Final Rule

11252

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

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 4, 145, and 147
RIN 3038–AD30

Commodity Pool Operators and
Commodity Trading Advisors:
Compliance Obligations
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:

The Commodity Futures
Trading Commission is adopting
amendments to its existing part 4
regulations and promulgating one new
regulation regarding Commodity Pool
Operators and Commodity Trading
Advisors. The Commission is also
adopting new data collections for CPOs
and CTAs that are consistent with a data
collection required under the DoddFrank Act for entities registered with
both the Commission and the Securities
and Exchange Commission. The
adopted amendments rescind the
exemption from registration; rescind
relief from the certification requirement
for annual reports provided to operators
of certain pools offered only to qualified
eligible persons (QEPs; modify the
criteria for claiming relief); and require
the annual filing of notices claiming
exemptive relief under several sections
of the Commission’s regulations.
Finally, the adopted amendments
include new risk disclosure
requirements for CPOs and CTAs
regarding swap transactions.
DATES: Effective dates: This final rule is
effective on April 24, 2012, except for
the amendments to § 4.27, which shall
become effective on July 2, 2012.
Compliance dates: Compliance with
§ 4.27 shall be required by not later than
September 15, 2012, for a CPO having
at least $5 billion in assets under
management, and by not later than
December 14, 2012, for all other
registered CPOs and all CTAs.
Compliance with § 4.5 for registration
purposes only shall be required not later
than the later of December 31, 2012, or
60 days after the effective date of the
final rulemaking further defining the
term ‘‘swap,’’ which the Commission
will publish in the Federal Register at
a future date. Entities required to
register due to the amendments to § 4.5
shall be subject to the Commission’s
recordkeeping, reporting, and disclosure
requirements pursuant to part 4 of the
Commission’s regulations within 60
days following the effectiveness of a
final rule implementing the
Commission’s proposed harmonization
effort pursuant to the concurrent

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SUMMARY:

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proposed rulemaking. CPOs claiming
exemption under § 4.13(a)(4) shall be
required to comply with the rescission
of § 4.13(a)(4) by December 31, 2012;
however, compliance shall be required
for all other CPOs on April 24, 2012.
Compliance with all other amendments,
not otherwise specified above, shall be
required by December 31, 2012.
FOR FURTHER INFORMATION CONTACT:
Kevin P. Walek, Assistant Director,
Telephone: (202) 418–5463, Email:
[email protected], or Amanda Lesher
Olear, Special Counsel, Telephone:
(202) 418–5283, Email: [email protected],
Michael Ehrstein, Attorney-Advisor,
Telephone: 202–418–5957, Email:
[email protected], Division of Swap
Dealer and Intermediary Oversight,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
I. Background on the Proposal To
Amend the Registration and
Compliance Obligations for CPOs and
CTAs
A. Statutory and Regulatory Background
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Dodd-Frank Act’’).1 The legislation
was enacted to reduce risk, increase
transparency, and promote market
integrity within the financial system by,
inter alia, enhancing the Commodity
Futures Trading Commission’s (the
‘‘Commission’’ or ‘‘CFTC’’) rulemaking
and enforcement authorities with
respect to all registered entities and
intermediaries subject to the
Commission’s oversight.
The preamble of the Dodd-Frank Act
explicitly states that the purpose of the
legislation is:
To promote the financial stability of the
United States by improving accountability
and transparency in the financial system, to
end ‘too big to fail’, to protect the American
taxpayer by ending bailouts, to protect
consumers from abusive financial services
practices, and for other purposes.2

Pursuant to this stated objective, the
Dodd-Frank Act has expanded the scope
of federal financial regulation to include
instruments such as swaps, enhanced
the rulemaking authorities of existing
federal financial regulatory agencies
including the Commission and the
Securities and Exchange Commission
1 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at http://www.cftc.gov/
LawRegulation/OTCDERIVATIVES/index.htm.
2 Id.

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(‘‘SEC’’), and created new financial
regulatory entities.
In addition to the expansion of the
Commission’s jurisdiction to include
swaps under Title VII of the Dodd-Frank
Act, Title I of the Dodd-Frank Act
created the Financial Stability Oversight
Council (‘‘FSOC’’).3 The FSOC is
composed of the leaders of various state
and federal financial regulators and is
charged with identifying risks to the
financial stability of the United States,
promoting market discipline, and
responding to emerging threats to the
stability of the country’s financial
system.4 The Dodd-Frank Act
anticipates that the FSOC will be
supported in these responsibilities by
the federal financial regulatory
agencies.5 The Commission is among
those agencies that could be asked to
provide information necessary for the
FSOC to perform its statutorily
mandated duties.6
Title IV of the Dodd-Frank Act
requires advisers to large private funds 7
to register with the SEC.8 Through this
registration requirement, Congress
3 See

section 111 of the Dodd-Frank Act.
section 112(a)(1)(A) of the Dodd-Frank Act.
5 See sections 112(a)(2)(A) and 112(d)(1) of the
Dodd-Frank Act.
6 See section 112(d)(1) of the Dodd-Frank Act.
7 Section 202(a)(29) of the Investment Advisers
Act of 1940 (‘‘Investment Advisers Act’’) defines the
term ‘‘private fund’’ as ‘‘an issuer that would be an
investment company, as defined in section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a–
3), but for section 3(c)(1) or 3(c)(7) of that Act.’’ 15
U.S.C. 80a–3(c)(1), 80a–3(c)(7). Section 3(c)(1) of
the Investment Company Act provides an exclusion
from the definition of ‘‘investment company’’ for
any ‘‘issuer whose outstanding securities (other
than short term paper) are beneficially owned by
not more than one hundred persons and which is
not making and does not presently propose to make
a public offering of its securities.’’ 15 U.S.C. 80a–
3(c)(1). Section 3(c)(7) of the Investment Company
Act provides an exclusion from the definition of
‘‘investment company’’ for any ‘‘issuer, the
outstanding securities of which are owned
exclusively by persons who, at the time of
acquisition of such securities, are qualified
purchasers, and which is not making and does not
at that time propose to make a public offering of
such securities.’’ 15 U.S.C. 80a–3(c)(7). The term
‘‘qualified purchaser’’ is defined in section 2(a)(51)
of the Investment Company Act. See 15 U.S.C. 80a–
2(a)(51).
8 The Dodd-Frank Act requires private fund
adviser registration by amending section 203(b)(3)
of the Advisers Act to repeal the exemption from
registration for any adviser that during the course
of the preceding 12 months had fewer than 15
clients and neither held itself out to the public as
an investment adviser nor advised any registered
investment company or business development
company. See section 403 of the Dodd-Frank Act.
There are exemptions from this registration
requirement for advisers to venture capital funds
and advisers to private funds with less than $150
million in assets under management in the United
States. There also is an exemption for foreign
advisers with less than $25 million in assets under
management from the United States and fewer than
15 U.S. clients and private fund investors. See
sections 402, 407 and 408 of the Dodd-Frank Act.
4 See

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations
sought to make available to the SEC
‘‘information regarding [the] size,
strategies and positions’’ of large private
funds, which Congress believed ‘‘could
be crucial to regulatory attempts to deal
with a future crisis.’’ 9 In section 404 of
the Dodd-Frank Act, Congress amended
section 204(b) of the Investment
Advisers Act to direct the SEC to require
private fund advisers registered solely
with the SEC 10 to file reports containing
such information as is deemed
necessary and appropriate in the public
interest and for investor protection or
for the assessment of systemic risk.
These reports and records must include
a description of certain prescribed
information, such as the amount of
assets under management, use of
leverage, counterparty credit risk
exposure, and trading and investment
positions for each private fund advised
by the adviser.11 Section 406 of the
Dodd-Frank Act also requires that the
rules establishing the form and content
of reports filed by private fund advisers
that are dually registered with the SEC
and the CFTC be issued jointly by both
agencies after consultation with the
FSOC.12
The Commodity Exchange Act
(‘‘CEA’’) 13 authorizes the Commission
to register Commodity Pool Operators
(‘‘CPOs’’) and Commodity Trading
Advisors (‘‘CTAs’’),14 exclude any entity
from registration as a CPO or CTA,15
and require ‘‘[e]very commodity trading
advisor and commodity pool operator
registered under [the CEA to] maintain
books and records and file such reports
in such form and manner as may be
prescribed by the Commission.’’ 16 The
Commission also has the authority to
include within or exclude from the
definitions of ‘‘commodity pool,’’
‘‘commodity pool operator,’’ and
‘‘commodity trading advisor’’ any entity
‘‘if the Commission determines that the
rule or regulation will effectuate the
9 See

S. Conf. Rep. No. 111–176, at 38 (2010).
this release, the term ‘‘private fund adviser’’
means any investment adviser that is (i) registered
or required to be registered with the SEC (including
any investment adviser that is also registered or
required to be registered with the CFTC as a CPO
or CTA) and (ii) advises one or more private funds
(including any commodity pools that satisfy the
definition of ‘‘private fund’’).
11 See section 404 of the Dodd-Frank Act.
12 See section 406 of the Dodd-Frank Act.
13 7 U.S.C. 1, et seq.
14 7 U.S.C. 6m.
15 7 U.S.C. 1a(11) and 1a(12).
16 7 U.S.C. 6n(3)(A). Under part 4 of the
Commission’s regulations, entities registered as
CPOs have reporting obligations with respect to
their operated pools. See 17 CFR. 4.22. Although
CTAs have recordkeeping obligations under part 4,
the Commission has not required reporting by
CTAs, See generally, 17 CFR. part 4.

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10 In

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purposes of the CEA.’’ 17 In addition, the
Commission has the authority to ‘‘make
and promulgate such rules and
regulations as, in the judgment of the
Commission, are reasonably necessary
to effectuate the provisions or to
accomplish any of the purposes of [the
CEA].’’ 18 The Commission’s
discretionary authority to exclude or
exempt persons from registration was
intended to be exercised ‘‘to exempt
from registration those persons who
otherwise meet the criteria for
registration * * * if, in the opinion of
the Commission, there is no substantial
public interest to be served by the
registration.’’ 19 It is pursuant to this
authority that the Commission has
promulgated the various exemptions
from registration as a CPO that are
enumerated in § 4.13 of its regulations
as well as the exclusions from the
definition of CPO that are delineated in
§ 4.5.20
As stated previously in this release,
and in the Proposal, Congress enacted
the Dodd-Frank Act in response to the
financial crisis of 2007 and 2008.21 That
Act requires the reporting of certain
information by investment advisers to
private funds related to potential
systemic risk including, but not limited
to, the amount of assets under
management, use of leverage,
counterparty credit risk exposure, and
trading and investment positions for
each private fund under the reporting
entity’s advisement.22 This information
facilitates oversight of the investment
activities of funds within the context of
the rest of a discrete market or the
economy as a whole.
The sources of risk delineated in the
Dodd-Frank Act with respect to private
funds are also presented by commodity
pools. To provide the Commission with
similar information to address these
risks, the Commission has determined
to require registration of certain
previously exempt CPOs and to further
require reporting of information
comparable to that required in Form PF,
which the Commission has previously
adopted jointly with the SEC. To
implement this enhanced oversight, the
Commission proposed, and has now
determined to adopt, the revision and
rescission of certain discretionary
exemptions that it previously granted.
17 7

U.S.C. 1a(10), 1a(11), 1a(12).
U.S.C. 12a(5).
19 See H.R. Rep. No. 93–975, 93d Cong., 2d Sess.
(1974), p. 20.
20 See 68 FR 47231 (Aug. 8, 2003).
21 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111–203, 124
Stat. 1376 (2010).
22 See section 404 of the Dodd-Frank Act.
18 7

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11253

B. The Proposal
Following the recent economic
turmoil, and consistent with the tenor of
the provisions of the Dodd-Frank Act,
the Commission reconsidered the level
of regulation that it believes is
appropriate with respect to entities
participating in the commodity futures
and derivatives markets. Therefore, on
January 26, 2011, the Commission
proposed amendments and additions to
its existing regulatory regime for CPOs
and CTAs and the creation of two new
data collection instruments, Forms
CPO–PQR and CTA–PR (‘‘Proposal’’).23
In a concurrent joint proposal with the
SEC, the Commission also proposed
§ 4.27(d) and sections 1 and 2 of Form
PF.24
In the Proposal, the Commission
specifically proposed the following
amendments: (A) to require the periodic
reporting of data by CPOs and CTAs
regarding their direction of commodity
pool assets; (B) to identify certain
proposed filings with the Commission
as being afforded confidential treatment;
(C) to revise the requirements for
determining which persons should be
required to register as a CPO under
§ 4.5; (D) to require the filing of certified
annual reports by all registered CPOs;
(E) to rescind the exemptions from
registration under §§ 4.13(a)(3) and
(a)(4); (F) to require annual affirmation
of claimed exemptive relief for both
CPOs and CTAs; (G) to require an
additional risk disclosure statement
from CPOs and CTAs that engage in
swaps transactions; and (H) to make
certain conforming amendments to the
Commission’s regulations in light of the
proposed amendments.
In describing the rationale for the
Proposal, the Commission stated:
[T]o ensure that necessary data is collected
from CPOs and CTAs that are not operators
or advisors of private funds, the Commission
is proposing a new § 4.27, which would
require quarterly reports from all CPOs and
CTAs to be electronically filed with NFA.
The Commission is promulgating proposed
§ 4.27 pursuant to the Commission’s
authority to require the filing of reports by
registered CPOs and CTAs under section 4n
23 See

76 FR 7976 (Feb. 11, 2011).
76 FR 8068 (Feb. 11, 2011). Because the
Commission did not adopt the remainder of
proposed § 4.27 at the same time as it adopted the
subsection of § 4.27 implementing Form PF, the
Commission modified the designation of § 4.27(d)
to be the sole text of that section. Additionally, the
Commission made some revisions to the text of
§ 4.27 to: (1) clarify that the filing of Form PF with
the SEC will be considered substitute compliance
with certain Commission reporting obligations and
(2) allow CPOs and CTAs who are otherwise
required to file Form PF the option of submitting
on Form PF data regarding commodity pools that
are not private funds as substitute compliance with
certain CFTC reporting obligations.
24 See

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

C. Comments on the Proposal
The Commission received 61
comment letters in response to the
Proposal. The commenters represented a
diversity of market participants. Seven
commenters were registered investment
companies or registered investment
advisers; five commenters were
registered or exempt CPOs; and three
commenters were registered investment
companies or registered investment
advisers that also claimed exemption
from registration as a CPO under § 4.13.
The Commission also received 20
comments from law firms; 14 comments
from trade organizations; two comments
from individual interested parties; a
comment from a compliance service
provider; and a comment from a
registered futures association.26 The
majority of the comments received
opposed the adoption of the proposed
amendments to § 4.5 and the rescission
of §§ 4.13(a)(3) and (a)(4).
Having considered these comments,
the Commission has decided to adopt
most of the amendments to part 4 that
it proposed, with some modifications. In
addition, the Commission has decided
not to rescind the exemption in
§ 4.13(a)(3) for entities engaged in a de
minimis amount of derivatives trading.
The Commission’s amendments to part
4, and the modifications to its Proposal
are discussed below.
The scope of this Federal Register
release generally is restricted to the
comments received in response to the
Proposal and to the changes to, and the
clarifications of, the Proposal that the
25 76

FR 7976, 7977–78 (Feb. 11, 2011).
the Commission received six
comments that were not pertinent to the substance
of the Proposal. Three concerned position limits in
silver, one consisted of a web address; one was an
advertisement; and one simply said ‘‘nice.’’
26 Additionally,

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Commission is making in response
thereto. The Commission encourages
interested persons to read the Proposal
for a fuller discussion of the purpose of
each of the amendments contained in
the Proposal.
D. Significant Changes From the
Proposal
The significant changes from the
Proposal that the Commission is making
in the rules it is adopting today are as
follows: (1) The marketing restriction in
§ 4.5 no longer contains the clause ‘‘(or
otherwise seeking investment exposure
to)’’; (2) § 4.5 will be amended to
include an alternative trading threshold
test based on the net notional value of
a registered investment company’s
derivatives positions; (3) annual notices
for exemptions and exclusions will be
filed on an annual calendar year end
basis rather than on the anniversary of
the filing date; and (4) changes have
been made to the substance of Forms
CPO–PQR and CTA–PR and the filing
timelines for both forms.
II. Responses to Comments on the
Proposal
A. Comments Regarding Proposed
Amendments to § 4.5
As part of the Proposal, the
Commission proposed amendments to
§ 4.5(c)(2)(iii), reinstating a trading
threshold and marketing restriction for
registered investment companies
claiming exclusion from the definition
of CPO under that section. In support of
the Proposal, the Commission stated
that it became aware that certain
registered investment companies were
offering interests in de facto commodity
pools while claiming exclusion under
§ 4.5.27 The Commission further stated
that it believed that registered
investment companies should not
engage in such activities without
Commission oversight and that such
oversight was necessary to ensure
consistent treatment of CPOs regardless
of their status with respect to other
regulators.28 The Commission also
recognized that operational issues may
exist regarding the ability of registered
investment companies to comply with
the Commission’s compliance regime.29
The Commission received numerous
comments regarding the proposed
27 76 FR 7976, 7983 (Feb. 12, 2011). The
Commission determined to propose amendments to
§ 4.5 following the submission of a petition for
rulemaking by the National Futures Association, to
which the Commission has delegated much of its
direct oversight activities relating to CPOs, CTAs,
and commodity pools. See, 75 FR 56997 (Sept. 17,
2010).
28 Id. at 7984.
29 Id.

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amendments to § 4.5. The comments can
be broadly categorized into eight
categories: (1) General comments as to
the advisability of making such a change
and the Commission’s justification for
doing so; (2) the trading threshold; (3)
the inclusion of swaps within the
trading threshold; (4) the proposed
marketing restriction; (5) harmonization
of compliance obligations with those of
the SEC; (6) the appropriate entity to
register as the registered investment
company’s CPO; (7) the use and
permissibility of controlled foreign
corporations by registered investment
companies; and (8) the timeline for
implementation.
1. General Comments on Proposed
Amendments to § 4.5
Certain comments argued against the
adoption of any change to § 4.5 and
questioned the Commission’s
justification for doing so.30 Most
commenters generally opposed the
change because they claimed that
requiring registration and compliance
with the Commission’s regulatory
regime would provide no tangible
benefit to the Commission or investors
because registered investment
companies are already subject to
comprehensive regulation by the SEC.
The Commission believes that
registration with the Commission
provides two significant benefits. First,
registration allows the Commission to
ensure that all entities operating
collective investment vehicles
participating in the derivatives markets
meet minimum standards of fitness and
competency.31 Second, registration
provides the Commission and members
of the public with a clear means of
addressing wrongful conduct by
individuals and entities participating in
the derivatives markets. The
Commission has clear authority to take
punitive and/or remedial action against
registered entities for violations of the
CEA or of the Commission’s regulations.
Moreover, the Commission has the
ability to deny or revoke registration,
thereby expelling an individual or entity
from serving as an intermediary in the
industry. Members of the public also
may access the Commission’s
reparations program or National Futures
Association’s (‘‘NFA’’) arbitration
program to seek redress for wrongful
conduct by a Commission registrant
30 Comment letter from the Investment Company
Institute (April 12, 2011) (‘‘ICI Letter’’); comment
letter from the Mutual Fund Directors Forum (April
12, 2011) (‘‘MFDF Letter’’).
31 See H.R. Rep. No. 565 (Part 1), 97th Cong., 2d
Sess. 48 (1982), S. Rep. No. 384, 97th Cong., 2d
Sess. 111 (1982). See also, 48 FR 14933 (Apr. 6,
1983).

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and/or NFA member. Therefore, the
Commission continues to believe that its
registration requirements further critical
regulatory objectives and serve
important public policy goals.
A number of commenters who
expressed general opposition also
acknowledged that if the Commission
determined to proceed with its
proposed changes to § 4.5, certain areas
of harmonization with SEC
requirements should be addressed. To
that end, concurrently with the issuance
of this rule, the Commission plans to
issue a notice of proposed rulemaking
detailing its proposed modifications to
part 4 of its regulations to harmonize the
compliance obligations that apply to
dually registered investment companies.
Commenters did not question, however,
that the Commission has a regulatory
interest in overseeing entities engaging
in derivatives trading. Rather, they
argued that the SEC currently provides
adequate oversight of their activities.
The Commission disagrees with the
arguments presented by those
commenters who argued against the
adoption of any change to § 4.5. The
Commission continues to believe that
entities operating collective investment
vehicles that engage in more than a de
minimis amount of derivatives trading
should be required to register with the
Commission. The Commission believes
that because Congress empowered the
Commission to oversee the derivatives
market, the Commission is in the best
position to oversee entities engaged in
more than a limited amount of nonhedging derivatives trading.
Several commenters also asserted that
modifying § 4.5 would result in a
significant burden to entities required to
register with the Commission without
any meaningful benefit to the
Commission.32 The Commission
believes, as discussed throughout this
release, that entities that are offering
services substantially identical to those
of a registered CPO should be subject to
substantially identical regulatory
32 See ICI Letter; comment letter from Vanguard
(April 12, 2011) (‘‘Vanguard Letter’’); comment
letter from Reed Smith LLP (April 12, 2011) (‘‘Reed
Smith Letter’’); comment letter from
AllianceBernstein Mutual Funds (April 12, 2011)
(‘‘AllianceBernstein Letter’’); comment letter from
United States Automobile Association (April 12,
2011) (‘‘USAA Letter’’); comment letter from
Principal Management Corporation (April 12, 2011)
(‘‘PMC Letter’’); comment letter from Investment
Adviser Association (April 12, 2011) (‘‘IAA Letter’’);
comment letter from Dechert LLP and clients (April
12, 2011) (‘‘Dechert II Letter’’); comment letter from
Janus Capital Management LLC (April 12, 2011)
(‘‘Janus Letter’’); comment letter from Security
Traders Association (April 12, 2011) (‘‘STA
Letter’’); comment letter from Invesco Advisers, Inc.
(April 12, 2011) (‘‘Invesco Letter’’); and comment
letter from Equinox Fund Management, LLC (July
28, 2011) (‘‘Equinox Letter’’).

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obligations. The Commission also
recognizes that modification to § 4.5
may result in costs for registered
investment companies. For that reason,
as stated above, in conjunction with
finalizing the proposed amendments to
§ 4.5, the Commission has proposed to
adopt a harmonized compliance regime
for registered investment companies
whose activities require oversight by the
Commission. Although the Commission
believes the modifications to § 4.5
enhance the Commission’s ability to
effectively oversee derivatives markets,
it is not the Commission’s intention to
burden registered investment companies
beyond what is required to provide the
Commission with adequate information
it finds necessary to effectively oversee
the registered investment company’s
derivatives trading activities. Through
this harmonization, the Commission
intends to minimize the burden of the
amendments to § 4.5.
Second, the Commission disagrees
with the commenters’ assertion that the
Commission would not receive any
meaningful benefit from a modification
to § 4.5. As stated above, the
Commission disagrees that such
registration and oversight is redundant,
and emphasizes that it is in the best
position to adequately oversee the
derivatives trading activities of entities
in which the Commission has a
regulatory interest. As discussed above,
the Commission is charged with
administering the Commodity Exchange
Act to protect market users and the
public from fraud, manipulation,
abusive practices and systemic risk
related to derivatives that are subject to
the Act, and to foster open, competitive,
and financially sound markets. The
Commission’s programs are structured
and its resources deployed in service of
that mission.
One commenter questioned the
Commission’s reasoning for choosing to
impose additional requirements on
registered investment companies but not
proposing to impose such requirements
on other categories of entities.33 This
commenter also stated that the
Commission was required to detail its
reasoning under the Administrative
Procedure Act.34 As stated in the
Proposal, the Commission remains
concerned that registered investment
companies are offering managed futures
strategies, either in whole or in part,
without Commission oversight and
without making the disclosures to both
the Commission and investors regarding
the pertinent facts associated with the
investment in the registered investment
33 See

ICI Letter.

34 Id.

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11255

company. The Commission is focused
on registered investment companies
because it is aware of increased trading
activity in the derivatives area by such
entities that may not be appropriately
addressed in the existing regulatory
protections, including risk management
and recordkeeping and reporting
requirements. The SEC has also noted
this increased trading activity and is
reviewing the use of derivatives by
investment companies.35 In its recent
concept release regarding the use of
derivatives by registered investment
companies, the SEC noted that although
its staff had addressed issues related to
derivatives on a case-by-case basis, it
had not developed a ‘‘comprehensive
and systematic approach to derivatives
related issues.’’ 36 As aptly noted by the
Chairman of the SEC, ‘‘The controls in
place to address fund management in
traditional securities can lose their
effectiveness when applied to
derivatives. This is particularly the case
because a relatively small investment in
a derivative instrument can expose a
fund to potentially substantial gain or
loss—or outsized exposure to an
individual counterparty.’’ 37 Despite the
commenter’s assertion, the Commission
is unaware of other classes of entities
that are excluded from the definition of
CPO engaging in significant derivatives
trading. Of course, if the Commission
becomes aware of any other categories
of excluded entities engaging in similar
levels of derivatives trading, it will
consider appropriate action to ensure
that such entities and their derivatives
35 For example, the SEC recently issued a concept
release seeking comment on use of derivatives by
investment companies, noting: ‘‘The dramatic
growth in the volume and complexity of derivatives
investments over the past two decades, and funds’
increased use of derivatives, have led the
[Securities and Exchange] Commission and its staff
to initiate a review of funds’ use of derivatives
under the Investment Company Act. (footnotes
omitted)’’ 76 FR 55237, 55238 (Sep. 7, 2011).
36 76 FR 55237, 55239 (Sept. 7, 2011). See, Press
Release, Securities and Exchange Commission, SEC
Seeks Public Comment on Use of Derivatives by
Mutual Funds and Other Investment Companies
(Aug. 31, 2011), available at http://www.sec.gov/
news/press/2011/2011-175.htm (‘‘ ‘The derivatives
markets have undergone significant changes in
recent years, and the Commission is taking this
opportunity to seek public comment and ensure
that our regulatory approach and interpretations
under the Investment Company Act remain current,
relevant, and consistent with investor protection,’ ’’
said SEC Chairman Mary Shapiro.’’).
37 Chairman Mary Shapiro, Opening Statement at
SEC Open Meeting Item 1—Use of Derivatives by
Funds (Aug. 31, 2011), available at http://
www.sec.gov/news/speech/2011/spch083111mlsitem1.htm (‘‘The current derivatives review gives us
the opportunity to re-think our approach to
regulating funds’ use of derivatives. We are
engaging in this review with a holistic perspective,
in the wake of the financial crisis, and in light of
the new comprehensive regulatory regime for swaps
being developed under the Dodd-Frank Act.’’).

