------------------------------------------------------------------
Based on the foregoing, the Commission concludes that the general
nature of such affiliate relationships assuages its stated concerns in
the 2020 Proposal in the context of the Affiliate Contribution
Exception. The Commission believes that where the U.S. affiliate
contributing initial capital to the offshore pool controls, is
controlled by, or is under common control with, the offshore pool's
non-U.S. CPO, consistent with the ``affiliate'' definition in
Commission regulation 4.7(a)(1)(i), this provides such U.S. affiliate
with sufficient access to the information it needs about the non-U.S.
CPO or the offshore pool to make properly informed decisions regarding
any initial capital contributions to that offshore pool. Thus, the
Commission concludes that such U.S. affiliate of a non-U.S. CPO
contributing to its offshore pool should be eligible for the Affiliate
Contribution Exception, provided the other conditions are met. The
Final Rule therefore adopts the Affiliate Contribution Exception,
without additionally requiring that the U.S. affiliate control the
affiliated non-U.S. CPO, and without reference to Commission regulation
49.2(a)(4).\158\
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\158\ See infra new Commission regulation 3.10(c)(5)(ii).
---------------------------------------------------------------------------
2. The Timing of a U.S. Affiliate's Capital Contributions to an
Offshore Pool
In the 2020 Proposal, the Commission also stated its preliminary
intent to limit the Affiliate Contribution Exception to capital
contributed by a U.S. controlling affiliate at or near the inception of
a non-U.S. CPO's offshore pool.\159\ The Commission explained that such
initial capital contributions generally result from commercial
decisions by the U.S. controlling affiliate, typically in conjunction
and coordination with the non-U.S. CPO, to support the offshore pool
until such time as it has an established performance history for
solicitation purposes, notwithstanding that the affiliate's capital may
remain invested for the life of the offshore pool.\160\ Limiting the
Affiliate Contribution Exception to initial capital contributions, the
Commission preliminarily believed, is appropriate to ensure that the
capital is being contributed in an effort to support the operations of
the offshore pool at a time when its viability is being tested, rather
than as a mechanism for the U.S. controlling affiliate to generate
returns for its own investors.\161\
---------------------------------------------------------------------------
\159\ 2020 Proposal, 85 FR at 35826.
\160\ Id.
\161\ Id.
---------------------------------------------------------------------------
The Commission also discussed in the 2020 Proposal whether such
contributions should be time-limited in any regard. The Commission
acknowledged a staff letter issued by the Division of Swap Dealer and
Intermediary Oversight (DSIO), wherein DSIO staff determined that a
limitation on how long U.S. contributions could remain invested in an
offshore pool without the non-U.S. CPO registering as such was
appropriate, because some of the U.S. derived capital came from U.S.
natural persons employed by the non-U.S. CPO's affiliated U.S.
investment advisers.\162\ In the 2020 Proposal, the Commission
preliminarily concluded that imposing a similar time limit on the
proposed Affiliate Contribution Exception was not necessary, where the
initial capital contributions are derived not from natural person
employees, but rather from the corporate funds of the contributing
affiliate.\163\
---------------------------------------------------------------------------
\162\ Id. at 35825, citing CFTC Staff Letter 15-46 (May 8,
2015), available at https://www.cftc.gov/csl/15-46/download.
\163\ 2020 Proposal, 85 FR at 35825.
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[[Page 78730]]
In response, the Industry Groups commented that the Commission's
rationale supporting the Affiliate Contribution Exception ``applies
equally to affiliate support provided at other points in a pool's life
cycle, and that limiting the [exception] to `initial' contributions
would thus reduce the effectiveness of the exemption without serving
any U.S. investor protection purpose.'' \164\ Vanguard supported the
Commission's belief that any contribution of capital by a U.S.
affiliate should be done to support the operations of an offshore pool
at a time when its viability is being tested.\165\ However, Vanguard
noted that limiting contributions to ``at or near a pool's inception''
would have the unintended consequence of ``limiting [an] affiliate's
ability to support its non-U.S. CPO,'' and accordingly, recommended
that the Commission not limit the Affiliate Contribution Exception to
initial capital contributions.\166\
---------------------------------------------------------------------------
\164\ Industry Group Letter, at 8.
\165\ Vanguard, at 3.
\166\ Id.
---------------------------------------------------------------------------
Additionally, the Industry Groups stated that there are ``many
situations in the life of an offshore pool, after the initial startup
period, where it is beneficial, and may be essential, to the pool's
viability and to its participants for the CPO or its affiliates to
provide additional support for the pool.'' \167\ The Industry Groups
noted that there are matters beyond a CPO's control ``such as
shareholder redemption activity and market disruptions'' that make it
important for the offshore pool to have continued access to affiliate
capital support.\168\ Alternatively, the Industry Groups stated that
they would not be opposed to the Commission including in the Affiliate
Contribution Exception a specific ``purpose'' provision, to ensure it
is used ``properly'' or in good faith; their suggested language would
require that, `` `contributions of the affiliate will be for the
purpose of establishing, or providing ongoing support to, the
[offshore] pool to attract or retain non-U.S. investors and will not be
used as a mechanism for the U.S. affiliate to generate returns for its
own investors.' '' \169\
---------------------------------------------------------------------------
\167\ Industry Group Letter, at 8-9 (describing regulatory and
business reasons, such as limits on owner concentration, investment
diversification, internal guidelines, ensuring qualified purchaser
status, or seeding a new share class for an existing offshore pool).
\168\ Industry Group Letter, at 9.
\169\ Id.
---------------------------------------------------------------------------
After considering the comments received, the Commission is limiting
the Affiliate Contribution Exception to initial capital contributions
to an offshore pool by U.S. affiliates of the pool's non-U.S. CPO, as
proposed. Specifically, commenters confirmed the Commission's
preliminary belief that affiliates commonly support offshore pools by
making capital contributions at or near the pool's inception to
facilitate the establishment of performance history for solicitation
purposes, although the affiliate's capital may remain invested as long
as the offshore pool operates. The Commission was clear in the 2020
Proposal that it was comfortable excepting from regulation, via the
proposed Affiliate Contribution Exception, those capital contributions
from a non-U.S. CPO's U.S. affiliate to an offshore pool that are
contributed ``at or near a pool's inception'' for the specific purposes
of generating performance history resulting from innovative or new
trading programs.\170\ The Commission stated that, consistent with its
authority under CEA section 4(c), the Commission intended the proposed
Affiliate Contribution Exception to allow such non-U.S. CPOs to test
novel trading programs or otherwise engage in proof of concept testing
in the collective investment industry that might otherwise not be
possible due to a lack of a performance history for the offshore
pool.\171\
---------------------------------------------------------------------------
\170\ 2020 Proposal, 85 FR at 35826.
\171\ Id.
---------------------------------------------------------------------------
Conversely, commenters have recommended expanding the time frame
for affiliate capital contributions to permit them at any point during
an offshore pool's existence, such that affiliate contributions may be
made for a variety of reasons, other than testing a novel trading
strategy or establishing a performance history for solicitation
purposes.\172\ Such circumstances would permit a U.S. affiliate to
provide ongoing support to an offshore pool, either to facilitate the
offshore pool's ongoing operations in times of distress, or to attract
and retain participants later in the offshore pool's lifecycle, well
beyond its inception. The Commission has concerns that expanding the
time frame for the Affiliate Contribution Exception in this manner
could result in a U.S. affiliate being used by its affiliated non-U.S.
CPO to financially support an otherwise poorly performing or even
failing offshore pool, which could, in turn, adversely affect the
financial condition of (and potentially result in the failure of) the
U.S. affiliate, and ultimately, cause harm to the U.S. financial system
and investors.
---------------------------------------------------------------------------
\172\ See, e.g., Industry Group Letter, at 8-9.
---------------------------------------------------------------------------
Moreover, the Commission believes that it would be difficult to
craft a regulatory provision that appropriately expands the time frame
and/or circumstances under which U.S. affiliates would be permitted to
make capital contributions to an offshore pool, without rendering the
Affiliate Contribution Exception overbroad or impermissibly vague. As
noted above, commenters suggested rule text requiring that, ``
`contributions of the affiliate will be for the purpose of
establishing, or providing ongoing support to, the [offshore] pool to
attract or retain non-U.S. investors and will not be used as a
mechanism for the U.S. affiliate to generate returns for its own
investors.' '' \173\ This suggested language, in the Commission's
opinion, provides such minimal limitations on the circumstances under
which a U.S. affiliate could contribute capital to an offshore pool
(with the only prohibition being the outright evasive generation of
profits for investors in the U.S. affiliate), as to render the
limitation meaningless in practice. As noted above, the Commission
intended the proposed Affiliate Contribution Exception to be available
for specific purposes related to the start-up or inception of an
offshore pool, and to generating performance history for its new
trading program or strategy. The Commission finds that broadening the
exception's purpose as suggested by commenters could result in undue
risk from offshore pools flowing back onto U.S. shores, and thus, to
U.S. investors. Therefore, the Commission declines to broaden the time
frame, and is adopting the Affiliate Contribution Exception as
proposed, with the limitation to initial capital contributions by U.S.
affiliates.\174\
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\173\ Id.
\174\ Any non-U.S. CPO contemplating accepting additional
capital contributions for an offshore pool from one or more of its
U.S. affiliates outside the period of initial capitalization would
have to separately qualify for, rely upon, or claim other relief
from registration as a CPO with the Commission. Any such investment
would not be eligible for this Affiliate Contribution Exception.
---------------------------------------------------------------------------
The Industry Groups also suggested that the Commission consider
clarifying that, for purposes of the 3.10 Exemption, including the
Affiliate Contribution Exception, when the Commission or one of its
regulations refers to a ``pool,'' it should generally be construed as
also referring to series, sub-funds, and/or segregated portfolios of
business organizations that provide statutory ring-fencing of assets
and liabilities for each series, sub-fund, or segregated
portfolio.\175\ The Commission notes that the 2020 Proposal did not
[[Page 78731]]
address the treatment of series, sub-funds, and/or segregated
portfolios of structures that provide limited liability amongst such
subdivisions. Furthermore, the Commission notes that, to date, it has
not revised the definition of the term ``pool'' in Commission
regulation 4.10(d) to recognize such subdivisions as individual pools,
nor did the Commission propose such amendment in the 2020
Proposal.\176\ Finally, given that the term ``pool'' is used throughout
the Commission's regulations, the Commission believes that it would be
more appropriate to address the issue of how a pool may be organized
more globally within its regulations, which it is unable to accomplish
through this Final Rule.\177\ Therefore, the Commission is not adopting
a definition of ``pool'' for purposes of the 3.10 Exemption.
