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Proposed Rule

Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations

Action

Notice Of Proposed Rulemaking.

Summary

The Commodity Futures Trading Commission is proposing to amend its existing regulations and proposing one new regulation regarding Commodity Pool Operators and Commodity Trading Advisors. The Commission is proposing a new data collection for CPOs and CTAs that is consistent with the data collection required under the Dodd-Frank Act. The proposed amendments would: Rescind the exemptions from registration provided in the Commission's regulations; rescind the relief from the certification requirement for annual reports provided to operators of certain pools only offered to qualified eligible persons (“QEPs”); modify the criteria for claiming relief under the Commission's regulations; and require the annual filing of notices claiming exemptive relief. Finally, the proposal includes new risk disclosure requirements for CPOs and CTAs regarding swap transactions.

Unified Agenda

Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations

3 actions from February 11th, 2011 to December 2011

  • February 11th, 2011
  • April 12th, 2011
    • NPRM Comment Period End
  • December 2011
    • Final Action
 

Table of Contents Back to Top

DATES: Back to Top

Comments must be in writing and received on or before April 12, 2011.

ADDRESSES: Back to Top

You may submit comments, identified by RIN number 3033-AD30, by any of the following methods:

  • Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments through the Web site.
  • Mail: David A. Stawick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
  • Hand Delivery/Courier: Same as mail above.
  • Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

Please submit your comments using only one method.

Please specify the regulation(s) to which your comment refers in the subject field of comments submitted by e-mail, and otherwise clearly indicate the regulation(s) on written submissions. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the procedure established in 17 CFR 145.9.

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from http://www.cftc.gov that it may deem to be inappropriate for publication, including, but not limited to, obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Back to Top

For further information about the proposed amendments to existing §§ 4.5, 4.7, 4.13, 4.14, 4.24, 4.34, or 145.5, contact Kevin P. Walek, Assistant Director, Telephone: (202) 418-5463, E-mail: kwalek@cftc.gov, or Amanda Lesher Olear, Special Counsel, Telephone: (202) 418-5283, E-mail: aolear@cftc.gov, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

For further information about proposed § 4.27 or proposed Forms CPO-PQR or CTA-PR, contact Kevin P. Walek, Assistant Director, Telephone: (202) 418-5463, E-mail: kwalek@cftc.gov, or Daniel Konar, Attorney-Advisor, Telephone: (202) 418-5405. E-mail: dkonar@cftc.gov, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: Back to Top

I. Statutory and Regulatory Background Back to Top

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 (“SEC”), and created new financial regulatory entities.

The Commodity Exchange Act (“CEA”) [3] empowers the Commission with the authority to register Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”), [4] exclude any entity from registration as a CPO or CTA, [5] and to 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.” [6] The Commission also has the power 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].” [7] The Commission's discretionary power 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.” [8] 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.

Following the recent economic turmoil, and consistent with the tenor of the provisions of the Dodd-Frank Act, the Commission has reconsidered the level of regulation that it believes is appropriate with respect to entities participating in the commodity futures and derivatives markets. The Commission believes that it is necessary to rescind or modify several of its exemptions and exclusions to more effectively oversee its market participants and manage the risks that such participants pose to the markets. Additionally, the Commission has re-evaluated its prior decision not to require reporting by CTAs and has concluded that additional information regarding CTAs' activities is needed to provide the Commission with a more complete understanding of such activities' effects on commodities and derivatives markets.

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”). [9] 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 county's financial system. [10] The Dodd-Frank Act anticipates that the FSOC will be supported in these responsibilities by the Federal financial regulatory agencies. [11] The Commission is among those agencies that could be asked to provide information necessary for the FSOC to perform its statutorily mandated duties. [12]

Consistent with the Commission's view regarding the appropriate level of regulation for its registrants in light of the recent economic turmoil and the current regulatory environment, and in anticipation of any requests for information from the FSOC, the Commission is performing two tasks. First, the Commission is working with the SEC to jointly promulgate the rules and forms needed to gather the data required under section 406 of Title IV of the Dodd-Frank Act. [13] Second, the Commission is re-evaluating its regulation of CPOs and CTAs to ensure that its regulatory structure is appropriately designed to effectuate its views regarding the necessary level of regulation in the current economic environment and to be responsive to any informational requests made to the Commission by other governmental agencies or FSOC.

A. Title IV of the Dodd-Frank Act

Title IV of the Dodd-Frank Act requires advisers to large private funds [14] to register with the SEC. [15] Through this registration requirement, Congress 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.” [16] 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 [17] 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. [18] 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. [19]

To fulfill this statutory mandate, the Commission and the SEC today are jointly proposing sections 1 and 2 of Form PF in a forthcoming proposal. Additionally, to 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 of the CEA. [20] 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.

B. Reason for Amending Existing CPO and CTA Regulations

In order to ensure that the Commission can adequately oversee the commodities and derivatives markets and assess market risk associated with pooled investment vehicles under its jurisdiction, the Commission is re- evaluating its regulation of CPOs and CTAs. Additionally, the Commission does not want its registration and reporting regime for pooled investment vehicles and their operators and/or advisors to be incongruent with the registration and reporting regimes of other regulators, such as that of the SEC for investment advisers under the Dodd-Frank Act.

Ultimately, the Commission has determined that to address these concerns it will be necessary to amend certain sections of its existing regulations. These proposed amendments are designed to (1) bring the Commission's CPO and CTA regulatory structure into alignment with the stated purposes of the Dodd-Frank Act; (2) encourage more congruent and consistent regulation of similarly-situated entities among Federal financial regulatory agencies; (3) improve accountability and increase transparency of the activities of CPOs, CTAs, and the commodity pools that they operate or advise, and (4) facilitate a collection of data that will assist the FSOC, acting within the scope of its jurisdiction, in the event that the FSOC requests and the Commission provides such data. Additionally, these proposed amendments will have the added benefit of enabling the Commission to more efficiently deploy its regulatory resources and to more expeditiously take necessary action to ensure the stability of the commodities and derivatives markets, thereby promoting the stability of the financial markets as a whole. The existing regulations that the Commission proposes to amend are enumerated below.

II. The Proposals Back to Top

The Commission's proposed amendments are designed to (1) bring the Commission's CPO and CTA regulatory structure into alignment with the stated purposes of the Dodd-Frank Act; (2) encourage more congruent and consistent regulation of similarly situated entities among Federal financial regulatory agencies; (3) improve accountability and increase transparency of the activities of CPOs, CTAs, and the commodity pools that they operate or advise; and (4) facilitate a collection of data that will assist the FSOC, acting within the scope of its jurisdiction, in the event that the FSOC requests and the Commission provides such data. The proposed amendments will also allow the Commission to more effectively oversee its market participants and manage the risks posed by the commodities and derivatives markets. To those ends, the amendments: (A) Require the periodic reporting of data by CPOs and CTAs regarding their direction of commodity pool assets; (B) identify certain proposed filings with the Commission as being afforded confidential treatment; (C) revise the requirements for determining which persons should be required to register as a CPO under § 4.5; (D) require the filing of certified annual reports by all registered CPOs; (E) rescind the exemptions from registration under §§ 4.13(a)(3) and (a)(4); (F) require periodic affirmation of claimed exemptive relief for both CPOs and CTAs; (G) require an additional risk disclosure statement from CPOs and CTAs that engage in swaps transactions; and (H) make certain conforming amendments to the Commission's regulations as described below in subsection (H) of this preamble. In addition, the proposed amendments make conforming changes to the Commission's regulations in light of certain provisions in the Dodd-Frank Act, including updating the accredited investor definition, which the Commission has incorporated into the definition of QEP in § 4.7.

The Commission requests comment on all aspects of the proposal, as well as comment on the specific provisions and issues highlighted in the discussion below.

A. Proposed New § 4.27 and Appendices A and C: Data Collection for CPOs and CTAs

1. General Purpose of Forms CPO-PQR and CTA-PR

Section 4n of the CEA empowers the Commission to require all registered CPOs and CTAs to file such reports as the Commission deems necessary. [21] Following the recent economic turmoil, and consistent with the tenor of the provisions of the Dodd-Frank Act, the Commission has determined that the reports currently required of Commission registrants do not provide sufficient information regarding their activities for the Commission to effectively monitor the risks posed by those participants to the commodity futures and derivatives markets. Moreover, the Commission has re-evaluated its prior decision not to require reporting by CTAs and has concluded that additional information regarding CTAs' activities is needed to provide it with a more complete understanding of such activities.