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trading activities are brought under the
Commission’s regulatory oversight. As
stated previously, the Commission
continues to believe that entities that are
offering services substantially identical
to those of a registered CPO should be
subject to substantially identical
regulatory obligations.

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2. Comments on the Proposed Trading
Threshold
The Commission also received
numerous comments on the proposed
addition of a trading threshold to the
exclusion under § 4.5.38 The proposed
trading threshold provided that
derivatives trading could not exceed
five percent of the liquidation value of
an entity’s portfolio, without
registration with the Commission. The
Proposal excluded activity conducted
for ‘‘bona fide hedging’’ purposes.39
Most commenters stated that a five
percent threshold was far too low in
light of the Commission’s determination
to include swaps within the measured
activities and the limited scope of the
Commission’s bona fide hedging
definition, but no data was provided to
support this assertion. The Commission,
in its adoption of the exemption under
§ 4.13(a)(3),40 previously determined
that five percent is an appropriate
threshold to determine whether an
entity warrants oversight by the
Commission.41
Despite the views of some
commenters, the Commission believes
that the five percent threshold continues
to be the appropriate percentage for
exemption or exclusion based upon an
entity’s limited derivatives trading. Five
percent remains the average required for
futures margins, although the
Commission acknowledges that margin
38 See Invesco Letter; ICI Letter; Vanguard Letter;
Reed Smith Letter; AllianceBernstein Letter; AII
Letter; STA Letter; Janus Letter; PMC Letter; USAA
Letter; comment letter from Fidelity Management
and Research Co. (April 12, 2011) (‘‘Fidelity
Letter’’); comment letter from Securities Industry
and Financial Markets Association (April 12, 2011)
(‘‘SIFMA Letter’’); comment letter from Dechert LLP
(July 26, 2011) (‘‘Dechert III Letter’’); comment letter
from Rydex/SGI Morgan, Lewis & Bockius LLP
(April 12, 2011) (‘‘Rydex Letter’’); comment letter
from the United States Chamber of Commerce
(April 12, 2011) (‘‘USCC Letter’’); comment letter
from Sidley Austin LLP (April 12, 2011) (‘‘Sidley
Letter’’); comment letter from the National Futures
Association (April 12, 2011) (‘‘NFA Letter’’);
comment letter from Campbell & Company, Inc.
(April 12, 2011) (‘‘Campbell Letter’’); comment
letter from AQR Capital Management, LLC (April
12, 2011) (‘‘AQR Letter’’); comment letter from
Steben & Company, Inc. (April 12, 2011) (‘‘Steben
Letter’’); comment letter from the Investment
Company Institute (July 28, 2011) (‘‘ICI II Letter’’);
and comment from the Association of Institutional
Investors (April 12, 2011) (‘‘AII Letter’’).
39 76 FR 7976, 7989 (Feb. 11, 2011).
40 17 CFR 4.13(a)(3).
41 68 FR 47221, 47225 (Aug. 8, 2003).

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levels for securities product futures are
significantly higher and the levels for
swaps margining may be as well. The
Commission believes, however, that
trading exceeding five percent of the
liquidation value of a portfolio
evidences a significant exposure to the
derivatives markets. The Commission
believes that such exposure should
subject an entity to the Commission’s
oversight. Moreover, the Commission
believes that its adoption of an
alternative net notional test to
determine eligibility for exclusion from
the definition of CPO, as discussed
infra, provides flexibility to registered
investment companies in consideration
of the fact that initial margin for certain
commodity interest products may not
permit compliance with the five percent
threshold.
Commenters also recommended that
the Commission exclude from the
threshold calculation various
instruments including broad-based
stock index futures, security futures
generally, or financial futures contracts
as a whole.42 The Commission does not
believe that exempting any of these
instruments from the threshold
calculation is appropriate. The
Commission does not believe that there
is a meaningful distinction between
those security or financial futures and
other categories of futures. The
Commission believes that its oversight
of the use of security or financial futures
is just as essential as its oversight of
physical commodity futures. Congress
granted the Commission authority over
all futures in § 2 of the CEA.43 The
Commission believes that it is in the
best position to assess investor and
market risks posed by entities trading in
derivatives regardless of type. Therefore,
the Commission has decided not to
modify the scope of the threshold from
what was proposed in order to exclude
security futures or financial futures from
the trading threshold.
Commenters requested that the
Commission expand its definition of
bona fide hedging as it appears in
§ 1.3(z) to include risk management as a
recognized bona fide hedging activity
for purposes of § 4.5.44 The Proposal
excluded activity conducted for ‘‘bona
fide hedging’’ purposes as that term was
defined in § 1.3 as it existed at the time
of the proposal.45 Further, the Proposal
noted that the Commission anticipated
that the definition of ‘‘bona fide
42 See

Rydex Letter; Invesco Letter; ICI Letter.
43 7 U.S.C. 2.
44 See Invesco Letter; ICI Letter; Vanguard Letter;
Reed Smith Letter; AllianceBernstein Letter; IAA
Letter; Janus Letter; and STA Letter.
45 76 FR 7976, 7989 (Feb. 11, 2011).

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hedging’’ would be modified through
future rulemakings,46 which were open
for comments from the public.
The Commission recently adopted
final rules regarding position limits and,
through that rulemaking, implemented a
new statutory definition of bona fide
hedging transactions for exempt and
excluded commodity transactions as
part of new § 151.5.47 This statutory
definition limits the scope of bona fide
hedging transactions for exempt and
agricultural commodities, and does not
provide for a risk management
exemption for position limits
purposes.48 With regard to position
limits and bona fide hedging
transactions for excluded commodities,
the Commission amended the pre-DoddFrank definition of bona fide hedging in
§ 1.3(z) to only apply to excluded
commodities. Further, the Commission
allowed DCMs and SEFs that are trading
facilities to provide for a risk
management exemption from position
limits for excluded commodity
transactions.
The Commission does not believe that
it is appropriate to exclude risk
management transactions from the
trading threshold. The Commission
believes that an important distinction
between bona fide hedging transactions
and those undertaken for risk
management purposes is that bona fide
hedging transactions are unlikely to
present the same level of market risk as
they are offset by exposure in the
physical markets. Additionally, the
Commission is concerned that in the
context of exclusion under § 4.5, a risk
management exclusion would permit
registered investment companies to
engage in a greater volume of
derivatives trading than other entities
which are engaged in similar activities,
but which are otherwise required to
register as CPOs. This could result in
disparate treatment among similarly
situated entities. Moreover, there was no
consensus among the commenters as to
the appropriate definition of risk
management transactions. Thus, the
Commission believes that it may be
difficult in this context to properly limit
the scope of such exclusion as objective
criteria are not universally recognized,
which would make such exclusion
onerous to enforce.49
46 76
47 7

FR 7976, 7984 (Feb. 11, 2011).
U.S.C. 6a(c); 76 FR 71626, 71643 (Nov. 18,

2011).
48 76 FR 71626, 71644 (Nov. 18, 2011).
49 The Commission notes that § 4.5 references the
definition of bona fide hedging for exempt and
agricultural commodities under § 151.5 as well as
the definition of bona fide hedging for excluded
commodities under § 1.3(z). Market participants
should not construe either § 151.5 or § 1.3(z) as

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During numerous meetings with
commenters, the commenters noted that
most registered investment companies
use derivatives for risk management
purposes, namely to offset the risk
inherent in positions taken in the
securities or bond markets, or to
equitize cash efficiently. Although the
Commission recognizes the importance
of the use of derivatives for risk
management purposes, it does not
believe that transactions that are not
within the bona fide hedging definition
should be excluded from the
determination of whether an entity
meets the trading threshold for
registration and oversight. Therefore,
the Commission has decided not to
exclude risk management activities by
registered investment companies from
the trading threshold for purposes of
§ 4.5.
Several panelists at the Commission’s
staff roundtable held on July 6, 201150
(‘‘Roundtable’’) suggested that, instead
of a trading threshold that is based on
a percentage of margin, the Commission
should focus solely on entities that offer
‘‘actively managed futures’’ strategies.51
The panelist defined ‘‘actively managed
futures’’ strategies as those in which the
entity or its investment adviser made its
own decisions as to which derivatives to
take positions in, as compared to the
‘‘passive’’ use of an index, wherein the
entity’s investments simply track those
held by an index.52
The Commission does not believe that
it is proper to exclude from the
Commission’s oversight those entities
that are using an index or other socalled ‘‘passive’’ means to track the
value of other derivatives. Establishing
‘‘active’’ versus ‘‘passive’’ use of
derivatives as a criterion for entitlement
to the exclusion would introduce an
element of subjectivity to an otherwise
objective standard and make the
threshold more difficult to interpret,
apply, and enforce. It also could have
the undesirable effect of encouraging
funds to structure their investment
activities to avoid regulation. Moreover,
permitting a risk management exemption for
purposes of determining compliance with the
trading threshold in § 4.5.
50 See Notice of CFTC Staff Roundtable
Discussion on Proposed Changes to Registration
and Compliance Regime for Commodity Pool
Operators and Commodity Trading Advisors,
available at http://www.cftc.gov/PressRoom/Events/
opaevent_cftcstaff070611.
51 See Transcript of CFTC Staff Roundtable
Discussion on Proposed Changes to Registration
and Compliance Regime for Commodity Pool
Operators and Commodity Trading Advisors
(‘‘Roundtable Transcript’’), at 19, 25, 30, 76–77, 87–
90, available at http://www.cftc.gov/ucm/groups/
public/@swaps/documents/dfsubmission/
dfsubmission27_070611-trans.pdf.
52 Id.

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the use of an index or other passive
investment vehicle by a large number of
investment companies can amplify the
market assumptions built into an index
or other vehicle. Thus, the Commission
has decided not to adopt the panelist’s
suggestion that the Commission focus
on whether an entity offers an actively
managed futures strategy.
One commenter suggested that the
Commission should consider the
adoption of an alternative test that
would be identical to the aggregate net
notional value test that is currently
available under § 4.13(a)(3)(ii)(B).53
Section 4.13(a)(3)(ii)(B) provides that an
entity can claim exemption from
registration if the net notional value of
its fund’s derivatives trading does not
exceed one hundred percent of the
liquidation value of the fund’s
portfolio.54
Conversely, several panelists at the
Roundtable opposed such a test, stating
that it was not a reliable means to
measure an entity’s exposure in the
market.55 Specifically, certain panelists
asserted that the net notional value of
positions may not provide a reliable
measure of the risk posed by certain
entities in the market.56
The Commission first considered the
addition of an alternative net notional
trading threshold when it proposed to
amend § 4.5 in 2002.57 In support of its
proposal, the Commission stated that
the alternative test provided otherwise
regulated entities that use certain
classes of futures with higher initial
margin requirements with an
opportunity to also receive exclusionary
relief from the definition of CPO.58 The
Commission further stated that the
inclusion of an alternative test enabled
entities seeking exclusion to rely on
whichever test was less restrictive based
on their futures positions.59 In 2003, the
Commission proposed and adopted final
rules amending § 4.5, which eliminated
the five percent trading threshold and
did not adopt the alternative net
notional test.60 In stating its rationale for
rescinding the five percent threshold
test and declining to adopt the
alternative net notional test, the
Commission stated that because it was
simultaneously proposing, and
ultimately adopting, an exemption from
registration in § 4.13(a)(4), which did
not impose any trading restriction, the
53 Dechert

III Letter.
CFR 4.13(a)(3)(ii)(B).
55 See Roundtable Transcript at 69–71.
56 See Roundtable Transcript at 70.
57 67 FR 65743 (Oct. 28, 2002).
58 67 FR 65743, 65744–45.
59 67 FR 65743, 65745.
60 68 FR 12622 (Mar. 17, 2003); 68 FR 47221
(Aug. 8, 2003).
54 17

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11257

Commission would remove the trading
restrictions from § 4.5 as well to provide
consistent treatment.61
The Commission no longer believes
that its prior justification for
abandoning the alternative net notional
test is persuasive. By the adoption of
this final rule, the Commission will
reinstate the five percent trading
threshold in § 4.5 for registered
investment companies and rescind the
exemption in § 4.13(a)(4), which
reverses the regulatory conditions in
existence in 2003. The Commission
believes that the appropriate criteria for
exclusion through the use of a net
notional test is delineated in
§ 4.13(a)(3)(ii)(B),62 commonly known
as the ‘‘de minimis exemption,’’ albeit
with the addition of allowing unlimited
use of futures, options, or swaps for
bona fide hedging purposes, which is
not permitted under § 4.13(a)(3).
As stated previously, the net notional
test, as set forth under § 4.13(a)(3)(ii)(B),
permits entities to claim relief if the
aggregate net notional value of the
entity’s commodity interest positions
does not exceed 100 percent of the
liquidation value of the pool’s
portfolio.63 Notional value is defined by
asset class. For example, the notional
value of futures contracts is derived by
multiplying the number of contracts by
the size of the contract, in contract
units, and then multiplying by the
current market price for the contract.64
The notional value of a cleared swap,
however, will be determined consistent
with the provisions of part 45 of the
Commission’s regulations. The ability to
net positions is also determined by asset
class, with entities being able to net
futures contracts across designated
contract markets or foreign boards of
trade, whereas swaps may only be
netted if cleared by the same designated
clearing organization (‘‘DCO’’) and it is
otherwise appropriate.65
The Commission believes that the
adoption of an alternative net notional
test will provide consistent standards
for relief from registration as a CPO for
entities whose portfolios only contain a
61 68 FR 12622, 12625–26 (noting that although
entities excluded under § 4.5 could solicit retail
participants, as compared to those entities exempt
under § 4.13(a)(4), which may only offer to certain
high net worth entities and individuals, the
Commission stated that the fact that the § 4.5
entities were otherwise regulated supported
consistent criteria for relief).
62 The net notional test as it appears in
§ 4.13(a)(3) will be amended by this rulemaking to
provide guidance regarding the ability to net
cleared swaps.
63 17 CFR 4.13(a)(3)(ii)(B).
64 Id.
65 See discussion of amendments to
§ 4.13(a)(3)(ii)(B) infra.

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

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3. Comments on the Inclusion of Swaps
in the Trading Threshold
The Commission also received
numerous comments opposing its
decision to include swaps within the
threshold test discussed above.68
66 See NFA Letter, Campbell Letter, AQR Letter,
Steben Letter.
67 See AQR Letter.
68 See Janus Letter; Reed Smith Letter;
AllianceBernstein Letter; USAA Letter; ICI Letter;

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Several commenters expressed concern
that the Commission would require
inclusion of swaps within the threshold
prior to its adoption of final rules
further defining the term ‘‘swap’’ and
explaining the margining requirements
for such instruments. The Commission
agrees that it should not implement the
inclusion of swaps within the threshold
test prior to the effective date of such
final rules. Therefore, it is the
Commission’s intention to establish the
compliance date of the inclusion of
swaps within the threshold calculation
as 60 days after the final rules regarding
the definition of ‘‘swap’’ and the
delineation of the margin requirement
for such instruments are effective.69 The
Commission believes that such
compliance date will provide entities
with sufficient time to assess the impact
of such rules on their portfolios and to
make the determination as to whether
registration with the Commission is
required.
The Commission also received a
comment asking for additional
clarification regarding its decision to
include swaps within the threshold.70
The Dodd-Frank Act amended the
statutory definition of the terms
‘‘commodity pool operator’’ and
‘‘commodity pool’’ to include those
entities that trade swaps.71 If the
Commission were to adopt the trading
threshold and only include futures and
options as the basis for calculating
compliance with the threshold, the
swaps activities of the registered
investment companies would still
trigger the registration requirement
notwithstanding the exclusion of swaps
from the calculus. That is, the purpose
of the threshold test is to define a de
minimis amount of trading activity that
would not trigger the registration
requirement. If swaps were excluded,
any swaps activities undertaken by a
registered investment company would
result in that entity being required to
register because there would be no de
minimis exclusion. As a result, one
swap contract would be enough to
trigger the registration requirement. For
that reason, if the Commission wants to
permit some de minimis level of swaps
activity by registered investment
companies without registration with the
PMC Letter; Invesco Letter; IAA Letter; Dechert II
Letter; AII Letter; and SIFMA Letter.
69 Effective Date for Swap Regulation, 76 FR
42508 (issued and made effective by the
Commission on July 14, 2011; published in Federal
Register on July 19, 2011).
70 See Janus Letter; Reed Smith Letter;
AllianceBernstein Letter; USAA Letter; ICI Letter;
PMC Letter; Invesco Letter; IAA Letter; Dechert II
Letter; AII Letter; and SIFMA Letter.
71 7 U.S.C. 1a(10); 1a(11).

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Commission, it must do so explicitly in
the exclusion.72 Because the
Commission has determined that de
minimis activity by registered
investment companies does not
implicate the Commission’s regulatory
concerns, the Commission has decided
to include swaps as a component of the
trading threshold.
4. Comments on the Proposed Marketing
Restriction
The marketing restriction, as
proposed by the Commission, prohibits
the marketing of interests in the
registered investment company ‘‘as a
vehicle for trading in (or otherwise
seeking investment exposure to) the
commodity futures, commodity options,
or swaps markets.’’ 73 Again, as with the
other aspects of the proposed
amendments to § 4.5, the Commission
received numerous comments on this
prohibition.74
The vast majority of comments urged
the Commission to remove the clause
‘‘or otherwise seeking investment
exposure to’’ as introducing an
unacceptable level of ambiguity into the
marketing restriction.75 The
Commission agrees with these
comments and believes that the removal
of this clause is appropriate as the
clause does not meaningfully add to the
marketing restriction and only creates
uncertainty. Thus, the Commission will
adopt the marketing restriction without
the clause ‘‘or otherwise seeking
investment exposure to * * *’’
The Commission also received many
comments asking that the Commission
provide some clarification regarding the
factors that it would consider in making
the determination whether an entity
violated the marketing restriction.76 The
Commission agrees that providing
factors to further explain the plain
language of the marketing restriction
would be helpful to those who plan to
market registered investment companies
72 Any reference to a de minimis level of swaps
activities by registered investment companies only
applies in the context of CPO registration by
registered investment companies.
73 76 FR 7976, 7989 (Feb. 12, 2011).
74 See Rydex Letter; Fidelity Letter; SIFMA Letter;
AII Letter; ICI Letter; Vanguard Letter; Reed Smith
Letter; AllianceBernstein Letter; USAA Letter; PMC
Letter; Invesco Letter; Janus Letter; STA Letter;
comment letter from the Managed Futures
Association regarding proposed amendments to
§ 4.5 (April 12, 2011) (‘‘MFA II Letter’’); Dechert II
Letter; NFA Letter; comment letter from Alston &
Bird, LLP (April 12, 2011) (‘‘Alston Letter’’);
Campbell Letter; AQR Letter; Steben Letter; and
Dechert III Letter.
75 See, e.g., ICI Letter; Alston Letter; Rydex Letter;
and Vanguard Letter.
76 See ICI Letter; MFA II Letter; Dechert II Letter;
Invesco Letter; NFA Letter; Campbell Letter; Steben
Letter; and AQR Letter.

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations
to investors. The Commission has
determined, however, that such factors
should be instructive and that no single
factor is dispositive. The Commission
will determine whether a violation of
the marketing restriction exists on a case
by case basis through an examination of
the relevant facts. The Commission
seeks to discourage entities from
designing creative marketing with the
intent to avoid the marketing restriction.
To address commenters’ requests for
guidance, the Commission believes that
the following factors are indicative of
marketing a registered investment
company as a vehicle for investing in
commodity futures, commodity options,
or swaps:
• The name of the fund;
• Whether the fund’s primary
investment objective is tied to a
commodity index;
• Whether the fund makes use of a
controlled foreign corporation for its
derivatives trading;
• Whether the fund’s marketing
materials, including its prospectus or
disclosure document, refer to the
benefits of the use of derivatives in a
portfolio or make comparisons to a
derivatives index;
• Whether, during the course of its
normal trading activities, the fund or
entity on its behalf has a net short
speculative exposure to any commodity
through a direct or indirect investment
in other derivatives;
• Whether the futures/options/swaps
transactions engaged in by the fund or
on behalf of the fund will directly or
indirectly be its primary source of
potential gains and losses; and
• Whether the fund is explicitly
offering a managed futures strategy.77
The Commission will give more
weight to the final factor in the list
when determining whether a registered
investment company is operating as a de
facto commodity pool. In contrast, a
registered investment company that
does not explicitly offer a managed
futures strategy could still be found to
have violated the marketing restriction
based on whether its conduct satisfied
any number of the other factors
enumerated above. Put differently, if a
registered investment company offers a
strategy with several indicia of a
managed futures strategy, yet avoids
explicitly describing the strategy as such
in its offering materials, that registered
investment company may still be found
to have violated the marketing
restriction.
The Commission also notes that
whether the name of the fund includes
77 These factors are derived in substantial part
from the Steben Letter and AQR Letter.

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the terms ‘‘futures’’ or ‘‘derivatives,’’ or
otherwise indicates a possible focus on
futures or derivatives, will not be
considered a dispositive factor, but
rather one of many that the Commission
will consider in making its
determination. Moreover, the
Commission will not consider the mere
disclosure to investors or potential
investors that the registered investment
company may engage in derivatives
trading incidental to its main
investment strategy and the risks
associated therewith as being violative
of the marketing restriction.
At the Roundtable, several panelists
questioned the Commission’s reasoning
for deeming the use of a controlled
foreign corporation (‘‘CFC’’) to be an
appropriate factor in determining
whether the registered investment
company violates the marketing
restriction. Based on comments received
at the Roundtable and during the
comment period, the Commission
believes that registered investment
companies use controlled foreign
corporations as a mechanism to invest
up to 25 percent of the registered
investment company’s portfolio in
derivatives.78 The Commission,
therefore, believes that a registered
investment company’s use of a CFC may
indicate that the company is engaging in
derivatives trading in excess of the
trading threshold. Again, the
Commission will consider this factor in
the context of the registered investment
company’s other conduct and will not
view this factor as being dispositive of
a violation of the marketing restriction.
For these reasons, and those stated in
the Proposal, the Commission adopts
the marketing restriction in § 4.5 with
the modifications discussed herein.
5. Comments on the Harmonization of
Compliance Obligations
Many commenters raised concerns
about the potential conflicts between
the Commission’s regulatory regime and
that imposed by the SEC if the
Commission were to adopt the proposed
amendments as final rules.79 As noted
above, in an effort to obtain further
information from interested parties,
Commission staff held the Roundtable,
and invited staff from the SEC, the IRS,
and members of various trade
organizations. The roundtable focused
predominantly on harmonization of the
78 See

Roundtable Transcript at 152–53.
Vanguard Letter; ICI Letter; Dechert III
Letter; Reed Smith Letter; AllianceBernstein Letter;
USAA Letter; PMC Letter; Invesco Letter; IAA
Letter; Dechert II Letter; Fidelity Letter; Janus
Letter; SIFMA Letter; STA Letter; AQR Letter; NFA
Letter; MFA II Letter; Alston Letter; Rydex Letter;
and ICI II Letter.
79 See

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Commission’s compliance regime with
that of the SEC. Upon consideration of
the comments and the discussions held
as a result of the Roundtable relating to
registered investment companies that
will be required to register under
amended § 4.5, the Commission agrees
that it is necessary to harmonize the
Commission’s compliance obligations
under part 4 of the Commission’s
regulations with the requirements of the
SEC for registered investment
companies. To that end, concurrently
with the issuance of this rule, the
Commission is issuing a notice of
proposed rulemaking detailing its
proposed modifications to part 4 of its
regulations to harmonize the
compliance obligations that apply to
dually registered investment companies.
The Commission will not require
entities that must register due to the
amendments to § 4.5 to comply with the
Commission’s compliance regime until
the adoption of final rules governing the
compliance framework for registered
investment companies subject to the
Commission’s jurisdiction.
6. Comments Regarding the Entity
Required to Register as the CPO
The Commission received a number
of comments requesting clarification as
to which entity would be required to
register as a CPO if a registered
investment company would not qualify
for exclusion under § 4.5, as amended.80
The commenters consistently proposed
that the registered investment
company’s investment adviser is the
appropriate entity to register in the
capacity of the investment company’s
CPO. The Commission agrees that the
investment adviser is the most logical
entity to serve as the registered
investment company’s CPO. To require
a member or members of the registered
investment company’s board of
directors to register would raise
operational concerns for the registered
investment company as it would result
in piercing the limitation on liability for
actions undertaken in the capacity of
director.81 Thus, the Commission
concludes that the investment adviser
for the registered investment company
is the entity required to register as the
CPO.
80 See ICI Letter; Reed Smith Letter;
AllianceBernstein Letter; Rydex Letter; Fidelity
Letter; USAA Letter; PMC Letter; IAA Letter; Janus
Letter; SIFMA Letter; STA Letter; comment letter
from AlphaSimplex Group (April 12, 2011) (‘‘ASG
Letter’’); NFA Letter; MFDF Letter; and Campbell
Letter.
81 See MFDF Letter.