---------------------------------------------------------------------------
\175\ Industry Group Letter, at 11, n. 25 (noting that, despite
the different terminology between domestic series trusts and
``segregated portfolios,'' the latter is an analogous corporate
structure frequently used in jurisdictions outside of the United
States).
\176\ 17 CFR 4.10(d)(1) (defining ``pool'' as any investment
trust, syndicate or similar form of enterprise operated for the
purpose of trading commodity interests).
\177\ See Administrative Procedure Act, Public Law 404, 60 Stat.
237, ch. 324, sections 1-12 (1946) (APA); codified by Public Law 89-
554 (1966) at 5 U.S.C. 551-559, 701-706, 1305, 3105, 3344, 5372,
7521 (2011). Specifically, see APA, 5 U.S.C. 553(b).
---------------------------------------------------------------------------
3. Additional Anti-Evasion Conditions: The Marketing Prohibition and
Prohibiting ``Bad Actor'' U.S. Affiliates
The Commission acknowledged in the 2020 Proposal that the proposed
Affiliate Contribution Exception could result in evasion of the
Commission's regulations generally with respect to offshore pools.\178\
As an example, the Commission described a situation where a U.S.
controlling affiliate could invest in its affiliated non-U.S. CPO's
offshore commodity pool, and then solicit persons located in the United
States for investment in the U.S. controlling affiliate, in an effort
to provide such U.S. investors with indirect exposure to the offshore
pool.\179\ The Commission then stated its preliminary belief that,
under those circumstances, the Commission would consider such practices
as constituting evasion of the Commission's CPO regulations, and would
thus render the non-U.S. CPO ineligible for the 3.10 Exemption.\180\
The Commission therefore proposed an ``anti-evasion'' requirement in
the Affiliate Contribution Exception that, interests in the U.S.
controlling affiliate are not marketed as providing access to trading
in commodity interest markets in the United States, its territories or
possessions.\181\
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\178\ 2020 Proposal, 85 FR at 35826.
\179\ Id.
\180\ Id.
\181\ Id. at 35832 (proposing Commission regulation
3.10(c)(3)(iii)(B)). If interests in a U.S. entity including an
affiliate of a CPO are marketed to U.S. persons as providing access
to trading in commodity interest markets outside the United States,
its territories or possessions, then that entity may be required to
register with the Commission pursuant to Commission regulation
30.4(c). 17 CFR 30.4(c).
---------------------------------------------------------------------------
In the 2020 Proposal, the Commission further stated its preliminary
belief that U.S. controlling affiliates who are barred from
participating in the U.S. commodity interest markets should not be
permitted to utilize the Affiliate Contribution Exception as a method
to gain indirect access to those markets via an affiliated non-U.S.
CPO's offshore pool, which would undermine the efficacy of such a
bar.\182\ Therefore, the Commission also proposed to limit the
Affiliate Control Exception to U.S. controlling affiliates, which
themselves and their principals are not subject to a statutory
disqualification, ongoing registration suspension or bar, prohibition
on acting as a principal, or trading ban with respect to participating
in commodity interest markets in the United States, its territories or
possessions.\183\
---------------------------------------------------------------------------
\182\ 2020 Proposal, 85 FR at 35826.
\183\ Id. at 35832 (proposing Commission regulation
3.10(c)(3)(iii)(A)).
---------------------------------------------------------------------------
Regarding the Commission's concerns about the Affiliate
Contribution Exception being used to evade other of the Commission's
part 4 regulatory protections, the Industry Groups concluded that the
``anti-evasion condition of the [2020] Proposal,'' prohibiting the
marketing of interests in the U.S. affiliate as providing access to
trading in U.S. commodity interest markets, addresses this concern and
``is well-tailored to achieve its purpose.'' \184\ The Industry Groups
did suggest, however, that the Commission could also ``specify in the
rule text, or in the final adopting release, that only affiliated
entities, and not natural person affiliates, are contemplated by the
[Affiliate Contribution Exception].'' \185\ The Commission agrees that
it would further its intention of limiting the Affiliate Contribution
Exception to juridical persons, rather than natural persons, as stated
in the 2020 Proposal, to specifically limit the availability of that
provision to entities, and not natural persons, in the regulatory text.
As discussed in the 2020 Proposal, the Commission declined to propose a
limit on the time in which capital contributions from U.S. affiliates
can remain in the offshore pool because it was envisioning such
contributions deriving from entity affiliates rather than natural
persons.\186\ For the reasons stated in the 2020 Proposal, the
Commission is therefore adopting, as proposed, but with the additional
limitation suggested by commenters, the ``anti-evasion'' requirement
designed to prohibit evasive conduct, in which U.S. participant capital
could be solicited for investment in the U.S. affiliate, providing
indirect exposure to the offshore pool.\187\
---------------------------------------------------------------------------
\184\ Industry Group Letter, at 7.
\185\ Id.
\186\ 2020 Proposal, 85 FR at 35825.
\187\ See infra new Commission regulation 3.10(c)(5)(ii)(C).
---------------------------------------------------------------------------
With respect to the proposed condition prohibiting those U.S.
controlling affiliates that are subject to a statutory
disqualification, ongoing registration suspension or bar, prohibition
on acting as a principal, or trading ban with respect to participating
in commodity interest markets in the United States from relying on the
Affiliate Contribution Exception, the Industry Groups stated that the
proposed condition goes far beyond its purpose as stated by the
Commission.\188\ The Industry Groups explained that the ``regulatory
purpose is to keep out affiliates that are barred from participating in
the U.S. commodity interest markets,'' but the proposed condition
``applies to the vague and far broader universe of persons that are
`subject to a statutory disqualification.' '' \189\ Consequently, the
Industry Groups recommended that the Commission remove any reference to
statutory disqualification in this provision, for the purpose of
eliminating confusion, and that the Commission focus this condition on
prohibiting ``entities that are in fact barred from participating in
the U.S. commodity interest markets,'' from utilizing the Affiliate
Contribution Exception.\190\
---------------------------------------------------------------------------
\188\ Industry Group Letter, at 10.
\189\ Id.
\190\ Id.
---------------------------------------------------------------------------
The Commission agrees that including statutory disqualifications in
this provision does not further its goal of mitigating the risk that
persons no longer permitted to participate in the U.S. commodity
interest markets directly use the Affiliate Contribution Exception to
access such markets through indirect means. The Commission notes that
the issue of statutory disqualifications is related to registration
with the Commission and generally concerns judgments regarding fitness
to intermediate transactions on behalf of third parties.\191\ Those
concerns are not present in the context
[[Page 78732]]
of the Affiliate Contribution Exception, where the Commission is more
focused on foreclosing a potential loophole that could permit persons
that are barred or prohibited from trading in the U.S. commodity
interest markets to do so indirectly via offshore pool investments.
Therefore, in response to commenters and to more clearly tailor this
provision to the rationale the Commission articulated in the 2020
Proposal, the Commission is adopting the Affiliate Contribution
Exception with the condition that the affiliate and its principals are
not barred or suspended from participating in commodity interest
markets in the United States, its territories or possessions.\192\
---------------------------------------------------------------------------
\191\ See 7 U.S.C. 12a(2) and 12a(3).
\192\ See infra new Commission regulation 3.10(c)(5)(ii)(B).
---------------------------------------------------------------------------
4. Analysis Under Section 4(c) of the Act
Consistent with its authority under section 4(c) of the Act, the
Commission concludes that providing the Affiliate Contribution
Exception, subject to the conditions included in the Final Rule as
detailed above, could result in increased economic or financial
innovation by non-U.S. CPOs and their offshore pools participating in
the U.S. commodity interest markets. The persons involved in the
transactions subject to the exemptive relief provided herein are
``appropriate persons,'' as discussed in the 2020 Proposal, because the
term ``appropriate person'' as used in CEA section 4(c) includes a
commodity pool formed or operated by a person subject to regulation
under the Act.\193\ The Commission has previously interpreted the
clause ``subject to regulation under the Act'' as including persons who
are exempt from registration or excluded from the definition of a
registration category.\194\ The Commission continues to believe that
enabling U.S. affiliates to provide initial capital to offshore pools
operated by affiliated non-U.S. CPOs could provide such non-U.S. CPOs
with the ability to test novel trading programs, or otherwise engage in
proof of concept testing with respect to innovations in the collective
investment industry that might otherwise not be possible, due to a lack
of a performance history for the offered pool.
---------------------------------------------------------------------------
\193\ 7 U.S.C. 6(c)(3)(E).
\194\ 77 FR at 30655 (finding, in the context of the eligible
contract participant definition, that construing the phrase ``formed
and operated by a person subject to regulation under the [CEA]'' to
refer to a person excluded from the CPO definition, registered as a
CPO or properly exempt from CPO registration appropriately reflects
Congressional intent).
---------------------------------------------------------------------------
Additionally, the adoption of the Affiliate Contribution Exception
will not have a material adverse effect on the ability of the
Commission to discharge its regulatory duties under the CEA. The U.S.
affiliates contributing initial capital to offshore pools operated by
their affiliated non-U.S. CPO will typically have access to the
information and disclosures necessary for such U.S. affiliate to
independently evaluate the propriety of its contribution to a specific
offshore pool, absent the protections typically provided by part 4 of
the Commission's regulations. Based on its analysis above, the
Commission concludes that the contributions subject to the Affiliate
Contribution Exception are distinguishable from offshore pool
contributions sourced from the general public in the United States that
otherwise make such offshore pool ineligible for the 3.10 Exemption.