Therefore, the Commission is proposing Forms CPO-PQR (proposed to appear in the Commission's regulations as appendix A to part 4), and CTA-PR (proposed to appear in the Commission's regulations as appendix C to part 4) to collect information from CPOs and CTAs that are solely registered with the Commission to permit the Commission to more effectively oversee participants acting within its jurisdiction. The information that the Commission currently receives is limited, not designed to measure systemic or market risk in any meaningful way, and is only submitted by registered CPOs on an annual basis. In addition, the annual financial reports filed by CPOs do not disclose information regarding CPOs' use of stress testing or the tenor of fixed income assets held by commodity pools.

The Commission proposes Forms CPO-PQR and CTA-PR to solicit information that is generally identical to that sought through Form PF, which is being jointly promulgated in a forthcoming release in conjunction with the SEC. These forms were developed in consultation with other financial regulators tasked with overseeing the financial integrity of the economy. Through the collection of the data delineated in proposed Forms CPO-PQR and CTA-PR, the Commission will be able, if requested, by other financial regulators or FSOC, to provide them with the information needed to identify whether any commodity pools are systemically relevant and, as a result, warrant additional examination or scrutiny.

The amount of information that a CPO or CTA will be required to disclose on proposed Forms CPO-PQR and CTA-PR will vary depending on both the size of the operator or advisor and the size of the advised pools. This tiered approach to disclosure acknowledges the fact that smaller operators, advisors, and pools are less likely to present significant risk to the stability of the commodities futures and derivatives markets and the financial market as a whole, and therefore, such entities should have a lesser compliance burden. As detailed infra, the Commission is proposing to collect more detailed information from operators and advisors managing a large amount of commodity pool assets.

2. Persons Required To Report on Proposed Forms CPO-PQR and CTA-PR

Pursuant to proposed § 4.27, any CPO or CTA that is registered or required to be registered must complete and submit proposed Forms CPO-PQR and CTA-PR, respectively, with NFA as the Commission's delegatee. [22] As discussed infra, only certain large CPOs and CTAs would have to complete the sections of Forms CPO-PQR and CTA-PR that require the most detailed information. It is expected that most CPOs would only have to complete schedule A of form CPO-PQR, which contains essentially the same information that NFA currently collects through form PQR. In addition, the Commission expects that most CTAs only would have to complete schedule A of form CTA-PR, which consists of limited questions regarding self-identification, general operations of the CTA, and whether the CTA directs assets for commodity pools equal to or exceeding $150 million.

Those CPOs with assets under management equal to or greater than $150 million would be required to complete schedule B of form CPO-PQR, which solicits basic information regarding the commodity pools operated by such CPOs. CPOs with assets under management equal to or greater than $1 billion would be required to complete schedule C of form CPO-PQR, which solicits aggregate information regarding the commodity pools operated by such CPOs and commodity pools with a net asset value exceeding $500 million. Similarly, a CTA with commodity pool assets under management equal to or exceeding $150 million would be required to complete schedule B of form CTA-PR, which solicits basic information regarding the CTA's trading program, the identification of the CTA's client pool(s), and the position data of each commodity pool advised by the CTA.

The Commission estimates that the number of CPOs that would have to file schedule C of form CPO-PQR will be relatively small. The Commission believes that it is appropriate to limit the more extensive reporting obligations to the large entities detailed above because it would provide information about those entities that are most likely to pose market and systemic risk, and it minimizes the burden on smaller registrants that are less likely to pose such risk.

The Commission requests comment on the proposed reporting scheme. Should the Commission require that all CPOs and CTAs registered or required to be registered with the Commission complete all of the information on their respective forms regarding the pools that they operate or advise? Please provide detail supporting your position. Are there more appropriate thresholds for determining which CPOs and CTAs must report more extensive information? Should the assets under management thresholds be lower or higher? Is there additional information that should be requested?

3. Frequency of Reporting

The Commission proposes to require the completion and filing of the required section(s) of forms CPO-PQR and CTA-PR on a quarterly basis, with the exception of mid-sized CPOs filing schedule B of form CPO-PQR on an annual basis. The Commission believes that the proposed frequency of reporting would permit the Commission to effectively monitor key information relevant to the assessment of market risk posed by the advisors and operators of commodity pools both on an individual and aggregate basis. The proposal would require CPOs and CTAs to file the appropriate reports within 15 days of each quarter end as set forth in proposed § 4.27. Additionally, proposed form CPO-PQR would require schedule B to be filed by mid-sized CPOs within 90 days of the end of the calendar year. The Commission believes that this periodic reporting for CPOs and CTAs is necessary to provide the Commission with timely data to effectively monitor CPOs' and CTAs' activities and to identify emerging market issues. It is expected that this reporting would coincide with registrants' existing internal reporting and risk assessment system cycles. The various reporting schedules for Commission registrants are set forth in the charts below.

Form PF and Form ADV PQR Schedule A PQR Schedule B PQR Schedule C
Dual Registrant CPO for Private Funds Only (Assets under Management equal to or exceeding $1 Billion) Quarterly Quarterly.    
Dual Registrant CPO for Private Funds Only (Assets under Management less than $1 Billion) Annually Quarterly.    
Large CPO—Not Dual Quarterly Quarterly Quarterly.
Mid-size CPO Quarterly Annually.  
Small CPOs Quarterly.    
Form PF and Form ADV PR Schedule A PR Schedule B
Dual Registrant CTA (Assets under Management equal to or exceeding $1 Billion) Quarterly Quarterly.  
Dual Registrant CTA (Assets under Management less than $1 Billion) Annually Quarterly.  
Large and Mid-size CTAs Quarterly Quarterly.
Small CTAs Quarterly.  

The Commission requests comment on the proposed filing frequency. Is quarterly reporting an appropriate amount of time to gather the information necessary to assess risk posed by filers? Is the 15-day deadline for reports too long to ensure reporting of timely information by filers?

4. Implementation of Reporting Obligation

The Commission currently anticipates that the proposed rules requiring the filing of forms CPO-PQR and CTA-PR would become effective six months after the adoption of the proposed forms, which will allow sufficient time for the registrants to develop any systems necessary to collect the information requested on the forms and prepare them for filing. This effective date will also provide NFA with sufficient time to modify its “EasyFile” system to enable registrants to file the forms through that system.

The Commission has determined to authorize NFA to maintain and serve as official custodian of record for the filings, notice, reports, and claims required by § 4.27. This designation is consistent with the Commission's prior designation of NFA as the official custodian of record for the financial information filed as part of the annual reports required under §§ 4.7(b)(3) and 4.22(c). [23] This determination is based upon NFA's representations regarding procedures for maintaining and safeguarding all such records, in connection with NFA's assumption of the responsibilities for the activities referenced herein. In maintaining the Commission's records, NFA shall be subject to all other requirements and obligations imposed upon it by the Commission in existing or future orders or regulations. In this regard, NFA shall also implement such additional procedures (or modify existing procedures) as are acceptable to the Commission and as are necessary to: Ensure the security and integrity of the records in NFA's custody; to facilitate prompt access to those records by the Commission and its staff, particularly as described in other Commission orders or rules; to facilitate disclosure of public or nonpublic information in those records when permitted by the Commission concerning disclosure of nonpublic information; and otherwise to safeguard the confidentiality of records. [24]

The Commission requests comment as to when proposed § 4.27 should become effective, requiring the filing of forms CPO-PQR and CTA-PR.

5. Information Required on Form CPO-PQR

The questions contained in form CPO-PQR reflect the experience of the Commission in regulating CPOs, in consultation with staff of the FSOC, the SEC, and NFA, [25] as well as the purpose and requirements of the Dodd-Frank Act. The information that the Commission proposes to collect from CPOs is largely identical to that required under form PF for private fund advisers and incorporates the information already being collected by NFA in its form PQR. As stated previously, the Commission expects that the collection of the data required by form CPO-PQR would enhance the Commission's oversight of CPOs. A discussion of the information required by form CPO-PQR follows.

a. Proposed Schedule A

Generally, the information required under proposed schedule A will be substantially similar to that required under form PF. Proposed schedule A would be required of all CPOs that are registered or required to be registered and incorporates all of the information currently required by NFA's PQR data collection instrument. Proposed part 1 of schedule A seeks basic identifying information about the CPO, including its name, NFA identification number, and the CPO's assets under management. Proposed part 2 of schedule A requires the reporting of information regarding each of the CPO's pools, including the names and NFA identification numbers for the pools operated during the reporting period, position information for positions comprising five percent or more of each pool's net asset value, and the pool's key relationships with brokers, other advisors, administrators, etc. CPOs that advise multiple pools will be required to complete and file a separate part 2 of schedule A for each pool that they advise.