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7. Comments Regarding the Use of
Controlled Foreign Corporations
The Commission received many
comments regarding the use of CFCs by
registered investment companies for
purposes of engaging in commodities
trading. As stated previously, it is the
Commission’s understanding that
registered investment companies invest
up to 25 percent of their assets in the
CFC, which then engages in actively
managed derivatives strategies, either on
its own or under the direction of one or
more CTAs. Operators of CFCs have
been exempt from Commission
registration by claiming relief under
§ 4.13(a)(4) of the Commission’s
regulations because the sole participant
in the CFC is the registered investment
company. Additionally, at the
Roundtable, panelists informed
Commission staff that several registered
investment companies that operated
CFCs did not claim relief under
§ 4.13(a)(4) because it was their opinion
that the CFC was merely a subdivision
of the registered investment company
and was not a separate commodity
pool.82
Commenters urged the Commission to
continue to permit registered
investment companies to use CFCs and
to allow such CFCs to be exempt from
registration with the Commission under
§ 4.13 or exclude them under § 4.5 by
reason of their sole investor being
excluded as well. Commenters proposed
various mechanisms by which the
Commission could obtain information
regarding the activities of CFCs,
including requiring disclosure of CFC
fees and expenses at the registered
investment company level, requiring a
representation that the CFC will comply
with key provisions of the Investment
Company Act of 1940 (‘‘Investment
Company Act’’),83 and requiring the
registered investment company to make
its CFC’s books and records available to
the Commission and NFA for
inspection.
The Commission does not oppose the
continued use of CFCs by registered
investment companies, but it believes
that CFCs that fall within the statutory
definition of ‘‘commodity pool’’ should
be subject to regulation as a commodity
pool.84 The Dodd-Frank Act amended
the CEA to define a commodity pool as
‘‘any investment trust, syndicate, or
similar form of enterprise operated for
the purpose of trading in commodity
interests, including any * * *
commodity for future delivery, security
82 See

Roundtable Transcript at 165.
U.S.C. 80a–1, et seq.
84 7 U.S.C. 1a(10).
83 15

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futures product, or swap.’’ 85 Based on a
plain language reading of the statutory
definition, CFCs wholly owned by
registered investment companies and
used for trading commodity interests are
properly considered commodity pools.
These entities also satisfy the definition
of ‘‘pool’’ delineated in § 4.10(d)(1) of
the Commission’s regulations, which is
substantively identical to the statutory
definition. There is no meaningful basis
for concluding otherwise. Moreover, the
Commission believes that each separate
legally cognizable entity must be
assessed on its own characteristics and
that a CFC should not be entitled to
exclusion simply because its parent
company is a registered investment
company that may be entitled to
exclusion under § 4.5. Therefore, the
Commission does not oppose the use of
CFCs for trading in commodity interests
by registered investment companies, but
such CFCs will be required to have their
CPOs register with the Commission
unless they may claim exemption or
exclusion therefrom on their own
merits.
8. Comments Regarding Implementation
of Amendments
The Commission received several
comments with suggestions regarding
implementation of the proposed
amendments to § 4.5, if the Commission
decided to adopt the proposed
provisions as final rules.86 Several
commenters recommended that the
Commission provide for an undefined
‘‘substantial transition period for
compliance.’’ 87 Conversely, one
commenter suggested that the
Commission should only provide a
short period of time for compliance.88
Another commenter suggested that at
least 12-months would be required for
registered investment companies to
come into registration and compliance
with Commission requirements.89
Finally, a commenter suggested that the
Commission delay implementation until
all mandatory Dodd-Frank Act rules are
implemented.90
In light of the Commission’s proposed
harmonization effort with respect to the
compliance obligations for dually
registered investment companies and
85 7

U.S.C. 1a(10).
Steben Letter; ICI Letter; NFA Letter; Reed
Smith Letter; AllianceBernstein Letter; USAA
Letter; PMC Letter; IAA Letter; Janus Letter; STA
Letter; Rydex Letter; Alston Letter; and comment
letter from the Association of Institutional Investors
(July 1, 2011) (‘‘AII II Letter’’).
87 See ICI Letter; NFA Letter; Reed Smith Letter;
AllianceBernstein Letter; USAA Letter; PMC Letter;
IAA Letter; Janus Letter; and STA Letter.
88 See Steben Letter.
89 See Rydex Letter.
90 See AII II Letter.
86 See

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the ongoing efforts to further define the
term ‘‘swap’’ and the margin
requirements for swaps positions, the
Commission recognizes that a short
implementation period is not
practicable. The Commission believes
that 11 months is an adequate amount
of time to enable compliance by existing
registered investment companies.
Recognizing that the definition of swap
is not yet finalized, the Commission has
decided that compliance with the
amendments to § 4.5 for purposes of
registration only will occur on the later
of either December 31, 2012 or within
60-days following the adoption of final
rules defining the term ‘‘swap,’’ and
establishing margin requirements for
such instruments.91 Entities required to
register due to the amendments to § 4.5
shall be subject to the Commission’s
recordkeeping, reporting, and disclosure
requirements set forth in part 4 of the
Commission’s regulations within 60
days following the effectiveness of a
final rule implementing the
Commission’s proposed harmonization
effort pursuant to the concurrent
proposed rulemaking.
Several commenters also suggested
that the Commission exempt from
compliance those registered investment
companies that have already claimed
relief under § 4.5.92 The Commission
does not believe that ‘‘grandfathering’’ is
appropriate in this context. As the
Commission stated in its Proposal, and
reaffirms in this preamble, part of the
purpose of amending § 4.5 is to ensure
that entities that are engaged in a certain
level of derivatives trading are subject to
the registration and compliance
obligations and oversight by the
Commission.93 Grandfathering is
inconsistent with the goals of the
Commission’s amendments. The
Commission, however, believes that
harmonization of the Commission’s
compliance regime with that of the SEC
will minimize the regulatory burden of
existing registered investment
companies. In addition, the Commission
is permitting a sufficient amount of time
for existing entities to come into
compliance before the compliance dates
set forth above. Therefore, the
Commission believes that it is
addressing the commenters’ concerns
through harmonization while still
ensuring that the Commission has the
91 Effective Date for Swap Regulation, 76 FR
42508.
92 See ICI Letter; Reed Smith Letter;
AllianceBernstein Letter; Invesco Letter; IAA Letter;
Janus Letter; AII Letter; SIFMA Letter; and STA
Letter.
93 76 FR 7976, 7983–84 (Feb. 12, 2011).

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information necessary to oversee all
participants in the derivatives markets.
B. Comments Regarding Proposed
Amendment to § 4.7
The Commission proposed two
amendments to § 4.7. The first proposed
to amend §§ 4.7(a)(3)(ix) and (a)(3)(x) to
incorporate by reference the accredited
investor standard from the SEC’s
Regulation D 94 under the Securities Act
of 1933,95 rather than by direct
inclusion of its specific terms. The
Commission stated that this amendment
would ‘‘permit the Commission’s
definition of QEP to continue to include
the specific terms of the accredited
investor standard in the event that it is
later modified by the SEC without
requiring the Commission to amend
§ 4.7 each time to maintain parity.’’ 96
The Commission received one
comment supporting this proposed
amendment. Specifically, the
commenter stated its belief that this
amendment would ‘‘facilitate
consistency amongst federal standards
for financial sophistication and reduce
investor confusion.’’ 97 The Commission
agrees and, accordingly, is adopting the
amendments to §§ 4.7(a)(3)(ix) and
(a)(3)(x) as proposed.
The second proposed amendment to
§ 4.7 would rescind the relief provided
in § 4.7(b)(3) 98 from the certification
requirement of § 4.22(c) 99 for financial
statements contained in commodity
pool annual reports. In support of the
Proposal, the Commission noted that
approximately 85 percent of all pools
operated under § 4.7 in fiscal year 2009
filed financial statements that were
certified by certified public accountants,
‘‘despite being eligible to claim relief
from certification under § 4.7(b)(3).’’ 100
The number of uncertified financial
statements has continued to decline
and, for fiscal year 2010, approximately
91 percent of all reports filed for pools
operated under § 4.7 included financial
statements that were certified by
certified public accountants.101 In the
Proposal, the Commission stated its
belief that ‘‘requiring certification of
financial information by an independent
accountant in accordance with
established accounting standards will
ensure the accuracy of the financial
information submitted by its
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94 17

CFR 230.501(a)(5), (a)(6) (2011).
U.S.C. 77a, et seq.
96 76 FR 7976, 7985 (Feb. 12, 2011).
97 See MFA II Letter.
98 17 CFR 4.7(b)(3) (2011).
99 Id. 4.22(c).
100 76 FR 7967, 7984–85 (Feb. 12, 2011).
101 In 2010, 951 pools were operated pursuant to
§ 4.7 and 84 of those pools filed uncertified
financial statements for fiscal year 2010.
95 15

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registrants,’’ and will further the stated
purposes of the Dodd-Frank Act.102
The Commission received two
comments regarding this proposed
amendment. One commenter supported
the proposed rescission and the
Commission’s stated justification for
doing so.103 The other commenter
recommended that the Commission
retain an exemption from certification of
financial statements for entities where
the pool’s participants are limited to the
principals of its CPO(s) and CTA(s) and
other categories of employees listed in
§ 4.7(a)(2)(viii).104 It is unclear how
many of the pools operated under § 4.7
would qualify for such relief if adopted.
The Commission believes that rather
than adopt an exemption for such
entities without data regarding the
scope of the exemption’s applicability,
it is more appropriate to rescind the
exemption from certification for all
pools operated under § 4.7(b)(3)
generally and permit entities to write to
the Division of Swap Dealer and
Intermediary Oversight to request
exemptive relief from the certification
requirement on a case by case basis
under § 140.99.105 By requiring entities
to request relief from the Commission,
the Commission can better determine
whether such an exemption should be
adopted in the future. Therefore, the
Commission is adopting the
amendments to § 4.7 as proposed.
C. Comments Regarding the Proposed
Rescission of §§ 4.13(a)(3) and (a)(4)
As stated previously, the Commission
proposed to rescind §§ 4.13(a)(3) and
(a)(4). After considering the comments
received, which are detailed herein, the
Commission has determined to retain
the de minimis exemption in
§ 4.13(a)(3). The Commission concluded
that overseeing entities with less than
five percent exposure to commodity
interests is not the best use of the
Commission’s limited resources.
Moreover, the Commission believes that
the retention of the de minimis
exemption in § 4.13(a)(3) provides for
consistent treatment of entities engaging
in de minimis levels of trading due to
the addition of a five percent trading
threshold in § 4.5 as well. The
Commission received several comments
requesting that the Commission modify
§ 4.13(a)(3) in various respects. The
Commission has determined, however,
that it is appropriate to retain
§ 4.13(a)(3) in its current form, for the
reasons detailed below.
102 Id.

at 7985.
NFA Letter.
104 See MFA II Letter.
105 17 CFR § 140.99.
103 See

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11261

1. General Comments
In addition to the comments that the
Commission received regarding the
specific parts of the Proposal rescinding
§§ 4.13(a)(3) and (a)(4), the Commission
received numerous comments regarding
the proposed rescissions generally.106
Broadly, the comments opposed the
rescission of both provisions.
Several commenters asserted that
rescission was not necessary because
the Commission has the means to obtain
any needed information from exempt
CPOs through its large trader reporting
requirements and its special call
authority.107 Although the Commission
has the means to obtain certain
information through the mechanisms
delineated by the commenters, neither
of those mechanisms provide the type of
data requested on Forms CPO–PQR or
CTA–PR with the kind of regularity
proposed under § 4.27. For example,
large trader reporting may provide
detailed trading information for a
particular market participant, but it does
not provide the Commission with
information regarding trends across
funds that are not large enough to trigger
the reporting obligation, but that may
nevertheless impact the market. Also,
with respect to the Commission’s
special call authority under § 21.03, the
collection of data under that section is
generally reactive in nature. That is, the
Commission would be in a position to
collect data under § 21.03 after it
became aware of an issue. Conversely, it
is anticipated that collecting data using
Forms CPO–PQR and CTA–PR will
enable the Commission to be more
proactive in assessing possible threats to
market stability and in carrying out its
duties in overseeing market participants
generally.
Some commenters suggested that the
Commission adopt a limited exemption
for SEC-registered entities that are not
‘‘primarily engaged’’ in trading
commodity interests.108 Pursuant to the
106 See comment letter from the New York State
Bar Association (April 12, 2011) (‘‘NYSBA Letter’’);
comment letter from Skadden, Arps, Slate, Meagher
& Flom LLP (April 12, 2011) (‘‘Skadden Letter’’);
MFA Letter; comment letter from Katten, Muchin
Rosenman LLP (April 12, 2011) (‘‘Katten Letter’’);
Fidelity Letter; Dechert Letter; comment letter from
the Alternative Investment Management
Association, Ltd. (April 12, 2011) (‘‘AIMA Letter’’);
comment letter from the Alternative Investment
Management Association, Ltd. (July 1, 2011)
(‘‘AIMA II Letter’’); IAA Letter; SIFMA Letter;
comment letter from HedgeOp Compliance, LLC
(July 28, 2011) (‘‘HedgeOp Letter’’); comment letter
from the Private Investor Coalition; Inc. (April 12,
2011) (‘‘PIC Letter’’); and comment letter Seward &
Kissel, LLP (April 12, 2011) (‘‘Seward Letter’’).
107 See Skadden Letter; Katten Letter; and MFA
Letter.
108 See Dechert Letter; and Katten Letter.

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terms of § 4m(3) of the CEA, as amended
by the Dodd-Frank Act, CTAs that are
registered with the SEC and whose
business does not consist primarily of
acting as a CTA, and that do not act as
a CTA to any pool engaged primarily in
the trading of commodity interests, are
exempt from registration with the
Commission.109 The Commission
believes that that statutory exemption
for CTAs is explicit as to Congress’s
limited intentions regarding exempting
entities from registration with the
Commission. By the plain language of
§ 4m(3), this section creates an
exemption from the CTA registration
requirements of the CEA; commodity
pools are discussed in that provision
only to the extent that the
characteristics of the pool enable the
CTA to claim relief. The registration
category of CPO is not implicated.
Therefore, the Commission concludes
that the provisions of § 4m(3) do not
mandate any exemption from the
registration requirements for CPOs.
Moreover, the Commission disagrees
with the commenter who asserted that
rescission is inconsistent with
Congress’s asserted intention to avoid
dual registration. The Commission does
not believe it is accurate to state that
Congress intended to avoid oversight by
both agencies, and indeed Congress
clearly anticipated some overlap when,
in the Dodd-Frank Act, it required the
Commission to work with the SEC to
adopt a data collection instrument for
dual registrants. Section 406 of the
Dodd-Frank Act explicitly mandated
that the Commission and the SEC jointly
promulgate a reporting form for dually
registered entities.110 The Commission
does not believe that this requirement
could be consistent with any asserted
Congressional intention to absolutely
avoid dual registration with the
commissions. Therefore, the
Commission concludes that dual
registration of certain entities is not
irreconcilable with the Congressional
intent underlying the Dodd-Frank Act.
Other commenters asserted that the
compliance and regulatory obligations
under the Commission’s rules are
burdensome and costly for private
businesses and would unnecessarily
distract entities from their primary focus
of managing client assets.111 The
Commission disagrees with this
assertion, which in any event was not
fully detailed by any commenter. The
Commission believes that regulation is
necessary to ensure a well functioning
109 7

U.S.C. 6m(3).
Section 406 of the Dodd-Frank Act.
111 See MFA Letter; Seward Letter; and Katten
Letter.
110 See

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market and to provide investor
protection. The Commission further
believes that the compliance regime that
the Commission has adopted strikes the
appropriate balance between limiting
the burden placed on registrants and
enabling the Commission to carry out its
duties under the CEA. Moreover, the
compliance and regulatory obligations
imposed on these CPO registrants will
be no different from those imposed on
other registered CPOs. Such compliance
and regulatory obligations have not been
unduly burdensome for these other
registrants.
2. Comments Regarding the Proposed
Rescission of § 4.13(a)(3)
In the Proposal, the Commission
proposed rescinding the ‘‘de minimis’’
exemption in § 4.13(a)(3). The
Commission stated its belief that ‘‘it is
possible for a commodity pool to have
a portfolio that is sizeable enough that
even if just five percent of the pool’s
portfolio were committed to margin for
futures, the pool’s portfolio could be so
significant that the commodity pool
would constitute a major participant in
the futures market.’’ 112 Moreover, the
Commission stated that it believed that
this rescission was consistent with the
purposes of the Dodd-Frank Act, with
specific regard to increased
transparency and accountability of
participants in the financial markets.
The Commission did, however, solicit
comment as to whether some form of de
minimis exemption should be
maintained.
The Commission received ten
comments specifically on its proposed
rescission of the ‘‘de minimis’’
exemption in § 4.13(a)(3).113 The
commenters consistently urged the
Commission to retain a de minimis
exemption. Some commenters cited to
the amendment to § 4m(3) of the CEA by
the Dodd Frank Act, which provides an
exemption from registration for CTAs
that are registered with the SEC and
whose business does not consist
primarily of acting as a CTA and that
does not act as a CTA to any pool
engaged primarily in the trading of
commodity interests.114 One commenter
stated that the effect of § 4m(3) was to
exempt such CTAs from registration as
a CPO or CTA; 115 whereas another
112 76

FR 7976, 7985 (Feb. 12, 2011).
MFA Letter; NYSBA Letter; comment
letter from Schulte Roth & Zabel LLP (April 12,
2011) (‘‘Schulte Letter’’); Dechert III Letter; Skadden
Letter; Seward Letter; IAA Letter; NFA Letter;
SIFMA Letter; and comment letter from
McGuireWoods LLC (April 12, 2011)
(‘‘McGuireWoods Letter’’).
114 7 U.S.C. 6m(3).
115 See Skadden Letter.

commenter asserted that the amendment
of § 4m(3) is evidence that Congress did
not intend to have the operator of a
commodity pool register as a CPO if its
pool is not primarily engaged in trading
commodity interests.116 The
Commission notes that under the tenets
of statutory interpretation, where
Congress explicitly enumerates certain
exceptions to a general prohibition,
additional exceptions are not to be
implied in the absence of evidence of a
contrary legislative intent.117 By the
plain language of § 4m(3), this section
creates an exemption from the CTA
registration requirements of the CEA;
commodity pools are discussed only to
the extent that the characteristics of the
pool enable the CTA to claim relief. The
registration category of CPO is not
referenced. Therefore, the Commission
concludes that the provisions of § 4m(3)
do not mandate any exemptions from
registration for CPOs. The Commission
notes, however, that it has determined
to retain the de minimis exemption set
forth in § 4.13(a)(3).
Several commenters suggested adding
as a prerequisite for exemptive relief
under § 4.13(a)(3), registration with the
SEC as an investment adviser.118 The
Commission is declining to add SEC
registration as part of the criteria for
relief under § 4.13(a)(3) because the
basis for providing relief is the limited
nature of the pool’s trading activity
rather than its operator’s registration
status with the SEC. To require the CPO
of an exempt pool to be regulated by the
SEC would limit the applicability of
§ 4.13(a)(3), which is not the
Commission’s intention at this time.
Most commenters suggesting the
additional requirement of SEC
registration also proposed an increase in
the trading threshold, ranging from 20
percent to 50 percent of the pool’s
liquidation value due to the inclusion of
the pool’s swaps activity within the
trading threshold.119 As discussed
earlier in this release in the context of
§ 4.5, the Commission believes that a
five percent threshold continues to be
the appropriate level for exemption or
exclusion due to limited derivatives
trading. Moreover, the Commission
would again note that the inclusion of
an alternative net notional test provides
CPOs with another, perhaps less
restrictive means, of qualifying for the
exemption. The Commission believes

113 See

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116 See

MFA Letter.
Andrus v. Glover Construction Co., 446
U.S. 608 (1980).
118 See MFA Letter; NFA Letter; Skadden Letter;
Schulte Letter; NYSBA Letter; Dechert III Letter;
IAA Letter; and Seward Letter.
119 See MFA Letter; Skadden Letter; NYSBA
Letter; Dechert III Letter.
117 See

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that trading exceeding five percent of
the liquidation value of a portfolio, or a
net notional value of commodity
interest positions exceeding 100 percent
of the liquidation value of a portfolio,
evidences a significant exposure to the
derivatives markets, and that such
exposure should subject an entity to the
Commission’s oversight.
With respect to the issue of the
inclusion of swaps making it more
difficult to satisfy the trading threshold,
the Commission believes that it would
be premature to increase the threshold
at this time. Additionally, as stated
previously, the inclusion of an
alternative net notional test may
provides entities with another
mechanism for qualifying for the
exemption in § 4.13(a)(3). The
Commission believes that it may be
more appropriate to reassess the trading
threshold after collecting data from
registered CPOs through Form CPO–
PQR. Therefore, the Commission has
decided not to increase the trading
threshold under § 4.13(a)(3).
Additionally, the Commission
believes that it must include swaps
within the threshold to enable the most
entities to claim relief under § 4.13(a)(3).
As stated previously with respect to the
amendments to § 4.5, the Dodd-Frank
Act amended the statutory definition of
the terms ‘‘commodity pool operator’’
and ‘‘commodity pool’’ to include those
entities that trade swaps.120 If the
Commission were to keep the de
minimis test in § 4.13(a)(3) and only
include futures and options as the basis
for calculating compliance with the
threshold, the swaps activities of the
CPOs would still trigger the registration
requirement notwithstanding the
exclusion of swaps from the calculus.
That is, the purpose of the threshold test
is to define a de minimis amount of
trading activity that would not trigger
the registration requirement. If swaps
were excluded, any swaps activities
undertaken by a CPO would result in
that entity being required to register
because there would be no de minimis
exclusion for such activity. As a result,
one swap contract would be enough to
trigger the registration requirement. For
that reason, if the Commission wants to
permit some de minimis level of swaps
activity by CPOs without registration
with the Commission, it must do so
explicitly in the exemption.121 Because
the Commission has determined that de
minimis activity by CPOs does not
120 7

U.S.C. 1a(10); 1a(11).
reference to a de minimis level of swaps
activities by registered investment companies only
applies in the context of CPO registration by
registered investment companies.
121 Any

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implicate the Commission’s regulatory
concerns, the Commission has decided
that it is appropriate to include swaps
within the trading threshold under
§ 4.13(a)(3).122
Additionally, to enable CPOs to fully
exercise the alternative net notional test,
the Commission is amending
§ 4.13(a)(3)(ii)(B) to provide guidance as
to the notional value of cleared swaps
positions and the ability to net swaps
cleared by the same DCO. The
Commission believes that this
amendment will serve to provide equal
ability to claim relief under § 4.13(a)(3)
to all CPOs regardless of the types of
commodity interests held by their
operated pools. Therefore, the
Commission is amending
§ 4.13(a)(3)(ii)(B)(1) to provide that the
notional value of a cleared swap is
determined consistent with the
provisions of part 45 of the
Commission’s regulations and
§ 4.13(a)(3)(ii)(B)(2) to provide that
swaps cleared by the same DCO may be
netted where appropriate.
After consideration of the comments
and the Commission’s stated rationale
for proposing to rescind the exemption
in § 4.13(a)(3), the Commission has
determined to retain the de minimis
exemption currently set forth in that
section without modification.123
3. Comments Regarding a Family Offices
Exemption
In response to the Commission’s
proposed rescission of §§ 4.13(a)(3) and
(a)(4), the Commission received
numerous comments asking that the
Commission adopt an exemption from
registration for family offices that is akin
to the exemption adopted by the SEC.124
The commenters noted that prior to the
adoption of §§ 4.13(a)(3) and (a)(4), the
Commission staff granted relief to
family offices on an ad hoc basis, but
that when §§ 4.13(a)(3) and (a)(4) were
adopted, most family offices availed
themselves of those exemptions from
registration. The commenters argued
that the Commission should have less
regulatory concern about family offices
because their clientele is necessarily
limited to family members and the
122 The Commission has proposed to amend the
definition of ‘‘commodity interest’’ as it appears in
§ 1.3 to include swaps, consistent with the DoddFrank Act. See, 76 FR 33066 (June 7, 2011).
123 The Commission does not need to amend the
language of § 4.13(a)(3) to include swaps within the
trading threshold as this section determines
eligibility based on the amount of ‘‘commodity
interests’’ traded. In a separate rulemaking, the
Commission has proposed to amend the definition
of the term ‘‘commodity interest’’ to include swaps.
See 76 FR 11701 (March 3, 2011).
124 See 17 CFR 250.202(a)(11)(G)–1.