Also, pursuant to CEA section 4(d), the Commission expressly retains
the statutory authority to conduct investigations in order to determine
compliance with the requirements or conditions of such exemption, or to
take enforcement action for any violation of any provision of the CEA
or any rule, regulation, or order thereunder caused by the failure to
comply with or satisfy such conditions or requirements, notwithstanding
this amendment.\195\ Further, the Commission retains the authority to
take enforcement action against any non-U.S. CPO claiming the 3.10
Exemption based on its activities within the U.S. commodity interest
markets, and nothing in the Final Rule, including the adoption of the
Affiliate Contribution Exception, negatively affects or restricts the
Commission's statutory and regulatory authority applicable to the
commodity pool and intermediary activities of a non-U.S. CPO involving
persons located in the United States. For the reasons stated in the
2020 Proposal and the analysis provided in this Final Rule, the
Commission concludes that it is appropriate to provide the Affiliate
Contribution Exception from the U.S. participant prohibition in the
3.10 Exemption, pursuant to section 4(c) of the Act.
---------------------------------------------------------------------------
\195\ 7 U.S.C. 6(d).
---------------------------------------------------------------------------
G. Additional Relief for Commodity Trading Advisors
The Industry Groups recommended that the Commission adopt relief
for non-U.S. CTAs, substantially similar to that proposed for non-U.S.
CPOs in the 2020 Proposal, because, they argued, ``[t]he regulatory
goals in the 2020 Release apply equally to CTAs.'' \196\ Specifically,
the Industry Groups requested that the Commission amend Commission
regulation 3.10(c) to ``permit non-U.S. CTAs to claim the relief under
Commission regulation 3.10(c) on an account-by-account basis . . . and
[to] simultaneously rely on registration or other exemptions or
exclusions for CTA activities on behalf of U.S. investors, in the same
manner as the proposed amendments provide for CPOs.'' \197\ They argued
that this amendment would also make it clear that a non-U.S. CTA
providing advice to an offshore pool operated pursuant to the 3.10
Exemption would be eligible for relief from registration with the
Commission.\198\ In support of their arguments, the Industry Groups
cited multiple instances of the Commission and its staff historically
permitting the ``stacking'' of statutory and regulatory exemptions with
registration for CTAs, and stated that ``the Commission's focus on
[commodity trading] advice to U.S. investors [is] well established in
the Commission's regulatory framework.'' \199\
---------------------------------------------------------------------------
\196\ Industry Group Letter, at 13.
\197\ Id.
\198\ Id.
\199\ Id. at 13-14.
---------------------------------------------------------------------------
Despite these comments, the Commission is not adopting the
suggested amendments to Commission regulation 3.10(c) regarding the
activities of non-U.S. CTAs. The 2020 Proposal, which dealt primarily
with amendments impacting the operations of CPOs, did not contemplate
or discuss any such comparable modifications to Commission regulation
3.10(c) with respect to the activities of non-U.S. CTAs on behalf of
foreign located persons.\200\ The 2020 Proposal also did not query
whether the amendments impacting non-U.S. CPOs and their offshore pools
should likewise be extended to include any of the activities of non-
U.S. CTAs; nor did it address or consider the regulatory impact,
positive or negative, such policy choices could have on the
Commission's regulatory program for CTAs. Under these circumstances,
the Commission does not believe that the public would have had
sufficient notice regarding the issue of adopting parallel provisions
for non-U.S. CTAs, such that the public could provide meaningful
comment as required by the Administrative Procedure Act.\201\
Therefore, the
[[Page 78733]]
Commission declines to amend revised Commission regulation 3.10(c)(4)
in a manner that would substantively alter or change the relief
currently provided by that regulation to qualifying non-U.S. CTAs.
---------------------------------------------------------------------------
\200\ The Commission is adopting as final herein other
amendments to Commission regulation 3.10(c) applicable to non-U.S.
CTAs consistent with the 2016 Proposal. The Commission notes that
those amendments broadly applied to non-U.S. IBs, non-U.S. CPOs, and
non-U.S. CTAs, and did not impact or alter the specific conditions
of eligibility for non-U.S. CTAs relying on the exemptive relief in
that regulation.
\201\ APA, 5 U.S.C. 553(b)-(c). The Commission notes that it
does not disagree with the Industry Groups' characterization of the
Commission's or its staff's past positions with respect to the
``stacking'' of statutory and/or regulatory exemptions from CTA
registration, or their combination with registration as such, being
permissible. The Commission is, however, declining to adopt in
revised Commission regulation 3.10(c)(4) relief for non-U.S. CTAs,
comparable to that adopted herein for non-U.S. CPOs, without a prior
published rulemaking proposal raising, addressing, and soliciting
public comment on that specific policy question.
---------------------------------------------------------------------------
H. Reorganization of Commission Regulation 3.10(c)
As recognized by certain commenters, and as mentioned above,
adopting the Final Rule as proposed in both the 2020 Proposal and the
2016 Proposal requires modification of the rule text as presented in
each proposal. Thus, the Final Rule reorganizes that provision to
accommodate the adopted changes and to increase the regulation's
overall readability and clarity. Other than the changes specifically
explained in this adopting release, this reorganization is not intended
to make substantive changes to the regulatory obligations of any
affected market participant.
Commission regulation 3.10(c), as adopted in the Final Rule, is
reorganized. New paragraph 3.10(c)(1) now provides certain definitions
of terms that are used throughout the remainder of paragraph (c),
including: ``covered transaction,'' defined to mean a commodity
interest \202\ transaction executed bilaterally or made on or subject
to the rules of any DCM or registered SEF; ``foreign located person,''
defined to mean a person located outside the United States, its
territories, or possessions; and ``international financial
institution,'' the definition of which is discussed above in section
II.B.3. The remainder of paragraph (c) is organized so that its
enumerated sub-paragraphs refer to registration exemptions available to
each type of intermediary. Thus, new paragraph 3.10(c)(2) sets forth
exemptions applicable to market participants engaged in the activities
of an FCM; new paragraph 3.10(c)(3) sets forth exemptions applicable to
those persons engaged in the activities of an IB; new paragraph
3.10(c)(4) refers to an exemption for CTAs; and new paragraph
3.10(c)(5) provides an exemption for CPOs, and contains the conditions
thereto and related provisions discussed above. Finally, new paragraph
3.10(c)(6) contains the rule text previously presented in Commission
regulation 3.10(c)(5).
---------------------------------------------------------------------------
\202\ ``Commodity interest'' is defined in Commission regulation
1.3. 17 CFR 1.3, commodity interest.
---------------------------------------------------------------------------
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires Federal agencies,
when promulgating regulations, to consider whether the rules they
propose will have a significant economic impact on a substantial number
of small entities. If the rules are determined to have a significant
economic impact, such agencies must provide a regulatory flexibility
analysis regarding such economic impact. 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.\203\
---------------------------------------------------------------------------
\203\ 5 U.S.C. 601, et seq.
---------------------------------------------------------------------------
The Final Rule adopted by the Commission today would affect FCMs,
IBs, CTAs, and CPOs. The Commission has established certain definitions
of ``small entities'' to be used by the Commission in evaluating the
impact of its rules on such entities in accordance with the
requirements of the RFA.\204\ The Commission has previously determined
that FCMs are not small entities for purposes of the RFA. Therefore,
the RFA does not apply to FCMs.\205\
---------------------------------------------------------------------------
\204\ See, e.g., Policy Statement and Establishment of
Definitions of ``Small Entities'' for Purposes of the Regulatory
Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982).
\205\ Id.
---------------------------------------------------------------------------
With respect to CPOs, the Commission previously has determined that
a CPO is a small entity for purposes of the RFA, if it meets the
criteria for an exemption from registration under Commission regulation
4.13(a)(2).\206\ With respect to small CPOs operating pursuant to
Commission regulation 4.13(a)(2), the Commission has concluded that,
should the amendments to the 3.10 Exemption be adopted as final,
certain of those small CPOs may choose to operate additional pools
outside the United States, which could provide additional opportunities
to develop their operations not currently available to them.\207\ The
Commission notes, however, that such small CPOs would remain subject to
the total limitations on aggregate gross capital contributions and pool
participants set forth in Commission regulation 4.13(a)(2) because that
exemption is based on the entirety of the CPO's pool operations.
Because investment vehicles operated under the 3.10 Exemption remain
commodity pools under the CEA, the Commission does not believe that the
Final Rule will result in a significant economic impact on a
substantial number of small CPOs. Further, the Commission notes that
the Final Rule would impose no new obligation, significant or
otherwise, on any affected small CPO. Accordingly, the Chairman, on
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)
that the Final Rule will not have a significant impact on a substantial
number of small entities with respect to CPOs.
---------------------------------------------------------------------------
\206\ Id. at 18619-20. Commission 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. 17 CFR 4.13(a)(2).
\207\ 2020 Proposal, 85 FR at 35827.
---------------------------------------------------------------------------
With respect to CTAs and IBs, the Commission has found it
appropriate to consider whether such registrants should be deemed small
entities for purposes of the RFA on a case-by-case basis, in the
context of the particular Commission regulation at issue.\208\ As
certain of these registrants may be small entities for purposes of the
RFA, the Commission considered whether these amendments would have a
significant economic impact on such registrants.\209\ By combining
amendments from the 2016 and 2020 Proposals, the Final Rule will
clarify in what circumstances certain foreign located persons acting in
the capacity of an IB or CTA are exempt from registration under
Commission regulation 3.10(c), in connection with commodity interest
transactions solely on behalf of other foreign located persons. The
Final Rule thus would not impose any new burdens on these market
participants. Rather, to the extent that the Final Rule provides an
exemption from generally required intermediary registration, the
Commission believes it is reasonable to infer that operating pursuant
to the exemption, as amended by the Final Rule, will be less burdensome
to such participants. The Commission does not, therefore, expect IBs or
CTAs that are small entities to incur any additional costs as a result
of the Final Rule amendments. Accordingly, the Chairman, on behalf of
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
Final Rule will not have
[[Page 78734]]
a significant impact on a substantial number of small entities with
respect to IBs and CTAs.
---------------------------------------------------------------------------
\208\ See 47 FR at 18620 (CTAs); and Introducing Brokers and
Associated Persons of Introducing Brokers, Commodity Trading
Advisors and Commodity Pool Operators; Registration and Other
Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983) (IBs).
