Federal Register, Volume 76 Issue 42 (Thursday, March 3, 2011)[Federal Register Volume 76, Number 42 (Thursday, March 3, 2011)]

[Proposed Rules]

[Pages 11701-11705]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2011-4657]

[[Page 11701]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD49

Amendments to Commodity Pool Operator and Commodity Trading

Advisor Regulations Resulting From the Dodd-Frank Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

———————————————————————–

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

is proposing to amend its regulations affecting the operations and

activities of commodity pool operators (CPOs) and commodity trading

advisors (CTAs) (Proposal) in order to have those regulations reflect

changes made to the Commodity Exchange Act (CEA) by the Dodd-Frank Wall

Street Reform and Consumer Protection Act (Dodd-Frank Act).

DATES: Comments must be received on or before May 2, 2011.

ADDRESSES: You may submit comments, identified by RIN 3038-AD49, 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, Commodity Futures

Trading Commission, 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.

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 is exempt from disclosure under the Freedom of

Information Act (FOIA),1 a petition for confidential treatment of the

exempt information may be submitted according to the procedures set

forth in Commission Regulation 145.9.2

—————————————————————————

1 5 U.S.C. 552.

2 The Commission’s regulations are found at 17 CFR Ch. I

(2010) and can be accessed through the Commission’s Web site, http://www.cftc.gov.

—————————————————————————

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, such as 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: Barbara S. Gold, Associate Director,

or Christopher W. Cummings, Special Counsel, Division of Clearing and

Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.

Telephone number: 202-418-5450 and electronic mail: [email protected] or

[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Act.3

Title VII of the Dodd-Frank Act 4 amended the CEA 5 to establish a

comprehensive new regulatory framework for swaps and security-based

swaps. The goal of this legislation was to reduce risk, increase

transparency, and promote market integrity within the financial system

by, among other things: (1) Providing for the registration and

comprehensive regulation of SDs and MSPs; (2) imposing clearing and

trade execution requirements on standardized derivative products; (3)

creating robust recordkeeping and real-time reporting regimes; and (4)

enhancing the Commission’s rulemaking and enforcement authorities with

respect to, among others, all registered entities and intermediaries

subject to the Commission’s oversight. Among the changes made by the

Dodd-Frank Act to the CEA were to include within the CPO definition the

operator of a collective investment vehicle that trades swaps, and to

include within the CTA definition a person who provides advice

concerning swaps.6

—————————————————————————

3 See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The text of the

Dodd-Frank Act may be accessed at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

4 Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

be cited as the “Wall Street Transparency and Accountability Act of

2010.”

5 7 U.S.C. 1 et seq. (2006). The CEA also can be accessed

through the Commission’s web site.

6 See Section 721(a) of the Dodd-Frank Act, which re-organized

(and in some cases amended) existing definitions in, and added new

definitions to, Section 1a of the CEA. The CPO and CTA definitions,

as amended, are to be codified respectively at CEA sections 1a(11)

and 1a(12).

—————————————————————————

Part 4 of the Commission’s regulations sets forth a comprehensive

regulatory scheme for the operations and activities of CPOs and CTAs.

It includes disclosure, reporting and recordkeeping requirements for

registered CPOs and CTAs, registration and compliance exemptions for

CPOs and CTAs, and other provisions, including anti-fraud provisions,

applicable to CPOs and CTAs regardless of registration status. Many of

the Part 4 regulations generally apply to CPOs and CTAs and, thus, they

will be applicable to CPOs and CTAs with respect to their swap

activities.7 In other instances, however, the text of certain Part 4

regulations is specific to activities involving futures contracts,

commodity options, and off-exchange retail foreign currency

transactions, and it does not include, refer to or otherwise take

account of swap activities.8 The Proposal is intended to clarify and

ensure that the requirements governing the operations and activities of

CPOs and CTAs continue to apply to these intermediaries in the context

of their involvement with swap transactions.9

—————————————————————————

7 See, e.g., Regulations 4.21 and 4.31, which respectively

require registered CPOs and CTAs to deliver a Disclosure Document to

prospective pool participants and clients. See also Regulation 4.41,

which proscribes fraudulent advertising by CPOs, CTAs, and their

principals.