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11263

family offices do not solicit outside of
the family unit.
Due to the exemptions previously
granted by Commission staff, and the
resulting lack of information regarding
the activities of CPOs claiming relief
thereunder, the Commission does not
yet have a comprehensive view of the
positions taken and interests held by
currently exempt entities. The
Commission, therefore, believes that it
is prudent to withhold consideration of
a family offices exemption until the
Commission has developed a
comprehensive view regarding such
firms to enable the Commission to better
assess the universe of firms that may be
appropriate to include within the
exemption, should the Commission
decide to adopt one. Therefore, the
Commission is directing staff to look
into the possibility of adopting a family
offices exemption in the future.
The Commission notes that family
offices previously relying on the
exemption under Regulation § 4.13(a)(3)
will not be affected by the rules adopted
herein, as the Commission is not
rescinding the § 4.13(a)(3) exemption
and it will remain available to entities
meeting its criteria. The Commission
further notes that family offices
continue to be permitted to write in on
a firm by firm basis to request
interpretative relief from the registration
and compliance obligations under the
Commission’s rules and to rely on those
interpretative letters already issued to
the extent permissible under the
Commission’s regulations.125 Therefore,
the Commission does not believe an
exemption for family offices is
necessary at this time.
4. Comments Regarding a Foreign
Advisor Exemption
Several commenters suggested that if
the Commission determines to adopt the
proposed rescissions, it should adopt a
foreign advisor exemption similar to
that set forth in the Dodd-Frank Act
under the Investment Adviser Act of
125 See 17 CFR 140.99(a)(3) (‘‘An interpretative
letter may be relied upon by persons in addition to
the Beneficiary.’’). The most recent letter (CFTC
letter 10–25) issued affirming the Division’s
interpretation that a ‘‘family office’’ is not a pool
under § 4.10(d) is available at the Commission’s
Web site at: http://www.cftc.gov/ucm/groups/
public/@lrlettergeneral/documents/letter/10-25.pdf.
See, CFTC Interpretative Letter 00–100 [2000–2002
Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,420
(Nov. 1, 2000); CFTC Interpretative Letter No. 96–
24, [1994–1996 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ¶ 26,653 (March 4, 1996); CFTC
Interpretative Letter No. 97–29, [1996–1998
Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,039
(March 21, 1997); CFTC Interpretative Letter No.
95–35, [1994–1996 Transfer Binder] Comm. Fut. L.
Rep. (CCH) ¶ 26,376 (Nov. 23, 1994).

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1940.126 The commenters expressed
concern that the rescission of the
exemptions under §§ 4.13(a)(3) and
(a)(4) would result in nearly all non-US
based CPOs operating a pool with at
least one U.S. investor being required to
register with the Commission.
Commenters also expressed concern
that foreign CPOs would have to report
the entirety of their derivatives activities
to the Commission even if foreign
regulators also oversee such activities.
Due to the exemptions previously
adopted by the Commission, and the
resulting lack of information regarding
the activities of CPOs claiming relief
thereunder, the Commission does not
yet have a comprehensive view of the
positions taken and interests held by
currently exempt entities. The
Commission, therefore, believes that it
is prudent to withhold consideration of
a foreign advisor exemption until the
Commission has received data regarding
such firms on Forms CPO–PQR and/or
CTA–PR, as applicable, to enable the
Commission to better assess the
universe of firms that may be
appropriate to include within the
exemption, should the Commission
decide to adopt one. Foreign advisors to
pools that meet the criteria of
§ 4.13(a)(3) will be able to continue to
operate pursuant to that exemption, if
previously claimed, or file notice of
claim of exemption under § 4.13(a)(3).
Therefore, the Commission is not
providing an exemption for foreign
advisors at this time.

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5. Comments Regarding the Proposed
Rescission of § 4.13(a)(4)
In the Proposal, the Commission
proposed to rescind the exemption in
§ 4.13(a)(4) for operators of pools that
are offered only to individuals and
entities that satisfy the qualified eligible
person standard in § 4.7 or the
accredited investor standard under the
SEC’s Regulation D.127 In the Proposal,
the Commission stated that it
[S]eeks to eliminate the exemptions under
§§ 4.13(a)(3) and (4) for operators of pools
that are similarly situated to private funds
that previously relied on the exemptions
under §§ 3(c)(1) and (7) of the Investment
Company Act and § 203(b)(3) of the
Investment Advisers Act. It is the
Commission’s view that the operators of
these pools should be subject to similar
regulatory obligations, including proposed
form CPO–PQR, in order to provide
improved transparency and increased
accountability with respect to these pools.
The Commission has determined that it is
appropriate to limit regulatory arbitrage
through harmonization of the scope of its
126 See
127 See

Section 403 of the Dodd-Frank Act.
17 CFR 4.13(a)(4).

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data collection with respect to pools that are
similarly situated to private funds so that
operators of such pools will not be able to
avoid oversight by either the Commission or
the SEC through claims of exemption under
the Commission’s regulations.128

The Commission received several
comments regarding its proposed
rescission.129 Several commenters
argued that the Commission should
consider retaining the exemption in
§ 4.13(a)(4) for funds that do not directly
invest in commodity interests, but do so
through a fund of funds structure, and
who are advised by an SEC registered
investment adviser. Due to the
exemptions previously adopted by the
Commission, and the resulting lack of
information regarding the activities of
CPOs claiming relief thereunder, the
Commission does not yet have a
comprehensive view of the positions
taken and interests held by currently
exempt entities. The Commission,
therefore, believes that it is prudent to
withhold consideration of a fund of
fund exemption until the Commission
has received data regarding such firms
on Forms CPO–PQR and/or CTA–PR, as
applicable, to enable the Commission to
better assess the universe of firms that
may be appropriate to include within
the exemption, should the Commission
decide to adopt one. Therefore, the
Commission is not providing an
exemption for funds of funds at this
time. The Commission notes, however,
that staff will consider requests for
exemptive relief for funds of funds on
a case by case basis.
The Commission received two
comments that argued that the
rescission of § 4.13(a)(4) is inconsistent
with the private offering framework
under the SEC’s Regulation D and that
the rescission would result in the end of
private offerings.130 The Commission
believes that this analysis is flawed and
is the result of a mistaken conflation of
the private fund structure under the
Commission’s rules and privatelyoffered ownership interests under the
SEC’s rules. The Commission notes that
the rescission of § 4.13(a)(4) does not
preclude CPOs from utilizing Regulation
D with respect to the offering of pool
interests because the availability of
relief from the registration of an offering
under Regulation D does not require
that the entity involved be exempt from
128 76

FR 7976, 7986 (Feb 12, 2011).
comment letter from Sidley Austin LLP
(April 12, 2011) (‘‘Sidley Letter’’); MFA Letter;
NYSBA Letter; comment letter from Cranwood
Capital Management (April 12, 20110 (‘‘Cranwood
Letter’’); Dechert III Letter; and comment letter from
Nantucket Multi Managers, LLC (April 12, 2011)
(‘‘Nantucket Letter’’).
130 See MFA Letter; and NYSBA Letter.
129 See

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regulation. Therefore, the Commission
continues to believe that rescission of
§ 4.13(a)(4) is appropriate for the
reasons stated in the Proposing Release
and that it is consistent with the
registration of investment advisers of
such exempt funds with the SEC.
One commenter expressed concerns
about the fact that the class of eligible
participants in a pool operated pursuant
to § 4.13(a)(4) is broader than that for a
pool qualifying under § 4.7.131
Specifically, this commenter noted that
under § 4.13(a)(4), participants may
include non-natural participants that are
QEPs under § 4.7 or accredited investors
under § 230.501(a)(1)–(3), (a)(7) or
(a)(8),132 whereas § 4.7 does not include
such participants as QEPs.133 The
Commission recognizes that this
discrepancy may result in certain
entities being unable to claim relief
under § 4.7; however, due to the
exemptions previously adopted by the
Commission, and the resulting lack of
information regarding the activities of
CPOs claiming relief thereunder, the
Commission does not yet have a
comprehensive view of the positions
taken and interests held by currently
exempt entities and until the
Commission has more information
regarding the universe of entities
affected, the Commission does not
believe that it is appropriate to amend
§ 4.7 to reflect the nature of participants
in funds previously entitled to relief
under § 4.13(a)(4). After the Commission
has collected data from such entities
through Form CPO–PQR, the
Commission may reconsider this issue.
The Commission also notes that staff
will consider requests for exemptive
relief from the limitations of § 4.7 on a
case-by-case basis.
One commenter argued that rescission
is not necessary because any fund that
seeks to attract qualified eligible
purchasers is already required to
maintain oversight and controls that
exceed those mandated by part 4 of the
Commission’s regulations such that any
regulation imposed would be
duplicative and unnecessarily
burdensome.134 That commenter further
stated that:
We are accustomed to intense scrutiny
from potential investors that frequently
includes independent background checks of
our key employees, onsite visits that include
131 MFA raised this concern during several
meetings with Commission staff, although it did not
provide any detail regarding the scope of its
concerns and the topic was not discussed in the
written comments submitted regarding this
rulemaking.
132 17 CFR § 4.13(a)(4)(ii)(B).
133 17 CFR § 4.7(a).
134 See Cranwood Letter.

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations
interviews with our traders and other key
personnel, interviews of our third-party
administrator and our auditors, interviews of
officials of our clearing broker, interviews of
officers at our custodial bank, and bulk
delivery of transactional data for
independent analysis. To say that such
information-gathering goes far beyond the
contents of a mandated disclosure document
is a gross understatement.135

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

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

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136 See

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compliance with the Commission’s
regulations. The Commission does not,
however, believe that the process of
preparing for Commission oversight
necessitates an 18 month time period.
Based on the comments received
indicating that a certain portion of
entities currently claiming relief under
§ 4.13(a)(4) already have robust controls
in place independent of Commission
oversight, the Commission believes that
entities currently claiming relief under
§ 4.13(a)(4) should be capable of
becoming registered and complying
with the Commission’s regulations
within 12 months following the
issuance of the final rule. For entities
that are formed after the effective date
of the rescission, the Commission
expects the CPOs of such entities to
comply with the Commission’s
regulations upon formation and
commencement of operations.
The Commission does not believe that
‘‘grandfathering’’ is appropriate in this
context. As the Commission stated in its
Proposal, part of the purpose of
rescinding § 4.13(a)(4) is to ensure that
entities that are engaged in derivatives
trading are subject to substantively
identical registration and compliance
obligations and oversight by the
Commission.140 Grandfathering is not
consistent with the stated goals of the
Commission’s rescission and would
result in disparate treatment of similarly
situated entities.
Therefore, the Commission will
implement the rescission of § 4.13(a)(4)
for all entities currently claiming
exemptive relief thereunder on
December 31, 2012, but the rescission
will be implemented for all other CPOs
upon the effective date of this final
rulemaking.
D. Comments Regarding the Proposed
Annual Notices for Continued
Exemptive or Exclusionary Relief
In the Proposal, the Commission
proposed to require annual reaffirmance
of a claim of exemption or exclusion
from registration as a CPO or CTA. In
the Proposal, the Commission stated its
position that an annual notice
requirement would promote improved
transparency regarding the number of
entities either exempt or excluded from
the Commission’s registration and
compliance programs, which is
consistent with one of the primary
purposes of the Dodd-Frank Act.
Moreover, the Commission stated its
belief that an annual notice requirement
would enable the Commission to
determine whether exemptions and
exclusions should be modified,
140 76

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11265

repealed, or maintained as part of the
Commission’s ongoing assessment of its
regulatory scheme.
The Commission received three
comments on this provision in the
Proposal.141 One commenter supported
the adoption of an annual notice
requirement, but suggested that the due
date of the notice be changed from the
exemption’s original filing date to a
calendar-year end for all filers.142 The
Commission agrees that moving the due
date for the annual notice requirement
to the calendar-year end for all filers
may be more operationally efficient.
Therefore, the Commission will adopt
the annual notice requirement
mandating that the notice be filed at the
calendar year-end rather than the
anniversary of the original filing.
Two commenters suggested that the
30-day time period for filing was not
adequate to enable firms to comply.143
One commenter proposed a 60-day time
period,144 whereas the other commenter
proposed 90 days as the necessary
amount of time.145 The Commission
recognizes that the proposed 30-day
filing period may not be adequate due
to the ramifications of an entity’s failure
to file its annual notice in a timely
manner, which would result in the
exemption or exclusion being deemed
withdrawn. This issue is particularly
important because of the NFA’s Bylaw
1101, which prohibits NFA members
from conducting business with nonmembers. Should an entity fail to file its
annual notice within the requisite time
frame, its NFA membership could be
deemed withdrawn, which could
potentially impact numerous other NFA
members. The Commission believes that
extending the filing period from 30 days
to 60 days will provide NFA with
adequate time to follow up with filing
entities to ensure that a filing is not
omitted inadvertently and to limit the
adverse consequences for other NFA
members. The Commission does not,
however, believe that 90 days is
necessary as it intends for such notice
to be filed electronically with NFA and
for NFA’s filing system to pre-populate
the notice with the names and NFA IDs
of all exempt pools operated by the CPO
with an option to choose to reaffirm the
exemptions for all exempt pools. The
Commission believes that this
minimizes both the time and expense
burdens on the CPO and should enable
141 See

NFA Letter; AII Letter; and SIFMA Letter.
NFA Letter.
143 See NFA Letter; and SIFMA Letter.
144 See NFA Letter.
145 See SIFMA Letter.
142 See

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all entities to comply with the
requirement within 60 days.
E. Comments Regarding the Proposed
Risk Disclosure Statement for Swaps in
§ 4.24 and § 4.34
The Commission also proposed
adding standard risk disclosure
statements for CPOs and CTAs regarding
their use of swaps to §§ 4.24(b) and
4.34(b), respectively.146
The Commission received three
comments with respect to the proposed
standard risk disclosure statement for
swaps.147 Two argued that a standard
risk disclosure statement is not the
appropriate way to disclose the risks
inherent in swaps activity to
participants or clients.148 Specifically,
those commenters argued that the use of
swaps by CPOs and CTAs varies and
depending on the reason for using
swaps, different risks may be
implicated. Furthermore, those
commenters also noted that the
proposed risk disclosure statement is
inconsistent with recent SEC guidance
to registered investment companies to
avoid generic disclosures. The
Commission respectfully disagrees with
the assertions of those commenters who
believe that a standard risk disclosure
statement is not appropriate. The
Commission believes that a
standardized risk disclosure statement
addressing certain risks associated with
the use of swaps is necessary due to the
revisions to the statutory definitions of
CPO, CTA, and commodity pool enacted
by the Dodd-Frank Act.149 Moreover, it
is the Commission’s position that
concerns about ‘‘one-size-fits-all’’
disclosure of risks are addressed
through additional disclosures required
under §§ 4.24(g) and 4.34(g), which
govern disclosures regarding the risks
associated with participating in the
offered commodity pool or program.
With respect to the comments
submitted regarding the conflicting
requirements imposed on registered
investment companies whose advisers
are required to register as CPOs
pursuant to amended § 4.5,150 such
concerns will be addressed through the
proposed modifications to the
Commission’s compliance regime that
will be applicable to registered
investment companies overseen by both
the SEC and the Commission.
Additionally, the Commission
received one comment that supported
146 76

FR 7976, 7986 (Feb. 12, 2011).
SIFMA Letter; Fidelity Letter; and
comment letter from Chris Barnard (Feb. 26, 2011)
(‘‘Barnard Letter’’).
148 See SIFMA Letter; and Fidelity Letter.
149 See 7 U.S.C. 1a(10), 1a(11), and 1a(12).
150 See SIFMA Letter; and Fidelity Letter.
147 See

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the adoption of the standard risk
disclosure statement for swaps, but
suggested that the Commission consider
whether the wording needed to be
modified depending on whether the
swaps were cleared or uncleared.151
Based on the language proposed, the
Commission does not believe that
different language must be adopted to
account for the differences between
cleared and uncleared swaps. In
particular, the Commission notes that
the proposed risk disclosure statement
is not intended to address all risks that
may be associated with the use of
swaps, but that the CPO or CTA is
required to make additional disclosures
of any other risks in its disclosure
document pursuant to §§ 4.24(g) and
4.34(g) of the Commission’s regulations.
Moreover, the language of the proposed
risk disclosure statement is conditional
and does not purport to assert that all
of the risks discussed are applicable in
all circumstances. For the reasons
discussed above and those stated in the
Proposal, the Commission adopts the
proposed risk disclosure statements for
CPOs and CTAs regarding swaps.152
These additional risk disclosure
statements will be required for all new
disclosure documents and all updates
filed after the effective date of this final
rulemaking.
F. Section 4.27 and Forms CPO–PQR
and CTA–PR
1. General Comments
The Commission received numerous
comments in response to proposed
§ 4.27, which requires CPOs and CTAs
to report certain information to the
Commission on Forms CPO–PQR and
CTA–PR, respectively. Several
commenters questioned whether the
data collection was necessary for the
Commission’s oversight of its
registrants.153 Others asserted that
certain groups, such as registered
investment companies or family offices,
should be exempted from completing
the data collection.154
151 See

Barnard Letter.
risk disclosure statements do not affect
the swap disclosure requirements mandated in CEA
Section 4s(h)(3)(B) and rules relating to that
statutory provision. See proposed § 23.431
Disclosure of Material Information, Business
Conduct Standards for Swap Dealers and Major
Swap Participants with Counterparties, 75 FR
80638 (Dec. 22, 2010). In addition, managed
accounts that do not convey discretionary authority
to the CTA will require the pass through of the
swap disclosures in any final rule promulgated
pursuant to 4s(h)(3)(B).
153 See Fidelity Letter; and AIMA Letter.
154 See ICI Letter; AIMA Letter; and comment
letter from K&L Gates LLP (Feb. 12, 2011) (‘‘K&L
Letter’’).
152 These

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

Fidelity Letter.
AIMA Letter; SIFMA Letter; and Fidelity

Letter.

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stated in the Proposal, CPOs that are
dually registered with the SEC and that
file Form PF must still file Schedule A
with the Commission, and CTAs must
still file Form CTA–PR. The
Commission intends to adopt § 4.27 as
proposed and permit dual registrants to
file Form PF with the SEC in lieu of
completing Schedules B and/or C of
Form CPO–PQR. The Commission never
intended to require very large dual
registrants to file anything more than
the general identifying information
required on Schedule A with the
Commission, and neither § 4.27 nor the
forms require dual registrants to file
Schedules B or C if they are filing Form
PF.
The Commission has modified both
Schedule A of Form CPO–PQR and
Form CTA–PR so that both documents
are only soliciting general demographic
data. The Commission has moved
Question 12, which asked for
information regarding position
information, from proposed Schedule A
to Schedule B of Form CPO–PQR in an
effort to avoid collecting redundant
information from dual registrants.
Additionally, the Commission is not
adopting Schedule B from Form CTA–
PR, and therefore, will be limiting the
information collected from registered
CTAs to demographic data and the
names of the pools advised by the CTA.
One commenter questioned whether
the information collected on Forms
CTA–PR and CPO–PQR will provide the
Commission with real-time data that
will enable it to have an accurate and
timely picture of a CTA’s activities and
operating status.157 The Commission
recognizes the limitations of the data
collection instruments with respect to
the timeliness of the information
requested. The Commission believes,
however, that the forms strike the
appropriate balance between the time
needed to compile complex data and the
Commission’s need for timely
information. Moreover, the Commission
believes that the information required
on Form CPO–PQR and CTA–PR will be
useful because it will allow the
Commission to better deploy its
enforcement and examination resources.
Another commenter questioned
whether the Commission possessed the
staffing and financial resources
necessary to meaningfully use such data
as part of its oversight.158 The
Commission recognizes that the
resources available to it are limited. To
that end, the Commission, as stated in
the Proposal, intends to coordinate with
the NFA to accomplish the analysis
157 See
158 See

Barnard Letter.
Dechert Letter.

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necessary to make full use of the data
collected from Commission registrants.
In addition, the Commission intends
for the data to be collected from
registrants in an electronic format,
which will enable the Commission to
leverage its technology and to require
less intensive staff time to achieve the
desired results. The use of an electronic
format will enable the FSOC to conduct
additional analysis of the data collected
in the event that the FSOC requests such
information from the Commission,
without significant consumption of
Commission resources. For these
reasons, the Commission believes that it
has the tools necessary to make full use
of the data that it intends to collect on
Forms CPO–PQR and CTA–PR,
notwithstanding the Commission’s
current staffing and financial resources.
2. Comments Regarding the Reporting
Thresholds
The Commission received several
comments regarding the appropriate
reporting thresholds for the various
schedules of Form CPO–PQR.159 The
commenters stated that $150 million in
assets under management was too low
of a threshold for entities to be
categorized as mid-sized and required to
file Schedule B. Rather, the commenters
urged the Commission to increase the
threshold to $500 million in assets
under management.160 The Commission
believes that $150 million in assets
under management is still the
appropriate threshold for mid-sized
CPOs. The Commission will retain this
threshold because it is consistent with
the threshold for advisers filing Section
1 of Form PF, which is substantively
similar to Schedule B of Form CPO–
PQR, and it will ensure comparable
treatment of entities of similar
magnitude.
These commenters also suggested that
the Commission increase the threshold
for large CPOs from $1 billion to $5
billion in assets under management.161
The Commission has decided not to
increase the large CPO threshold to $5
billion. The Commission has decided,
however, to increase the threshold from
$1 billion to $1.5 billion. The
Commission believes that increasing the
threshold to $1.5 billion will reduce the
number of CPOs required to file
Schedule C of Form CPO–PQR, but will
still represent a substantial portion of
the assets under management by
registered CPOs. Moreover, the
159 See AIMA Letter; MFA II Letter; Seward
Letter. See also, AIMA II Letter.
160 See AIMA Letter.
161 See AIMA Letter; MFA II Letter; Seward
Letter.

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Commission notes that this modification
is consistent with the revised threshold
for large hedge fund advisers that it
recently adopted with respect to Form
PF.162 The Commission believes that
increasing the threshold beyond $1.5
billion could limit the Commission’s
access to information necessary to
oversee entities that could pose a risk to
the derivatives markets or the financial
system as a whole.
3. Comments Regarding Harmonization
With the SEC’s Compliance Regime
The Commission received numerous
comments on harmonizing Forms CPO–
PQR and CTA–PR with Form PF.163 The
Commission has considered comments
received on the Form PF proposed
jointly with the SEC that address
harmonization of the CFTC and SEC
forms in addition to the comments
received specifically on the Proposal.
Two commenters argued that the
Commission and the SEC should use the
same metrics for measuring assets under
management for purposes of
determining filing obligations.164 As
noted several times in this preamble, the
Commission has sought to harmonize
Forms CPO–PQR and CTA–PR to the
extent possible; however, it is not
appropriate in all circumstances. For
example, the SEC and the CFTC use
different methods for determining the
threshold for reporting assets under
management. In order to determine
whether a CPO meets the asset
threshold for classification as a midsized or large CPO, Form CPO–PQR
requires the use of the aggregated gross
pool assets under management.
Conversely, Form PF defines
‘‘regulatory assets under management’’
as the gross value of the securities
portfolio as reported on the SEC’s Form
ADV.165 Additionally, Form CPO–PQR
uses net assets under management as
the method for determining whether a
commodity pool is a large commodity
pool for filing purposes, whereas Form
PF uses net regulatory assets. In the
Commission’s view, gross assets under
management and net asset value are
more appropriate means for determining
filing obligations for CPOs and large
commodity pools because entities
registered with the Commission are
familiar with the use of net asset value
for other purposes including
162 76

FR 71128, 71135 (Nov. 16, 2011).
AIMA Letter; MFA II Letter; Dechert
Letter; Seward Letter; IAA Letter; Fidelity Letter;
AIMA II Letter; K&L Letter; MFA Letter; and SIFMA
Letter.
164 See AIMA Letter; and MFA II Letter.
165 Form PF defines net assets under management
as regulatory assets under management less
liabilities 76 FR 71128, 71136 (Nov. 16, 2011).
163 See

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determining the required frequency of
reporting to participants.166 Moreover,
the Commission believes that it is
inappropriate for it to incorporate the
SEC definitions of regulatory assets
under management and net regulatory
assets under management into Form
CPO–PQR as those terms are not
consistent with the existing CFTC
regulatory framework.167 The use of net
asset value is consistent with the
longstanding utilization of net asset
value in U.S. GAAP and in the
Commission’s regulations.168 Therefore,
the Commission does not believe that its
use of net asset value requires any
additional calculation by dual
registrants beyond that required to
complete Form PF.
Several commenters argued that the
Commission does not need to collect
information through Forms CPO–PQR
and CTA–PR because it already receives
information through the Large Trader
Reporting System and Form 40.169 Large
Trader Reporting and Form 40 do not
provide the information regarding the
relationship between a large position
held by a pool and the rest of the pool’s
other derivatives positions and
securities investments. The Commission
believes that the scope of information
sought through Forms CPO–PQR and
CTA–PR will provide it with
substantially more detail regarding the
activities of entities engaged in
derivatives trading and will better
enable it to assess the risk posed by a
pool or CPO as a whole.
Several commenters also urged the
Commission to consider coordinating
with the SEC to promulgate a single
form.170 The Commission believes that
it is most efficient for Commission-only
registrants to use a form that is based
upon the format of NFA’s Form PQR,
with which current registrants are
already familiar. Currently registered
CPOs have been filing NFA’s Form PQR
on a quarterly basis for more than one
year and have experience using NFA’s
interface for the collection of data. The
Commission recognizes that new
registrants will not have any experience
with NFA’s Form PQR or NFA’s filing
system; however, the same would be
true if the Commission were to
implement an altogether new system.
Therefore, the Commission believes that
by continuing to use the system
developed by NFA for collecting data
166 Id.
167 Id. Additionally, the Commission notes that
Form PF also asks for net assets under management
in question 3 of Section 1.
168 See, e.g., 17 CFR 4.22.
169 See Fidelity Letter; and K&L Letter.
170 See AIMA II Letter; Seward Letter; MFA
Letter; AIMA Letter; and SIFMA Letter.