Proposed part 2 also requires the identification of each operated pool's carrying brokers, administrators, trading managers, custodians, auditors, and marketers. This information would enable the Commission to determine which entities are exposed and connected to commodity pools. The Commission is also proposing to include quarterly and monthly performance information about each pool. This information would permit the Commission to monitor trends regarding the commodity pool industry, such as whether certain funds are engaging in investment strategies that include significant risks having marketwide or even systemic implications. Finally, the Commission is proposing to collect information regarding a pool's subscriptions and redemptions, and any restrictions thereon. The Commission believes that this information is important to ensure adequate oversight of a CPO's decision to restrict pool participants' access to their funds, given the recent economic conditions that gave rise to the imposition of restrictions on redemptions by CPOs.

The Commission is requesting comment on the appropriateness and completeness of the information requested in proposed schedule A of form CPO-PQR. Is there additional basic information that the Commission should require of all CPOs filing form CPO-PQR or regarding the commodity pools that they operate? Is there any information that is included in schedules B and C for larger CPOs that should be included in schedule A for all CPOs? Conversely, is there any information in schedule A that the Commission should not require or that the Commission should only require of large CPOs and, if so, why?

b. Proposed Schedule B

The Commission is proposing that all CPOs that are registered or required to be registered that have assets under management equal to or exceeding $150 million be required to file schedule B of form CPO-PQR. CPOs satisfying the assets under management threshold would be required to report detailed information for all operated pools, including information regarding each pool's investment strategy; borrowings by geographic area and the identities of significant creditors; credit counterparty exposure; and entities through which the pool trades and clears its positions. The Commission believes that this more detailed pool information is necessary from mid-sized and large CPOs as these CPOs and their pools are more likely to be a source of risk to both the commodity futures and derivatives markets and the financial markets as a whole.

The Commission is requesting comment on the appropriateness and completeness of the information proposed to be requested from all CPOs with assets under management equal to or exceeding $150 million. Is there additional information that the Commission should request of mid-sized and large CPOs? Is there information that the Commission should not require to be reported? Should the Commission set a threshold net asset value for pools for which CPOs must report information under proposed schedule B, and if so, what threshold would be appropriate?

c. Proposed Schedule C

The Commission is also proposing that all CPOs with assets under management equal to or exceeding $1 billion be required to file schedule C of proposed form CPO-PQR. Part 1 of schedule C would require certain aggregate information about the commodity pools advised by large CPOs, such as the market value of assets invested, on both a long and short basis, in different types of securities and derivatives, turnover in these categories of financial instruments, and the tenor of fixed income portfolio holdings, including asset-backed securities. This information will assist the Commission in monitoring asset classes in which commodity pools may be significant investors and trends in pools' exposures to allow the Commission to identify concentrations in particular asset classes that are building or transitioning over time. It also would aid the Commission in examining large CPOs' roles as a source of liquidity in different asset classes.

Proposed part 2 of schedule C would require large CPOs to report certain information about any commodity pool that they advise with a net asset value of at least $500 million as of the end of any business day during the reporting period. The Commission has selected $500 million as a threshold for more extensive individual commodity pool reporting because the Commission believes that a pool with $500 million in net asset value is a substantial fund whose activities could have an impact on particular markets in which it invests or on its counterparties. The Commission further believes that setting $500 million as the threshold will lessen the reporting burdens on smaller or start-up pools that are less likely to pose systemic risk. This threshold is the same threshold proposed by the Commission and the SEC in their joint release for form PF.

Proposed part 2 would require information on the individual pool level that is substantially similar to that requested in part 1 of schedule C on an aggregate level. Part 2, however, would also require additional information. The CPO would be required to report a geographic breakdown of the reportable pool's assets as well as information regarding asset liquidity, concentration of positions, material investment positions, collateral practices with significant counterparties, and clearing relationships. This information is designed to assist the Commission in monitoring the composition of commodity pool exposures over time as well as the liquidity of those exposures. [26]

Proposed part 2 of schedule C also proposes to require the reporting of data regarding commodity pool risk metrics, financial information, and investor information. If during the reporting period the CPO regularly calculated a value at risk (“VaR”) metric for the reportable pool, the CPO would have to report VaR for each month of the reporting period. [27] Form CPO-PQR would also require the CPO to report the impact on the pool's portfolio when stressing certain identified market factors, if applicable, broken down by the long and short components of the reportable pool's portfolio. It also requires the CPO to note whether it regularly performed stress tests in which that market factor was considered as part of its risk management process. [28] This information is designed to allow the Commission to track basic sensitivities of the commodity pool to common market factors, correlations in those factor sensitivities, and trends in those factor sensitivities among large commodity pools.

Proposed part 2 of schedule C would require a CPO to report certain financing information for its reportable pool, including a monthly breakdown of its secured, unsecured, and synthetic borrowing, as well as information about the collateral supporting the secured and synthetic borrowing and the types of creditors. It also would require certain information about the term of the fund's committed financing. This information would assist the Commission in monitoring the reportable pool's leverage, credit counterparties' unsecured exposure to the pool, and the committed term of that leverage, which the Commission may find important in monitoring if the pool comes under stress.

Finally, proposed part 2 of schedule C would require a CPO to report information about the reportable pool's investor composition and liquidity. For example, proposed part 2 contains questions regarding the pool's use of side pockets and gates, as well as information relating to investor liquidity. The Commission believes this information may be important in enabling the Commission to monitor the commodity pool's susceptibility to failure through investor redemptions in the event that the pool experiences stress due to market risks or other factors.

The Commission requests comment on the information proposed in schedule C for large CPOs. Is there additional information that should be included and, if so, why? Is there information that should be omitted and, if so, why? Is there information that the Commission should require only on an aggregate basis that the Commission is proposing to require CPOs to report on an individual pool basis? Are there additional risk metrics or market factors that the Commission should require CPOs to employ? Should the Commission require the proposed market factors but with different parameters? Is there information currently proposed that would not result in comparable or meaningful information for the Commission? If so, how can changes to the questions or instructions improve the utility of the information? Is there information that should be broken down further and reported as of smaller time increments, such as weekly? Is there information that should be reported to show ranges, high points, or low points during the reporting period, rather than as of the last day of the month or quarter? Should clearing information be collected with respect to pools with a net asset value less than $500 million?

6. Information Required on Proposed Form CTA-PR

The questions contained in proposed form CTA-PR reflect the experience of the Commission in regulating CTAs, its knowledge regarding how pools allocate funds among various CTAs, and the purpose and requirements of the Dodd-Frank Act. The Commission is proposing that all CTAs that direct commodity pool assets would be required to report on form CTA-PR. As stated previously, the Commission expects that the collection of the data required by form CTA-PR would enhance the Commission's oversight of CTAs and its information regarding the role that CTAs play in the investment of pool assets. A discussion of the information required by form CTA-PR follows.

a. Proposed Schedule A

Proposed schedule A of form CTA-PR would collect general information about the CTA and the pool assets under management by that CTA. All CTAs that are registered or required to be registered would be required to file proposed schedule A. Proposed schedule A consists of general information, including: The name of the CTA; the CTA's NFA identification number; the number of offered trading programs and whether any pool assets are directed under those trading programs; the total assets directed by the CTA; and the total pool assets directed by the CTA. The Commission believes that this information will assist the Commission in gaining a more complete understanding of CTAs and their relationships with commodity pools without imposing any significant burden on CTAs that do not manage a substantial amount of pool assets. The Commission is proposing that all CTAs be required to file proposed schedule A because the Commission believes that basic information about entities registered as CTAs will assist the Commission in making future determinations regarding their regulatory obligations.

The Commission is seeking comment on the content of proposed schedule A and which entities would be required to report under form CTA-PR. Should all CTAs be required to file proposed schedule A of form CTA-PR? If not, what criteria would be appropriate for limiting which CTAs are required to file proposed schedule A of form CTA-PR?

b. Proposed Schedule B

Under the Commission's proposal, CTAs that direct pool assets equal to or exceeding $150 million would be required to complete and file proposed schedule B with details regarding the CTA's trading program(s). CTAs would be required to file detailed position, performance, and trading strategy information for each trading program. CTAs also would be required to identify the pools advised under each program and the percentage of the pool's assets that are directed by the CTA. Finally, the CTA would be required to disclose whether it uses the services of an administrator. Through analysis of the information collected on form CTA-PR, in conjunction with that collected through form CPO-PQR, the Commission will obtain a more complete understanding of the relationships between CTAs and pools and interconnectedness of the Commission's registrants. This information will also assist the Commission in determining whether there is concentration of pool assets with particular CTAs that could result in market risk.

The Commission is seeking comment on the information proposed to be required under schedule B of form CTA-PR. Is there additional information that should be included and, of so, why? Is there information that should be omitted and, if so, why? Is there information currently proposed that would not result in comparable or meaningful information for the Commission? If so, how can changes to the questions or instructions improve the utility of the information?