\209\ 2016 Proposal, 81 FR at 51826.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA.\210\ 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. In the
2020 Proposal, the Commission preliminarily determined that the
proposed amendments, if adopted, would not impose any new recordkeeping
or information collection requirements, or other collections of
information that require approval of the Office of Management and
Budget (OMB) under the PRA.\211\
---------------------------------------------------------------------------
\210\ 44 U.S.C. 3501, et seq.
\211\ 2020 Proposal, 85 FR at 35827.
---------------------------------------------------------------------------
The Commission invited the public and other interested parties to
comment on any aspect of the information collection requirements
discussed in the 2020 Proposal.\212\ The Commission did not receive any
such comments. The Commission similarly invited the public and other
interested parties to comment on any aspect of the reporting burdens
under the 2016 Proposal,\213\ but also did not receive any such
comments. Therefore, the Commission concludes that the Final Rule, by
adopting amendments to Commission regulation 3.10(c) derived from both
the 2016 Proposal and the 2020 Proposal, does not impose any new
recordkeeping or information collection requirements, or other
collections of information that require OMB approval under the PRA.
---------------------------------------------------------------------------
\212\ Id.
\213\ 2016 Proposal, 81 FR at 51827.
---------------------------------------------------------------------------
C. Cost-Benefit Considerations
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the CEA.\214\ Section 15(a) of the Act further specifies that the costs
and benefits shall be evaluated in light of five broad areas of market
and public concern: (1) Protection of market participants and the
public; (2) efficiency, competitiveness and financial integrity of the
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
may, in its discretion, give greater weight to any of the five
enumerated areas of concern, and may, in its discretion, determine
that, notwithstanding its costs, a particular rule is necessary or
appropriate to protect the public interest, or to effectuate any of the
provisions or to accomplish any of the purposes of the CEA. The
Commission invited public comment on the cost-benefit considerations in
both the 2016 and 2020 Proposals, but received no comments on those
analyses.\215\
---------------------------------------------------------------------------
\214\ 7 U.S.C. 19(a).
\215\ 2016 Proposal, 81 FR at 51827; 2020 Proposal, 85 FR at
35827.
---------------------------------------------------------------------------
As discussed above, pursuant to the 2016 Proposal, the Commission
proposed to amend Commission regulations 3.10(c)(2) and (c)(3) to
revise the conditions under which those exemptions from registration
would apply. Specifically, the 2016 Proposal would permit a Foreign
Intermediary to be eligible for an exemption from registration, if the
Foreign Intermediary, in connection with a commodity interest
transaction, only acts on behalf of (1) foreign located persons, or (2)
IFIs, without regard to whether such persons or institutions clear such
commodity interest transaction.\216\ The Final Rule adopts the
exemptions as proposed in the 2016 Proposal, but clarifies that
commodity interest transactions effected by Foreign Intermediaries on
behalf of foreign located persons that are required or intended to be
cleared on a registered DCO, must be cleared through a registered FCM,
unless the foreign located person is a clearing member of the DCO (and
thus may clear for itself).\217\
---------------------------------------------------------------------------
\216\ 2016 Proposal, 81 FR at 51826.
\217\ See supra pt. II.B.3.
---------------------------------------------------------------------------
As described above, the Commission is adopting several amendments
to Commission regulation 3.10(c). Specifically, the Commission is
amending the 3.10 Exemption such that non-U.S. CPOs may rely on that
relief on a pool-by-pool basis through new Commission regulation
3.10(c)(5)(i). Next, new Commission regulation 3.10(c)(5)(ii) contains
the finalized Affiliate Contribution Exception, which makes it clear
that a non-U.S. CPO's eligibility for the 3.10 Exemption is unaffected
by initial capital contributions from a U.S. affiliate of the non-U.S.
CPO to the non-U.S. CPO's offshore pools, provided certain conditions
are met. The Commission is also adding new Commission regulation
3.10(c)(5)(iii), which establishes a conditional safe harbor permitting
non-U.S. CPOs, who cannot represent with absolute certainty that there
are no U.S. participants in their offshore pools, to nonetheless
utilize the 3.10 Exemption for those offshore pools. Finally, the
Commission is adopting Commission regulation 3.10(c)(5)(iv), which
explicitly permits a non-U.S. CPO utilizing the 3.10 Exemption for one
or more offshore pools to register as a CPO, claim an available
exemption from CPO registration, claim an exclusion from the CPO
definition, or claim other available relief from CPO regulation, with
respect to other pools it operates. These regulatory amendments adopted
by the Final Rule grant non-U.S. CPOs relief that will likely generate
costs and benefits. The baseline against which these costs and benefits
are compared is the regulatory status quo set forth in current
Commission regulation 3.10(c)(3).
The consideration of costs and benefits below is based on the
understanding that the markets function internationally, with many
transactions involving U.S. firms taking place across international
boundaries; with some Commission registrants being organized outside of
the United States; with some leading industry members typically
conducting operations both within and outside the United States; and
with industry members commonly following substantially similar business
practices wherever located. Where the Commission does not specifically
refer to matters of location, the discussion of costs and benefits
below refers to the effects of this proposal on all activity subject to
the proposed amended regulations, whether by virtue of the activity's
physical location in the United States or by virtue of the activity's
connection with activities in or effect on U.S. commerce under CEA
section 2(i).\218\
---------------------------------------------------------------------------
\218\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------
1. Costs and Benefits Related to Finalizing the 2016 Proposal
Pursuant to the Final Rule, the Commission has recognized that not
all commodity interest transactions are required to be cleared.\219\
This aspect of the Final Rule should provide the benefit of reducing
inefficiencies in the commodity interest activities of foreign located
persons by eliminating confusion over whether the relevant exemption
from registration is dependent on clearing commodity interest
transactions through a registered FCM. With respect to commodity
interest transactions that are required or intended to be cleared by a
registered DCO, the Final Rule should provide the benefit of increased
market efficiency by clearly delineating that such transactions must be
cleared
[[Page 78735]]
through a registered FCM, unless the Foreign Intermediary's customer is
a member of the DCO (and thus, may clear for itself). The Commission
further believes that the legal certainty provided by this aspect of
the Final Rule may increase participation in the U.S. commodity
interest markets by foreign located persons, and thus, ensure greater
depth in such markets accessed by U.S. persons. The Commission has not
identified any additional costs attributable to this aspect of the
Final Rule.
---------------------------------------------------------------------------
\219\ See supra pt. II.B.3.
---------------------------------------------------------------------------
2. Commission Regulation 3.10(c)(5)(i): Claiming the 3.10 Exemption on
a Pool-by-Pool Basis
Pursuant to the Final Rule, a non-U.S. CPO will be able to claim
the 3.10 Exemption with respect to its qualifying offshore pools, while
registering as a CPO or claiming another CPO exemption or exclusion for
its other pools that do not qualify for the 3.10 Exemption because they
are either domiciled in the U.S., or they solicit and/or accept as
participants persons located within the United States. Absent this
amendment, such non-U.S. CPOs face some costs and compliance burdens
associated with the operation of their offshore pools,\220\ despite the
Commission's historical focus on prioritizing customer protection with
respect to persons located in the United States. For example, certain
registered U.S. and non-U.S. CPOs file self-executing notices pursuant
to Advisory 18-96 with respect to their offshore pools. The Advisory
provides compliance relief with respect to all of the pool-based
disclosures required under the Commission's regulations, as well as
many of the reporting and recordkeeping obligations that otherwise
would apply to registered CPOs, with the exception of the requirement
to file Form CPO-PQR under Commission regulation 4.27.\221\ The relief
pursuant to Advisory 18-96 also allows qualifying, registered U.S. CPOs
to maintain their offshore pool's original books and records at its
offshore location, rather than at the CPO's main business office in the
United States.\222\
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\220\ Such costs vary widely because certain registered CPOs may
be eligible for significant compliance relief for their pools
pursuant to Advisory 18-96.
\221\ Advisory 18-96, at 1-2.
\222\ Id.
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Currently, based on the notices filed pursuant to Advisory 18-96,
the Commission is aware of 23 non-U.S. CPOs that operate 84 offshore
pools and 20 U.S. CPOs that operate 88 offshore pools. In total, 43
CPOs file Advisory 18-96 notices. However, the Commission believes that
there are likely a number of registered non-U.S. CPOs that do not list
their offshore pools with the Commission, and therefore, do not claim
relief under Advisory 18-96. Although these notices must be filed by
hardcopy, the Commission believes the administrative costs are
low.\223\ CPOs must employ at least one employee to manage and file the
one-time notice under Advisory 18-96. For a notice under Advisory 18-96
to be effective, the CPO must provide, among other things, business-
identifying and contact information; representations that the CPO and
its principals are not statutorily disqualified; enumerated rules from
which the CPO seeks relief; and contact information for person(s) who
will maintain the offshore books and records.\224\
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\223\ Exemptions Available to CPOs, NFA, available at https://www.nfa.futures.org/members/cpo/cpo-exemptions.html (noting that,
while CPOs must generally claim exemptions electronically through
NFA's Exemption System, ``[e]xemptions pursuant to CFTC Advisory No.
18-96 must be filed with NFA in hardcopy'').
\224\ Advisory 18-96, at 1.
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Pursuant to the Final Rule, the current 23 registered non-U.S. CPOs
that file Advisory 18-96 notices will be able to delist their offshore
pools and no longer file Advisory 18-96 notices claiming relief for the
84 offshore pools. Upon delisting such pools, those registered non-U.S.
CPOs would no longer have to include their offshore pools in their Form
CPO-PQR filings, which will result in a relatively substantial cost
savings for those non-U.S. CPOs and their offshore pool operations. The
20 U.S. CPOs, however, currently claiming relief under Advisory 18-96
will continue to do so because they remain ineligible for the 3.10
Exemption, due to their location in the United States, and as such, are
not directly impacted by the Final Rule.