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from CPOs and CTAs, it is minimizing
the burden on current registrants
because they will not be required to
learn a new system, without adding any
additional burden to new registrants.
Several commenters raised concerns
about how affiliated entities will be
treated on the forms.171 The
Commission believes that affiliated
entities should be permitted, but should
not be required, to report on a single
form with respect to all affiliates and the
pools that they advise. This position is
consistent with the treatment of
affiliated entities on Form PF.
Furthermore, the Commission believes
that where a pool is operated by one or
more co-CPOs, only one CPO should
report on the activities of the jointly
operated pool, but that CPO must
disclose the identities of the other coCPOs. The Commission believes that
this will eliminate the potential for
double counting of pool assets if all coCPOs were required to report on the
jointly operated pool.
4. Comments Regarding Funds of Funds
The Commission also received one
comment regarding issues unique to
fund of funds and feeder funds.172
Specifically, this commenter asserted
that funds of funds that invest in
unaffiliated commodity pools are ‘‘not
in the business of trading commodity
interests,’’ and therefore, should not be
subject to reporting obligations on Form
CPO–PQR.173 This commenter further
argues that funds of funds reporting is
not necessary because either the
Commission or the SEC will oversee the
investee fund and that funds of funds
likely do not have access to information
with sufficient detail to respond to the
questions in Form CPO–PQR regarding
size, strategy, or positions held by the
investee fund.174
The Commission disagrees with the
commenter’s assertion that funds
investing in unaffiliated commodity
pools are not in the business of trading
commodity interests. Although it is true
that the fund does not directly engage in
such trading, it is the position of the
Commission that a fund investing in an
unaffiliated commodity pool is itself a
commodity pool. This interpretation is
consistent with the statutory definition
of commodity pool, which draws no
distinctions between direct and indirect
investments in commodity interests.175
Moreover, the Commission believes that
171 See MFA II Letter; MFA Letter; AIMA Letter;
SIFMA Letter; and Seward Letter.
172 See MFA II Letter.
173 Id.
174 Id.
175 See 7 U.S.C. 1a(11).

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permitting indirect investment in
commodity interests to occur without
Commission oversight would create an
incentive for entities to avoid direct
investment in commodity interests and
possibly increase the opacity of the
market. Therefore, the Commission
concludes that a fund that invests in an
unaffiliated commodity pool is a
commodity pool for purposes of the
CEA and the Commission’s regulations
promulgated thereunder.
With respect to the commenter’s
assertion that the funds of funds need
not report because the investee fund
will be subject to the jurisdiction of
either the Commission or the SEC, the
Commission must again disagree. As the
commenter itself noted in its comment,
the funds of funds could be invested in
a fund whose adviser or operator is not
required to report due to exemptive
relief granted by either the Commission
or the SEC. The Commission
acknowledges that a fund of funds may
not have access to the kind of
information necessary to respond to all
of the data elements in Schedules B and
C with respect to the investment
activities of its investee funds.
Nevertheless, the Commission believes
that requiring basic information about
the investment in the investee funds
without requiring that funds of funds
complete the additional detail strikes an
appropriate balance between
recognizing the limitations of the
information available to funds of funds
and enabling the Commission to analyze
and monitor the levels of
interconnectedness among a CPO’s
funds. The Commission believes that a
fund of funds should still be required to
provide at a minimum the name of the
investee fund(s) and the size of its
investment(s) in such funds.
Accordingly, the Commission is
adding a question to Schedule A of
Form CPO–PQR requesting the names of
the investee funds and the size of the
fund of funds’ investment in the
investee funds. The Commission is also
adding an instruction to Form CPO–
PQR permitting the CPO of a fund of
funds to exclude any assets invested in
the equity of commodity pools or
private funds for purposes of
determining the CPO’s reporting
obligations. The CPO must, however,
treat these assets consistently for
purposes of Form CPO–PQR. For
example, an adviser may not include
these assets for purposes of certain
questions such as those regarding
borrowing, but disregard such assets for
purposes of determining the reporting
thresholds. This new instruction will
permit a CPO to disregard investments
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but would not allow a CPO to disregard
the liabilities of the fund, even if
incurred due to the investment in the
underlying fund. Moreover, if any of the
CPO’s commodity pools invests
substantially all of its assets in the
equity of other commodity pools or
private funds and, aside from those
investments, holds only cash, cash
equivalents, and instruments intended
to hedge currency risk, the CPO may
complete only Schedules A and B with
respect to that fund and otherwise
disregard such assets for reporting
purposes. These instructions are
consistent with those instructions
adopted as part of the joint Form PF,
and the Commission believes that this
treatment of funds of funds reduces the
burden of reporting for CPOs and
improves the quality of the data
obtained by the Commission. Therefore,
the Commission is adding a general
question regarding funds of funds, but is
otherwise permitting CPOs to disregard
the assets of such funds that are
invested in other commodity pools or
private funds for reporting purposes.

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5. Adopted Modifications to Form CPO–
PQR
The Commission has decided to make
several additional revisions to Form
CPO–PQR in addition to those
discussed previously. The Commission
believes that these revisions are
necessary to provide clarification,
decrease the burden imposed on
registrants, and further harmonize Form
CPO–PQR with Form PF.
a. Instructions
As discussed previously, the
Commission has decided to revise
certain instructions governing the
completion of Form CPO–PQR.
Specifically, the Commission has
determined that it is appropriate to raise
the threshold for large CPOs from $1
billion to $1.5 billion in an effort to
reduce the number of CPOs required to
report on a quarterly basis and respond
to commenters’ concerns, but still
provide the Commission with the
information necessary to effectively
oversee such large market participants.
The Commission has also determined to
modify the frequency of reporting for
filers of Form CPO–PQR. As adopted, all
CPOs, other than large CPOs, will be
required to file Schedule A on an
annual basis; mid-size CPOs will be
required to file Schedule B on an annual
basis; and large CPOs will be required
to file Schedules A, B, and C on a
quarterly basis.
The Commission received several
comments asserting that the 15-day
period for reporting was not sufficient to

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permit reporting CPOs to complete and
file the form and all suggested extending
the period to 30 or 45 days.176 The
Commission agrees that reporting CPOs
will need additional time in which to
submit the various schedules of Form
CPO–PQR.
Upon further consideration, the
Commission believes that it is
appropriate to require all CPOs, other
than large CPOs, to file Schedule A
within 90 days of the end of the
calendar year. This time period
coincides with the annual questionnaire
required by NFA of its entire population
of member CPOs and with the vast
majority of annual report filings for
commodity pools. The revised deadline
will enable CPOs, other than large
CPOs, to benefit from the availability of
the NFA annual questionnaire and the
availability of the information in CPO
annual report filings. Moreover, because
the Commission has transferred the pool
position information from Schedule A
to Schedule B, the Commission believes
that non-large CPOs should be able to
comply with filing basic demographic
data within 90 days.
With respect to mid-sized CPOs filing
Schedule B, the Commission believes
that 90 days is an adequate time period
for compiling data and completing that
schedule. The Commission notes that
CPOs are generally required to file
annual reports for their pools within 90
days of their fiscal year end, most of
which coincide with the calendar year
end. The Commission believes that the
alignment of pools’ fiscal years with the
calendar year end should facilitate the
preparation of Schedule B and reduce
the burden imposed on mid-size CPOs
because some of the information
required will be similar to that included
in a pool’s annual financial statements.
With respect to the quarterly reporting
by large CPOs on Schedules A, B, and
C, the Commission believes that 60 days
is a sufficient amount of time to
complete those schedules for large
CPOs. The Commission notes that the
entities required to file on a quarterly
basis have a significant amount of assets
under management, and as such, the
Commission anticipates that such
entities routinely generate the type of
information requested on Schedules B
and C as part of their internal
governance. Accordingly, the
Commission will require large CPOs to
file Schedules B and C within 60 days
following the end of the reporting
period as defined in Form CPO–PQR.
In October 2011, the Commission
adopted Form PF as a joint reporting
176 See NFA Letter; Seward Letter; and AIMA
Letter.

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form with the SEC. The terms of Form
PF permit dually registered entities that
are filing the form for their private funds
under advisement to report on the
activities of their other commodity
pools as well. Entities that choose to file
Form PF for all of their funds under
advisement will still be required to file
Schedule A on an annual basis, which
is consistent with the terms of the
Proposal. The instructions of Form
CPO–PQR have been modified to reflect
this change.
The Commission has also determined
to omit the statement that the failure to
answer all required questions
completely and accurately may severely
impact your ability to operate. The
Commission does not believe that such
language is necessary to inform
registered CPOs of their obligations
under the CEA and the Commission’s
regulations to comply with such
obligations in good faith.
Additionally, the Commission has
concluded that it should clarify the
obligations of co-CPOs of a pool with
respect to the submission of Form CPO–
PQR. The Commission has amended the
instructions to the form to clarify that
for co-CPOs, the CPO with the greater
assets under management overall is
required to report for the co-operated
pool. Furthermore, if a pool is operated
by co-CPOs and one of the CPOs is also
a registered investment adviser, the noninvestment adviser CPO will still be
obligated to file the applicable sections
of Form CPO–PQR regardless of whether
the investment adviser CPO filed a Form
PF. The Commission believes that this
will prevent the possibility of double
counting and unnecessary duplicative
filings regarding co-operated pools.
b. Schedule A
Schedule A seeks basic identifying
information about the CPO, each of its
pools, and any services providers used.
The Commission has decided to adopt
Schedule A as proposed with the
following revisions. In question 3 of part
2, the Commission has added a question
asking whether the pool is operated by
co-CPOs and for the name of the other
CPO(s). This question will enable the
Commission to ensure that only one
CPO is filing with respect to each cooperated commodity pool. In addition,
question 12 of part 2, which asked for
information regarding the pool’s trading
strategies, has been moved to Schedule
B, both in response to a commenter’s
suggestion 177 and in an effort to ensure
that dual registrants are not required to
file extensive duplicative information
177 See

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on Schedule A that they are already
providing on Form PF.
The Commission added a question
asking for the telephone number and
email for the contact person for the
reporting CPO as this was inadvertently
omitted in the Proposal. Also, the
Commission added a subpart h. to
question 10 regarding the base currency
used by the CPO for the particular pool
for which it is reporting. This question
was inadvertently omitted but is
necessary for the Commission to fully
utilize the information reported
regarding the changes in the pool’s
assets under management.
The Commission added subparts to
question 12 regarding prospective risks
for the imposition of ‘‘gates’’ and
restrictions on redemption of
participant withdrawals. The terms of
question 12, as proposed, only seek
information on a retrospective basis,
which, although useful to the
Commission in assessing overall issues
regarding the imposition of restrictions
on redemption, does not assist the
Commission in assessing possible
sources of prospective risk to the market
and pool participants. Moreover,
question 12, as proposed, did not
capture information about pools that
have procedures in place governing the
imposition of restrictions on
redemptions, but whose restrictions
have not been triggered. The
Commission believes that the
modifications to this question solicits
such information and will provide the
Commission with a more complete
understanding of the role of restrictions
on redemptions in the operation of
commodity pools. Moreover, the
Commission believes that the request for
additional information regarding the
potential imposition of restrictions on
redemptions is consistent with the tenor
and intent of question 12 as proposed.
The Commission also has made
numerous non-substantive technical
amendments in Schedule A, including
formatting corrections, the deletion of
the term ‘‘carrying’’ from question 5 in
part 2, and the addition of two months
that were inadvertently omitted from
the monthly rate of return table in part
2, question 11.
c. Schedule B
Mid-sized and large CPOs will be
required to complete Schedule B, which
will solicit data about each pool
operated by these CPOs. The
Commission has decided to adopt
Schedule B with the following
revisions.
In question 1, subpart d, the
Commission has decided to change the
format of the question from a pull-down

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list of options to a chart, consistent with
the format used for substantively
identical question 20, section 1c in
Form PF. The Commission believes that
the chart format change will add clarity
to the question and will facilitate the
completion by registrants. The
Commission also has added a column
requesting the percentage of the pool’s
capital invested in each strategy. This
additional information aligns Form
CPO–PQR with the information
requested in Form PF and also provides
the Commission with the means to
assess the risk that a pool derives from
its borrowing activities.
The Commission has also amended
question 1 to add a subpart g asking the
reporting CPO to report the percentage
of the commodity pool’s net asset value
that is traded pursuant to a high
frequency trading strategy. This subpart
previously appeared as part of the chart
in question 1 regarding investment
strategies. The Commission believes that
denoting the issue of high frequency
trading as its own subpart of question 1
will enhance the clarity of the question
and make the data gained by the
Commission more usable in its
assessment of risks posed to the
derivatives markets.
The Commission is amending
question 2 to include the percentage of
a pool’s borrowings from U.S. and nonU.S. creditors that are not ‘‘financial
institutions,’’ as that term is defined in
Form CPO–PQR, as separate line items.
This revision parallels the structure of
subparts b and c of that question.
Finally, the Commission has made
several non-substantive corrections/
alterations, including modifying the
format of question 3 to provide a more
user-friendly interface for reporting
funds and combining several subparts
into charts, correcting a typographical
error in question 5, adding the question
that was formerly question 12 of
Schedule A to Schedule B as question
6, and expanding several categories of
investments to provide a parallel level
of detail among the asset classes.
d. Schedule C
Schedule C requests information
about the pools operated by large CPOs
on an aggregated and pool by pool basis.
The Commission is adopting Schedule C
as proposed with the following
revisions.
Part 1
The questions in part 1 of Schedule C
seek information for all of the pools
operated by the large CPO on an
aggregate basis.
Question 1 requires a CPO to report a
geographical breakdown of investments

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held by the pools that it operates. The
Commission has modified this question
to require a less detailed breakdown by
focusing on regions as opposed to
individual countries and has added a
separate disclosure regarding
investment in certain countries of
interest. The Commission expects that
this revision will reduce the burden of
responding to this question because the
less granular categories should permit
more CPOs to rely on classifications that
they already use.
The Commission has determined that
question 3, which seeks information
regarding the duration of the pools’
fixed income investments on an
aggregate basis, is redundant in light of
question 9 in part 2 of Schedule C.
Question 9 in part 2 of Schedule C asks
for the same information on a pool by
pool basis. For that reason, the
Commission has deleted question 3
from part 1 of Schedule C.
Part 2
Part 2 of Schedule C seeks
information from large CPOs on an
individual pool basis for each operated
‘‘large pool’’ as that term is defined in
Form CPO–PQR. The Commission has
revised subpart c of question 3 to be a
yes/no response with respect to whether
the pool used a central clearing
counterparty (‘‘CCP’’) during the
reporting period. The Commission
believes that this is less burdensome
and provides it with sufficient
information regarding the use of CCPs
because the CPO’s relationship is with
the swap dealer, futures commission
merchant, or direct clearing member
rather than directly with the CCP.
In subpart b of question 4, the
Commission has made several revisions
correcting the technical terminology
used with respect to ‘‘value at risk’’
(‘‘VaR’’). These revisions are nonsubstantive. The Commission also
added a new subpart c to question 4,
which asks the CPO whether it uses any
metrics other than VaR for risk
management purposes for the reporting
fund. The Commission believes that this
information will be useful as it
continues to amend Form CPO–PQR as
necessary to obtain relevant information
from registrants. Because of the addition
of a new subpart c to question 4, subpart
c of question 4 as proposed has been
redesignated as subpart d of question 4.
The Commission also added a category
of ‘‘relevant/not formally tested’’ to
subpart d of question 4 in an effort to
capture all possible opinions of the
reporting CPO with respect to the listed
market factors. The Commission
believes that this modification will
reduce the burden on reporting CPOs

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

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registrants to better assess sources of
risk to the market and measure their
potential reach. Because Form CTA–PR
will be limited to demographic data, the
Commission believes that it is
appropriate for CTAs to file the form on
an annual basis within 45 days of the
end of the fiscal year. Therefore, the
Commission has amended the text of
§ 4.27 to reflect this modification of the
reporting obligations of CTAs.
7. Implementation
The effective date for § 4.27 and
Forms CPO–PQR and CTA–PR is July 2,
2012. The Commission is adopting a
two-stage phase-in period for
compliance with Form CPO–PQR filing
requirements. The compliance date for
§ 4.27 is September 15, 2012 for any
CPO having at least $5 billion in assets
under management attributable to
commodity pools as of the last day of
the fiscal quarter most recently
completed prior to September 15, 2012.
Therefore, a CPO with $5 billion in
commodity pool assets under
management as of June 30, 2012, must
file its first Form CPO–PQR within 60
days following September 30, 2012.
Reporting CPOs must file all schedules
of Form CPO–PQR.
For all other registered CPOs and all
CTAs, the compliance date for § 4.27 is
December 15, 2012. As a result, most
advisers must file their first Form CPO–
PQR or CTA–PR based on information
as of December 31, 2012. This delay in
compliance should allow sufficient time
for CPOs and CTAs to develop systems
for collecting the information required
on the forms and prepare for filing. The
Commission anticipates that this
timeframe will also enable the NFA to
have adequate time to program a system
to accept the filings. The Commission
has determined that the extension of the
compliance dates is necessary because
the rule and forms are being adopted
later than expected.
G. Amendments to §§ 145.5 and 147.3:
Confidential Treatment of Data
Collected on Forms CPO–PQR and
CTA–PR
As the Commission stated in the
Proposal, the collection of certain
proprietary information through Forms
CPO–PQR and CTA–PR raises concerns
regarding the protection of such
information from public disclosure.180
The Commission received two
comments requesting that the
Commission treat the disclosure of a
pool’s distribution channels as
nonpublic information,181 and
180 76

FR 7976, 7982 (Feb. 12, 2011).
MFA II Letter and Seward & Kissel Letter.

181 See

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11271

numerous other comments urging the
Commission to be exceedingly
circumspect in ensuring the
confidentiality of the information
received as a result of the data
collections.182
The Commission agrees that the
distribution and marketing channels
used by a CPO for its pools may be
sensitive information that implicates
other proprietary secrets, which, if
revealed to the general public, could put
the CPO at a competitive disadvantage.
Accordingly, the Commission is
amending §§ 145.5 and 147.3 to include
question 9 of Schedule A of Form CPO–
PQR as a nonpublic document.
Additionally, the Commission is
amending §§ 145.5 and 147.3 to remove
reference to question 13 in Schedule A
of Form CPO–PQR because such
question no longer exists due to
amendments to that schedule. Similarly,
the Commission will be designating
question subparts (c) and (d) of question
2 of Form CTA–PR as nonpublic
because it identifies the pools advised
by the reporting CTA.
Therefore, as adopted, the parts of
Form CPO–PQR that are designated
nonpublic under parts 145 and 147 of
the Commission regulations are:
• Schedule A: Question 2, subparts
(b) and (d); Question 3, subparts (g) and
(h); Question 9; Question 10, subparts
(b), (c), (d), (e), and (g); Question 11; and
Question 12.
• Schedule B: All.
• Schedule C: All; and
• Form CTA–PR: question 2, subparts
c and d.
H. Conforming Amendments to Part 4
As a result of the amendments
adopted herein, the Commission must
amend various provisions in part 4 of
the Commission’s regulations for
purposes of making conforming
changes. Specifically, the Commission
is deleting references to repealed
§ 4.13(a)(4) in other sections of the
Commission’s regulations.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA)183 requires that agencies, in
proposing rules, consider the impact of
those rules on small businesses. The
Commission has previously established
certain definitions of ‘‘small entities’’ to
be used by the Commission in
evaluating the impact of its rules on
182 See Roundtable transcript. Commission staff
also had numerous meetings with commenters that
addressed this issue of confidentiality of
information.
183 See 5 U.S.C. 601, et seq.

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such entities in accordance with the
RFA.184
CPOs: The Commission has
determined previously that registered
CPOs are not small entities for the
purpose of the RFA.185 With respect to
CPOs exempt from registration, the
Commission has previously determined
that a CPO is a small entity if it meets
the criteria for exemption from
registration under current Rule
4.13(a)(2).186 Such CPOs will continue
to qualify for either exemption or
exclusion from registration and
therefore will not be required to report
on proposed Form CPO–PQR; however,
they will have an annual notice filing
obligation confirming their eligibility for
exemption or exclusion from
registration and reporting. The
Commission estimates that the time
required to complete this new
requirement will be approximately 0.25
of an hour, which the Commission has
concluded will not be a significant time
expenditure. The Commission has
determined that the proposed regulation
will not create a significant economic
impact on a substantial number of small
entities.
CTAs: The Commission has
previously decided to evaluate, within
the context of a particular rule proposal,
whether all or some CTAs should be
considered to be small entities, and if
so, to analyze the economic impact on
them of any such rule.187 Form CTA–PR
is proposed to be required of all
registered CTAs, which necessarily
includes entities that would be
considered small. The majority of the
information requested on Form CTA–PR
is information that is readily available to
the CTA or readily calculable by the
CTA, regardless of size. Therefore, the
Commission estimates that the time
required to complete the items
contained in Form CTA–PR will be
approximately 0.5 hours as it is
comprised of only two questions, which
solicit information that is expected to be
readily available. The Commission has
determined that Form CTA–PR will not
create a significant economic impact on
a substantial number of small entities.
Accordingly, the Chairman, on behalf of
the Commission, hereby certifies
pursuant to 5 U.S.C. 605(b) that the
proposed rules, will not have a
significant impact on a substantial
number of small entities.
The Commission did not receive any
comments on its analysis of the
FR 18618 (April 30, 1982).
47 FR 18618, 18619, Apr. 30, 1982.
186 See 47 FR at 18619–20.
187 See 47 FR at 18620.

application of the RFA to the instant
part 4 amendments.
B. Paperwork Reduction Act
This rulemaking contains information
collection requirements. The Paperwork
Reduction Act (‘‘PRA’’) imposes certain
requirements on Federal agencies in
connection with their conducting or
sponsoring any collection of
information as defined by the PRA.188
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless it
displays a currently valid control
number from the Office of Management
and Budget (‘‘OMB’’).
The Commission is amending
Collection 3038–0023 to allow for an
increase in response hours for the
rulemaking resulting from the rescission
of §§ 4.13(a)(4) and the modification of
§ 4.5. This amendment differs from that
in the Proposal due to the Commission’s
decision to retain the exemption set
forth in § 4.13(a)(3). The Commission is
amending Collection 3038–0005 to
allow for an increase in response hours
for the rulemaking associated with new
and modified compliance obligations
under part 4 of the Commission’s
regulations resulting from these
revisions. The titles for these collections
are ‘‘Part 3—Registration’’ (OMB Control
number 3038–0023) and ‘‘Part 4—
Commodity Pool Operators and
Commodity Trading Advisors’’ (OMB
Control number 3038–0005). Responses
to this collection of information will be
mandatory.
Both amendments differ from those
set forth in the Proposal due to
comments received asserting that,
absent harmonization of the
Commission’s compliance regime for
CPOs with that of the SEC for registered
investment companies, entities
operating registered investment
companies that would be required to
register with the Commission would not
be able to comply with the
Commission’s regulations and would
have to discontinue its activities
involving commodity interests.189 The
Commission acknowledges that there
are certain provisions of its compliance
regime that conflict with that of the SEC
and that it would not be possible to
comply with both. For this reason, the
Commission is considering issuing a
notice of proposed rulemaking regarding
the areas of potential harmonization
between the Commission’s compliance
obligations and those of the SEC. Until
such time as the harmonized

184 47

185 See

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188 See

44 U.S.C. 3501 et seq.
e.g., ICI Letter, Fidelity Letter, Dechert III

189 See,

Frm 00022

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

Letter.

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compliance regime is adopted as final
rules, the Commission will not be
requiring compliance with the
provisions of § 4.5 for registered
investment companies. Therefore, the
Commission is excluding § 4.5
compliance from the PRA burden
calculation for these final rules, and is
recalculating the information collection
requirements associated with § 4.5 in
the proposed harmonized compliance
rules.
The Commission will protect
proprietary information according to the
Freedom of Information Act (‘‘FOIA’’)
and 17 CFR part 145, ‘‘Commission
Records and Information.’’ In addition,
section 8(a)(1) of the CEA strictly
prohibits the Commission, unless
specifically authorized by the CEA, from
making public ‘‘data and information
that would separately disclose the
business transactions or market position
of any person and trade secrets or names
of customers.’’ 190 The Commission is
also required to protect certain
information contained in a government
system of records according to the
Privacy Act of 1974.191

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5 U.S.C. 552a.

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Annual responses by each
respondent: 75,932.
Estimated average hours per response:
0.09.
Annual reporting burden: 6,833.9.
In addition to the reporting burdens,
each CPO or CTA not previously subject
to registration will be obligated to
submit a $200 registration fee, an $85
registration fee for each associated
person, and a $15 fee for fingerprinting
services for each associated person.
Those entities that do not already
provide certified annual reports will
now incur public accounting costs as a
result of the newly adopted rules
requiring certification. Moreover, the
Commission anticipates that reporting
entities may hire external service
providers, such as law firms or
accounting firms, to prepare and submit
some of the documents required both in
Collection 3038–0023 and in Collection
3038–0005, which is accounted for
below.
b. OMB Control Number 3038–0005
Part 4 of the Commission’s regulations
concerns the operations of CTAs and
CPOs, and the circumstances under
which they may be exempted or
excluded from registration. Under
existing Collection 3038–0005 the
estimated average time spent per
response has not been altered; however,
adjustments have been made to the
collection to account for current
information available from NFA
concerning CPOs and CTAs registered
or claiming exemptive relief under the
part 4 regulations, and the new burden
expected under proposed § 4.27. The
Commission estimates that a total of 300
entities annually will file the Notice of
Exemption from CTA Registration under
§ 4.14(a)(8), with an estimated burden of
0.5 hours per notice filing. An estimated
253 entities will annually file 7,890
Notices of Exclusion from CPO
Definition under § 4.5, with an
estimated burden of 0.5 hours per notice
filing. The rules also require certain
reports by each entity registered as a
CPO or CTA. These include certain
disclosure documents, pool account
statements and pool annual reports, and
requests for extensions of the annual
report deadline. The Commission
estimates that 180 entities will prepare
an average of 1.5 pool account
statements as required under § 4.22(a)
an average of 9 times per year, with a
per-response burden of 3.85 hours. The
Commission estimates that these same
180 entities will prepare and file an
average of 1.5 annual reports, with a
burden of 9.58 hours per report. In
addition, the Commission anticipates
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a deadline extension for the annual
report each year, with a burden of 0.5
hours per request.
These burden estimates, together with
those associated with the increases
necessary to account for the filing of
forms CPO–PQR, PF, and CTA–PR
discussed below, will result in an
amendment to Collection 3038–0005 to
provide, in the aggregate:
Estimated number of respondents:
43,168.
Annual responses for all respondents:
61,868.
Estimated average hours per response:
8.77.
Annual reporting burden: 257,635.8.
Proposed § 4.27 is expected to be the
main reason for the increased burden
under Collection 3038–0005.
The Commission has amended its
burden estimates with respect to Form
CPO–PQR to reflect the fact that dually
registered entities that operate pools
that are not private funds may report the
activities for such funds on Form PF.192
The Commission expects that any entity
that is eligible to file form PF will file
that form and not the form CPO–PQR,
and has excluded from the estimates for
form CPO–PQR those entities. As most
of the burden associated with filing
form PF for CPOs newly required to
register with the Commission has been
accounted for by the Commission in an
information collection request
associated with a rulemaking adopted
jointly with the SEC, the amendment to
Collection 3038–0005 accounts only for
the burden of filing form PF by dually
registered CPOs for pools that are not
private funds as defined in the joint
rulemaking.
i. Comments on § 4.27 Reporting
Requirements
The Commission received numerous
comments in response to proposed
§ 4.27, and in response has adopted a
number of cost-mitigating measures.
Several commenters questioned whether
the data collection was necessary for the
Commission’s oversight of its
registrants.193 Others asserted that
192 Based on information that the Commission
received from registrants on their annual financial
report filings, the Commission determined that 1⁄3
of all pools reporting to the Commission in 2009
reported gains or losses from securities or a
combination of securities and futures. Based on the
provisions of Form PF, which permits filers of the
form to file with respect to commodity pools that
are not private funds, the Commission anticipates
that all entities entitled to file Form PF for their
commodity pools will do so, as it is less
burdensome on the filer. Therefore, the Commission
has included burden estimates for CPOs to file
Form PF for their commodity pools that are not
private funds, which is an incremental increase
over the burden imposed by the obligation to file
Form PF for the entity’s private funds.
193 See Fidelity Letter; and AIMA Letter.