8 See, e.g., Regulations 4.24(l) and 4.34(k), which currently

do not include “swap dealer” among the intermediaries for whom a

CPO or CTA must provide information concerning material litigation

in its Disclosure Document. See also Regulations 4.24(g) and

4.34(g), which do not specify any risks unique to trading swaps in

calling for disclosure of principal risk factors.

9 Part 4 applies to CPOs with respect to their activities

affecting pool participants and to CTAs with respect to their

activities affecting clients. Depending on the nature of its

activities, a CPO or CTA may also come within the definition of the

term “swap dealer” or “major swap participant” in new CEA

Section 1a(49) or 1a(33), respectively (added to the CEA by Section

721(a) of the Dodd-Frank Act). As directed by the Dodd-Frank Act,

the Commission has proposed new regulations that would establish

business conduct standards for swap dealers and major swap

participants. See 75 FR 80638 (Dec. 22, 2010). These new regulations

would apply to swap dealers and major swap participants with respect

to the counterparties with whom they transact swap business, and

would govern different activity than that to which the Part 4

regulations apply.

—————————————————————————

The Commission is proposing still other rulemakings in response to

the Dodd-Frank Act that could affect the Part 4 regulations.10 The

Commission intends to resolve any discrepancies that may arise between

any of these other rulemakings and the Proposal in

[[Page 11702]]

the course of finalizing its rulemaking under the Dodd-Frank Act.

—————————————————————————

10 See, e.g., Commodity Pool Operators and Commodity Trading

Advisors: Amendments to Compliance Obligations, 76 FR 7976 (Feb. 11,

2011); and Swap Data Recordkeeping and Reporting Requirements;

Proposed Rule, 75 FR 76574 (Dec. 8, 2010).

—————————————————————————

II. The Proposal

The Part 4 regulations employ the term “commodity interest”

throughout.11 This term currently is defined in Regulation 1.3(yy) to

mean:

—————————————————————————

11 See, e.g., Regulations 4.10(f) and (g), which respectively

define the terms “direct” and “trading program;”

4.12(b)(1)(i)(D), which provides an exemption from CPO registration

where, among other things, the pool at issue “will trade * * *

commodity interests in a manner solely incidental to its securities

trading activities;” 4.22(a)(1), which requires itemization in a

pool’s periodic Account Statement of certain information concerning

commodity interest trading; 4.23 and 4.33, which respectively

require CPOs and CTAs to make and keep certain books and records

relating to commodity interest trading; and 4.24 and 4.34, which

respectively require CPOs and CTAs to disclose specified information

with respect to “commodity interests.”

(1) Any contract for the purchase or sale of a commodity for

future delivery;

(2) Any contract, agreement or transaction subject to Commission

regulation under section 4c or 19 of the Act; and

(3) Any contract, agreement or transaction subject to Commission

jurisdiction under section 2(c)(2) of the Act.

To ensure that the Part 4 regulations adequately and accurately

encompass swap transactions, the Proposal would adopt in new Regulation

4.10(a) a definition of the term “commodity interest” to be employed

for the purposes of Part 4. That definition would include the text of

existing Regulation 1.3(yy) along with reference to the term “swap”

as defined in Section 1a(47) of the CEA.12

—————————————————————————

12 Section 721(a) of the Dodd-Frank Act added this new

definition to Section 1a of the CEA.

—————————————————————————

At various regulations throughout Part 4, the Proposal would insert

“swap,” “swap transaction” or a similar term. See the proposed

amendments to Regulations 4.23(a)(1), 4.24(g), (h)(1), and (i)(2) for

CPOs and Regulations 4.34(g) and 4.34(i)(2) for CTAs. For example,

regulation 4.23(a)(1) would be amended to include “swap type and

counterparty” in the itemized daily record that a CPO must make and

keep with respect to a pool’s commodity interest transactions.