Currently, any registered CPO may avoid the requirement to list its
offshore pools with the Commission by establishing a separate, foreign-
domiciled non-U.S. CPO for all of the operated offshore pools
qualifying for the 3.10 Exemption. The Commission believes that the
Final Rule will effectively eliminate this incentive to establish a
separately organized CPO solely for the purpose of operating offshore
pools that qualify for the 3.10 Exemption. The costs associated with
establishing a non-U.S. CPO vary, depending on the operating size and
structure of the registered CPO and its pools, and the jurisdiction
where the non-U.S. CPO is formed. For instance, these incentives to
establish additional CPOs may be affected by the financial outlay
required to establish foreign-domiciled CPOs given that set-up costs,
e.g., costs to pay staff and experts; expenses for business licenses
and registrations; costs to draft operational and disclosure documents;
fees to establish technological services, would be expected to vary by
jurisdiction. Therefore, although the Commission believes that there
are costs associated with establishing a separate, foreign-domiciled
non-U.S. CPO, the Commission finds that such costs may vary widely and
are highly dependent on the organization and footprint of the
registered CPO and its operated pools, as well as the relevant
jurisdiction where the additional non-U.S. CPO would be formed.
The Commission believes, however, that permitting non-U.S. CPOs to
claim the 3.10 Exemption on a pool-by-pool basis pursuant to the Final
Rule will likely result in CPO complexes generally saving the costs
associated with forming and maintaining separate CPOs to operate the
other pools in its structure, thereby reducing unnecessary complexity
in overall corporate structure and pool operations. Amending the 3.10
Exemption such that non-U.S. CPOs may claim the exemption on a pool-by-
pool basis, the Commission believes, will eliminate a large portion of
the compliance costs associated with CFTC-registered, non-U.S. CPOs'
offshore pool operations, which, by their very characteristics,
implicate fewer of the Commission's regulatory interests.\225\ The
Commission notes that this reduction only relates to U.S. compliance
costs, as the Final Rule has no impact on the costs non-U.S. CPOs incur
related to foreign regulatory regimes. As mentioned above, the
Commission concludes that targeting its CPO oversight in this manner
appropriately recognizes the increasingly global nature of the asset
management industry.
---------------------------------------------------------------------------
\225\ See supra II.C.
---------------------------------------------------------------------------
The Commission also does not anticipate that non-U.S. CPOs will
experience any increased costs associated with claiming the 3.10
Exemption on a pool-by-pool basis. The 3.10 Exemption has never
required a filing or notice to claim the relief it provides, and that
remains true under the Final Rule. Prior to the Final Rule, the terms
of the 3.10 Exemption required a non-U.S. CPO to continuously monitor
the operations of its offshore pools to ensure that they are neither
offered nor sold to any participants located in the United States.
Under the terms of the Final
[[Page 78736]]
Rule, and with the exception of the safe harbor discussed below, the
3.10 Exemption will continue to require such non-U.S. CPOs to monitor
their offshore pool operations to ensure compliance with the 3.10
Exemption, as amended by the Final Rule.
The Commission believes that the Final Rule may result in some loss
of information available to the public, specifically regarding offshore
pools operated by registered non-U.S. CPOs, because such offshore pools
will no longer be required to be listed with the Commission.
Consequently, the offshore pools' existence and identifying information
will no longer be publicly disclosed on NFA's BASIC database, once the
non-U.S. CPO claims the 3.10 Exemption for such offshore pools. The
Commission concludes that this loss of information will likely have a
minimal practical effect on the investing public because persons
located within the United States are typically not permitted by non-
U.S. CPOs to participate in offshore pools, consistent with the
conditions of the 3.10 Exemption, as amended by the Final Rule.
3. Commission Regulation 3.10(c)(5)(iii): Providing a Safe Harbor for
Non-U.S. CPOs Whose Offshore Pools May Have Inadvertent U.S.
Participants
As explained previously, the Commission is adopting Commission
regulation 3.10(c)(5)(iii), which establishes a safe harbor for those
non-U.S. CPOs, who, due to the structure of their offshore pools,
cannot represent with absolute certainty that there are no U.S.
participants; the safe harbor requires that such non-U.S. CPOs take
specifically enumerated actions to minimize the possibility that U.S.
persons are participating in the offshore pool.\226\ Commission
regulation 3.10(c)(5)(iii), as adopted, benefits non-U.S. CPOs by
making the registration relief provided under the 3.10 Exemption more
widely available and by recognizing the informational limitations
inherent in certain pool structures. Therefore, the Commission believes
that this safe harbor could result in more non-U.S. CPOs relying upon
the 3.10 Exemption with respect to more offshore pools. At this time,
the Commission lacks sufficient information to estimate or quantify the
number of non-U.S. CPOs and offshore pools that may claim relief under
Commission regulation 3.10(c)(5)(iii), because the Commission does not
currently receive the information necessary to determine which offshore
pools currently listed with the Commission are offered and sold solely
to offshore participants, and what subset of those pools may have
participation units traded in the secondary market. Given, however,
that exchange-traded commodity pools currently comprise less than 1% of
the total number of pools listed with the Commission, the Commission
believes, it is reasonable to estimate the number of offshore pools
operated in a similar manner to be equally small.
---------------------------------------------------------------------------
\226\ See infra new Commission regulation 3.10(c)(5)(iii)(A)-
(F).
---------------------------------------------------------------------------
The Commission believes that non-U.S. CPOs that would be eligible
for registration relief under the safe harbor in Commission regulation
3.10(c)(5)(iii) will avail themselves of that relief. This could result
in the Commission receiving less information regarding the operation of
such offshore pools. As noted above, the Commission believes that the
amount of information lost as a result of the deregistration of such
non-U.S. CPOs and associated delisting of their eligible offshore pools
would be minimal, due to the expected small number of qualifying non-
U.S. CPOs and offshore pools, relative to the total population of
registered CPOs and listed pools.
The Commission also anticipates that there may be some inadvertent
U.S. participants in offshore pools, who would lose the customer
protections afforded by part 4 of the Commission's regulations, should
a non-U.S. CPO decide to delist its offshore pools and claim relief
under the 3.10 Exemption in reliance on this safe harbor. The
Commission believes that its enumerated conditions, however, should
result in a small number of U.S. participants being impacted. Moreover,
the Commission believes that such U.S. participants, to the extent that
they are aware that they are participating in what is known to be an
offshore pool through the purchase of units sold in an offshore
secondary market, may not expect to benefit from the customer
protection provisions in part 4 of the Commission's regulations, but
would instead expect to rely upon the regulatory protections of the
offshore pool's home jurisdiction.
4. Commission Regulation 3.10(c)(5)(iv): Utilizing the 3.10 Exemption
Concurrent With Other Available Exclusions and Exemptions
As explained above, the Commission is also adding Commission
regulation 3.10(c)(5)(iv), such that non-U.S. CPOs may rely upon the
3.10 Exemption concurrent with other exemptions and exclusions, or,
alternatively, CPO registration. The Commission believes that
Commission regulation 3.10(c)(5)(iv) therefore benefits non-U.S. CPOs
due to its consistent treatment of CPOs of pools that are operated in a
substantively identical manner, regardless of where the CPO is based.
The Commission also anticipates that this amendment will benefit the
non-U.S. CPO industry generally by providing regulatory certainty with
respect to the ability of all non-U.S. CPOs to simultaneously rely upon
the 3.10 Exemption and other applicable exclusions and exemptions under
the Commission's regulations. This amendment is consistent with other
provisions of the Commission's CPO regulatory program, where the
Commission explicitly permits CPOs to claim more than one type of
exemption or exclusion, or to register with respect to the variety of
commodity pools that they operate.\227\
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\227\ See, e.g., 17 CFR 4.13(e)(2) and 4.13(f).
---------------------------------------------------------------------------
The Commission further believes that by clarifying the
permissibility of using Commission regulation 4.13 exemptions, for
example, in conjunction with the 3.10 Exemption, non-U.S. CPOs may be
more likely to claim the relief under Commission regulation 4.13 for
their pools that limit their commodity interest exposure to a de
minimis amount, rather than registering and listing those pools. The
Commission concludes that clearly establishing the availability of
other exemptions and exclusions, or alternatively, registration with
respect to the operation of certain pools offered or sold to persons
within the United States, will further enable the Commission to more
efficiently deploy its resources in the oversight of CPOs and commodity
pools that it has determined more fully implicate its regulatory
concerns and interests under the CEA.
If more non-U.S. CPOs claim exemptions under Commission regulation
4.13(a)(3), for example, for some of their U.S. facing pools as a
result of the 2020 Proposal, this could result in pools that were
previously listed and associated with a CPO registration being
delisted. Under these circumstances, the Commission would, as a result,
no longer receive financial reporting with respect to those pools,
including on Form CPO-PQR. Because these commodity pools would, in
fact, already be operated consistent with an existing exemption or
exclusion, and because the Commission has previously determined that
pools operated in such a manner generally do not require a registered
CPO, the Commission concludes that any resulting loss of insight into
such pools and their CPOs is consistent with the Commission's
[[Page 78737]]
overall regulatory policy, and therefore, will likely have minimal
negative impact on the public.\228\
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\228\ The Commission notes that it retains special call
authority with respect to those CPOs claiming an exemption from
registration pursuant to Commission regulation 4.13, which enables
the Commission to obtain additional information regarding the
operation of commodity pools by such exempt CPOs. See 17 CFR
4.13(c)(iii).
---------------------------------------------------------------------------
5. Commission Regulation 3.10(c)(5)(ii): The Affiliate Contribution
Exception
The Commission is also adopting amendments permitting non-U.S. CPOs
to rely upon the 3.10 Exemption for the operation of an offshore pool,
even if an affiliate within the United States provides initial capital
for the offshore pool, pursuant to the Affiliate Contribution
Exception. Absent the relief provided by Commission regulation
3.10(c)(5)(ii), a non-U.S. CPO of an offshore pool receiving initial
capital from an affiliate within the United States would generally be
required to register as a CPO and list that pool with the Commission,
unless another exemption or exclusion was available. As a registered
CPO with respect to that offshore pool, the non-U.S. CPO would then be
required to comply with the compliance obligations set forth in part 4
of the Commission's regulations.