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11273

certain groups, such as registered
investment companies or family offices,
should be exempted from completing
the data collection.194 In the
Commission’s judgment, in order to
fulfill the Commission’s systemic-risk
mitigation mandate, it is necessary to
obtain information from the full
universe of registrants to fully assess the
activities of CPOs and CTAs in the
derivatives markets.
With respect to the assertion that
registered investment companies should
not be required to file form CPO–PQR,
the Commission believes that it is
important to collect the data in form
CPO–PQR from registered investment
companies whose activities require CPO
registration to assess the risk posed by
such investment vehicles in the
derivatives markets and the financial
system generally. In this respect, the
Commission intends to require the same
information from the CPOs of registered
investment companies as it is requiring
from other registered CPOs.
Additionally, the Commission notes that
to the extent that the entity registered as
the CPO for the registered investment
company is registered as an investment
adviser and is required to file Form PF
with the SEC, the activities of the
registered investment company may be
reported on Form PF rather than form
CPO–PQR.
The Commission further believes that
the same reasoning applies with respect
to the collection of data from family
offices. To enable the Commission to
evaluate a potential family offices
exemption following the collection and
analysis of data regarding their
activities, the Commission believes that
it is essential that family offices remain
subject to the data collection
requirements.
One commenter recommended that
the Commission clarify the filing
obligations for CPOs and CTAs that are
required to file form PF with the SEC
and streamline the reporting
obligations.195 Another commenter
argued that a very large private fund
that has a limited amount of derivatives
trading should not be subject to
schedule C of form CPO–PQR.196
As stated in the Proposal, CPOs that
are dually registered with the SEC and
that file form PF must still file schedule
A, containing basic demographic
information, with the Commission, and
CTAs must still file form CTA–PR. The
Commission intends to adopt § 4.27 as
proposed and permit dual registrants to
194 See

ICI Letter; AIMA Letter; and K&L Letter.
Fidelity Letter.
196 See AIMA Letter; see also, SIFMA Letter; and
Fidelity Letter.
195 See

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

Barnard Letter.
Dechert Letter.

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a further cost-mitigating measure, the
Commission will leverage any limits on
its resources through its coordination
with NFA to accomplish the analysis
necessary to make full use of the data
collected from Commission registrants.
The Commission received several
comments regarding the appropriate
reporting thresholds for the various
schedules of form CPO–PQR.199 The
commenters stated that $150 million in
assets under management was too low
of a threshold for entities to be
categorized as mid-sized and required to
file schedule B. Rather, the commenters
urged the Commission to increase the
threshold to $500 million in assets
under management.200 These
commenters also suggested that the
Commission increase the threshold for
large CPOs to $5 billion in assets under
management.201
The Commission believes that $150
million in assets under management is
still the appropriate threshold for midsized CPOs. The Commission will retain
this threshold because it is consistent
with the threshold for advisers filing
section 1 of form PF, which is
substantively similar to schedule B of
form CPO–PQR, and it will ensure
comparable treatment of entities of
similar magnitude. In addition, the
Commission has decided not to increase
the large CPO threshold to $5 billion.
The Commission has decided, however,
to increase the threshold for large CPOs
from $1 billion to $1.5 billion. The
Commission anticipates that increasing
the threshold to $1.5 billion will lower
costs by reducing the number of CPOs
required to file schedule C of form CPO–
PQR, while still capturing data
concerning a substantial portion of the
assets under management by registered
CPOs. The Commission believes that
increasing the threshold beyond $1.5
billion, however, could limit the
Commission’s access to information
necessary to oversee entities that could
pose a risk to the derivatives markets or
the financial system as a whole.
In response to comments, the
Commission has also determined to
mitigate costs and promote efficiency by
modifying the frequency of reporting for
filers of form CPO–PQR. As adopted, all
CPOs other than large CPOs will be
required to file schedule A on an annual
basis; mid-size CPOs will be required to
file schedule B on an annual basis; and
large CPOs will be required to file
199 See AIMA Letter; MFA II Letter; Seward
Letter. See also, AIMA II Letter.
200 See AIMA Letter.
201 See AIMA Letter; MFA II Letter; and Seward
Letter.

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schedules A, B, and C on a quarterly
basis.
The Commission received several
comments asserting that the 15-day
period for reporting was not sufficient to
permit reporting CPOs to complete and
file the form and all suggested extending
the period to 30 or 45 days.202 The
Commission agrees that reporting CPOs
will need additional time in which to
submit the various schedules of form
CPO–PQR. In a further effort to reduce
costs to participants, all CPOs other
than large CPOs will be required to file
schedule A within 90 days of the end of
the calendar year. This time period was
chosen for efficiency and cost mitigation
inasmuch as it coincides with the
annual questionnaire required by NFA
of its entire population of member CPOs
and with the vast majority of annual
report filings for commodity pools.
Moreover, because the Commission has
transferred the pool position
information from schedule A to
schedule B, the Commission believes
that CPOs should be able to comply
with filing basic demographic data
within 90 days.
For schedule B, mid-sized CPOs are
required to submit that schedule within
90 days; the Commission believes this is
an adequate time period for compiling
and reporting that schedule. The
Commission notes that CPOs are
generally required to file annual reports
for their pools within 90 days of their
fiscal year end, most of which coincide
with the calendar year end. The
Commission believes that the alignment
of pools’ fiscal years with the calendar
year end should facilitate the
preparation of schedule B and reduce
the burden imposed on mid-size CPOs
because some of the information
required will be similar to that included
in a pool’s annual financial statements.
With respect to the quarterly reporting
by large CPOs on schedules A, B, and
C, the Commission believes that 60 days
is a sufficient amount of time to
complete those schedules for large
CPOs. The Commission notes that the
entities required to file on a quarterly
basis have a significant amount of assets
under management, and as such, the
Commission anticipates that such
entities routinely generate the type of
information requested on schedules B
and C as part of their internal
governance. Accordingly, the
Commission will require large CPOs to
file schedules A, B, and C within 60
days following the end of the reporting
period as defined in form CPO–PQR.
202 See NFA Letter; Seward Letter; and AIMA
Letter.

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The Commission received several
comments regarding the content of form
CTA–PR.203 Most commenters urged the
Commission to eliminate the form in its
entirety.204 The Commission does not
believe that the complete elimination of
form CTA–PR is appropriate; however,
the Commission agrees that schedule B
of the form contains redundant
information that will already be
collected through form CPO–PQR.
Accordingly, the Commission has
decided to adopt only schedule A of
form CTA–PR. In so doing, the
Commission believes the burden on
CTAs should be significantly reduced.
Because form CTA–PR will be limited to
demographic data, the Commission
believes that it is appropriate for CTAs
to file the form on an annual basis
within 45 days of the end of the fiscal
year.
Finally, because the regulations have
been modified to allow dually registered
entities to file only form PF (plus the
first schedule A of form CPO–PQR) for
all of their commodity pools, even those
that are not ‘‘private funds,’’ the
Commission expects that such entities
should not be burdened by the costs of
dual registration and dual filing.

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ii. Information Collection Estimates for
Forms CPO–PQR, PF, and CTA–PR
The Commission expects the
following burden with respect to the
various schedules of Forms CPO–PQR,
PF, and CTA–PR:
Form CPO–PQR: Schedule A:
Estimated number of respondents
(excluding large CPOs): 3,890.
Annual responses by each
respondent: 1.
Estimated average hours per response:
6.
Annual reporting burden: 23,340.
Estimated number of respondents
(large CPOs): 170.
Annual responses by each
respondent: 4.
Estimated average hours per response:
6.
Annual reporting burden: 4,080.
Form CPO–PQR: Schedule B:
Estimated number of respondents
(mid size CPOs): 440.
Annual responses by each
respondent: 1.
Estimated average hours per response:
4.
Annual reporting burden: 1,760.
Estimated number of respondents
(large CPOs): 170.
Annual responses by each
respondent: 4.
203 See e.g., IAA Letter; MFA II Letter; AIMA
Letter; SIFMA Letter; and Fidelity Letter.
204 Id.

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Estimated average hours per response:
4.
Annual reporting burden: 2,720.
Form CPO–PQR: Schedule C:
Estimated number of respondents:
170.
Annual responses by each
respondent: 4.
Estimated average hours per response:
18.
Annual reporting burden: 12,240.
Form PF (non-large CPOs):
Estimated number of respondents:
220.
Annual responses by each
respondent: 1.
Estimated average hours per response:
4.
Annual reporting burden: 880.
Form PF (large CPOs):
Estimated number of respondents: 90.
Annual responses by each
respondent: 4.
Estimated average hours per response:
18.
Annual reporting burden: 6,480.
Form CTA–PR:
Estimated number of respondents:
450.
Annual responses by each
respondent: 1.
Estimated average hours per response:
0.5.
Annual reporting burden: 225.
C. Considerations of Costs and Benefits
The Commission has historically
exercised its authority to exempt certain
categories of entity from the CPO and
CTA registration requirement set forth
in Section 4m(1) of the CEA, which
states that it is otherwise ‘‘unlawful for
any commodity trading advisor or
commodity pool operator, unless
registered under this Act’’ to conduct
business in interstate commerce.205
Exempted entities have included certain
investment companies registered with
the SEC pursuant to the Investment
Company Act of 1940, and certain
entities whose only participants are
‘‘qualified eligible persons.’’ 206 This
system of exemptions was appropriate
because such entities engaged in
relatively little derivatives trading, and
dealt exclusively with qualified eligible
persons, who are considered to possess
the resources and expertise to manage
their risk exposure.
In the Commission’s judgment,
changed circumstances warrant
revisions to these rules. The
Commission is aware, for example, of
increased derivatives trading activities
by entities that have previously been
exempted from registration with the
205 7

U.S.C. 6m.
CFR §§ 4.5(a)(1), 4.13(a)(4).

206 17

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11275

Commission, such that entities now
offering services substantially identical
to those of registered entities are not
subject to the same regulatory oversight.
Meanwhile, the Dodd-Frank Act has
given the Commission a more robust
mandate to manage systemic risk and to
ensure safe trading practices by entities
involved in the derivatives markets,
including qualified eligible persons and
other participants in commodity pools.
Yet, while the Commission must
execute this mandate, there currently is
no source of reliable information
regarding the general use of derivatives
by registered investment companies.
The Commission, therefore, is
adopting a new registration and data
collection regime for CPOs and CTAs
that is consistent with the data
collection required under the DoddFrank Act. In these final rules, the
adopted amendments to part 4 of the
Commission’s regulations will do the
following: (A) Rescind the exemption
from CPO registration provided in
§ 4.13(a)(4) of the Commission’s
regulations; (B) rescind relief from CTA
registration for those CTAs who advise
pools with relief under § 4.13(a)(4); (C)
rescind relief from the certification
requirement for annual reports provided
to operators of certain pools only offered
to qualified eligible persons (‘‘QEPs’’)
under § 4.7(b)(3); (D) modify the criteria
for claiming relief under § 4.5 of the
Commission’s regulations; (E) require
the annual filing of notices claiming
exemptive relief under § 4.5, § 4.13, and
§ 4.14 of the Commission’s regulations;
and (F) require additional risk
disclosures for CPOs and CTAs
regarding swap transactions and, certain
conforming amendments. By these
amendments, the Commission seeks to
eliminate informational ‘‘blind spots,’’
which will benefit all investors and
market participants by enhancing the
Commission’s ability to form and frame
effective policies and procedures.
Section 15(a) 207 of the CEA requires
the Commission to consider the costs
and benefits of its actions before
promulgating a regulation under the
CEA or issuing an order. Section 15(a)
further specifies that the costs and
benefits shall be evaluated in light of the
following five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. To the
extent that these new regulations reflect
the statutory requirements of the Dodd207 7

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Frank Act, they will not create costs and
benefits beyond those resulting from
Congress’s statutory mandates in the
Dodd-Frank Act. However, to the extent
that the new regulations reflect the
Commission’s own determinations
regarding implementation of the DoddFrank Act’s provisions, such
Commission determinations may result
in other costs and benefits. It is these
other costs and benefits resulting from
the Commission’s own determinations
pursuant to and in accordance with the
Dodd-Frank Act that the Commission
considers with respect to the Section
15(a) factors.
The Commission has quantified
estimated costs and benefits where it is
reasonably practicable to do so. The
Commission notes that, unless
otherwise specified, all costs discussed
herein are estimates based on the
Commission’s knowledge of the
operations and registration statuses of
CPOs and CTAs. Moreover, the
Commission is obligated to estimate the
burden of and provide supporting
statements for any collections of
information it seeks to establish under
considerations contained in the PRA, 44
U.S.C. 3501 et seq., and to seek approval
of those requirements from the OMB.
Therefore, the estimated burden and
support for the collections of
information in this this rulemaking, as
well as the consideration of comments
thereto, are discussed in the PRA
section of this rulemaking and the
information collection requests filed
with OMB as required by that statute.
All estimates are based on average costs;
actual costs may vary depending on the
entity’s individual business model and
compliance procedures.
The Commission is sensitive to costs
incurred by market participants and has
attempted in a variety of ways to
minimize burdens on affected entities.
These include the Commission’s efforts
to harmonize its compliance
requirements with those of the SEC,
including through specific harmonizing
provisions in the joint SEC–CFTC rule
for dually registered investment
advisers, as well as through tailoring of
the current amendments.208 A number
of other cost-mitigation measures are
discussed later in this section.
In its Proposal, the Commission
invited commenters to ‘‘to submit any
data and other information that they
may have quantifying or qualifying the
costs and benefits of this proposed rule
208 See Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128 (Nov. 16, 2011).

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with their comment letters.’’ 209 Many
comments addressed the costs and
benefits of the proposed rule in
qualitative terms. These comments are
considered below.
In the following discussion, the
Commission sets forth its own
assessment of the benefits and costs of
the amendments; addresses relevant
comments on the Proposal and
alternatives to the Proposal submitted
by commenters; and evaluates the
benefits and costs in light of the five
broad areas of market and public
concern set forth in Section 15(a) of the
CEA. The analysis begins by addressing
general comments related to cost-benefit
analysis in the context of the Proposal
as a whole, and then proceeds to
examine the specific issues according to
the following three categories of
regulation contained within the
Proposal: (1) registration (including
changes to § 4.5, § 4.13(a), and § 4.14);
(2) data collection (including the
adoption of forms CPO–PQR and CTA–
PR); and (3) complementary amending
provisions (including changes to § 4.7,
§ 4.24, § 4.34, and parts 145 and 147).
1. General Comments
Several commenters claimed that the
Commission did not provide a sufficient
consideration of costs and benefits in
the Notice of Proposed Rulemaking.210
One commenter noted that the costbenefit considerations focused on
benefits that are already provided by
other federal securities laws, making the
regulations duplicative.211 Another
commenter asserted that until other
rules, such as the further definition of
‘‘swaps,’’ as well as capital and margin
requirements, have been finalized, it is
not possible to determine the costs and
benefits of these rules.212 Other
commenters suggested there be another
roundtable meeting to discuss the
proposed rules.213
In response to these comments, the
Commission has further considered
costs and benefits as they relate to the
final rules. As explained below in the
discussion concerning dual SEC and
Commission registrants, the
Commission believes that the benefits
provided by these rules are
supplementary to, and not duplicative
or redundant of, benefits provided by
the federal securities laws. The
Commission does not believe that the
adoption of these regulations should be
209 76

FR 7976, 7989 (Feb. 11, 2011).
SIFMA Letter; USCC Letter; Reed Smith
Letter; NFA Letter; Invesco Letter; Dechert II Letter;
and ICI Letter.
211 See ICI Letter.
212 See Dechert II Letter.
213 See Vanguard Letter; MFA Letter.
210 See

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postponed until after other regulations
are finalized and believes that the costs
and benefits are sufficiently clear at this
point and that delay is not justified.214
In addition, the Commission has no
reason to believe that another
roundtable meeting would yield
information substantially different from
that gleaned from prior roundtables,
comment letters, and meetings with
industry representatives.
The Commission has determined that
these amendments will create additional
compliance costs for affected
participants. These costs include, but
may not be limited to, the cost to
prepare and file new forms CPO–PQR
and CTA–PR; the cost to file an annual
notice to claim exemptive relief under
§§ 4.5, 4.13, and 4.14; the cost of
preparing, certifying, and submitting
annual reports as required for
registrants; the cost of preparing
required disclosure documents; the cost
of preparing and distributing account
statements on a periodic basis to
participants; the cost of keeping certain
records as required; and the cost of
registering as a CPO or CTA. These costs
each relate to collections of information
subject to PRA compliance, and
therefore have been accounted for in the
PRA section of this rulemaking and the
information collection requests filed
with OMB as required by that statute.
Notably, many of the benefits
associated with the requirements
adopted or amended in these
regulations are recognized not only by
the Commission in its mission to protect
derivatives markets and the participants
in them but also by the industry. Several
‘‘best practices’’ manuals highlight the
benefits of being registered with the
Commission, preparing and
disseminating risk disclosure
documents, confirming receipt of
disclosure documents, and ensuring
independent audit of financial
statements and annual reports.215 These
benefits include increased consumer
214 As noted above, however, the Commission
agrees that it should not implement the inclusion
of swaps within the threshold test prior to the
effective date of such relevant final rules. Therefore,
it is the Commission’s intention to delay the
effective date of the inclusion of swaps into the
threshold calculation until 60 days after the final
rules regarding the definition of ‘‘swap’’ and the
delineation of the margin requirement for such
instruments are effective.
215 See, e.g. ‘‘Sound Practices for Hedge Fund
Managers.’’ Managed Funds Association (MFA).
Washington DC, 2007.; ‘‘Principles and Best
Practices for the Hedge Fund Industry.’’ Investors
Committee Report to the President’s Working Group
on Financial Markets, Washington DC, 2008.; and
‘‘Best Practices for the Hedge Fund Industry.’’ Asset
Managers Committee Report to the President’s
Working Group on Financial Markets, Washington
DC, 2009.

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

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2. Regulations Regarding Registration
Requirements for CPOs and CTAs
As discussed above, the amendments
to the registration provisions under part
4 include rescissions of the exemptions
for entities functioning as commodity
pools with only ‘‘qualified eligible
persons’’ as participants and the
exclusion of registered investment
companies under the Investment
Company Act of 1940, unless those
investment companies fall below a
certain threshold level of derivatives
investment activity. With respect to
those entities that will continue to claim
exemption or exclusion from
registration as CPOs or CTAs under the
rules, the amendments will also require
annual reaffirmance of those claims of
exemption or exclusion.
a. Benefits of Registration Provisions
As discussed above in II.A.1, the
Commission believes that registration
provides two significant interrelated
benefits. First, registration allows the
Commission to ensure that entities with
greater than a de minimis level of
participation in the derivatives markets
meet minimum standards of fitness and
competency. Second, registration
provides the Commission and members
of the public with a direct means to
address wrongful conduct by
participants in the derivatives markets.
The Commission has direct authority to
take punitive and/or remedial action
against registered entities for violations
of the CEA or of the Commission’s
regulations. The Commission also has
the ability to deny or revoke
registration, thereby prohibiting an unfit
individual or entity from serving as an
intermediary in the industry. Members
of the public also may access the
Commission’s reparations program to
seek redress for wrongful conduct by a
Commission registrant.
The Commission believes that the
registration procedures enacted as part
of its regulatory regime upgrade the
overall quality of market participants,
which, in turn, strengthens the
derivatives industry by minimizing lost
business due to customer dissatisfaction
and by reducing litigation arising from
acts of market participants. Therefore,
the Commission believes that its
registration requirements further critical
regulatory objectives and serve
important public policy goals.
By expanding the Commission’s
regulatory oversight of entities
performing the functions of CPOs and
CTAs, the Commission believes that the

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final rules related to registration will
help to ensure that such entities meet
basic standards of competency and
fitness, which in turn will provide a
greater level of protection to market
participants. Ensuring that CPOs and
CTAs are qualified in the first
instance—as opposed to relying solely
on after-the-fact enforcement actions to
deter and remedy misconduct—should
reduce such instances of misconduct
and resulting litigation, and thereby
promote overall market confidence.
Therefore, the Commission believes that
its registration requirements are integral
to its regulatory objectives and are in the
public interest.
With specific respect to the annual
reaffirmance requirement, this
amendment will promote transparency
regarding the number of entities either
exempt or excluded from the
Commission’s registration and
compliance programs. One primary
purpose of the Dodd Frank Act is the
promotion of transparency in the
financial system, particularly in the
derivatives market. This requirement is
consistent with and will further that
purpose. Finally, the annual notice
requirement will enable the
Commission to determine whether
exemptions and exclusions should be
modified, repealed, or maintained as
part of the Commission’s ongoing
assessment of its regulatory scheme.
These benefits—enhancing the quality
of entities operating within the market,
and the screening of unfit participants
from the markets—are substantial, even
if unquantifiable. Through registration,
the Commission will be better able to
protect the public and markets from
unfit persons and conduct that may
threaten the integrity of the markets
subject to its jurisdiction.
b. Costs of Registration Provisions
Because of the amendments to part 4
as adopted here, the Commission
recognizes that some participants who
previously were excluded or exempted
from registering as a CPO or CTA will
now be required to register with the
Commission through NFA. In addition
to costs associated with registration
accounted for under the PRA, which
one commenter said would ‘‘vary
significantly depending on a range of
factors, including the number of
employees who will need to pass
examinations, the number of funds
advised, investment strategy and
complexity, existing IT systems, and
whether or not an adviser is already
registered or authorized and subject to
a different regulatory regime,’’ 216 the
216 See

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11277

commenter estimated ongoing costs to
be in the range of $150,000 to $250,000
per year, a substantial part of which
would be made up of additional
compliance personnel, information
technology development and legal/
accounting advice that will be required,
and again vary significantly depending
on the factors mentioned above.217 The
Commission presents these estimates for
the consideration of affected entities,
reiterating the high variability of costs
depending on the factors enumerated by
the commenter. This variability is one
reason the Commission presented its
own estimates of costs on a perrequirement basis; affected entities
should be aware that the total cost of
registration and compliance will most
likely be the sum of any number of the
estimates presented in this section and
under the PRA. In addition to the
information collection costs addressed
by the Commission under the PRA,
entities that will be required to register
with the Commission also will become
subject to NFA rules and to NFA audit
procedures. NFA assesses annual
membership dues on CPOs and CTAs,
currently $750, and charges $90 for the
National Commodity Futures
Examination (NCFE) or Series 3
Examination for each AP. The
Commission understands that NFA
audits CPOs and CTAs, on average,
every two to three years, though the
frequency of audit depends greatly on
individual risk factors, and NFA
generally conducts an audit within the
first year following registration of an
entity.218 The cost of such an audit may
be incurred by the CPO or CTA through
an ‘‘audit fee’’ imposed by NFA;
however, the audit fee varies greatly by
individual entity and individual audit
and thus is difficult to quantify on any
sort of aggregated basis.
Notwithstanding the difficulty of
quantifying such a burden, the
Commission notes this cost will most
likely arise in the first year of
registration and on average every few
years thereafter, and entities should
expect such a fee to be incurred.
c. Comments Regarding Registration
Provisions
1. § 4.5 Amendments
Commenters who opposed the
changes to § 4.5 claimed that requiring
registered investment companies to
register and comply with the
Commission’s regulatory regime would
217 Id.
218 For more information on audit procedures,
visit the NFA Web site, currently at http://
www.nfa.futures.org/NFA-compliance/NFAgeneral-compliance-issues/nfa-audits.HTML.