At other Part 4 regulations, the Proposal would include the term

“swap dealer” among the persons for whom a CPO or CTA must provide

information in its Disclosure Document and a CPO must provide

information in a pool’s periodic Account Statement. See the proposed

amendments to Regulations 4.22(a)(3), 4.24(j)(1), (j)(3), (l)(1), and

(l)(2) for CPOs and Regulations 4.34(j)(1), (j)(3), (k)(1) and (k)(2)

for CTAs. For example, Regulations 4.24(j) and 4.34(j) would be amended

to include swap dealers in the group of persons as to which conflicts

of interest must be disclosed by CPOs and CTAs. Also, the Proposal

would include a registered swap dealer among the persons listed in

Regulation 4.7(a)(2) that do not have to satisfy a portfolio

requirement in order to be a qualified eligible person (QEP), such that

a CPO or CTA that has claimed relief under Regulation 4.7 may accept

the swap dealer as a pool participant or advisory client without regard

to the size of its investment portfolio. This would be consistent with

the current treatment of other financial intermediaries registered with

the Commission (such as futures commission merchants and retail foreign

exchange dealers) as QEPs under Regulation 4.7(a)(2).

Yet other proposed amendments would require a CPO or CTA to make

and keep certain books and records generated by the swap transactions

in which they engage on behalf of not only their pool participants and

clients, but also themselves. See the proposed amendments to

Regulations 4.23(a)(7) and (b)(1) for CPOs and Regulations 4.33(a)(6)

and (b)(1) for CTAs. The proposed amendments to Regulations 4.23(a)(7)

and 4.33(a)(6) would require CPOs and CTAs to retain each

acknowledgment of a swap transaction received from a swap dealer. The

proposed amendments to Regulations 4.23(b)(1) and 4.33(b)(1) would make

clear that if a CPO or CTA was a counterparty to a swap transaction,

then it would be subject to the swap data recordkeeping and reporting

requirements of Part 45.13

—————————————————————————

13 See Proposed Regulation 45.2, 75 FR 76574. In this regard,

the Commission notes that it intends to propose regulations

concerning recordkeeping and reporting requirements for “pre-

enactment swaps” and “transition swaps,” as those terms will be

defined in that proposal. The Commission further intends to provide

a cross-reference in Regulations 4.23(b)(1) and 4.33(b)(1) to any

such requirements it may adopt.

—————————————————————————

The Proposal would also amend Regulation 4.30. Currently, this

regulation provides:

No commodity trading advisor may solicit, accept or receive from

an existing or prospective client funds, securities or other

property in the trading advisor’s name (or extend credit in lieu

thereof) to purchase, margin, guarantee or secure any commodity

interest of the client; Provided, however, That this section shall

not apply to a futures commission merchant that is registered as

such under the Act or to a leverage transaction merchant that is

registered as a commodity trading advisor under the Act or to a

retail foreign exchange dealer that is registered as such under the

Act.

Because swap dealers will generally fall within the statutory

definition of CTA, and because a swap dealer engaging in uncleared swap

transactions may be accepting funds or other property from its

counterparties as variation and initial margin payments,14 the

Commission is proposing to amend Regulation 4.30 by excluding a

registered swap dealer from the regulation’s prohibition in connection

with a swap that is not cleared through a derivatives clearing

organization. This action would result in four distinct categories of

intermediaries being excluded from the operative requirements of

Regulation 4.30. Accordingly, the Commission also is proposing to amend

the regulation by reorganizing its text where applicable to these

exclusions.

—————————————————————————

14 The Commission intends to address the circumstances in

which non-bank swap dealers may be required or permitted to accept

margin payments in uncleared swap transactions in a future proposed

rulemaking. Accordingly, this proposed amendment to Regulation 4.30

should not be interpreted to impose or authorize any such margin

requirements.

—————————————————————————

Finally, the Proposal would delete Regulation 4.32. This regulation

deals with trading by a registered CTA on or subject to the rules of a

derivatives transaction execution facility (DTEF) for non-institutional

numbers. Section 734(a) of the Dodd-Frank Act repeals Section 5a of the

CEA, which is the section establishing and providing for the regulation

of DTEFs. Accordingly, because subsequent to the effective date of the

Dodd-Frank Act 15 Regulation 4.32 will no longer have a statutory

basis or purpose, the Proposal would remove and reserve Regulation

4.32.

—————————————————————————

15 Subject to certain limited exceptions, the provisions of

the Dodd-Frank Act become effective 360 days after its enactment

(Jul. 21, 2010).

