Federal Register, Volume 77 Issue 37 (Friday, February 24, 2012)[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]

[Proposed Rules]

[Pages 11345-11352]

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

[FR Doc No: 2012-3388]

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

Proposed Rules

[[Page 11345]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

Harmonization of Compliance Obligations for Registered Investment

Companies Required To Register as Commodity Pool Operators

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission is proposing

amendments to its regulations regarding requirements applicable to

investment companies registered under the Investment Company Act of

1940 (“registered investment companies”) whose advisors will be

subject to registration as commodity pool operators due to changes that

the Commission is adopting.

DATES: Comments should be received on or before April 24, 2012.

ADDRESSES: Comments may be submitted by any of the following methods:

Agency Web site, via its Comments Online Process: Comments

may be submitted to http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx. Follow the instructions for submitting

comments on the Web site.

Mail: David A. Stawick, Secretary, 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.

“Regulation 4.5 Harmonization” must be in the subject

field of comments submitted electronically, and clearly indicated 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 www.cftc.gov. You should submit only information that you

wish to make available publicly. If you wish the CFTC to consider

information that may be exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the established procedures in

CFTC Regulation 145.9 (17 CFR 145.9).

The CFTC reserves the right, but shall have no obligation,

to: review, prescreen, 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 which 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: Kevin P. Walek, Assistant Director,

Telephone: (202) 418-5463, Email: [email protected], Amanda Lesher Olear,

Special Counsel, Telephone: (202) 418-5283, Email: [email protected], or

Michael Ehrstein, Attorney-Advisor, Telephone: 202-418-5957, Email:

[email protected], Division of Swap Dealer and Intermediary Oversight,

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory and Regulatory Background

The Commodity Exchange Act (“CEA”) 1 provides the Commission

with the authority to register Commodity Pool Operators (“CPOs”) and

Commodity Trading Advisors (“CTAs”),2 to exclude any entity from

registration as a CPO or CTA,3 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.” 4 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].”5 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.” 6 It

is pursuant to this authority that the Commission has promulgated the

exclusions from the definition of CPO that are delineated in Sec.

4.5.7

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1 7 U.S.C. 1, et seq.

2 7 U.S.C. 6m.

3 7 U.S.C. 1a(11) and 1a(12).

4 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.

5 7 U.S.C. 12a(5).

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

7 17 CFR 4.5. See 68 FR 47231 (Aug. 8, 2003).

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B. Reinstatement of Trading and Marketing Criteria in Sec. 4.5

In February 2011, the Commission proposed to revise the

requirements for determining which persons should be required to

register as a CPO under Sec. 4.5.8 The Commission is adopting the

proposed changes to Sec. 4.5, with some minor modifications, and is

proposing certain provisions to facilitate compliance by registered

investment companies with the Commission’s disclosure, reporting, and

recordkeeping requirements. The proposed amendments that follow are

based on the consideration of the comments that were submitted on the

previously proposed amendments to Sec. 4.5, information provided

during a staff roundtable on July 16, 2011 (“Roundtable”),9 and

meetings with interested parties.10

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8 76 FR 7976 (Feb. 12, 2011).

9 See Notice of CFTC Staff Roundtable Discussion on Proposed

Changes to Registration and Compliance Regime for Commodity Pool

Operators and Commodity Trading Advisors, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.

10 See generally, http://comments.cftc.gov/PublicComments/CommentList.aspx?id=973.

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C. Proposed Harmonization Provisions

Many commenters noted that sponsors of registered investment

companies which also would be required to register as CPOs would be

subject to duplicative, inconsistent, and possibly conflicting

disclosure and reporting requirements. In comment letters, meetings,

and at the Roundtable, a number of suggestions were made regarding the

manner in which the Securities and Exchange Commission (“SEC”) and

CFTC requirements could be harmonized. Specific areas identified by the

commenters as needing harmonization include: the timing of delivery of

Disclosure Documents to prospective participants; the signed

acknowledgement requirement for receipt of Disclosure Documents; the

cycle for updating Disclosure Documents; The timing of financial

reporting to participants; the requirement that a CPO maintain its

books and records on site; the required disclosure of fees; the

required disclosure of past performance; the inclusion of mandatory

certification language; and the SEC-permitted use of a summary

prospectus of open-ended registered investment companies.

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Several commenters suggested that the Commission make available

relief, with respect to document and report distribution, similar to

that which it has recently adopted with respect to exchange-traded

funds (“ETFs”).11 Other commenters suggested that where

requirements are inconsistent, the Commission should defer to SEC

requirements. A few commenters made recommendations about the treatment

of specific disclosures, such as presenting both SEC and CFTC-required

fee information and presenting certain performance information required

by the CFTC in the Statement of Additional Information (“SAI”). At

least one commenter noted that registered investment companies should

be required to comply with all disclosure and other requirements

applicable to registered CPOs.

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11 76 FR 28641 (May 18, 2011).

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The Commission has carefully considered the comments regarding

harmonization and has determined to propose the following exemptive

provisions that would be available to advisors of registered investment

companies who are required to register as CPOs.

1. Delivery of Disclosure Documents and Periodic Reports

Part 4 of the Commission’s regulations impose certain risk

disclosure, reporting, and recordkeeping obligations on registered

CPOs. Section 4.21 12 of the Commission’s regulations requires that

each CPO registered or required to be registered with the Commission

deliver a Disclosure Document prepared in accordance with Sec. Sec.