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provide no benefit, because such
entities are already subject to
comprehensive regulation by the
SEC.219 The Commission disagrees.
While the Commission and the SEC
share many of the same regulatory
objectives, including protecting market
users and the public from fraud and
manipulation, the Commission
administers the CEA to foster open,
competitive, and financially sound
commodity and derivatives markets.
The Commission’s programs are
structured and its resources deployed to
meet the needs of the markets it
regulates. In light of this Congressional
mandate, it is the Commission’s view
that entities engaging in more than a de
minimis amount of derivatives trading
should be required to register with the
Commission. The alternative
approaches suggested by commenters
would, as discussed above, detract from
the benefits of registration.
As also discussed above, the
Commission is aware that currently
unregistered entities are offering
services substantially identical to those
of registered CPOs. Several commenters
also asserted that modifying § 4.5 would
result in a significant burden on entities
required to register with the
Commission without any meaningful
benefit to the Commission.220 The
Commission recognizes that significant
burdens may arise from the
modifications to § 4.5; however, the
Commission believes, as discussed
throughout this release, that entities that
are offering services substantially
identical to those of a registered CPO
should be subject to substantially
identical regulatory obligations.
Nevertheless, the Commission has not
eliminated altogether the exemption
available under § 4.5. Where an entity’s
trading does not exceed five percent of
the liquidation value of its portfolio,
that entity will remain exempt from
registration. In the Commission’s
judgment, trading exceeding five
percent of the liquidation value of a
portfolio evidences a significant
exposure to the derivatives markets.221
This threshold was adopted by the
Commission in its earlier enactment of
219 See,

e.g., ICI Letter.
ICI Letter; Vanguard Letter; Reed Smith
Letter; AllianceBernstein Letter; USAA Letter; PMC
Letter; IAA Letter; Dechert II Letter; Janus Letter;
STA Letter; Invesco Letter; and Equinox Letter.
221 76 FR 7976, 7985 (Feb. 12, 2011) (stating that
‘‘[the] Commission believes that it is possible for a
commodity pool to have a portfolio that is sizeable
enough that even if just five percent of the pool’s
portfolio were committed to margin for futures, the
pool’s portfolio could be so significant that the
commodity pool would constitute a major
participant in the futures market’’).

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220 See

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§ 4.13(a)(3).222 In promulgating that
exemption for de minimis activity, the
Commission determined that five
percent is an appropriate threshold
beyond which oversight by the
Commission is warranted.223 Because
current data and information does not
allow the Commission to evaluate the
difference in market impact at various
threshold levels 224 the Commission
believes it is prudent to maintain the
current threshold level. Further, as
discussed above, no facts have been put
before the Commission that would
warrant deviation from the five-percent
threshold, including data respecting the
costs and benefits of the same. The
Commission also received numerous
comments on the proposed addition of
a trading threshold to the exclusion
under § 4.5.225 Some commenters stated
that a five percent de minimis threshold
is too low in light of the Commission’s
determination to include swaps within
the measured activities. Although these
commenters presented alternatives to
this five percent threshold (some said
twenty percent would be more
reasonable, for example) the
Commission believes, as stated in the
Proposal, that trading exceeding five
percent of the liquidation value of a
portfolio evidences a significant
exposure to the derivatives markets.226
Moreover, in its adoption of the
exemption under § 4.13(a)(3),227 the
Commission previously determined that
five percent is an appropriate threshold
to determine whether an entity warrants
oversight by the Commission.228 Current
data and information does not allow the
222 17

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

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Commission to evaluate the difference
in market impact at various threshold
levels; 229 thus, the Commission believes
it is prudent to maintain the current
threshold level. Commenters also
recommended that the Commission
exclude from the threshold calculation
various instruments including broadbased stock index futures, security
futures generally, or financial futures
contracts as a whole.230 As discussed
above, the Commission does not believe
that a meaningful distinction can be
drawn between those security or
financial futures and other categories of
futures for the purposes of registration;
thus, the Commission does not believe
that exempting any of these instruments
from the threshold calculation is
appropriate.
Several panelists at the Roundtable
suggested that, instead of a trading
threshold that is based on a percentage
of margin, that the Commission should
focus solely on entities that offer
‘‘actively managed futures’’
strategies.231 As discussed in section
II.A.2, the Commission does not find it
appropriate to establish a differentiation
between ‘‘active’’ and ‘‘passive’’
derivative investments because, in
addition to other reasons,232
establishing such differentiation would
introduce an element of subjectivity to
an otherwise objective standard and
make the threshold more difficult to
interpret, apply, and enforce.
One commenter suggested that the
Commission should consider the
adoption of an alternative test that
would be identical to the aggregate net
notional value test that is currently
available under § 4.13(a)(3)(ii)(B).233
Section 4.13(a)(3)(ii)(B) provides that an
entity can claim exemption from
229 The Commission currently only has
information on the positions held by CPOs in
futures markets, i.e., those entities already
registered as CPOs, as opposed to those excluded
from the definition of CPO under § 4.5. The
Commission does not have access to information on
the total liquidation value of funds operated by
registered CPOs or those operated by excluded
CPOs, values that are needed to determine the
universe of entities affected by one particular
percentage threshold versus another. These data
limitations are one reason why the Commission is
pursuing additional data collection initiatives
under these final rules.
230 See Rydex Letter; Invesco Letter; and ICI
Letter.
231 See Transcript of CFTC Staff Roundtable
Discussion on Proposed Changes to Registration
and Compliance Regime for Commodity Pool
Operators and Commodity Trading Advisors
(‘‘Roundtable Transcript’’), at 19, 25, 30, 76–77, 87–
90, available at http://www.cftc.gov/ucm/groups/
public/@swaps/documents/dfsubmission/
dfsubmission27_070611-trans.pdf.
232 Additional reasons for not accepting this
alternative are discussed in section II.A.2 of this
release.
233 See Dechert III Letter.

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Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations
registration if the net notional value of
its fund’s derivatives trading does not
exceed one hundred percent of the
liquidation value of the fund’s
portfolio.234
Conversely, several panelists at the
Roundtable opposed such a test, stating
that it was not a reliable means to
measure an entity’s exposure in the
market.235 As stated previously herein,
the Commission believes that the
adoption of an alternative net notional
test will provide consistent standards
for relief from registration as a CPO for
entities whose portfolios only contain a
limited amount of derivatives positions
and will afford registered investment
companies with additional flexibility in
determining eligibility for exclusion.
Therefore, the Commission will adopt
an alternative net notional test,
consistent with that set forth in
§ 4.13(a)(3)(ii)(B) as amended herein, for
registered investment companies
claiming exclusion from the definition
of CPO under § 4.5.
The Commission also received several
comments supporting both the
imposition of a trading threshold in
general and the five percent threshold
specifically.236 At least one commenter
suggested, however, that the
Commission consider requiring
registered investment companies that
exceed the threshold to register, but not
subjecting them to the Commission’s
compliance regime beyond requiring
them to be subject to the examination of
their books and records, and
examination by NFA.237 In effect, this
commenter requested that the
Commission subject such registrant to
‘‘notice registration.’’ The Commission
believes that adopting the approach
proposed by the commenter would not
materially change the information that
the Commission would receive
regarding the activities of registered
investment companies in the derivatives
markets, which is one of the
Commission’s purposes in amending
§ 4.5. Moreover, a type of notice
registration would not provide the
Commission with any real means for
engaging in consistent ongoing
oversight. Notwithstanding such notice
registration, the Commission would still
be deemed to have regulatory
responsibility for the activities of these
registrants. In the Commission’s view,
notice registration does not equate to an
appropriate level of oversight. For that
reason, the Commission has determined
234 17

CFR 4.13(a)(3)(ii)(B).
Roundtable Transcript at 69–71.
236 See NFA Letter, Campbell Letter, AQR Letter,
and Steben Letter.
237 See AQR Letter.
235 See

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not to adopt the alternative proposed by
the commenter. The Commission is
adopting the amendment to § 4.5
regarding the trading threshold without
modification for the reasons stated
herein and those previously discussed
in the Proposal.
2. §§ 4.13(a)(3) and (a)(4) Rescissions
In addition to the comments that the
Commission received regarding the
specific parts of the Proposal rescinding
§§ 4.13(a)(3) and (a)(4), the Commission
received numerous comments regarding
the proposed rescissions generally.238
Broadly, the comments opposed the
rescission of the provisions. In the
Proposal, the Commission proposed
rescinding the ‘‘de minimis’’ exemption
in § 4.13(a)(3). The Commission
received ten comments specifically on
this aspect of the Proposal, which
consistently urged the Commission to
retain a de minimis exemption. As
discussed above in section II.C.2, the
Commission, after consideration of the
comments and the Commission’s stated
rationale for proposing to rescind the
exemption in § 4.13(a)(3), has
determined to retain the ‘‘de minimis’’
exemption currently set forth in that
section without modification.
Several commenters asserted that
rescission was not necessary because
the Commission has the means to obtain
any needed information from exempt
CPOs through its large trader reporting
requirements and its special call
authority.239 Although the Commission
has those means, neither of those rules
were intended to provide the kind of
data requested of registered entities on
forms CPO–PQR or CTA–PR with the
regularity proposed under § 4.27.
Another commenter asserted that the
compliance and regulatory obligations
under the Commission’s rules are
burdensome for private businesses and
would unnecessarily distract entities
from their primary focus of managing
client assets.240 The Commission
believes that regulation is necessary to
ensure a well functioning market and to
provide protection of those clients. The
Commission further believes that the
compliance regime that the Commission
has adopted strikes the appropriate
balance between limiting the burden
placed on registrants and enabling the
238 See NYSBA Letter; Skadden Letter; MFA
Letter; Katten Letter; Fidelity Letter; Dechert Letter;
AIMA Letter; AIMA II Letter; IAA Letter; SIFMA
Letter; HedgeOp Letter; PIC Letter; and Seward
Letter.
239 See Skadden Letter; Katten Letter; and MFA
Letter.
240 See MFA Letter; Seward Letter; and Katten
Letter.

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

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rules. The Commission adopts the
rescission of § 4.13(a)(4) as proposed.
The Commission has also elected to
mitigate costs by phasing in gradually
the rescission of § 4.13(a)(4). As
discussed in section II.C.5, in response
to certain comments, the Commission
will implement the rescission of
§ 4.13(a)(4) for all entities currently
claiming exemptive relief thereunder on
December 31, 2012, but the rescission
will be implemented for all other CPOs
upon the effective date of this final
rulemaking. This timeline reflects the
Commission’s belief that entities
currently claiming relief under
§ 4.13(a)(4) should be capable of
becoming registered and complying
with the Commission’s regulations
within 11 months following the
issuance of the final rule. For entities
that are formed after the effective date
of the rescission, the Commission
expects the CPOs of such entities to
comply with the Commission’s
regulations upon formation and
commencement of operations.
3. Annual Notice of Exemption or
Exclusion Requirement
The amendments will require annual
reaffirmance of any claim of exemption
or exclusion from registration as a CPO
or CTA.243 In the Proposal, the
Commission stated that an annual
notice requirement would promote
transparency, a primary purpose of the
Dodd Frank Act, regarding the number
of entities either exempt or excluded
from the Commission’s registration and
compliance programs. Moreover, the
Commission stated that an annual
notice requirement would enable the
Commission to determine whether
exemptions and exclusions should be
modified, repealed, or maintained as
part of the Commission’s ongoing
assessment of its regulatory scheme.
Two commenters suggested that the
30-day time period for filing was not
adequate to enable firms to comply.244
One commenter proposed a 60-day time
period,245 whereas the other commenter
proposed 90 days as the necessary
amount of time.246 As a further costmitigating measure, and for the reasons
discussed in section II.D, the
Commission has elected to extend the
filing period from 30 days to 60 days.
Further, the Commission will adopt the
annual notice requirement with one
significant modification designed,
among other things, to mitigate costs—
that the notice be filed at the end of the
243 76

FR 7976, 7986 (Feb. 12, 2011).
NFA Letter; and SIFMA Letter.
245 See NFA Letter.
246 See SIFMA Letter.
244 See

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calendar year and not the anniversary of
the original filing. The Commission
believes this alternative presented by a
commenter will be more operationally
efficient.247
d. Section 15(a)
In this section, the Commission
considers the costs and benefits of its
actions in light of five broad areas of
market and public concern set forth in
§ 15(a) of the CEA: (1) protection of
market participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.
1. Protection of Market Participants and
the Public
Registration provides many benefits
for both the registrants and their
customers. The registration process
allows the Commission to ensure that
all entities participating in derivative
markets meet a minimum standard of
fitness and competency. The regulations
governing who must register and what
registrants must do provide clear
direction for CPOs and CTAs. At the
same time, clients wishing to invest
with registered entities have the
knowledge that such entities are held to
a high financial standard through
periodic account statements, disclosure
of risk, audited financial statements,
and other measures designed to provide
transparency to investors. The
Commission believes its regulations
protect market participants and the
public by requiring certain parties
previously excluded or exempt from
registration to be held to the same
standards as registered operators and
advisors, which ensures the fitness of
such market participants and
professionals.
Additionally furthering the goal of
investor protection, NFA provides an
on-line, public database with
information on the registration status of
market participants and their principals
as well as certain additional registrant
information such as regulatory actions
taken by the NFA or Commission.248
This information is intended to assist
the public in making investment
decisions regarding the use of
derivatives professionals. Although
those previously exempt entities may
incur costs associated with registering
and the compliance obligations arising
therefrom, or may incur costs to inform
247 See

NFA Letter.
National Futures Association’s
Background Affiliation Status Information Center
(BASIC) is currently available at http://
www.nfa.futures.org/basicnet/.
248 The

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

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information to the Commission on forms
CPO–PQR and CTA–PR, respectively.
The forms, reporting thresholds, and
filing deadlines are further detailed in
section II.F of this release.
a. Benefits of Data Collection
The Commission expects that the data
collected from forms CPO–PQR and
CTA–PR will increase the amount and
quality of information available to the
Commission regarding a previously
opaque area of investment activity.
Entities that are required to file all three
schedules of the forms are large enough
to have, potentially, a great impact on
derivatives markets should such entities
default, whereas smaller entities are
required to file only basic demographic
information. Because the data currently
available to the Commission regarding
CPOs and CTAs is limited in scope, the
Commission does not have complete
information as to who is transacting in
derivatives markets. With the additional
information that the Commission will
have as a result of the new requirements
under § 4.27, the Commission will be
able to tailor its regulations to the needs
of, and risks posed by, entities in the
market, and to protect investors and the
general public from potentially negative
or overly risky behavior.
The Dodd-Frank Act charged the
Commission, as a member of FSOC and
as a financial regulatory agency, with
mitigating risks that may impact the
financial stability of the United States.
The Commission is dedicated to
assisting FSOC in that goal, and these
final regulations are essential for the
Commission to be able to fulfill that role
effectively because the Commission
cannot protect against risks of which it
is not aware. By creating a reporting
regime that makes the operations of
commodity pools more transparent to
the Commission, the Commission is
better able to identify and address
potential threats. The total benefit of
risk mitigation as it pertains to the
overall financial stability of the United
States is not quantifiable, but it is
significant insofar as the Commission
may be able to use this data to prevent
further future shocks to the U.S.
financial system.

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b. Costs of Data Collection
The Commission has not identified
costs of data collection that are not
associated with an information
collection subject to the PRA. These
costs therefore have been accounted for
in the PRA section of this rulemaking
and the information collection requests
filed with OMB, as required by the PRA.

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c. Section 15(a) Determination
This section analyzes the data
collection rules according to the five
factors set forth in section 15(a) of the
CEA: (1) protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.
1. Protection of Market Participants and
the Public
The Commission believes that the
information to be gathered from forms
CPO–PQR and CTA–PR increases the
amount and quality of information
available regarding a previously opaque
area of investment activity and, thereby,
enhances the ability of the Commission
to protect investors and oversee
derivatives markets. This enhanced
ability provides a better understanding
of the participants in derivatives
markets and their operations, and as
such, the Commission is better able to
protect the public from the potential
risk that large, unregulated entities
could bring to markets under the
Commission’s jurisdiction, many of
which are essential to society at large.
Moreover, to mitigate reporting costs to
regulated entities that may be registered
both with the Commission and with the
SEC, the regulations have been modified
to allow dually registered entities to file
only form PF (plus the first schedule A
of form CPO–PQR) for all of their
commodity pools, even those that are
not ‘‘private funds.’’ The cost mitigation
has been accounted for in the PRA
section of this rulemaking and the
information collection requests filed
with OMB, as required by the PRA.
2. Efficiency, Competitiveness, and
Financial Integrity of Futures Markets
Although the Commission does not
believe this rule relates directly to the
efficiency or competitiveness of futures
markets, the Commission does recognize
that the interconnectedness of the
participants within derivatives markets
can be extensive such that the proper
oversight of each category of
participants affects proper oversight of
derivatives markets and the financial
system as a whole. To the extent that the
information collected by form CPO–PQR
and form CTA–PR and the adopted
amendments to the Commission’s
compliance regime assist the
Commission in identifying threats in
derivatives markets, the regulations
herein protect the integrity of futures
markets.

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3. Price Discovery
The Commission has not identified
any impact on price discovery as a
result of this data collection initiative.
4. Sound Risk Management
The Dodd-Frank Act tasks FSOC and
its member agencies (including both the
SEC and the Commission) with
mitigating risks to the financial stability
the United States. The Commission
believes these regulations are necessary
to fulfill that obligation. These
regulations improve the ability of the
Commission to oversee the derivatives
markets. As the Commission’s
understanding of the regulated entities,
their behavior in derivatives markets,
and the overall riskiness of their
positions increases through the data
collection in these rules, the
Commission will be able to better
understand any risks posed to the
financial system as a whole arising from
markets under the Commission’s
jurisdiction. These benefits are shared
by market participants, at least
indirectly, as a part of the United States
financial system. In addition, CPOs and
CTAs may benefit from these
regulations to the extent that reporting
form CPO–PQR and form CTA–PF
requires such entities to review their
firms’ portfolios, trading practices, and
risk profiles; thus, the CFTC believes
that these regulations may improve the
sound risk management practices within
their internal risk management systems.
5. Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
impacted by this data collection
initiative.
4. Complementary Provisions
As part of these final regulations, the
Commission is also adopting other
amending provisions that complement
the registration and data collection
provisions, including changes to § 4.7,
§ 4.22, §§ 4.24 and 4.34, and parts 145
and 147. This section sets forth the
Commission’s consideration of related
costs and benefits in general, responds
to relevant comments, and then
analyzes the complementary provisions
in light of the five factors enumerated in
§ 15(a) of the CEA.
a. Benefits of the Complementary
Provisions
The provisions in this category amend
additional sections of part 4 in order to
improve the Commission’s ability to
effectively regulate derivatives markets
and their participants. Some of these
complementary provisions are
specifically designed to protect

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investors, e.g., requiring certified annual
reports and disclosure of swaps risk
ensures investors are getting complete
and accurate information regarding their
investment, which increases consumer
confidence in the financial system. As
the information available to consumers
becomes more accurate and complete, a
prospective investor can more easily
compare investment vehicles to choose
the investment vehicle best suited to the
investor’s individual financial plan and
risk tolerance.
Other provisions protect market
participants by amending the
Commission’s internal procedures to
provide for the confidentiality of certain
proprietary information. Moreover, the
Commission’s planned harmonization
rules are designed to limit the impact to
entities regulated by multiple entities,
protecting those participants from
overly burdensome regulatory regimes.
b. Costs of the Complementary
Provisions
The Commission has identified no
costs of the complementary provisions
that are not associated with an
information collection subject to the
PRA. These costs therefore have been
accounted for in the PRA section of this
rulemaking and the information
collection requests filed with OMB, as
required by the PRA.

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c. Comments on the Complementary
Provisions
1. § 4.7 Amendments
As stated previously, the Commission
is adopting an amendment to § 4.7 that
would rescind the relief provided in
§ 4.7(b)(3) from the certification
requirement of § 4.22(c) for financial
statements contained in commodity
pool annual reports. The Commission
received two comments regarding this
proposed amendment. One commenter
supported the proposed rescission and
the Commission’s stated justification for
doing so. The other commenter
recommended that the Commission
retain an exemption from certification of
financial statements for entities where
the pool’s participants are limited to the
principals of its CPO(s) and CTA(s) and
other categories of employees listed in
§ 4.7(a)(2)(viii). It is unclear how many
of the pools operated under § 4.7 would
qualify for such relief if adopted. The
Commission is therefore unable to agree
that such exclusions would materially
reduce costs or increase any benefit
achieved by the rule.
2. § 4.24 and § 4.34 Amendments
The Commission also proposed
adding standard risk disclosure
statements for CPOs and CTAs regarding

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their use of swaps to §§ 4.24(b) and
4.34(b), respectively. The Commission
received three comments with respect to
the proposed standard risk disclosure
statement for swaps. Two argued that a
standard risk disclosure statement does
not beneficially disclose the risks
inherent in swaps activity to
participants or clients. A third
recommended that the Commission
consider whether the wording of the
standard disclosure should be modified
depending on whether the swaps were
cleared or uncleared.
The Commission respectfully
disagrees with the assertions of those
commenters who believe that a standard
risk disclosure statement is not
beneficial. The Commission believes
that a standardized risk disclosure
statement addressing certain risks
associated with the use of swaps is
necessary due to the revisions to the
statutory definitions of CPO, CTA, and
commodity pool enacted by the DoddFrank Act. In addition, based on the
language proposed, the Commission
does not believe that different language
must be adopted to account for the
differences between cleared and
uncleared swaps. In particular, the
Commission notes that the proposed
risk disclosure statement is not intended
to address all risks that may be
associated with the use of swaps, but
that the CPO or CTA is required to make
additional disclosures of any other risks
in its disclosure document pursuant to
§§ 4.24(g) and 4.34(g) of the
Commission’s regulations. Moreover,
the language of the proposed risk
disclosure statement is conditional and
does not purport to assert that all of the
risks discussed are applicable in all
circumstances.
For the reasons discussed above in
section II.E and those stated in the
Proposal, the Commission adopts the
proposed risk disclosure statements for
CPOs and CTAs regarding swaps. These
additional risk disclosure statements
will be required for all new disclosure
documents and all updates filed after
the effective date of this final
rulemaking.
3. Harmonization of Regulations and
Fund-of-Fund Investments
The Commission received numerous
other comments regarding such subjects
as harmonizing CFTC regulations with
SEC regulations and fund of fund
investments. These comments are
discussed in detail in sections II.F.3 and
4 and adopted by reference herein.
4. Confidentiality of Submitted Data
Additionally, as the Commission
stated in the Proposal, the collection of

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certain proprietary information through
forms CPO–PQR and CTA–PR raises
concerns regarding the protection of
such information from public
disclosure. The Commission received
two comments requesting that the
Commission treat the disclosure of a
pool’s distribution channels as
nonpublic information, and numerous
other comments urging the Commission
to be exceedingly circumspect in
ensuring the confidentiality of the
information received as a result of the
data collections.
The Commission agrees that the
distribution and marketing channels
used by a CPO for its pools may be
sensitive information that implicates
other proprietary secrets, which, if
revealed to the general public, could put
the CPO at a competitive disadvantage.
Accordingly, and to mitigate costs and
eliminate risks to participants, the
Commission is amending §§ 145.5 and
147.3 to include question 9 of schedule
A of form CPO–PQR as a nonpublic
document. Additionally, the
Commission is amending §§ 145.5 and
147.3 to remove reference to question 13
in Schedule A of Form CPO–PQR
because that such question no longer
exists due to amendments to that
schedule. Similarly, the Commission
will be designating subparts c. and d. of
question 2 of form CTA–PR as
nonpublic because it identifies the pools
advised by the reporting CTA.
d. Section 15(a) Determination
This section considers these costs and
benefits in light of the five broad areas
of market and public concern set forth
in section 15(a) of the CEA: (1)
protection of market participants and
the public; (2) efficiency,
competitiveness, and financial integrity
of futures markets; (3) price discovery;
(4) sound risk management practices;
and (5) other public interest
considerations.
1. Protection of Market Participants and
the Public
The complementary provisions
discussed in this section protect market
participants and the public in a variety
of ways. The changes under § 4.7
require entities to have their annual
financial statements independently
audited; such a requirement protects the
investors in pools registered under § 4.7
by ensuring that the financial statements
provided to participants are accurate
and correct. As most CPOs registered
under § 4.7 currently file audited annual
reports, the burden to the industry as a
whole will be relatively minor whereas
the benefits, including increased
consumer confidence, are likely to be

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

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5. Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
impacted by as a result of these
regulations.
5. Conclusion
The Commission recognizes that the
final regulations will impose some
significant costs on the industry, as
described above and in the PRA section.
Notwithstanding the costs, the
Commission has determined to adopt
this rule because the Commission
believes that proper regulation and
oversight of market participants is
necessary to promote fair and orderly
derivatives markets.
List of Subjects
17 CFR Part 4
Advertising, Brokers, Commodity
futures, Commodity pool operators,
Commodity trading advisors, Consumer
protection, Reporting and recordkeeping
requirements.
17 CFR Part 145
Commission records and information.
17 CFR Part 147
Open commission Meetings.
Accordingly, 17 CFR Chapter I is
amended as follows:
PART 4—COMMODITY POOL
OPERATORS AND COMMODITY
TRADING ADVISORS
1. The authority citation for part 4
continues to read as follows:

■

Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c,
6l, 6m, 6n, 6o, 12a, and 23.

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

■

§ 4.5 Exclusion from the definition of the
term ‘‘commodity pool operator.’’