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

1. Proposed Amendments to § 145.5

The Commission's collection of certain proprietary information through proposed forms CPO-PQR and CTA-PR raises concerns regarding whether the Commission could protect such information from public disclosure. If publicly disclosed, this proprietary information could put reporting entities at a significant competitive disadvantage. Certain questions in both proposed forms request information on pool assets under management, key service providers used by operators and advisors, position-level information, pool performance, pool subscriptions and redemptions, and the market value of pool assets invested in different types of securities and swaps. The Commission has determined that at least one of the nine exemptions to the Freedom of Information Act, 5 U.S.C. 552 et seq., (“FOIA”) [29] and section 8(a)(1) of the CEA [30] protect certain proprietary information like the information described above that the Commission would obtain through proposed forms CPO-PQR and CTA-PR. [31] A discussion of the specific exemption from FOIA disclosure and the privacy protections afforded under section 8(a)(1) of the CEA is described immediately below.

In general, FOIA requires the Commission and other Federal agencies to provide the fullest possible disclosure of information unless such information is otherwise exempted pursuant to one (or more) of nine exemptions under FOIA. [32] Accordingly, the Commission is required by FOIA to make public its records and actions unless a specific exemption is available.

Commercial and financial information and trade secrets are generally exempted from public disclosure under FOIA. [33] Information will qualify for this exemption if the public disclosure of such information would cause substantial harm to the competitive position of the person from whom the information was obtained. [34] As noted above, the Commission believes that proposed forms CPO-PQR and CTA-PR would require CPOs and CTAs, respectively, to report a great deal of proprietary information that, if publicly disclosed, would cause substantial harm to the competitive positions of those entities.

Section 8(a)(1) of the CEA provides, in relevant part, that “except as otherwise specifically authorized in the [CEA], the Commission may not publish data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.” [35] The CEA does not specifically authorize the Commission to disclose to the public the type of proprietary information collected in proposed forms CPO-PQR and CTA-PR.

Currently, § 145.5 of the Commission's regulations sets out the Commission's general policy to protect from public disclosure those portions of “nonpublic records” [36] filed with it, which are exempted under the commercial and financial information exemption from FOIA. [37] Specifically, § 145.5 provides that “[t]he Commission shall publish or make available reasonably segregable portions of `nonpublic records' * * *” subject to a FOIA request if those portions are not listed in § 145.5. [38]

To clarify the Commission's determination to treat certain proprietary information collected in proposed forms CPO-PQR and CTA-PR as nonpublic records—thereby protecting such information from public disclosure—the Commission proposes to list such information in § 145.5(d). [39] Specifically, the Commission proposes to list the following schedules and questions in proposed forms CPO-PQR and CTA-PR, the responses to which the Commission would deem to be nonpublic records:

Proposed form CPO-PQR:

  • Proposed 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.
  • Proposed schedule B: All.
  • Proposed schedule C: All.

Proposed form CTA-PR:

  • Proposed schedule B: Question 4, subparts (b), (c), (d), and (e); Question 5; and Question 6.

2. Proposed Amendments to § 147.3

The Commission's collection of certain proprietary information through proposed forms CPO-PQR and CTA-PR raises concerns regarding whether the Commission could protect such information from public disclosure under The Government in the Sunshine Act, 5 U.S.C. 552b (“Sunshine Act”), which are substantively identical to those discussed above with respect to FOIA. The Sunshine Act was enacted to ensure that agency action is open to public scrutiny and contains exceptions to publication to the extent that such agency actions, or portions of them, are protected by one or more exemptions, [40] which are identical to those under FOIA, discussed above. Accordingly, the Commission is required by the Sunshine Act to make public its records and actions unless a specific exemption is available. Commission meetings, or portions thereof, may be “closed” under the Sunshine Act where the Commission determines that open meetings will likely reveal information protected by an exemption. [41]

The Commission believes that portions of the filings required by proposed § 4.27 through proposed forms CPO-PQR and CTA-PR are protected from disclosure as confidential commercial or financial information under Sunshine Act exemption (c)(4), which prohibits the disclosure of “trade secrets and commercial or financial information obtained from a person and privileged or confidential,” [42] for reasons that are substantively identical to the rationale discussed supra with respect to FOIA.

The Commission further believes that the portions of forms CPO-PQR and CTA-PR that are protected under Sunshine Act exemption (c)(4) are also protected from disclosure by Sunshine Act exemption (c)(8), pursuant to which the Commission is authorized to withhold from the public matter “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” [43] Section 147.3(b) of the Commission's regulations provides that the Commission generally will not make public matters that are “contained in or related to examinations, operating, or conditions 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.” The Commission is aware that no court has considered directly whether Commission registrants are financial institutions for the purposes of Sunshine Act exemption (c)(8). The Commission believes, however, that the language of the Sunshine Act's legislative history contemplates the inclusion of commodities professionals, including futures commission merchants, designated contract markets, derivatives transaction execution facilities, CPOs, and CTAs. [44]

In light of the foregoing considerations, the Commission is proposing to amend § 147.3 to exempt from mandatory disclosure, pursuant to Sunshine Act exemptions (c)(4) and (c)(8), the portions of proposed forms CPO-PQR and CTA-PR as set forth below:

Proposed form CPO-PQR:

  • Proposed 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.
  • Proposed schedule B: All.
  • Proposed schedule C: All.

Proposed form CTA-PR:

  • Proposed schedule B: Question 4, subparts (b), (c), (d), and (e); Question 5; and Question 6.

C. Proposed Amendments to § 4.5: Reinstating Trading Criteria for Exclusion From the CPO Definition

The exclusion from the CPO definition under § 4.5 is available to certain otherwise regulated persons, including investment companies registered under the Investment Company Act of 1940, [45] in connection with their operation of specified trading vehicles. Prior to amendments that the Commission made in 2003, § 4.5 required entities to file a notice of eligibility that contained a representation that the use of commodity futures for non bona fide hedging purposes will be limited to five percent of the liquidation value of the qualifying entity's portfolio and that the entity will not market the fund as a commodity pool to the public. [46]

The 2003 amendments revised § 4.5 to require that notices of eligibility only include representations that:

[T]he qualifying entity: (i) Will disclose in writing to each participant, whether existing or prospective, that the qualifying entity is operated by a person who has claimed an exclusion from the definition of the term `commodity pool operator' under the [Commodity Exchange] Act, and therefore, who is not subject to registration or regulation as a pool operator under the [Commodity Exchange] Act * * * and (ii) Will submit to special calls as the Commission may require. [47]

When adopting the final amendments, the Commission explained that its decision to delete the prohibition on marketing was driven by comments claiming that “the `otherwise regulated' nature of the qualifying entities * * * would provide adequate customer protection, and, further, that compliance with the subjective nature of the marketing restriction could give rise to the possibility of unequal enforcement where commodity interest trading was restricted.” [48]

In 2010, the Commission became aware of certain registered investment companies that were offering series of de facto commodity pool interests claiming exclusion under § 4.5. The Commission consulted with market participants and NFA regarding this practice. Following this consultation, NFA submitted a petition for rulemaking in which NFA suggested certain revisions to § 4.5 with respect to registered investment companies. [49] On September 17, 2010, the Commission solicited comments from the public on NFA's petition for rulemaking, which proposed the reinstatement of the pre-2003 operating restrictions in § 4.5. In its petition, NFA proposed that § 4.5(c)(2) be amended to read as follows:

(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 solely for bona fide hedging purposes within the meaning and intent of [Rule] 1.3(z)(1) [50] ; Provided, however, That in addition, with respect to positions in commodity futures or commodity option contracts that may be held by a qualifying entity only which do not come within the meaning and intent of [Rule] 1.3(z)(1), 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) may be excluded in computing such [five] percent; (b) 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 (or otherwise seeking investment exposure to) the commodity futures or commodity options markets. [51] (Emphasis removed).