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The Commission requests comment on the foregoing. In addition, the

Commission seeks comment on any other amendments it should make to the

Part 4 regulations to clarify and ensure that that the requirements

governing the operations and activities of CPOs and CTAs continue to

apply to these intermediaries in the context of their involvement with

swap transactions.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) 16 requires that

agencies, in proposing rules, consider the impact of those rules on

small businesses.17 The Commission previously has established certain

definitions of “small entities” to be used by the Commission in

evaluating the impact of its rules on such entities in accordance with

the

[[Page 11703]]

RFA.18 With respect to CPOs, the Commission previously has determined

that a CPO is a small entity for the purpose of the RFA if it meets the

criteria for an exemption from registration under Regulation

4.13(a)(2).19 Thus, because the Proposal applies to registered CPOs,

the RFA is not applicable to it. As for CTAs, the Commission previously

has stated that it would evaluate within the context of a particular

rule proposal whether all or some affected CTAs would be considered to

be small entities and, if so, the economic impact on them of the

particular rule. In this regard, the Commission notes that the Proposal

applies to registered CTAs. Moreover, the Proposal would not have a

significant economic impact on any CPO or CTA who would be affected

thereby, because it would merely bring within the current Part 4

regulatory structure of disclosure, reporting and recordkeeping

information with respect to swap activities. It would not impose any

additional operative requirements or otherwise direct or confine the

activities of CPOs and CTAs.20 Accordingly, the Chairman, on behalf

of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that

the Proposal would not have a significant economic impact on a

substantial number of small entities. However, the Commission invites

the public to comment on this certification.

—————————————————————————

16 5 U.S.C. 601 et seq.

17 By its terms, the RFA does not apply to “individuals.”

See 48 FR 14933, n. 115 (Apr. 6, 1983).

18 See 47 FR 18618 (Apr. 30, 1982).

19 Id. at 18619-20.

20 While the Proposal would amend Regulation 4.30, which

concerns prohibited activities by a CTA regardless of registration

status, that amendment would extend to persons registered as a swap

dealer the existing exclusion from the regulation’s scope.

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B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) 21 imposes certain

requirements on Federal agencies (including the Commission) in

connection with their conducting or sponsoring any collection of

information as defined by the PRA. The Proposal would not, if adopted,

require any new collection of information from any entity that would be

subject to the affected regulations. Accordingly, for purposes of the

PRA, the Chairman, on behalf of the Commission, certifies that the

proposed amendments to Part 4, if adopted, would not impose any new

reporting or recordkeeping requirements.

—————————————————————————

21 44 U.S.C. 3501 et seq.

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C. Cost-Benefit Analysis

Section 15(a) of the CEA 22 requires the Commission to consider

the costs and benefits of its actions before issuing a rulemaking under

the CEA. By its terms, Section 15(a) does not require the Commission to

quantify the costs and benefits of a rule or to determine whether the

benefits of the rulemaking outweigh its costs; rather, it simply

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 five broad areas of market and public

concern: (1) Protection of market participants and the public; (2)

efficiency, competitiveness and financial integrity of futures markets;

(3) price discovery; (4) sound risk management practices; and (5) other

public interest considerations. The Commission may in its discretion

give greater weight to any one of the five enumerated areas and could

in its discretion determine that, notwithstanding its costs, a

particular rule is necessary or appropriate to protect the public

interest or to effectuate any of the provisions or accomplish any of

the purposes of the CEA.

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22 7 U.S.C. 19(a).

—————————————————————————

Summary of Proposed Amendments. As is explained above, the proposed

amendments to Part 4 would ensure that the Commission’s regulations

governing the operations and activities of CPOs and CTAs reflect

changes made to the CEA by the Dodd-Frank Act by, e.g., including swap

dealers among the intermediaries for whom CPOs and CTAs must disclose

information to prospective pool participants and clients, and swap

transaction confirmations among the books and records that CPOs and

CTAs must make and keep.

Costs. With respect to costs, the Commission has determined that

the costs of the Proposal would not be significant. This is because the

Proposal would simply conform the language of the existing Part 4

regulatory scheme to take into account the changes made to the

Commission’s overall regulatory scheme as a result of the Dodd-Frank

Act. There will be additional disclosure and recordkeeping requirements

on CPOs and CTAs as a result of the Proposal. The information required

for compliance should be readily available, with minimal administrative

burdens, to CPOs and CTAs.