As discussed previously, the Commission has concluded that
participation in an offshore pool by a U.S. affiliate does not raise
the same regulatory concerns as an investment in the same pool by an
unaffiliated participant located within the United States.\229\ In
addition to the reasons outlined above, the Commission believes that
the Affiliate Contribution Exception will provide regulatory relief for
a small number of currently-registered CPOs. As mentioned above, based
on the number of claims filed under Advisory 18-96, there are 23 non-
U.S. CPOs that operate 84 offshore commodity pools. The Commission is
unaware, however, of whether any of the offshore pools operated by
those non-U.S. CPOs actually received initial capital contributions
from a U.S. affiliate, in part, because the Commission does not collect
such information. Nevertheless, because of the small number of claims
by non-U.S. CPOs under Advisory 18-96, the Commission believes that the
number of these CPOs that would be eligible for relief under the
Affiliate Contribution Exception would likely be less than the 23. The
Commission believes that there may be an unknown number of registered
non-U.S. CPOs that have never listed their offshore pools with the
Commission, and hence, did not seek relief under the Advisory.
Therefore, the total number of non-U.S. CPOs utilizing this provision
could also be higher. In addition, as a result of the Commission being
unaware of the current number of offshore pools operated by a non-U.S.
CPO receiving seed capital from a U.S. affiliate, it is unable to
predict how many pools will utilize the Affiliate Contribution
Exception in the future.
---------------------------------------------------------------------------
\229\ See supra pt. II.F.
---------------------------------------------------------------------------
The Commission also believes that the Affiliate Contribution
Exception will result in reduced costs for non-U.S. CPOs by removing
initial capital investments by U.S. affiliates in offshore pools from
the analysis for 3.10 Exemption eligibility, and by eliminating any
registration and compliance costs for such pools. This amendment will,
however, result in U.S. affiliates not being able to rely upon the
protections provided by CPO registration and by part 4 of the
Commission's regulations, with respect to their initial capital
investments in an offshore pool operated by their affiliated non-U.S.
CPO.\230\ The Commission believes that this loss will likely be
mitigated by a U.S. affiliate's ability to obtain whatever information
regarding the offshore pool a U.S. affiliate may deem material to its
investment, by virtue of its relationship with the non-U.S. CPO as
affiliated entities. Moreover, the Commission believes this approach is
consistent with the Commission's focus on protecting U.S. investors
participating in commodity pools.
---------------------------------------------------------------------------
\230\ For example, a U.S. affiliate would not be able to rely
upon the Commission's part 4 regulations to require its affiliated
non-U.S. CPO to provide the affiliate with disclosures and reporting
generally mandated by those rules.
---------------------------------------------------------------------------
In the event a non-U.S. CPO has listed one or more offshore pools
with the Commission due to the fact that the offshore pool received
initial capital contributions from a U.S. affiliate, and such non-U.S.
CPO determines to delist the offshore pool in question and instead rely
upon the 3.10 Exemption by virtue of the Affiliate Contribution
Exception, the Commission will no longer receive financial reporting
with respect to such offshore pool, including on Form CPO-PQR. Because
the Commission has determined that initial capital contributions by a
U.S. affiliate do not raise the same customer protection concerns as
capital received from other unaffiliated U.S. participants, however,
the Commission concludes that any loss of insight into such offshore
pools and their non-U.S. CPOs resulting from the Affiliate Contribution
Exception is generally consistent with the Commission's overall
regulatory policy concerning CPOs and commodity pools.
6. Section 15(a) Factors
a. Protection of Market Participants and the Public
The Commission believes that the Final Rule will not have a
material negative effect on the protection of market participants and
the public. The Commission will continue to receive identifying
information from U.S. CPOs operating offshore pools and pools offered
to U.S. investors. Regarding a non-U.S. CPO whose offshore pools
receive initial capital contributions from an affiliate in the United
States, the Commission believes that although those offshore pools may
no longer be subject to part 4 of the Commission's regulations, such
U.S. affiliates, by virtue of their relationship with the non-U.S. CPO,
are generally not as dependent upon the customer protections provided
by the Commission's regulations. The Commission comes to this
conclusion on the basis of its detailed analysis above of ``affiliate''
relationships generally, finding that, where a U.S. affiliate is
controlled by, controlling, or under common control with the non-U.S.
CPO of an offshore pool, as set forth in Commission regulation
4.7(a)(1)(i), the U.S. affiliate typically has access to information
and disclosures that allow it to make an informed decision regarding
its initial capital contributions to that offshore pool, even in the
absence of express regulatory requirements from the Commission. The
Commission also anticipates that some U.S. participants in offshore
pools operated pursuant to the adopted safe harbor may lose the
customer protections afforded by part 4 of the Commission's
regulations; however, the Commission believes that the number of
impacted U.S participants will be small, due to the specific criteria
required for reliance upon the safe harbor and the small number of
exchange-traded commodity pools, generally. With respect to those
aspects of the Final Rule that are derived from the 2016 Proposal, the
Commission believes that the Final Rule will foster the protection of
market participants and the public by providing greater legal certainty
with respect to the commodity interest activities of persons located
outside the U.S.
[[Page 78738]]
b. Efficiency, Competitiveness and Financial Integrity of the Futures
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 will benefit the efficiency,
competitiveness and financial integrity of the futures markets because,
among other things, the Final Rule will effectively eliminate the
current incentive to establish a separately organized CPO solely for
the purpose of operating offshore pools that qualify for the 3.10
Exemption. As discussed above, permitting non-U.S. CPOs to claim the
3.10 Exemption on a pool-by-pool basis pursuant to the Final Rule will
likely result in CPO complexes generally saving the costs associated
with forming and maintaining separate CPOs to operate the other pools
in their structure, thereby reducing unnecessary complexity in overall
corporate structure and pool operations. The Commission believes this
reduction in the complexity of CPO operations, specifically with
respect to offshore pool operations, will positively affect the general
financial integrity of market participants, and as discussed further
above, may lead to more pools operated by non-U.S. CPOs being offered
to U.S. participants, increasing competition and depth in U.S.
commodity interest markets.
Additionally, the Commission believes that the adoption of the
Affiliate Contribution Exception, the safe harbor, as well as the
amendments from the 2016 Proposal, by the Final Rule clarifies
Commission regulation 3.10(c), including the 3.10 Exemption, making the
provision overall easier to understand and apply, providing additional
flexibility in light of the increasingly global nature of the asset
management industry as a whole, and likely, increasing the number of
non-U.S. CPOs and offshore pools able to participate in the U.S.
commodity interest markets without additional requirements. For these
reasons, the Commission believes the Final Rule will have a positive
impact on the efficiency, competitiveness and financial integrity of
the futures markets, as contemplated by CEA section 15(a)(2)(B).
c. 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. The Commission believes that the legal certainty
provided by the amendments to the registration exemptions in the Final
Rule may increase participation in the U.S. commodity interest markets
by foreign located persons, and thus, ensure greater depth in such
markets accessed by persons in the U.S. Thus, the Commission believes
that the Final Rule, in its totality, will result in deeper commodity
interest markets in the United States, which facilitates the price
discovery function thereof.
d. Sound Risk Management Practices
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, as specifically related to
non-U.S. CPOs, will not have a significant impact on the practice of
sound risk management because the manner in which various funds,
operators, and advisors organize, register, or claim relief from such
regulation has only a small influence on how market participants manage
their risks overall. The Commission believes, however, that the Final
Rule, through the legal certainty provided by the amendments to these
registration exemptions may increase participation in the U.S.
commodity interest markets by foreign located persons, and thus, ensure
greater depth in such markets accessed by persons in the U.S. The
greater depth in such markets in turn will facilitate sound risk
management.
e. 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 has not identified any other
public interest considerations impacted by the Final Rule beyond those
identified as part of its analysis supporting the Commission's exercise
of its authority under section 4(c) of the Act.
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.\231\ 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
2016 and 2020 Proposals implicate any other specific public interest to
be protected by the antitrust laws, and it received no comments
addressing this issue.
---------------------------------------------------------------------------
\231\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission has considered the Final Rule to determine whether
its amendments are anticompetitive and has identified no
anticompetitive effects. Because the Commission has determined the
Final Rule amendments are not anticompetitive and have 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 3
Consumer protection, Definitions, Foreign futures, Foreign options,
Registration requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 3 as follows:
PART 3--REGISTRATION
0
1. The authority citation for part 3 continues to read as follows:
Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1,
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12,
12a, 13b, 13c, 16a, 18, 19, 21, and 23.
0
2. In Sec. 3.10, revise paragraph (c) to read as follows:
Sec. 3.10 Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators, swap dealers, major swap
participants, and leverage transaction merchants.
* * * * *
(c) Exemption from registration for certain persons--(1)
Definitions. For purposes of this paragraph (c), the following terms
shall have the meanings set forth below.
(i) Covered transaction means a commodity interest transaction, as
defined in Sec. 1.3 of this chapter, executed bilaterally or made on
or subject to the rules of any designated contract market or registered
swap execution facility.
(ii) Foreign located person means a person located outside the
United States, its territories, or possessions.
(iii) International financial institution means the International
Monetary Fund, the International Bank for Reconstruction and
Development, the Inter-American Development Bank, the Asian Development
Bank, the African Development Bank, the United Nations,
[[Page 78739]]
the European Stability Mechanism, the North American Development Bank,
those institutions defined as ``international financial institutions''
in 22 U.S.C. 262r(c)(2), those institutions defined as ``multilateral
development banks'' in Article 1(5(a)) of Regulation (EU) No. 648/2012
of the European Parliament and of the Council on OTC Derivative
Transactions, Central Counterparties and Trade Repositories, their
agencies and pension plans, and any other similar international
organizations, and their agencies and pension plans.
(2) Exempt futures commission merchants--(i) Proprietary accounts.
A person trading solely for proprietary accounts, as defined in Sec.
1.3 of this chapter, is not required to register as a futures
commission merchant; provided, that such person remains subject to all
other provisions of the Act and of the rules, regulations and orders
thereunder.
(ii) Foreign located persons. (A) A foreign located person engaging
in the activity of a futures commission merchant, as defined in Sec.
1.3 of this chapter, in connection with any covered transaction only on
behalf of foreign located persons or international financial
institutions is not required to register in such capacity; provided,
that if any such covered transaction is required or intended to be
cleared on a registered derivatives clearing organization and the
foreign located person or international financial institution that is
party to the covered transaction is not a clearing member of such
registered derivatives clearing organization, the covered transaction
is submitted for clearing through a futures commission merchant
registered in accordance with section 4d of the Act.