To stop the practice of registered investment companies offering futures-only investment products without Commission oversight, the Commission is proposing to amend § 4.5 to reinstate the pre-2003 operating criteria consistent with the language proposed by NFA in its petition. The Commission believes that NFA's proposed language is an appropriate point at which to begin discussions regarding the Commission's concerns. Moreover, the Commission believes that imposing such restrictions would limit the possibility of entities engaging in regulatory arbitrage whereby operators of otherwise regulated entities that have significant holdings in commodity interests would avoid registration and compliance obligations under the Commission's regulations. The Commission believes that this is appropriate to ensure consistent treatment of operators of commodity pools regardless of registration status with other regulators. In addition, the Commission has determined that adopting the restrictions proposed by NFA would ensure that entities that operate funds that are de facto commodity pools would be required to report the activities of such pools on the proposed form CPO-PQR. The Commission, however, is cognizant of the fact that the structure of these otherwise regulated entities may result in operational difficulties with respect to compliance with part 4 of the Commission's regulations. To that end, the Commission poses several questions, immediately below, derived from comments received with respect to NFA's petition to solicit comments regarding what the Commission should consider with respect to the regulation of such entities:

  • Several commenters to NFA's petition have suggested that the marketing strategies used by entities claiming relief under § 4.5 would be prohibited under NFA's proposal. Specifically, it has been argued that marketing these funds under proposed § 4.5 would be impossible, or nearly impossible, as it would be cost prohibitive. The Commission solicits comments on how these marketing strategies would be affected by the proposed rule change. Specifically, should the proposed restriction on marketing as a commodity pool or as a vehicle for providing exposure to commodity interests be broader or more narrow?
  • It has been suggested that funds operated pursuant to relief under § 4.5 are now following numerous trading strategies, including “life cycle” fund strategies, which are set to maximize trading successes for certain trading periods, or horizons. The Commission seeks comment on the differential impact the proposed rulemaking would have on the various trading strategies implemented by funds operated under § 4.5, including which types of funds might be more severely impacted than others, and, if so, why?
  • Some commenters to the NFA petition have suggested that the term “marketing” needs to be clarified. What considerations should be made with respect to such a definition? Further, what specific areas related to marketing are most problematic and, if so, why?
  • Commenters to the NFA petition have suggested that the changes to § 4.5 would result in direct conflicts with SEC regulations relating to registered investment companies. Please detail which rules and regulations are in conflict, and indicate how these could be best addressed by the two Commissions.
  • Is a limit of five percent of the liquidation value of the portfolio attributable to non-bona fide hedging purposes the appropriate threshold? Should a higher or lower limit apply? Should the calculation of the limit include swaps, or be limited to futures and options? Is a portfolio based criterion appropriate or is there another more effective means for identifying entities that should be registered as CPOs?
  • Additionally, the Commission is soliciting comment regarding the implementation of the proposed changes to § 4.5. What issues should the Commission consider with respect to the ability of registered investment companies to comply with the disclosure document and reporting delivery requirements; recordkeeping; and related fund performance disclosure requirements under part 4 of the Commission's regulations? How much time will be necessary for entities that have previously claimed exclusion under this section to comply with the proposed changes? Should any entities that have previously claimed exclusion under this section be exempted from compliance with the proposed revisions to § 4.5?

D. Proposed Amendments to § 4.7: Removing Exemptive Relief From the Certification Requirement for Pool Annual Reports and Incorporating Accredited Investor Definition

1. Removing Exemptive Relief From the Certification Requirement for Financial Statements in Pool Annual Reports

In 1992, the Commission proposed and adopted § 4.7, which provided relief from disclosure, reporting, and recordkeeping obligations under part 4 of the Commission's regulations for CPOs and CTAs that are privately offered to sophisticated persons. [52] Section 4.7(b)(3) provides relief from the certification requirement for financial statements contained in annual reports distributed to participants and filed with NFA. [53]

Despite the availability of the exemption from the audit requirement under § 4.7(b)(3)(i), the vast majority of CTAs and CPOs that operate commodity pools under § 4.7 have their annual reports for those pools audited by certified public accountants. For example, 759 of the 892 pools that operated pursuant to exemptive relief under § 4.7 in fiscal year 2009 (i.e., 85% of all pools operated under § 4.7 in that year) filed certified annual reports despite being eligible for exemptive relief from certification in § 4.7(b)(3).

In light of the stated purposes of the Dodd-Frank Act (i.e., transparency and accuracy of information across market participants), the Commission proposes to extend the requirement for certified financial statements in commodity pool annual reports to commodity pools with participants who are QEPs. The Commission believes that requiring certification of financial information by an independent accountant in accordance with established accounting standards will ensure the accuracy of the financial information submitted by its registrants. Accordingly, proposed section 3 of the amendatory text would remove the exemption in § 4.7(b)(3)(C)(ii) from the requirement that certified financial statements be included in the annual reports to participants in their commodity pools. Commission staff will continue to consider requests for exemption from the audit requirement pursuant to the general exemptive provisions of § 4.12(a), in accordance with the criteria under which such relief previously has been granted. [54]

2. Incorporating by Reference the Accredited Investor Standard

The Commission is also proposing to amend §§ 4.7(a)(3)(ix) and (a)(3)(x), which list those persons required to satisfy the portfolio requirement to be QEPs. [55] In 1992, when the Commission proposed and adopted § 4.7, it stated that the relief provided in § 4.7 was intended for persons who were “highly accredited investors”, [56] which was defined as “accredited investors”, per the terms of § 230.501 of regulation D [57] under the Securities Act of 1933, [58] who also satisfy a portfolio value requirement. [59] Section 4.7(a)(3)(ix) incorporates the specific net worth provision set forth in § 230.501(a)(5) of the SEC's regulations. [60] Similarly, § 4.7(a)(3)(x) incorporates the income standards of § 230.501(a)(6) of the SEC's regulations. [61]

Section 413 of the Dodd-Frank Act instructs the SEC to examine and adjust the threshold for “accredited investor” status under its regulations and initially increases the threshold amount so that it is significantly greater than the current provisions of regulation D. Because the Commission has incorporated the “accredited investor” definition from regulation D into its definition of QEP, the Commission has determined that it is necessary to amend §§ 4.7(a)(3)(ix) and (a)(3)(x) to incorporate the new accredited investor standard. Thus, the Commission's proposal seeks to amend § 4.7 to incorporate the accredited investor standard from Regulation D by reference, rather than by direct inclusion of its terms. Incorporation by reference will 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.

E. Proposed Amendments to §§ 4.13(a)(3) and (a)(4): Rescission of Exemption From Registration

The Commission proposes to rescind certain exemptions from registration provided in §§ 4.13(a)(3) and (a)(4). Section 4.13(a)(3) of the Commission's regulations currently provides that a person is exempt from registration as a CPO if the interests in the pool are exempt from registration under the Securities Act of 1933 and offered only to QEPs, accredited investors, or knowledgeable employees, and the pool's aggregate initial margin and premiums attributable to commodity interests do not exceed five percent of the liquidation value of the pool's portfolio. [62] Section 4.13(a)(4) of the Commission's regulations provides that a person is exempt from registration as a CPO if the interests in the pool are exempt from registration under the Securities Act of 1933 and the operator reasonably believes that the participants are all QEPs. [63]

As a result of the creation of exemptions from registration as a CPO under §§ 4.13(a)(3) and (a)(4), a large group of market participants have fallen outside of the oversight of regulators (i.e., there is very little if any transparency or accountability over the activities of these participants). The Commission has concluded that continuing to grant an exemption from registration and reporting obligations for these market participants is outweighed by the Commission's concerns of regulatory arbitrage.

To address the lack of transparency and accountability, the Commission's proposal would eliminate the exemption under § 4.13(a)(3). Indeed, 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.

In addition, the Commission proposes to eliminate the exemption in § 4.13(a)(4) because 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.

With the passage of the Dodd-Frank Act, the regulatory environment has changed from that which was in existence when §§ 4.13(a)(3) and (a)(4) were promulgated in 2003. As stated previously, one of the primary purposes of the Dodd-Frank Act is to promote transparency with respect to the activities of participants in the financial markets. Sections 403 and 404 of the Dodd-Frank Act generally require registration and reporting by investment advisers to private funds. [64] Many private funds claim an exemption from SEC registration under sections 3(c)(1) and (7) of the Investment Company Act of 1940 (the “Investment Company Act”). [65] The Dodd-Frank Act, although not rescinding these exemptions from registration under the Investment Company Act, requires the advisers of such funds to register with the SEC as “private fund investment advisers”. [66] The Commission's proposal seeks 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 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.

The Commission is soliciting comment regarding the implementation of the proposed rescission of §§ 4.13(a)(3) and (a)(4). How much time will be necessary for entities that have previously claimed exemption under these sections to comply with the proposed changes? How should the Commission address entities whose activities do not require registration; i.e., should such entities be required to file notice with the Commission to avoid registration? Should any entities that have previously claimed exemption under these sections be exempted from compliance with the proposed revisions to §§ 4.13(a)(3) and (a)(4)? Should the Commission consider an alternative de minimis exemption under § 4.13, and, if so, what criteria should be required to claim such exemption?