Benefits. With respect to benefits, the Commission has determined

that the benefits of the Proposal would be significant. This is because

it would enhance the customer protections currently provided under Part

4 by increasing the transparency of swap activities by CPOs and CTAs to

their pool participants and clients. This will be accomplished by

including information on swap activities in the disclosure, reporting

and recordkeeping scheme already existing under Part 4.

Public Comment. The Commission invites public comment on its cost-

benefit considerations. Commenters are also invited to submit any data

or other information that they may have quantifying or qualifying the

costs and benefits of the Proposal with their comment letters.

List of Subjects in 17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Customer protection, Reporting and

recordkeeping requirements, Swaps.

For the reasons presented above, the Commission proposes to amend

Chapter I of Title 17 of the Code of Federal Regulations as follows:

PART 4–COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

1. The authority citation for part 4 is amended to read as follows:

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

as amended by Title VII of the Dodd-Frank Wall Street Reform and

Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (Jul. 21,

2010).

2. Section 4.7 is amended by adding paragraph (a)(2)(i)(C) to read

as follows:

Sec. 4.7 Exemption from certain part 4 requirements for commodity

pool operators with respect to offerings to qualified eligible persons

and for commodity trading advisors with respect to advising qualified

eligible persons.

* * * * *

(a) * * *

(2) * * *

(i) * * *

(C) A swap dealer registered pursuant to section 4s(a)(1) of the

Act, or a principal thereof;

* * * * *

3. Section 4.10 is amended by adding paragraph (a) to read as

follows:

Sec. 4.10 Definitions.

* * *

(a) Commodity interest means:

(1) Any contract for the purchase or sale of a commodity for future

delivery;

(2) Any contract, agreement or transaction subject to Commission

regulation under section 4c or 19 of the Act;

(3) Any contract, agreement or transaction subject to Commission

jurisdiction under section 2(c)(2) of the Act; and

[[Page 11704]]

(4) A swap as defined under section 1a(47) of the Act and any

Commission regulations implemented thereunder.

* * * * *

4. Section 4.22 is amended by revising paragraph (a)(3) to read as

follows:

Sec. 4.22 Reporting to pool participants.

(a) * * *

(3) The Account Statement must also disclose any material business

dealings between the pool, the pool’s operator, commodity trading

advisor, futures commission merchant, retail foreign exchange dealer,

swap dealer, or the principals thereof that previously have not been

disclosed in the pool’s Disclosure Document or any amendment thereto,

other Account Statements or Annual Reports.

* * * * *

5. Section 4.23 is amended by:

a. Revising paragraphs (a)(1) and (a)(7); and

b. Revising paragraph (b)(1), to read as follows:

Sec. 4.23 Recordkeeping.

* * * * *

(a) * * *

(1) An itemized daily record of each commodity interest transaction

of the pool, showing the transaction date, quantity, commodity

interest, and, as applicable, price or premium, delivery month or

expiration date, whether a put or a call, strike price, underlying

contract for future delivery or underlying physical, swap type and

counterparty, the futures commission merchant and/or retail foreign

exchange dealer carrying the account and the introducing broker, if

any, whether the commodity interest was purchased, sold (including, in

the case of a retail forex transaction, offset), exercised, expired

(including, in the case of a retail forex transaction, whether it was

rolled forward), and the gain or loss realized.

* * * * *

(7) Copies of each confirmation or acknowledgment of a commodity

interest transaction of the pool, and each purchase and sale statement

and each monthly statement for the pool received from a futures

commission merchant or retail foreign exchange dealer or swap dealer.

* * * * *

(b) * * *

(1) An itemized daily record of each commodity interest transaction

of the commodity pool operator and each principal thereof, showing the

transaction date, quantity, commodity interest, and, as applicable,

price or premium, delivery month or expiration date, whether a put or a

call, strike price, underlying contract for future delivery or

underlying physical, the futures commission merchant or retail foreign

exchange dealer carrying the account and the introducing broker, if

any, whether the commodity interest was purchased, sold, exercised, or

expired, and the gain or loss realized; Provided, however, that if the

pool operator is a counterparty to a swap, it must comply with the swap

data recordkeeping and reporting requirements of part 45 of this

chapter.