*

*
*
*
*
(c) * * *
(2) * * *
(iii) Furthermore, if the person
claiming the exclusion is an investment
company registered as such under the
Investment Company Act of 1940, then
the notice of eligibility must also
contain representations that such person
will operate the qualifying entity as
described in Rule 4.5(b)(1) in a manner
such that the qualifying entity:
(A) Will use commodity futures or
commodity options contracts, or swaps
solely for bona fide hedging purposes
within the meaning and intent of Rules
1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and
151.5); Provided however, That in
addition, with respect to positions in
commodity futures or commodity

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11283

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

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this section must affirm on an annual
basis the notice of exemption from
registration, withdraw such exemption
due to the cessation of activities
requiring registration or exemption
therefrom, or withdraw such exemption
and apply for registration within 30
days of the calendar year end through
National Futures Association’s
electronic exemption filing system.
*
*
*
*
*
■ 3. In § 4.7:
■ a. Revise paragraphs (a)(3)(ix),
(a)(3)(x), and (b)(3) to read as follows:
§ 4.7 Exemption from certain part 4
requirements for commodity pool operators
with respect to offerings to qualified eligible
persons and for commodity trading
advisors with respect to advising qualified
eligible persons.

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*

*
*
*
*
(a) * * *
(3) * * *
(ix) A natural person whose
individual net worth, or joint net worth
with that person’s spouse at the time of
either his purchase in the exempt pool
or his opening of an exempt account
would qualify him as an accredited
investor as defined in Sec. 230.501(a)(5)
of this title;
(x) A natural person who would
qualify as an accredited investor as
defined in S§ 203.501(a)(6) of this title;
*
*
*
*
*
(b) * * *
(3) Annual report relief. (i) Exemption
from the specific requirements of
§ 4.22(c) of this part; Provided, that
within 90 calendar days after the end of
the exempt pool’s fiscal year or the
permanent cessation of trading,
whichever is earlier, the commodity
pool operator electronically files with
the National Futures Association and
distributes to each participant in lieu of
the financial information and statements
specified by that section, an annual
report for the exempt pool, affirmed in
accordance with § 4.22(h) which
contains, at a minimum:
(A) A Statement of Financial
Condition as of the close of the exempt
pool’s fiscal year (elected in accordance
with § 4.22(g));
(B) A Statement of Operations for that
year;
(C) Appropriate footnote disclosure
and such further material information as
may be necessary to make the required
statements not misleading. For a pool
that invests in other funds, this
information must include, but is not
limited to, separately disclosing the
amounts of income, management and
incentive fees associated with each
investment in an investee fund that
exceeds five percent of the pool’s net

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assets. The income, management and
incentive fees associated with an
investment in an investee fund that is
less than five percent of the pool’s net
assets may be combined and reported in
the aggregate with the income,
management and incentive fees of other
investee funds that, individually,
represent an investment of less than five
percent of the pool’s net assets. If the
commodity pool operator is not able to
obtain the specific amounts of
management and incentive fees charged
by an investee fund, the commodity
pool operator must disclose the
percentage amounts and computational
basis for each such fee and include a
statement that the CPO is not able to
obtain the specific fee amounts for this
fund;
(D) Where the pool is comprised of
more than one ownership class or series,
information for the series or class on
which the financial statements are
reporting should be presented in
addition to the information presented
for the pool as a whole; except that, for
a pool that is a series fund structured
with a limitation on liability among the
different series, the financial statements
are not required to include consolidated
information for all series.
(ii) Legend. If a claim for exemption
has been made pursuant to this section,
the commodity pool operator must make
a statement to that effect on the cover
page of each annual report.
*
*
*
*
*
■ 4. In § 4.13:
■ a. Revise paragraphs (a)(3)(ii)(B)(1)
and (2);
■ b. Remove and reserve paragraph
(a)(4);
■ c. Revise paragraph (b)(1)(ii);
■ d. Redesignate paragraph (b)(4) as
paragraph (b)(5) and add new paragraph
(b)(4); and
■ e. Revise paragraph (e)(2) introductory
text.
The revisions and additions read as
follows:
§ 4.13 Exemption from registration as a
commodity pool operator.

*

*
*
*
*
(a) * * *
(3) * * *
(ii) * * *
(B) * * *
(1) The term ‘‘notional value’’ shall be
calculated for each futures position by
multiplying the number of contracts by
the size of the contract, in contract units
(taking into account any multiplier
specified in the contract, by the current
market price per unit, for each such
option position by multiplying the
number of contracts by the size of the
contract, adjusted by its delta, in

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contract units (taking into account any
multiplier specified in the contract, by
the strike price per unit, for each such
retail forex transaction, by calculating
the value in U.S. Dollars of such
transaction, at the time the transaction
was established, excluding for this
purpose the value in U.S. Dollars of
offsetting long and short transactions, if
any, and for any cleared swap by the
value as determined consistent with the
terms of part 45 of the Commission’s
regulations; and
(2) The person may net futures
contracts with the same underlying
commodity across designated contract
markets and foreign boards of trade; and
swaps cleared on the same designated
clearing organization where appropriate;
and
*
*
*
*
*
(b) * * *
(2) * * *
(ii) Contain the section number
pursuant to which the operator is filing
the notice (i.e., § 4.13(a)(1), (2), or (3))
and represent that the pool will be
operated in accordance with the criteria
of that paragraph; and
*
*
*
*
*
(4) Annual Notice. Each person who
has filed a notice of exemption from
registration under this section must
affirm on an annual basis the notice of
exemption from registration, withdraw
such exemption due to the cessation of
activities requiring registration or
exemption therefrom, or withdraw such
exemption and apply for registration
within 30 days of the calendar year end
through National Futures Association’s
electronic exemption filing system.
*
*
*
*
*
(e) * * *
(2) If a person operates one or more
commodity pools described in
paragraph (a)(3) of this section, and one
or more commodity pools for which it
must be, and is, registered as a
commodity pool operator, the person is
exempt from the requirements
applicable to a registered commodity
pool operator with respect to the pool or
pools described in paragraph (a)(3) of
this section; Provided, That the person:
*
*
*
*
*
■ 5. In § 4.14:
■ a. Revise paragraph (a)(8)(i)(D); and
■ b. Redesignate paragraph (a)(8)(iii)(D)
as (a)(8)(iii)(E) and add a new paragraph
(a)(8)(iii)(D).
The revision and addition read as
follows:
§ 4.14 Exemption from registration as a
commodity trading adviser.

*

*
*
(a) * * *

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*

Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations
(8) * * *
(i) * * *
(D) A commodity pool operator who
has claimed an exemption from
registration under § 4.13(a)(3), or, if
registered as a commodity pool
operator, who may treat each pool it
operates that meets the criteria of
§ 4.13(a)(3) as if it were not so
registered; and
*
*
*
*
*
(iii) * * *
(D) Annual notice. Each person who
has filed a notice of exemption from
registration under this section must
affirm on an annual basis the notice of
exemption from registration, withdraw
such exemption due to the cessation of
activities requiring registration or
exemption therefrom, or withdraw such
exemption and apply for registration
within 30 days of the calendar year end
through National Futures Association’s
electronic exemption filing system.
*
*
*
*
*
■ 6. In § 4.24, add paragraph (b)(5) to
read as follows:
§ 4.24

General disclosures required.

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*

*
*
*
*
(b) * * *
(5) If the pool may engage in swaps,
the Risk Disclosure Statement must
further state:
SWAPS TRANSACTIONS, LIKE
OTHER FINANCIAL TRANSACTIONS,
INVOLVE A VARIETY OF
SIGNIFICANT RISKS. THE SPECIFIC
RISKS PRESENTED BY A PARTICULAR
SWAP TRANSACTION NECESSARILY
DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR
CIRCUMSTANCES. IN GENERAL,
HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME
COMBINATION OF MARKET RISK,
CREDIT RISK, COUNTERPARTY
CREDIT RISK, FUNDING RISK,
LIQUIDITY RISK, AND OPERATIONAL
RISK.
HIGHLY CUSTOMIZED SWAPS
TRANSACTIONS IN PARTICULAR
MAY INCREASE LIQUIDITY RISK,
WHICH MAY RESULT IN A
SUSPENSION OF REDEMPTIONS.
HIGHLY LEVERAGED TRANSACTIONS
MAY EXPERIENCE SUBSTANTIAL
GAINS OR LOSSES IN VALUE AS A
RESULT OF RELATIVELY SMALL
CHANGES IN THE VALUE OR LEVEL
OF AN UNDERLYING OR RELATED
MARKET FACTOR.
IN EVALUATING THE RISKS AND
CONTRACTUAL OBLIGATIONS
ASSOCIATED WITH A PARTICULAR
SWAP TRANSACTION, IT IS
IMPORTANT TO CONSIDER THAT A
SWAP TRANSACTION MAY BE

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MODIFIED OR TERMINATED ONLY BY
MUTUAL CONSENT OF THE
ORIGINAL PARTIES AND SUBJECT TO
AGREEMENT ON INDIVIDUALLY
NEGOTIATED TERMS. THEREFORE, IT
MAY NOT BE POSSIBLE FOR THE
COMMODITY POOL OPERATOR TO
MODIFY, TERMINATE, OR OFFSET
THE POOL’S OBLIGATIONS OR THE
POOL’S EXPOSURE TO THE RISKS
ASSOCIATED WITH A TRANSACTION
PRIOR TO ITS SCHEDULED
TERMINATION DATE.
*
*
*
*
*
■ 7. In § 4.34, add paragraph (b)(4) to
read as follows:
§ 4.34

General disclosures required.

*

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

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

■

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

(a) General definitions. For the
purposes of this section:
(1) Commodity pool operator or CPO
has the same meaning as commodity
pool operator defined in section 1a(11)
of the Commodity Exchange Act;
(2) Commodity trading advisor or CTA
has the same meaning as defined in
section 1a(12);
(3) Direct has the same meaning as
defined in section 4.10(f);
(4) Net asset value or NAV has the
same meaning as net asset value as
defined in section 4.10(b);
(5) Pool has the same meaning as
defined in section 1(a)(10) of the
Commodity Exchange Act;
(6) Reporting period means the
reporting period as defined in the forms
promulgated hereunder;
(b) Persons required to report. A
reporting person is:
(1) Any commodity pool operator that
is registered or required to be registered
under the Commodity Exchange Act and
the Commission’s regulations
thereunder; or
(2) Any commodity trading advisor
that is registered or required to be
registered under the Commodity
Exchange Act and the Commission’s
regulations thereunder.
(c) Reporting. (1) Except as provided
in paragraph (c)(2) of this section, each
reporting person shall file with the
National Futures Association, a report
with respect to the directed assets of
each pool under the advisement of the
commodity pool operator consistent
with appendix A to this part or
commodity trading advisor consistent
with appendix C to this part.
(2) All financial information shall be
reported in accordance with generally
accepted accounting principles
consistently applied.
(d) Investment advisers to private
funds. Except as otherwise expressly
provided in this section, CPOs and
CTAs that are dually registered with the
Securities and Exchange Commission
and are required to file Form PF
pursuant to the rules promulgated under
the Investment Advisers Act of 1940,
shall file Form PF with the Securities
and Exchange Commission in lieu of
filing such other reports with respect to
private funds as may be required under
this section. In addition, except as
otherwise expressly provided in this
section, CPOs and CTAs that are dually
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Exchange Commission and are required
to file Form PF pursuant to the rules
promulgated under the Investment
Advisers Act of 1940, may file Form PF
with the Securities and Exchange
Commission in lieu of filing such other
reports with respect to commodity pools
that are not private funds as may be
required under this section. Dually
registered CPOs and CTAs that file Form
PF with the Securities and Exchange
Commission will be deemed to have
filed Form PF with the Commission for
purposes of any enforcement action
regarding any false or misleading
statement of a material fact in Form PF.
(e) Filing requirements. Each report
required to be filed with the National

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Futures Association under this section
shall:
(1)(i) Contain an oath and affirmation
that, to the best of the knowledge and
belief of the individual making the oath
and affirmation, the information
contained in the document is accurate
and complete; Provided, however, That
it shall be unlawful for the individual to
make such oath or affirmation if the
individual knows or should know that
any of the information in the document
is not accurate and complete and
(ii) Each oath or affirmation must be
made by a representative duly
authorized to bind the CPO or CTA.
(2) Be submitted consistent with the
National Futures Association’s
electronic filing procedures.

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(f) Termination of reporting
requirement. All reporting persons shall
continue to file such reports as are
required under this section until the
effective date of a Form 7W filed in
accordance with the Commission’s
regulations.
(g) Public records. Reports filed
pursuant to this section shall not be
considered Public Records as defined in
§ 145.0 of this chapter.
9. Revise appendix A to part 4 to read
as follows:

■

Appendix A to Part 4—Form CPO–PQR
BILLING CODE 6351–01–P

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Appendix C to Part 4—Form CTA–PR

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

■

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11342

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

PART 145—COMMISSION RECORDS
AND INFORMATION
11. The authority citation for part 145
continues to read as follows:

■

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

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

■

§ 145.5

Disclosure of nonpublic records.

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*

*
*
*
*
(d) * * *
(1) * * *
(viii) The following reports and
statements that are also set forth in
paragraph (h) of this section, except as
specified in 17 CFR 1.10(g)(2) or 17 CFR
31.13(m): Forms 1–FR required to be
filed pursuant to 17 CFR 1.10; FOCUS
reports that are filed in lieu of Forms 1–
FR pursuant to 17 CFR 1.10(h); Forms
2–FR required to be filed pursuant to 17
CFR 31.13; the accountant’s report on
material inadequacies filed in
accordance with 17 CFR 1.16(c)(5); all
reports and statements required to be
filed pursuant to 17 CFR 1.17(c)(6); and
(A)(1) The following portions of Form
CPO–PQR required to be filed pursuant

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

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subparts (b) and (d); Question 3,
subparts (g) and (h); Question 9;
Question 10, subparts (b), (c), (d), (e),
and (g); Question 11; Question 12; and
Question 13; and Schedules B and C;
(2) The following portions of Form
CTA–PR required to be filed pursuant to
17 CFR 4.27: Question 2, subparts (c)
and (d); and
*
*
*
*
*
PART 147—OPEN COMMISSION
MEETINGS
13. The authority citation for part 147
continues to read as follows:

■

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

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

■

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

*

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

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BILLING CODE 6351–01–C

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FOCUS reports that are filed in lieu of
Forms 1–FR pursuant to 17 CFR 1.10(h);
Forms 2–FR required to be filed
pursuant to 17 CFR 31.13; the
accountant’s report on material
inadequacies filed in accordance with
17 CFR 1.16(c)(5); all reports and
statements required to be filed pursuant
to 17 CFR 1.17(c)(6); the following
portions of Form CPO–PQR required to
be filed pursuant to 17 CFR 4.27:
Schedule A: Question 2, subparts (b)
and (d); Question 3, subparts (g) and (h);
Question 9; Question 10, subparts (b),
(c), (d), (e), and (g); Question 11; and
Question 12; and Schedules B and C;
and the following portions of Form
CTA–PR required to be filed pursuant to
17 CFR 4.27: Question 2, subparts (c)
and (d);
*
*
*
*
*
(8) Disclose information contained in
or related to examination, operating, or
condition reports prepared by, on behalf
of, or for the use of the Commission or
any other agency responsible for the
regulation or supervision of financial
institutions, including, but not limited
to the following reports and statements
that are also set forth in paragraph
(b)(4)(i)(H) of this section, except as
specified in 17 CFR 1.10(g)(2) or 17 CFR
31.13(m): Forms 1–FR required to be
filed pursuant to 17 CFR 1.10; FOCUS
reports that are filed in lieu of Forms 1–
FR pursuant to 17 CFR 1.10(h); Forms
2–FR pursuant to 17 CFR 31.13; the
accountant’s report on material
inadequacies filed in accordance with
1.16(c)(5); and all reports and
statements required to be filed pursuant
to 17 CFR 1.17(c)(6); and
(i) The following portions of Form
CPO–PQR required to be filed pursuant
to 17 CFR 4.27: Schedule A: Question 2,
subparts (b) and D; Question 3, subparts
(g) and (h); Question 10, subparts (b),
(c), (d), (e), and (g); Question 11;
Question 12; and Question 13; and
Schedules B and C; and
(ii) The following portions of Form
CTA–PR required to be filed pursuant to
17 CFR 4.27: Schedule B: Question 4,
subparts (b), (c), (d), and (e); Question
5; and Question 6;
*
*
*
*
*
Issued in Washington, DC, on February 8,
2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations:

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Appendices to Commodity Pool
Operators and Commodity Trading
Advisors: Amendments to Compliance
Obligations—Commission Voting
Summary and Statements of
Commissioners
Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler,
Commissioners Chilton, O’Malia and Wetjen
voted in the affirmative; Commissioners
Sommers voted in the negative.

Appendix 2—Statement of Chairman
Gary Gensler
I support the final rule increasing the
transparency to regulators of commodity pool
operators (CPOs) and commodity trading
advisors (CTAs) acting in the derivatives
marketplace—for both futures and swaps.
This rule reinstates the regulatory
requirements in place prior to 2003 for
registered investment companies that trade
over a de minimis amount in commodities or
market themselves as commodity funds. This
rule enhances transparency in a number of
ways and increases customer protections
through amendments to the compliance
obligations for CPOs and CTAs.
First, these amendments are consistent
with the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act),
as these changes bring the swaps activities of
CPOs and CTAs under the CFTC’s oversight.
If CPOs and CTAs are trading swaps, they
will have to register with the Commission,
giving their customers the benefit of the
protections in the Dodd-Frank Act.
Second, these amendments addressed the
concerns raised by the National Futures
Association (NFA) in its petition requesting
the Commission to reinstate Commission
oversight of CPOs and CTAs for futures that
existed prior to 2003. Since 2003, the
participation of registered investment
companies in commodity futures, swaps, and
options markets has increased significantly.
Some registered investment companies have
been marketing commodity pools to retail
investors and are operating without the
supervision of the CFTC and the NFA. In
addition, foreign advisors with U.S.
customers have been exempt from
supervision since 2003. The final rule
reinstates the protections that futures
customers of CPOs and CTAs had prior to the
exemptions the Commission granted in 2003.
It is critical to bring the pools that have been
in the dark since 2003 back into the light so
their customers can benefit from the CFTC’s
oversight.
Third, the final rule increases transparency
to regulators by enhancing data available to
the Commission and the NFA, providing a
much more complete understanding of how
these pools are operating in the derivatives
markets for futures and swaps. The data,
which CPOs and CTAs will submit through
Form CPO–PQR and Form CTA–PR, will
help the Commission develop further
regulatory protections for customers of these
entities, market participants and the
American public.
The Commission benefited from significant
public comment on this rule. Some

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commenters raised questions about the
definition of bona fide hedging under section
4.5, in particular that risk mitigation
positions were not included in such bona
fide hedging transactions. The final rule
provides treatments consistent with the
Commission’s treatment of registered
investment companies prior to 2003, and, in
fact, this rule reinstates criteria in place
before 2003. The Commission determined not
to include risk management positions within
the bona fide hedging exemption because
many, if not most, positions in a portfolio
could potentially be characterized as serving
a risk management purpose. This would
result in an overly broad exclusion from the
definition of CPO.
Further, bona fide hedging transactions are
excluded from determining whether a
registered investment company has to
register under 4.5, though these transactions
are not excluded when determining whether
commodity pools not registered with the
Securities and Exchange Commission (SEC)
will be required to register with the CFTC
under section 4.13(a)(3). With respect to the
consideration of bona fide hedging positions
under 4.13(a)(3), the Commission previously
stated its position that bona fide hedging
positions should not be excluded within the
de minimis exemption in 4.13(a)(3) when it
proposed that rule. In the proposal for
4.13(a)(3) (68 FR 12622, 12627), the
Commission stated its belief that 4.13(a)(3)
should not differentiate between trading for
bona fide hedging and non-hedging purposes
because the rule is intended to apply to
strictly de minimis situations, where trading
is limited regardless of purpose. Conversely,
the exclusion under 4.5 was not solely
determined by the de minimis nature of the
trading, but rather the combination of the de
minimis amount of trading and the fact that
the investment vehicle was otherwise
regulated by the SEC. See 67 FR 65743.
Several commenters asked the Commission
to reconsider the treatment of family offices
under these rules. The Commission will
continue to permit family offices to rely on
existing guidance for family offices seeking
relief from the requirements of Part 4. The
Commission also is directing staff to look
into the possibility of adopting a family
offices exemption that is similar to the rule
recently adopted by the SEC and is soliciting
comment from the public.

Appendix 3—Dissenting Statement of
Commissioner Jill E. Sommers
The amendments to the Commission’s Part
4 regulations we are adopting with these final
rules were prompted by a petition from the
NFA seeking to reinstate certain operating
restrictions that were in place prior to 2003
for entities excluded from the definition of
CPO under § 4.5. Had we limited the
amendments to address the issues raised by
the NFA’s petition, we could have met our
regulatory objectives without disrupting a
significant number of business structures. I
would have supported such an approach. As
it is, we have gone far beyond what was
needed to resolve NFA’s concerns and I must
dissent.
Section 404 of the Dodd-Frank Act requires
certain advisors of private funds to register

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mstockstill on DSK4VPTVN1PROD with RULES2

with the SEC and to report to the SEC
information ‘‘as necessary and appropriate
* * * for the protection of investors or for
the assessment of systemic risk by the
Financial Stability Oversight Council.’’ With
the finalization of these rules, the
Commission has determined that the
‘‘sources of risk delineated in the Dodd-Frank
Act with respect to private funds are also
presented by commodity pools’’ and that
registration of certain previously exempt or
excluded CPOs is therefore necessary ‘‘to
assess the risk posed by such investment
vehicles in the derivatives markets and the
financial system generally.’’ The Commission
states that the data it will collect as a
consequence of registration is necessary ‘‘in
order to fulfill the Commission’s systemic
risk mitigation mandate.’’ While I agree that
the Commission has a regulatory interest in
the activities of commodity pools, this
overstates the case and gives a false
impression that the data we gather will
enable us to actively monitor pools for
systemic risk, that we have the resources to
do so, and that we will do so. Moreover,
Congress was aware of the existing
exclusions and exemptions for CPOs when it
passed Dodd-Frank and did not direct the
Commission to narrow their scope or require
reporting for systemic risk purposes. The
Commission justifies the new rules as a
response to the financial crisis of 2007 and
2008 and the passage of Dodd-Frank, yet
there is no evidence to suggest that
inadequate regulation of commodity pools
was a contributing cause of the crisis, or that
subjecting entities to a dual registration
scheme will somehow prevent a similar crisis
in the future.
I could nevertheless support a revision of
the current exclusions and exemptions that
would give us access to information we
determine is necessary to carry out our
regulatory mission if supported by a
sufficient cost-benefit analysis. The rationale
underlying a number of the decisions
encompassed by the rules is sorely lacking,
however, and is not supported by the existing
cost-benefit analysis. The Commission
concludes, for example, that bona fide

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hedging transactions are unlikely to present
the same level of risk as risk mitigation
positions because they are offset by exposure
in the physical markets. A risk mitigation
position is, by definition, a position that
mitigates or ‘‘offsets’’ exposure in another
market. Both are hedges and there is no
explanation as to why the Commission
believes that bona fide hedges are less risky.
The preamble states that the alternative net
notional test under § 4.5 is meant to be
consistent with the net notional test set forth
in § 4.13(a)(3), except the § 4.5 test allows
unlimited use of futures, options or swaps for
bona fide hedging purposes, while the
§ 4.13(a)(3) test does not. No explanation is
given for the differing treatment. We reject an
exemption for foreign advisors similar to the
exemption allowed by the Investment
Advisors Act of 1940 under Section 403 of
Dodd-Frank because we lack information on
the activities of foreign pools, even though,
as some commenters observed, this may
result in nearly all non-U.S. based CPOs
operating a pool with at least one U.S.
investor having to register and report all of
their derivatives activities to the
Commission, including activity that may be
subject to comparable foreign regulation.
While we leave open the possibility of future
exemptions based on information we collect
on Forms CPO–PQR and CTA–PR, the more
likely result of this new policy is that U.S.
participants will be excluded from investing
in foreign pools. The Commission may have
good reasons for this course of action, but no
rationale is given.
Our ‘‘split the baby’’ approach on the issue
of family offices is illogical. The Commission
states that it is ‘‘essential that family offices
remain subject to the data collection
requirements’’ to fulfill our regulatory
mission and to develop a comprehensive
view of such firms to determine whether an
exemption may be appropriate in the future.
At the same time, we are allowing an
unknown percentage of family offices to rely
on previously issued interpretive letters to
avoid registration, reporting and other
compliance obligations. This makes no sense.
We either need this data or we do not. Family

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offices may fit within the parameters of the
existing interpretive letters, in which case we
will not develop the comprehensive view we
are seeking. On the other hand, we ignore the
fact that we have consistently found, for
more than three decades, that family offices
are not the type of collective investment
vehicle that Congress intended to regulate in
adopting the CPO and commodity pool
definitions, a finding that Congress
confirmed in § 409 of Dodd-Frank with
respect to investment advisors. Moreover, our
repeal of the family office exemption is
inconsistent with the exclusion recently
adopted by the SEC pursuant to § 409 at a
time when Dodd-Frank has urged us to
harmonize our rules to the fullest extent
possible.
It is unlikely, in my view, that the costbenefit analysis supporting the rules will
survive judicial scrutiny if challenged. And,
although I am relieved that the
recordkeeping, reporting and disclosure
obligations required by the rules will be
delayed until after proposed harmonization
rules are finalized, the rules contain a
confusing and needlessly complicated set of
compliance dates for other provisions.
While I have felt that many of the rules we
have finalized in the last few months were
far too overreaching, our justification that a
particular rule was required by statute was
largely accurate. With regard to these rules
the same justification does not hold true.
These rules are not mandated by Dodd-Frank,
and I do not believe that the benefits
articulated within the final rules outweigh
the substantial costs to the fund industry. We
admit in the preamble that we do not have
enough information to determine the validity
of requiring some of these entities to register.
A more prudent approach would have been
to gather the information first and then
decide what constitutes sound policy. For
these and other reasons, I cannot support the
final rules.
[FR Doc. 2012–3390 Filed 2–23–12; 8:45 am]
BILLING CODE 6351–01–P

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