F. Proposed Amendments to §§ 4.5, 4.13, and 4.14: Requiring Annual Filings of Notices of Claims of Exemption

The Commission has the power 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 the purposes of [the CEA].” [67] It is pursuant to this authority that the Commission promulgated the various exemptions from registration set forth in §§ 4.5, 4.13, and 4.14. It is also pursuant to this authority that the Commission may revise the criteria for claiming such exemptive relief.

Under the current provisions of part 4 of the Commission's regulations, persons claiming exemptive relief from inclusion in the definition of a CPO or from registration as a CPO or CTA are required to file only a notice of such claim with NFA and to comply with a few ministerial requirements. [68] For entities claiming relief under §§ 4.5, 4.13, or 4.14, the filing of an exemption notice is the end of these entities' interaction with the Commission or NFA (in the absence of a special call or their capture by the large trader reporting system). The Commission's regulations do not explicitly require these entities to inform the Commission in the event that these entities cease operating as a going concern. [69]

Based on the foregoing, the Commission proposes to require all persons claiming exemptive or exclusionary relief under §§ 4.5, 4.13, and 4.14 of the Commission's regulations to confirm their notice of claim of exemption or exclusion on an annual basis. [70] The Commission believes 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. 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. If a person chooses to withdraw their certification other than due to the cessation of activities requiring registration or exemption therefrom, the Commission's proposal would require such person to file a registration application with NFA within 30 days of the anniversary date of the initial claim for exemptive relief. Because persons are required to file electronically with NFA, NFA would conduct the annual confirmation process through its electronic system, similar to the annual updates to registration information that are required of registered firms under § 3.10(d). The Commission's proposal would make the failure to comply with the annual notice requirement result in a deemed withdrawal of the exemption or exclusion and under those circumstances could result in the initiation of an enforcement action.

The Commission invites comment on whether 30 days is an adequate period of time in which to affirm. Does it make sense to require a filing within 30 days of the anniversary date of the initial filing, or within 30 days of the end of the calendar year?

G. Proposed Amendments to §§ 4.24 and 4.34: New Risk Disclosure Statement for CPOs and CTAs

The enactment of the Dodd-Frank Act expanded the scope of the Commission's authority to include swaps. [71] In light of this expansion of the Commission's jurisdiction, the Commission has determined that it is necessary to amend the mandatory Risk Disclosure Statements [72] under §§ 4.24(b) and 4.34(b) for CPOs and CTAs to describe certain risks specific to swaps transactions. Specifically, the Commission believes that it is critical that registered CPOs and CTAs inform pool participants and clients about the potential risks that swaps may have limited liquidity and may be hard to value, which may result in difficulties regarding the pool participants' ability to redeem their interests in the pool and clients' ability to liquidate their accounts. The Commission believes that the significance of these risks should be appropriately highlighted by including a discussion in the Risk Disclosure Statement at the beginning of the document.

The Commission is specifically soliciting comment as to whether the risks discussed in the proposed Risk Disclosure Statement are the significant risks to pool participants and clients that are posed by the use of swaps by CPOs and CTAs? Should any other risks be included in the proposed Risk Disclosure Statement? Should any proposed language be omitted?

H. Proposed Amendments to Part 4: Conforming Amendments

As a result of the amendments discussed in this proposal, the Commission proposes to amend various provisions of part 4 of the Commission's regulations for the purposes of making confirming changes. Specifically, the proposal would delete references to repealed rules (e.g.,§§ 4.13(a)(3) and (a)(4), etc.) in other sections of the Commission's regulations.

III. Related Matters Back to Top

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) [73] requires that agencies, in proposing rules, consider the impact of those rules on small businesses.

CPOs: The Commission has determined previously that registered CPOs are not small entities for the purpose of the RFA. [74] 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). [75] 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. [76] Schedule A of proposed 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 schedule A 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 schedule A 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 proposed schedule A will not create a significant economic impact on a substantial number of small entities. With respect to proposed form CTA-PR, only CTAs directing pool assets equal to or in excess of $150 million will be obligated to file schedule B. The Commission is hereby determining that for purposes of this rulemaking that CTAs directing pool assets equal to or in excess of $150 million are not small entities for RFA purposes. 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.

B. Paperwork Reduction Act

The Paperwork Reduction Act (“PRA”) imposes certain requirements on Federal agencies in connection with their conducting or sponsoring any collection of information as defined by the PRA. [77] 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 proposing to amend Collection 3038-0023 to allow for an increase in response hours for the proposed rulemaking resulting from the rescission of §§ 4.13(a)(3) and (a)(4) and the modification of § 4.5. The Commission is also proposing to amend Collection 3038-0005 to allow for an increase in response house for the proposed rulemaking associated with new and modified compliance obligations under part 4 of the Commission's regulations resulting from this proposal. The Commission, therefore, is submitting this proposal to the OMB for its review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. 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 would be mandatory.

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.” [78] The Commission is also required to protect certain information contained in a government system of records according to the Privacy Act of 1974. [79]

1. Additional Information Provided by CPOs and CTAs

a. OMB Control Number 3038-0023

Part 3 of the Commission's regulations concern registration requirements. Existing Collection 3038-0023 has been amended to reflect the obligations associated with the registration of new entrants, i.e., CPOs that were previously exempt from registration under §§ 4.5, 4.13(a)(3) and 4.13(a)(4), that had not previously been required to register. 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.

Estimated number of respondents: 77,857.

Annual responses by each respondent: 78,109.

Annual reporting burden: 7,029.8.

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 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 total burden associated with Collection 3038-005 is expected to be:

Estimated number of respondents: 31,322.

Annual responses by each respondent: 69,082.

Estimated average hours per response: 8.77.

Annual reporting burden: 272,419.6.

Proposed § 4.27 is expected to be the main reason for the increased burden under Collection 3038-005. Specifically, the Commission expects the following burden with respect to the various schedules of proposed forms CPO-PQR and CTA-PR:

Form CPO-PQR: Schedule A:

Estimated number of respondents: 4,060.

Annual responses by each respondent: 4.

Estimated average hours per response: 8.

Annual reporting burden: 129,920.

Form CPO-PQR: Schedule B:

Estimated number of respondents: 920.

Annual responses by each respondent: 4.

Estimated average hours per response: 4.

Annual reporting burden: 14,720.

Form CPO-PQR: Schedule C:

Estimated number of respondents: 260.

Annual responses by each respondent: 4.

Estimated average hours per response: 18.

Annual reporting burden: 18,720.

Form CTA-PR: Schedule A:

Estimated number of respondents: 450.

Annual responses by each respondent: 4.

Estimated average hours per response: 0.5.

Annual reporting burden: 900.

Form CTA-PR: Schedule B:

Estimated number of respondents: 150.

Annual responses by each respondent: 4.

Estimated average hours per response: 7.

Annual reporting burden: 4,200.

2. Information Collection Comments

The Commission invites the public and other Federal agencies to comment on any aspect of the reporting and recordkeeping burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (ii) evaluate the accuracy of the Commission's estimate of the burden of the proposed collection of information; (ii) determine whether there are ways to enhance the quality, utility, and clarity of the information collected; and (iv) minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

Comments may be submitted directly to the Office of Information and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy of submitted comments so that they can be summarized and addressed in the final rule. Refer to the ADDRESSES section of this notice of proposed rulemaking for comment submission instructions to the Commission. A copy of the supporting statements for the collections of information discussed above may be obtained by visiting RegInfo.gov. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this release. Consequently, a comment to OMB is most assured of being fully effective if received by OMB (and the Commission) within 30 days after publication of this notice of proposed rulemaking.

C. Cost-Benefit Analysis

Section 15(a) of the CEA [80] requires the Commission to consider the costs and benefits of its actions before issuing rules, regulations, or orders under the CEA. By its terms, section 15(a) does not require the Commission to quantify the costs and benefits of its rules, regulations or orders or to determine whether the benefits outweigh the costs. Rather, section 15(a) requires that the Commission “consider” the costs and benefits of its actions. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may in its discretion give greater weight to any one of the five enumerated areas and could in its discretion determine that, notwithstanding the costs, a particular rule, regulation, or order is necessary or appropriate to protect the public interest or to effectuate any of the provisions or accomplish any of the purposes of the CEA.

The proposed amendments to the Commission's regulations require CPOs and CTAs registered with the CFTC to file in an electronic format the proposed forms CPO-PQR and CTA-PR, respectively. Under the proposed rule, most CPOs and CTAs would be required to provide quarterly a limited amount of basic information on forms CPO-PQR and CTA-PR about the operations of their commodity pools. Only large CPOs and CTAs would have to submit on a quarterly basis the full complement of systemic risk related information required by forms CPO-PQR and CTA-PR.