* * * * *

6. Section 4.24 is amended by:

a. Revising paragraph (g);

b. Revising paragraph (h)(1)(i);

c. Revising paragraph (i)(2)(xii);

d. Revising paragraphs (j)(1)(vi) and (j)(3); and

e. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and

(l)(2)(i), to read as follows:

Sec. 4.24 General disclosures required.

* * * * *

(g) Principal risk factors. A discussion of the principal risk

factors of participation in the offered pool. This discussion must

include, without limitation, risks relating to volatility, leverage,

liquidity, counterparty creditworthiness, as applicable to the types of

trading programs to be followed, trading structures to be employed and

investment activity (including retail forex and swap transactions)

expected to be engaged in by the offered pool.

(h) * * *

(1) * * *

(i) The approximate percentage of the pool’s assets that will be

used to trade commodity interests, securities and other types of

interests, categorized by type of commodity or market sector, type of

swap, type of security (debt, equity, preferred equity), whether traded

or listed on a regulated exchange market, maturity ranges and

investment rating, as applicable;

* * * * *

(i) * * *

(2) * * *

(xii) Any costs or fees included in the spread between bid and

asked prices for retail forex or, if known, swap transactions; and

* * * * *

(j) * * *

(1) * * *

(vi) Any other person providing services to the pool, soliciting

participants for the pool, or acting as a counterparty to the pool’s

retail forex transactions, acting as a swap dealer with respect to the

pool, or acting as a counterparty to the pool’s swap transactions.

* * * * *

(3) Included in the description of such conflicts must be any

arrangement whereby a person may benefit, directly or indirectly, from

the maintenance of the pool’s account with the futures commission

merchant and/or retail foreign exchange dealer and/or from the

maintenance of the pool’s positions with a swap dealer, or from the

introduction of the pool’s account to a futures commission merchant

and/or retail foreign exchange dealer and/or swap dealer by an

introducing broker (such as payment for order flow or soft dollar

arrangements) or from an investment of pool assets in investee pools or

funds or other investments.

* * * * *

(l) * * *

(1) * * *

(iii) The pool’s futures commission merchants and/or retail foreign

exchange dealers and/or swap dealers and its introducing brokers, if

any.

(2) With respect to a futures commission merchant and/or retail

foreign exchange dealer and/or swap dealer or an introducing broker, an

action will be considered material if:

(i) The action would be required to be disclosed in the notes to

the futures commission merchant’s, retail foreign exchange dealer’s,

swap dealer’s or introducing broker’s financial statements prepared

pursuant to generally accepted accounting principles;

* * * * *

7. Section 4.30 is revised to read as follows:

Sec. 4.30 Prohibited activities.

(a) Except as provided in paragraph (b) of this section, no

commodity trading advisor may solicit, accept or receive from an

existing or prospective client funds, securities or other property in

the trading advisor’s name (or extend credit in lieu thereof) to

purchase, margin, guarantee or secure any commodity interest of the

client.

(b) The prohibition in paragraph (a) of this section shall not

apply to:

(1) A futures commission merchant that is registered as such under

the Act;

(2) A leverage transaction merchant that is registered as a

commodity trading advisor under the Act;

(3) A retail foreign exchange dealer that is registered as such

under the Act; or

(4) A swap dealer that is registered as such under the Act, with

respect to funds, securities or other property accepted to purchase,

margin, guarantee

[[Page 11705]]

or secure any swap that is not cleared through a derivatives clearing

organization.

Sec. 4.32 [Removed and Reserved]

7. Section 4.32 is removed and reserved.

8. Section 4.33 is amended by

a. Revising paragraph (a)(6); and

b. Revising paragraph (b)(1), to read as follows:

Sec. 4.33 Recordkeeping.

* * * * *

(a) * * *

(6) Copies of each confirmation or acknowledgment of a commodity

interest transaction, and each purchase and sale statement and each

monthly statement received from a futures commission merchant or a

retail foreign exchange dealer or a swap dealer.