(B) A foreign located person acting in accordance with paragraph
(c)(2)(ii)(A) of this section is not required to comply with those
provisions of the Act and of the rules, regulations and orders
thereunder applicable solely to any registered futures commission
merchant or any person required to be so registered.
(3) Exempt introducing brokers--(i) Foreign located persons. (A) A
foreign located person engaged in the activity of an introducing
broker, as defined in Sec. 1.3 of this chapter, in connection with any
covered transaction only on behalf of foreign located persons or
international financial institutions is not required to register in
such capacity; provided, that if any such covered transaction is
required or intended to be cleared on a registered derivatives clearing
organization and the foreign located person or international financial
institution that is party to the covered transaction is not a clearing
member of such registered derivatives clearing organization, the
covered transaction is submitted for clearing through a futures
commission merchant registered in accordance with section 4d of the
Act.
(B) A foreign located person acting in accordance with paragraph
(c)(3)(i)(A) of this section is not required to comply with those
provisions of the Act and of the rules, regulations and orders
thereunder applicable solely to any registered introducing broker or
any person required to be so registered.
(ii) Exempt foreign brokers. (A) A foreign located person that is
exempt from registration as a futures commission merchant in accordance
with Sec. 30.10 of this chapter is not required to register as an
introducing broker in accordance with section 4d of the Act if:
(1) Such person is affiliated with a futures commission merchant
registered in accordance with section 4d of the Act;
(2) Such person introduces, on a fully-disclosed basis in
accordance with Sec. 1.57 of this chapter, any institutional customer,
as defined in Sec. 1.3 of this chapter, to a registered futures
commission merchant for the purpose of trading on a designated contract
market;
(3) Such person's affiliated futures commission merchant has filed
with the National Futures Association (Attn: Vice President,
Compliance) an acknowledgement that the affiliated futures commission
merchant will be jointly and severally liable for any violations of the
Act or the Commission's regulations committed by such person in
connection with those introducing activities, whether or not the
affiliated futures commission merchant submits for clearing any trades
resulting from those introducing activities; and
(4) Such person does not solicit any person located in the United
States, its territories or possessions for trading on a designated
contract market, nor does such person handle the customer funds of any
person located in the United States, its territories or possessions for
the purpose of trading on any designated contract market.
(B) For the purposes of this paragraph, a person shall be
affiliated with a futures commission merchant if such a person owns 50
percent or more of the futures commission merchant, is owned 50 percent
or more by the futures commission merchant, or is owned 50 percent or
more by a third person that also owns 50 percent or more of the futures
commission merchant.
(4) Exempt commodity trading advisors. (i) A foreign located person
engaging in the activity of a commodity trading advisor, as defined in
Sec. 1.3 of this chapter, in connection with any covered transaction
only on behalf of foreign located persons or international financial
institutions is not required to register in such capacity; provided,
that if any such covered transaction is required or intended to be
cleared on a registered derivatives clearing organization and the
foreign located person or international financial institution that is
party to the covered transaction is not a clearing member of such
registered derivatives clearing organization, the covered transaction
is submitted for clearing through a futures commission merchant
registered in accordance with section 4d of the Act.
(ii) A foreign located person acting in accordance with paragraph
(c)(4)(i) of this section remains subject to section 4o of the Act, but
otherwise is not required to comply with those provisions of the Act
and of the rules, regulations and orders thereunder applicable solely
to any registered commodity trading advisor or any person required to
be so registered.
(5) Exempt commodity pool operators. (i) A foreign located person
engaged in the activity of a commodity pool operator, as defined in
Sec. 1.3 of this chapter, in connection with any covered transaction
is not required to register in such capacity, when such covered
transactions are executed on behalf of a commodity pool, the
participants of which are all foreign located persons or international
financial institutions; provided, that if any such covered transaction
is required or intended to be cleared on a registered derivatives
clearing organization and the commodity pool that is party to the
covered transaction is not a clearing member of such registered
derivatives clearing organization, the covered transaction is submitted
for clearing through a futures commission merchant registered in
accordance with section 4d of the Act.
(ii) With respect to paragraph (c)(5)(i) of this section, initial
capital contributed to a commodity pool by an affiliate, as defined by
Sec. 4.7(a)(1)(i) of this chapter, of the pool's commodity pool
operator shall not be considered for purposes of determining whether
such commodity pool operator is executing commodity interest
transactions on behalf of a commodity pool, the participants of which
are all foreign located persons; provided, that:
(A) The affiliate is not a natural person;
[[Page 78740]]
(B) The affiliate and its principals are not barred or suspended
from participating in commodity interest markets in the United States,
its territories or possessions; and
(C) Interests in the affiliate are not marketed as providing access
to trading in commodity interest markets in the United States, its
territories or possessions.
(iii) A commodity pool operated by a foreign located person shall
be considered to be operated in accordance with the terms of paragraph
(c)(5)(i) of this section, if:
(A) The commodity pool is organized and operated outside of the
United States, its territories or possessions;
(B) The commodity pool's offering materials and any underwriting or
distribution agreements include clear, written prohibitions on the
commodity pool's offering to participants located in the United States
and on U.S. ownership of the commodity pool's participation units;
(C) The commodity pool's constitutional documents and offering
materials:
(1) are reasonably designed to preclude persons located in the
United States from participating therein; and
(2) include mechanisms reasonably designed to enable its operator
to exclude any persons located in the United States that attempt to
participate in the offshore pool, notwithstanding those prohibitions;
(D) The commodity pool operator exclusively uses non-U.S.
intermediaries for the distribution of participations in the commodity
pool;
(E) The commodity pool operator uses reasonable investor due
diligence methods at the time of sale to preclude persons located in
the United States from participating in the commodity pool; and
(F) The commodity pool's participation units are directed and
distributed to participants outside the United States, including by
means of listing and trading such units on secondary markets organized
and operated outside of the United States, and in which the commodity
pool operator has reasonably determined participation by persons
located in the United States is unlikely.
(iv) Utilizing the relief under paragraph (c)(5)(i) of this section
for a qualifying commodity pool will not affect the ability of a person
to register with the Commission as a commodity pool operator, or to
qualify for, rely upon, or claim other relief from regulation as such
by the Commission, with respect to the operation of commodity pools or
trading vehicles not otherwise eligible for the relief offered in this
section.
(v) A person acting in accordance with paragraph (c)(5)(i) of this
section remains subject to section 4o of the Act, but otherwise is not
required to comply with those provisions of the Act and of the rules,
regulations and orders thereunder applicable solely to any person
registered in such capacity, or any person required to be so
registered.
(6) Associated persons of swap dealers. In determining whether a
person is a swap dealer, the activities of a registered swap dealer
with respect to which such person is an associated person shall not be
considered.
* * * * *
Issued in Washington, DC, on October 22, 2020, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Exemption From Registration for Certain Foreign
Intermediaries--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--Statement of Support of Chairman Heath P. Tarbert
When the Commission considered the proposal to amend the
registration exemption for foreign commodity pool operators
(CPOs),\1\ I noted that, in his second inaugural address in 1893,
President Grover Cleveland remarked ``[u]nder our scheme of
government the waste of public money is a crime against the
citizen.'' \2\ The CFTC is a taxpayer-funded agency, and Congress
expects us to deploy our resources to serve the needs of American
taxpayers. That is why as Chairman and Chief Executive, I have
sought to revisit our agency's regulations where there does not
appear to be a clear connection to furthering the interests of the
United States or our citizens.\3\
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\1\ Exemption From Registration for Certain Foreign Persons
Acting as Commodity Pool Operators of Offshore Commodity Pools, 85
FR 35820 (June 12, 2020).
\2\ Statement of Chairman Heath P. Tarbert in Support of
Amending the Registration Exemption for Foreign CPOs (May 28, 2020),
available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement052820b. See Second Inaugural Address of Grover
Cleveland (Mar. 4, 1893), reprinted in American History Through Its
Greatest Speeches: A Documentary History of the United States 278
(Courtney Smith, et al., eds. 2016).
\3\ See Statement of Chairman Heath P. Tarbert in Support of
Amending the Registration Exemption for Foreign CPOs, supra note 2.
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The CFTC's framework for regulating foreign commodity CPOs
protects U.S. investors who put their money in commodity investment
funds run from outside the United States. But, in some instances,
the only benefit of CFTC regulation of offshore CPOs is to foreign
investors. There is no statutory mandate for the CFTC to regulate
pools never offered or sold to U.S. investors. To do so absent a
compelling reason would be--in President Cleveland's words--a waste
of public money.
Consequently, I am pleased to support today's final rule to
amend the exemption for CPOs in regulation 3.10(c) (3.10 Exemption).
The final rule eliminates the potential need for the CFTC to require
the registration and oversight of non-U.S. CPOs whose pools have no
U.S. investors. The final rule additionally exempts U.S.-based
affiliates of pool sponsors who put seed money into offshore funds
that have only foreign investors. In so doing, the final rule
provides much-needed regulatory flexibility for non-U.S. CPOs
operating offshore commodity pools, without compromising the CFTC's
mission to protect U.S. investors.
Exemption for Foreign CPOs Sponsoring Funds Without U.S. Investors
The final rule amends the conditions under which a foreign CPO,
in connection with commodity interest transactions on behalf of
persons located outside the United States, will qualify for an
exemption from CPO registration and regulation with respect to an
offshore pool. Specifically, through amendments to our regulation
3.10(c), a non-U.S. CPO will be able to operate pools offered to
U.S. persons as either a registered or exempt CPO, while
simultaneously claiming the 3.10 Exemption with respect to its
qualifying offshore commodity pools.\4\
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\4\ The final rule adds a safe harbor as new regulation
3.10(c)(3)(iv) for non-U.S. CPOs that have taken what the Commission
preliminarily believes are reasonable steps designed to ensure that
participation units in the operated offshore pool are not being
offered or sold to persons located in the United States.