With respect to costs, the Commission has determined that: (1) Although they are necessary to U.S. financial stability, the proposed reporting requirements will create additional compliance costs for these registrants; (2) without the proposed reporting requirements imposed on CPOs and CTAs, the Commission may not have sufficient information to provide effective oversight of participants in the futures and derivatives markets; and (3) the proposed reporting requirements, once finalized, will provide the Commission with better information regarding the business operations, creditworthiness, use of leverage, and other material information of certain registered CPOs and CTAs.

In addition to the costs associated with the proposed data collection instruments, the Commission has determined the following with respect to the costs of the other proposed changes to part 4 of the Commission's regulations impacting entitlement to exemptive relief from registration: (1) Unless the Commission rescinds the exemptive relief delineated in §§ 4.13(a)(3) and 4.13(a)(4), the information collected under proposed forms CPO-PQR and CTA-PR will not provide a complete understanding of the risks arising from the activities of CPOs and CTAs in the commodity derivatives markets; (2) failing to adopt revisions to § 4.5 that are substantively similar to those proposed in NFA's petition for rulemaking would result in disparate treatment of similarly situated collective investment schemes; (3) requiring the filing of an annual notice to claim exemptive relief under §§ 4.5, 4.13, and 4.14 enables the Commission to better understand the universe of entities claiming relief from the Commission's regulatory scheme; and (4) although the Commission believes that the abovementioned amendments are necessary, the proposed changes will result in additional costs to certain market participants due to registration and compliance obligations.

The Commission has determined that the proposed changes will provide a benefit to all investors and market participants by providing the Commission and other policy makers with more complete information about these registrants. In turn, this information would enhance the Commission's ability to form and frame appropriately tailored regulatory policies to the commodity pool industry and its operators and advisors. As mentioned above, the Commission does not have access to this information today and has instead made use of information from other, less reliable sources.

The Commission invites public comment on its cost-benefit considerations. Commenters are also invited to submit any data and other information that they may have quantifying or qualifying the costs and benefits of this proposed rule with their comment letters.

List of Subjects Back to Top

17 CFR Part 4

17 CFR Part 145

17 CFR Part 147

  • Open commission meetings
  • Sunshine Act

Accordingly, 17 CFR chapter I is proposed to be amended as follows:

begin regulatory text

PART 4—COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS Back to Top

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 [Rule] 1.3(z)(1); Provided however, That in addition, with respect to positions in commodity futures or commodity option contracts, or swaps that may be held by a qualifying entity only which do not come within the meaning and intent of Rule 1.3(z)(1), 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) may be excluded in computing such five percent;

(B) 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 (or otherwise seeking investment exposure to) the commodity futures, commodity options, or swaps markets.

* * * * *

(5) Annual notice: Each person who has filed a notice of exclusion under this section must affirm 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 anniversary of the initial filing date through National Futures Association's electronic exemption filing system.

* * * * *

3. In § 4.7, revise paragraphs (a)(3)(ix) and (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.

* * * * *

(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 Sec. 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 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. Remove and reserve paragraphs (a)(3), (4), and (e)

b. Revise paragraph (b)(1)(ii)

c. Redesignate paragraph (b)(4) as paragraph (b)(5), and add new paragraph (b)(4).

The revision and addition read as follows:

§ 4.13 Exemption from registration as a commodity pool operator.

* * * * *

(b) * * *

(2) * * *

(ii) Contain the section number pursuant to which the operator is filing the notice (i.e.,§ 4.13(a)(1) or (2)) 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 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 anniversary of the initial filing date through National Futures Association's electronic exemption filing system.

* * * * *

5. In § 4.14:

a. Remove paragraph (a)(8)(i)(D)

b. Redesignate paragraph (a)(8)(iii)(D) as (a)(8)(iii)(E) and add new paragraph (a)(8)(iii)(D) to read as follows:

§ 4.14 Exemption from registration as a commodity trading adviser.

* * * * *

(a) * * *

(8) * * *

(iii) * * *

(D) Annual notice: Each person who has filed a notice of exemption from registration under this section must affirm 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 anniversary of the initial filing date 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.

* * * * *

(b) * * *

(5) If the pool may engage in swaps, the Risk Disclosure Statement must further state:

SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL RISK.

HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.

IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.

* * * * *

7. Add § 4.27 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 commodity trading advisor defined in section 1a(12);

(3) Direct has the same meaning as direct 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 pool as defined in section 1(a)(10) of the Commodity Exchange Act;

(6) Reporting period means each quarter ending March 31, June 30, September 30, or December 31;

(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 section (c)(2) of this section, each reporting person shall file with the National Futures Association, not later than 15 days after the end of the first reporting period during which such reporting person satisfies the requirements of paragraph (b) of this section, and not later than 15 days after the end of each quarter during the calendar year subsequent thereto, 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) Mid-Sized CPOs, as that term is defined in appendix A to this part, shall file with the National Futures Association such reports consistent with the time period described in appendix A.

(3) All financial information shall be reported in accordance with generally accepted accounting principles consistently applied.

(d) [Reserved]

(e) Filing requirements. Each report required to be filed with the National Futures Association under this section shall:

(1)(i) Contain an oath and affirmation that, to the best of the knowledge and belief of the individual making the oath and affirmation, the information contained in the document is accurate and complete; Provided, however, That it shall be unlawful for the individual to make such oath or affirmation if the individual knows or should know that any of the information in the document is not accurate and complete and

(ii) Each oath or affirmation must be made by a representative duly authorized to bind the CPO or CTA.

(2) Be submitted consistent with the National Futures Association's electronic filing procedures.

(f) Termination of reporting requirement. All reporting persons shall continue to file such reports as are required under this section until the effective date of a Form 7W filed in accordance with the Commission's regulations.

(g) Public records. Reports filed pursuant to this section shall not be considered Public Records as defined in § 145.0 of this chapter.

8. 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.

* * * * *

9. Appendix A is revised to read as follows:

Appendix A to Part 4—Form CPO-PQR Back to Top

BILLING CODE P

10. Appendix C is added to read as follows:

Appendix C—Form CTA-PR Back to Top

BILLING CODE C

PART 145—COMMISSION RECORDS AND INFORMATION Back to Top

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

Authority:

99, 100 Stat. 3207; 89, 80 Stat. 383; 90, 81 Stat. 54; 98, 88 Stat. 1561-1564 (5 U.S.C. 552); Sec. 101(a), 93, 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.

* * * * *

(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) 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;

(B) 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;

* * * * *

(h) Contained in or related to examinations, operating, or condition reports prepared by, on behalf of, or for the use of the Commission or any other agency responsible for the regulation or supervision of financial institutions, including, but not limited to the following reports and statements that are also set forth in paragraph (d)(1)(viii) of this section, except as specified in 17 CFR 1.10(g)(2) and 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the accountant's report on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); all reports and statements required to be filed pursuant to 17 CFR 1.17(c)(6); and

(1) The following portions of Form CPO-PQR required to be filed pursuant to 17 CFR 4.27: Schedule A: Question 2, subparts (b) and D; Question 3, subparts (g) and (h); Question 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: Schedule B: Question 4, subparts (b), (c), (d), and (e); Question 5; and Question 6; and

* * * * *

PART 147—OPEN COMMISSION MEETINGS Back to Top

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

Authority:

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

14. In § 147.3, revise (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; 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(c0(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 10, subparts (b), (c), (d), (e), and (g); Question 11; Question 12; and Question 13; and Schedules B and C; and 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;

* * * * *

(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 January 26, 2011 by the Commission.

David A. Stawick,

Secretary of the Commission.

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

Note:

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

Appendix 1—Commission Voting Summary Back to Top

On this matter, Chairman Gensler and Commissioners Dunn, Sommers (by proxy), Chilton and O'Malia voted in the affirmative; no Commissioner voted in the negative.

Appendix 2—Statement of Chairman Gary Gensler Back to Top

I support the proposed joint rulemaking with the Securities and Exchange Commission (SEC) that requires reporting by investment advisers to private funds that are also registered as commodity pool operators (CPOs) or commodity trading advisors (CTAs) with the CFTC. I also support the CFTC's proposed amendment to compliance obligations of CPOs and CTAs. The joint rule requires private fund investment advisers with assets under management totaling more than $150 million to provide the SEC with financial and other trading information. Private fund investment advisers with assets under management totaling more than $1 billion would be subject to heightened reporting requirements. I support the CFTC rule that would bring similar reporting to CPOs and CTAs with assets under management greater than $150 million that are not otherwise jointly regulated. This is to ensure that similar entities in the asset management arena are regulated consistently. Lastly, the proposal repeals certain exemptions issued under Part 4 of the Commission's regulations so the Commission will have a more complete picture of the activity of operators of and advisors to pooled investment vehicles in the commodities marketplace.

end regulatory text

[FR Doc. 2011-2437 Filed 2-10-11; 8:45 am]

BILLING CODE P

Footnotes Back to Top

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.