* * * * *

(b) * * *

(1) An itemized daily record of each commodity interest transaction

of the commodity trading advisor, showing the transaction date,

quantity, commodity interest, and, as applicable, price or premium,

delivery month or expiration date, whether a put or a call, strike

price, underlying contract for future delivery or underlying physical,

the futures commission merchant and/or retail foreign exchange dealer

carrying the account and the introducing broker, if any, whether the

commodity interest was purchased, sold (including, in the case of a

retail forex transaction, offset), exercised, expired (including, in

the case of a retail forex transaction, whether it was rolled forward),

and the gain or loss realized; Provided, however, that if the trading

advisor is a counterparty to a swap, it must comply with the swap data

recordkeeping and reporting requirements of part 45 of this chapter.

* * * * *

9. Section 4.34 is amended by

a. Revising paragraph (g);

b. Revising paragraph (i)(2);

c. Revising paragraph (j)(3); and

d. Revising paragraphs (k)(1)(iii), (k)(2) introductory text and

(k)(2)(i), to read as follows:

Sec. 4.34 General disclosures required.

* * * * *

(g) Principal risk factors. A discussion of the principal risk

factors of this trading program. This discussion must include, without

limitation, risks due to volatility, leverage, liquidity, and

counterparty creditworthiness, as applicable to the trading program and

the types of transactions and investment activity expected to be

engaged in pursuant to such program (including retail forex and swap

transactions, if any).

* * * * *

(i) * * *

(2) Where any fee is determined by reference to a base amount

including, but not limited to, “net assets,” “gross profits,” “net

profits,” “net gains,” “pips” or “bid-asked spread,” the trading

advisor must explain how such base amount will be calculated. Where any

fee is based on the difference between bid and asked prices on retail

forex or swap transactions, the trading advisor must explain how such

fee will be calculated;

* * * * *

(j) * * *

(3) Included in the description of any such conflict must be any

arrangement whereby the trading advisor or any principal thereof may

benefit, directly or indirectly, from the maintenance of the client’s

commodity interest account with a futures commission merchant and/or

retail foreign exchange dealer, and/or from the maintenance of the

client’s positions with a swap dealer or from the introduction of such

account through an introducing broker (such as payment for order flow

or soft dollar arrangements).

(k) * * *

(1) * * *

(iii) Any introducing broker through which the client will be

required to introduce its account to the futures commission merchant

and/or retail foreign exchange dealer and/or swap dealer.

(2) With respect to a futures commission merchant, retail foreign

exchange dealer, swap dealer or introducing broker, an action will be

considered material if:

(i) The action would be required to be disclosed in the notes to

the futures commission merchant’s, retail foreign exchange dealer’s,

swap dealer’s or introducing broker’s financial statements prepared

pursuant to generally accepted accounting principles;

* * * * *

Issued in Washington, DC, on February 24, 2011, by the

Commission.

David A. Stawick,

Secretary of the Commission.

Appendices to Amendments to Commodity Pool Operator and Commodity

Trading Advisor Regulations Resulting from the Dodd-Frank Act–

Commission Voting Summary and Statements of Commissioners

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

Federal Regulations.

Appendix 1–Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Dunn,

Sommers, Chilton and O’Malia voted in the affirmative; no

Commissioner voted in the negative.

Appendix 2–Statement of Chairman Gary Gensler

I support the proposed rule that will amend certain provisions

of Part 4 of the Commission’s regulations regarding the operations

and activities of commodity pool operators (CPOs) and commodity

trading advisors (CTAs). The proposed amendments would ensure that

CFTC regulations with regard to CPOs and CTAs reflect changes made

to the Commodity Exchange Act by the Dodd-Frank Act. Consistent with

the Dodd-Frank Act revisions to the definitions of CPOs and CTAs to

include pools involved in swaps and advising on swaps, the proposed

amendments will enhance current customer protections by increasing

the transparency of swap activities by CPOs and CTAs to their pool

participants and clients. The proposed rule would require that this

information be included in the disclosure, reporting and

recordkeeping scheme that currently exists for CPOs and CTAs under

Part 4.

[FR Doc. 2011-4657 Filed 3-2-11; 8:45 am]

BILLING CODE P

Last Updated: March 3, 2011