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Absent a compelling reason, the CFTC should be focused on U.S.
markets and U.S. investors, and refrain from extending our reach
outside the United States.\5\ The
[[Page 78741]]
protection of non-U.S. customers of non-U.S. firms is best left to
foreign regulators with the relevant jurisdiction and mandate.\6\
Therefore, I believe it is appropriate for the final rule to allow
foreign CPOs to rely on the 3.10 Exemption for their foreign
commodity pools when they have no U.S. investors. Where a foreign
CPO does have U.S. investors, other exemptions or exclusions from
registration might be available.
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\5\ For example, section 2(i) of the Commodity Exchange Act
provides that the swap provisions of Title VII of the Dodd-Frank Act
shall not apply to activities outside the United States unless those
activities (1) have a direct and significant connection with
activities in, or effect on, commerce of the United States; or (2)
contravene such rules or regulations as the Commission may prescribe
or promulgate as are necessary or appropriate to prevent the evasion
of Title VII. In interpreting this provision, the Commission has
taken the position that ``[r]ather than exercising its authority
with respect to swap activities outside the United States, the
Commission will be guided by international comity principles and
will focus its authority on potential significant risks to the U.S.
financial system.'' Cross-Border Application of the Registration
Thresholds and Certain Requirements Applicable to Swap Dealers and
Major Swap Participants, 85 FR 56924, 56928 (Sep. 14, 2020).
\6\ The Commission also cited this policy position in the
initial proposal for what ultimately became Commission regulation
3.10(c)(3)(i). See 72 FR 15637, 15638 (Apr. 2, 2007).
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Unfortunately, under a strict construction of the current rule,
if a foreign CPO has one fund with U.S. investors, then the foreign
CPO must register all its funds or rely on some other exemption
besides the 3.10 Exemption. This ``all or nothing'' reading of the
rule has produced two competing consequences--neither of which makes
for good regulatory policy. First, if the CPO chooses to register
with respect to all its funds, the CFTC ends up regulating some
foreign-based funds without any U.S. investors. Second, if the CPO
refuses to register for any of its funds, then U.S. investors are
effectively denied the liquidity and investment opportunities
offered by foreign commodity pools.
In the last decade, statutory and regulatory developments have
produced a growing mismatch between the Commission's stated policy
purposes underlying the 3.10 Exemption (that focus the CFTC's
resources on the protection of U.S. persons) and the strict
construction of the 3.10 Exemption (that leads to its ``all or
nothing'' application). To address this mismatch, the final rule
amends the 3.10 Exemption to align the plain text of the exemption
with our longstanding policy goal of regulating foreign CPOs only
when they offer their funds to U.S. investors. In effect, the
Commission's walk finally conforms to our talk.\7\
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\7\ Apart from policy incoherence inside the CFTC, the mismatch
has also caused confusion among CPOs and their investors. A number
of foreign CPOs have not adopted the strict ``all or nothing''
reading of the 3.10 Exemption, but have instead quite sensibly
latched on to the Commission's stated policy behind the rule to
conclude that a foreign CPO may rely on the current 3.10 Exemption
for non-U.S. pools with only non-U.S. investors even if the foreign
CPO operates other non-U.S. pools with U.S. investors. Given that
the confusion largely stems from the Commission's own doing, I would
not support any enforcement action against foreign CPOs whose
interpretation followed the spirit, if not the letter, of the 3.10
Exemption. Furthermore, today's final rule conforms to their
reading.
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Affiliate Investment Exemption
The final rule also permits U.S. affiliates of a non-U.S. CPO to
contribute capital to that CPO's offshore pools as part of the
initial capitalization without rendering the non-U.S. CPO ineligible
for the 3.10 Exemption. In other words, the final rule allows a U.S.
affiliate of a foreign CPO to invest in the offshore fund without
triggering registration requirements because of the nature of the
relationship between the affiliate and the non-U.S. CPO.
It is hard to imagine how an entity that controls, is controlled
by, or is under common control with, a given foreign CPO could lack
a sufficient degree of transparency with respect to its own
contribution of initial capital to an offshore commodity pool run by
that very same foreign CPO. In short, a U.S. affiliate's initial
investment in its affiliated non-U.S. CPO's offshore pool does not
raise the same investor protection concerns as similar investments
in the same pool by unaffiliated persons located in the United
States. In many cases, moreover, the affiliate is itself regulated
by other U.S. regulators--for instance, state insurance departments
in the case of insurance companies that wish to deploy their own
general account assets as they best see fit, in keeping with their
separate regulatory regimes. Accordingly, I see no reason to deploy
the limited, taxpayer-funded resources of the CFTC to protect U.S.
affiliates of foreign CPOs who are far better positioned than us to
safeguard their own interests.
Appendix 3--Supporting Statement of Commissioner Brian Quintenz
I am pleased to support today's final rule that expands an
existing exemption from registration for foreign commodity pool
operators (CPOs) trading on U.S. markets on behalf of foreign
investors. Building on previously granted staff no-action relief,
the final rule creates new possibilities for fund managers,
appropriately focuses the Commission's resources and customer
protection activities upon domestic firms and U.S. customers, and
provides for simplified compliance. For example, the final rule
permits non-U.S. CPOs to claim the exemption on a pool-by-pool
basis, which I believe is appropriate given that many large, foreign
CPOs operate both U.S. and non-U.S. pools. The final rule also
permits a foreign fund manager to satisfy the exemption's
requirement that its pool does not contain funds of U.S. customers
by complying with certain safe harbors, such as fund documentation
requirements. In doing so, the final rule recognizes that the manner
in which fund interests are sold in the real world often makes it
impossible for a fund manager to make a blanket attestation that
there is no U.S. investment in a given commodity pool.
Finally, for the first time, the final rule would permit U.S.
affiliates of foreign pools to contribute initial capital to those
pools. Allowing U.S. affiliates to contribute seed money to offshore
pools operated by their affiliated non-U.S. CPOs should facilitate
innovation and fund development by enabling those offshore pools to
establish a performance history for solicitation purposes.
Appendix 4--Statement of Commissioner Dan M. Berkovitz
I am voting for the final rule amending regulation 3.10(c)
(``Final Rule''). Regulation 3.10(c) provides an exemption from
registration to foreign persons who operate commodity pools
(``CPOs'') located outside of the United States. The Final Rule
makes pragmatic adjustments to certain conditions for claiming the
exemption that will allow the Commission to focus its limited
resources on protecting U.S. persons who participate in commodity
pools, rather than on commodity pools operated outside the U.S. in
which non-U.S. persons participate.
A fundamental goal of the Commission's registration and
regulation of CPOs is the protection of U.S. customers.\1\ The CFTC
has long held that CPOs trading commodity interests in our markets
are not required to register as CPOs if they are located offshore
and only operate pools for non-U.S. persons.\2\ In 2007, the
Commission codified the exemption in regulation 3.10(c).
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\1\ The regulation of CPOs also facilitates the Commission's
ability to oversee the derivative markets, manage systemic risks,
and fulfill its mandate to ensure safe trading practices. See, e.g.,
Commodity Pool Operators and Commodity Trading Advisors: Compliance
Obligations, 77 FR 11252, 11253, 11275 (Feb. 24, 2012), upheld by
Investment Company Institute v. CFTC, 720 F.3d 370 (D.C. Cir. 2013).
\2\ See CFTC Staff Interpretative Letter 76-21 (Aug. 15, 1976).
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The Final Rule: (i) Exempts non-U.S. CPOs from registration and
regulation with respect to individual commodity pools that do not
solicit from U.S. persons or have U.S. investors; \3\ (ii) provides
that this exemption for some pools may be used with other exemptions
or exclusions; and (iii) provides a safe harbor to non-U.S. CPOs in
the event that U.S. persons inadvertently become participants in the
offshore pools, provided that a number of conditions are met to
minimize that possibility. Lastly, the Final Rule permits U.S.
affiliates of non-U.S. CPOs to contribute ``initial capital'' to
exempt offshore pools without being treated as ``participants'' in
the pools themselves if certain conditions are satisfied.
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\3\ The CPO would need to register and comply with CFTC
regulations with regard to any other commodity pools it operates
that do solicit funds from U.S. persons.
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In my statement for the proposed amendments to regulation
3.10(c), I noted some concern that the U.S. affiliate provision
might result in persons in the U.S. investing--either knowingly or
unknowingly--in unregulated foreign commodity pools if they invested
in the U.S. affiliates. The proposal included specific ``anti-
evasion'' provisions that would prevent certain ``bad actors'' from
using the exemption and prohibit the marketing of the U.S. affiliate
as a vehicle for U.S. commodity interest investments.\4\ At my
request, several questions regarding potential abuse of the U.S.
affiliate provision were included in the proposed rule.
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\4\ As noted in section II.F.3 of the Final Rule, if the U.S.
affiliate is marketed as providing access to commodity interests
traded outside the United States, then the affiliate would be
subject to the registration regime provided for such entities in
part 30 of the Commission's regulations.
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The letters commenting on the proposed rule generally expressed
support. A joint letter from asset management industry associations
addressed the questions in the proposal regarding the U.S. affiliate
provision and provided rationales in support thereof. The letter
explained that the initial capital investments from U.S. affiliates
intended to help demonstrate fund performance or facilitate fund
operations, for example, are not the types of investments that need
the full array of customer protections provided for individual
commodity pool investors.
[[Page 78742]]
Furthermore, comment letters explained how the conditions in the
U.S. affiliate provision, coupled with the anti-evasion provisions
(with some modifications), balance the flexibility needed by CPOs to
make prudent capital allocation decisions with preventive measures
reducing the likelihood of abuse. While it is possible that some
less than forthright actors could attempt to use the regulation
3.10(c) exemption to skirt the CPO registration requirements when
soliciting commodity interest investments from U.S. persons, the
Final Rule has appropriate restrictions that will facilitate
enforcement when necessary.
In conclusion, the Final Rule makes prudent, limited amendments
that reduce the burdens on the Commission's limited resources while
maintaining the necessary protections intended for U.S. commodity
pool participants. I would like to thank the commenters for their
contribution to improving the Final Rule and the CFTC staff for
working with my office to address my concerns.
[FR Doc. 2020-23810 Filed 12-2-20; 4:15 pm]
BILLING CODE 6351-01-P