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5. 7 U.S.C. 1a(11) and 1a(12).

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6. 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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8. See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p. 20.

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9. See section 111 of the Dodd-Frank Act.

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10. See section 112(a)(1)(A) of the Dodd-Frank Act.

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11. See sections 112(a)(2)(A) and 112(d)(1) of the Dodd-Frank Act.

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12. See section 112(d)(1) of the Dodd-Frank Act.

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13. The Commission and the SEC are jointly proposing Form PF with respect to entities registered with both agencies in a forthcoming release.

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14. 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).

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15. 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.

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16. See S. Conf. Rep. No. 111-176, at 38 (2010).

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17. In this release, the term “private fund adviser” means any investment adviser that is (i) registered or required to be registered with the SEC (including any investment adviser that is also registered or required to be registered with the CFTC as a CPO or CTA) and (ii) advises one or more private funds (including any commodity pools that satisfy the definition of “private fund”).

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18. See section 404 of the Dodd-Frank Act.

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19. See section 406 of the Dodd-Frank Act.

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22. In a forthcoming release, the Commission and the SEC will be jointly promulgating Form PF with respect to the advisers to private funds that areregistrants with both agencies. CPOs and CTAs that are dual registrants and that operate or advise commodity pools that are not private funds will still be required to file the proposed reports required in this release.

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23. 67 FR 77470, Dec. 18, 2002.

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25. NFA is currently the only registered futures association under the CEA and is the self regulatory organization overseeing all CPOs and CTAs registered with the Commission. It is also responsible for the administration of the Commission's registration program and exemptions therefrom. See the Commission's delegation order regarding the registration of CPOs and CTAs at 49 FR 39593, Oct. 9, 1984. Additionally, NFA currently collects certain data from CPOs that are NFA members on its form PQR under NFA Rule 2-46.

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26. It is noteworthy that the information in this proposed part 2 also could aid the FSOC, if it so requests such information from the Commission and such request is granted, in monitoring: (1) Credit counterparties' unsecured exposure to commodity pools, as well as the pools' exposure; (2) a CPO's ability to respond to market stresses; and (3) a CPO's interconnectedness with certain central clearing counterparties.

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27. If VaR was calculated, the CPO would have to report the confidence interval, time horizon, whether any weighting was used, and whether VaR was calculated using historical simulation or Monte Carlo simulation. If historical simulation was used, the CPO would have to report the historical lookback period used.

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28. The market factors are changes in: Equity prices; risk-free interest rates; credit spreads; currency rates; commodity prices; implied volatilities; implied correlations; default rates; and prepayment speeds.

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29. The nine exemptions are found in 5 U.S.C. 552(b)(1)-(7).

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31. Section 16 of the CEA, 7 U.S.C. 20, also prohibits the Commission from disclosing such data and information in market reports furnished to the public under that section. Section 16 is not, however, applicable to the proposed rulemaking because the reports to which it refers are investigations of such conditions as supply, demand, and prices in the markets for “goods, articles, services, rights, and interests which are the subject of futures contracts.”

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32. Section 552(b)(3) of FOIA provides that another statute may provide a FOIA exemption. Section 404 of the Dodd-Frank Act sets out such an exemption. Specifically, section 404 precludes the SEC from being compelled under FOIA to reveal proposed Form PF or information contained therein required to be filed with the SEC except to Congress upon agreement of confidentiality or to comply with a court order or other regulatory request. As noted above, the Commission and SEC are jointly proposing Form PF in a forthcoming release. The Dodd-Frank Act does not include similar language precluding the Commission from being compelled to reveal similar information to the public.

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33. See 5 U.S.C. 552(b)(4). “Commercial” and “financial” are given “ordinary meanings.”See Bd. of Trade of the City of Chicago v. CFTC, 627 F.2d 392, 394-95 (DC Cir. 1980).

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34. See, e.g., Pub. Citizen Health Research Group v. FDA, 704 F.2d 1280,1291 (DC Cir. 1983).

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36. Nonpublic records are defined as, among other things, information published in the Federal Register, final Commission opinions, orders, statements of policy and interpretations, administrative manuals and instructions, indices, and records released in response to FOIA requests that have been, or the Commission anticipates will be, the subject of additional FOIA requests.

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39. Section 145.5(d) tracks the language of its FOIA counterpart, exemption (b)(4).

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40. The exemptions from disclosure set forth in the Sunshine Act are codified in 5 U.S.C. 552b(c). There are 10 listed exemptions.

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41. The Commission's Sunshine Act obligations are codified in its part 147 rules, 17 CFR part 147.

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44. See S. Rep. No. 354, 94th Cong., 1st Sess. 24 (1975) (stating that “financial institution” is “intended to include banks, savings and loan associations, credit unions, brokers and dealers in securities or commodities, exchanges dealing in securities and commodities, such as the New York Stock Exchange, investment companies, investment advisors, self-regulatory organizations subject to 15 U.S.C. 78s, and institutional managers as defined in 15 U.S.C. 78m.”).

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46. 50 FR 15868, 15883, Apr. 23, 1985.

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48. 68 FR 47221, 47223, Aug. 8, 2003.

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49. 75 FR 56997, Sept. 17, 2010.

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50. The revisions to § 4.5 proposed herein contain a reference to the definition of “bona fide hedging” as it is currently set forth in § 1.3(z) of the Commission's regulations. The Commission notes that rules proposed in the future regarding “bona fide hedging” may require the proposed revisions to be amended to reflect such new regulations.

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51. 75 FR 56997, 56998, Sept. 17, 2010.

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54. See, e.g., CFTC Staff Letters 10-02, Feb. 23, 2010; 10-07, Jan. 7, 2010; 10-08, Feb. 23, 2010; 10-09, Feb. 25, 2010; 10-11, Mar. 3, 2010; 10-18, Apr. 12, 2010, at: http://www.cftc.gov/LawRegulation/CFTCStaffLetters/LettersAcrchive/2010/index.htm.

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55. See 17 CFR 4.7(a)(3)(ix).

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56. See 57 FR 34853, Aug. 7, 1992.

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59. See 57 FR at 34855.

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60. See id. at 34855.

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61. See id.

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62. See 17 CFR 4.13(a)(3). CPOs claiming relief under § 4.13 are required to submit to special calls by the Commission to demonstrate eligibility, however, even if the Commission determined to make a special call, it would not be entitled to information regarding the pool's activities beyond those implicated by the claim for exemptive relief. Therefore, the efficacy of special calls as a tool to gain any information on par with that required by Part 4 of the Commission's regulations is limited.

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63. See id. 4.13(a)(4). Natural persons who are required to satisfy the portfolio requirement to be considered QEPs are not included in the persons to whom a pool operating under this exemption may be offered.

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64. See sections 403 and 404 of the Dodd-Frank Act. The Dodd-Frank Act does grant a few exemptions from the registration requirement. For example, section 407 provides that [venture capital] funds are not required to register with the SEC.

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66. See sections 403 and 404 of the Dodd-Frank Act for the general registration provisions for private fund investment advisers.

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68. Under the Commission's regulations, persons claiming such relief remain subject to special calls (17 CFR 4.5(c)(2)(ii), 4.13(c)(2), 4.14(a)(8)(iv)(B)) and remain subject to all requirements applicable to traders on our markets (i.e., large trader reporting, position limits, anti-fraud provisions, etc.).

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69. Since 2003, the Commission, through NFA, has received over 10,000 notices of claim for exemptive relief under §§ 4.13(a)(3) and (a)(4), which represent approximately 30,000 pools. The Commission has no simple and economical way of determining whether all of the approximately 10,000 entities filing the notices claiming relief remain going concerns. Therefore, it is difficult to estimate the number of exempt entities currently operating in the derivative markets.

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70. If the proposed repeal of §§ 4.13(a)(3) and (a)(4) is adopted, annual notices will still be required to be filed pursuant to §§ 4.13(a)(1) and (a)(2) under this proposal. Regardless of whether the repeal of §§ 4.13(a)(3) and (a)(4) is adopted, all CPOs will be required to file annual notices in order to claim exemptive relief under all provisions of § 4.13.

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71. See generally Title VII of the Dodd-Frank Act.

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72. See 17 CFR 4.24(b), 4.34(b).

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74. See 47 FR 18618, 18619, Apr. 30, 1982.

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75. See 47 FR at 18619-20.

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76. See 47 FR at 18620.

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80. See 7 U.S.C. 19(a); see also 5 U.S.C. 801(a)(1)(B)(i).

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