4.24 and 4.25,13 which set forth the specific information required to

be disclosed, including the past performance of the offered pool to

each prospective participant in a pool that it operates or intends to

operate. Section 4.21 further provides that the CPO may not accept or

receive funds, securities, or other property from a prospective

participant unless the CPO first receives from the prospective

participant a signed and dated acknowledgment stating that the

prospective participant received a Disclosure Document for the pool.

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12 17 CFR 4.21.

13 17 CFR 4.24 and 4.25.

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With respect to a CPO’s reporting obligations, Sec. 4.22 14

requires that each CPO registered or required to be registered

periodically distribute to each participant in each pool that it

operates an Account Statement presented in the form of a Statement of

Income (Loss) and a Statement of Changes in Net Asset Value for the

prescribed period. The Account Statement must be distributed monthly

for pools with net assets of more than $500,000, and otherwise at least

quarterly.15 The financial statements must be presented in accordance

with generally accepted accounting principles, consistently

applied.16 With respect to a CPO’s recordkeeping obligations, Sec.

4.23 17 of the Commission’s regulations requires, in relevant part,

that each CPO who is registered or required to be registered must make

and keep the books and records specified in the regulation “at its

main business office.”

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14 17 CFR 4.22.

15 17 CFR 4.22(b).

16 17 CFR 4.22(a).

17 17 CFR 4.23.

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2. Comments Received Regarding Recently Adopted Exemptive Relief for

Exchange Traded Funds

In response to the Commission’s proposal to amend Sec. 4.5,

several commenters suggested that the Commission consider extending the

exemptive relief that it recently adopted for CPO’s operating ETFs

under Sec. 4.12(c),18 which makes available to such CPOs specified

relief from the Disclosure Document delivery and acknowledgment

requirements of Sec. 4.21, the monthly Account Statement delivery

requirement of Sec. 4.22, and the requirement to keep the CPO’s books

and records at its main business address in Sec. 4.23. The relief

permits CPOs to comply with the Disclosure Document and account

statement delivery requirements by making such documents available on

their web sites, and to maintain their records with specified third

parties, on the condition that certain information and representations

are filed with the CPO’s notice claiming relief.19 The criteria for

claiming this relief are that: (1) The units of participation in the

pool will be offered and sold pursuant to an effective registration

statement under the Securities Act of 1933,20 and (2) the units will

be listed for trading on a national securities exchange registered as

such under the Securities Exchange Act of 1934.21 In its release

proposing ETF relief, the Commission noted that historically, ETFs have

been investment companies registered under the Investment Company Act

of 1940 either as unit investment trusts or as open-end investment

companies.22 The Commission did not, however, make such registration

a condition of relief. Commenters noted that, like ETFs, the

distribution and subscription mechanisms for registered investment

companies would make it difficult for them to meet the Disclosure

Document delivery and acknowledgment requirements under the

Commission’s regulations. Commenters and Roundtable panelists also

noted that the records of registered investment companies often are

maintained by third parties, such as administrators, making it

difficult for registered investment companies to comply with the

requirement of Sec. 4.23 that a pool’s books and records be maintained

at the CPO’s main business office.23 To address these concerns, the

Commission is proposing to add an alternative criterion under Sec.

4.12(c) that will permit registered investment companies to claim the

disclosure, reporting, and recordkeeping relief currently available to

ETFs.

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18 17 CFR 4.12(c).

19 Id.

20 15 U.S.C. 77a, et seq.

21 15 U.S.C. 78a, et seq.

22 75 FR 54794, 54795 (Sept. 9, 2010).

23 17 CFR 4.23.

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Several commenters further requested that the Commission extend the

same relief it made available to operators of ETFs for delivery of

required disclosures and periodic reports to CPOs of publicly offered

commodity pools, noting that such offerings are regulated by the CFTC,

SEC, National Futures Association (“NFA”), Financial Industry

Regulatory Authority (“FINRA”), and each state in which they are

offered. The Commission agrees that for purposes of the exemption,

there is no useful distinction between publicly offered pools whose

units are listed for trading on a national securities exchange, and

those which are not. Therefore, the Commission is proposing to amend

Sec. 4.12(c) such that the CPO of any pool whose units of

participation will be offered and sold pursuant to an effective

registration statement under the Securities Act of 1933 may claim the

relief from the delivery and acknowledgement requirements under Sec.

4.21, certain periodic financial reporting obligations under Sec.

4.22, and the requirement that records be maintained at the CPO’s main

office under Sec. 4.23, available under Sec. 4.12(c) with respect to

that pool.

3. Content and Timing of Disclosure Documents

Many of the disclosures required by part 4 of the Commission’s

regulations are consistent with SEC-required disclosures. Where CFTC

requirements differ slightly, the Commission believes that CFTC-

required disclosures can be presented concomitant with SEC-required

information in a registered investment company’s prospectus. To

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address the few instances where conflicts in disclosure have been

identified, the Commission is proposing relief to harmonize these

requirements. With respect to performance, Sec. 4.25(b) specifies that

if the pool has traded commodity interests for three years or more,

during which at least seventy-five percent of its contributions have

been made by persons unaffiliated with the CPO, CTAs, or their

principals, the only required performance is that of the offered

pool.24 If a pool has not operated for at least three years, the CPO

must present the performance of other pools and accounts enumerated in

Sec. Sec. 4.25(c)(2)-(5).25 The Commission is proposing that the

performance of other pools and accounts required to be disclosed by

Sec. Sec. 4.25(c)(2)-(5) may be presented in the registered investment

company’s SAI. The Commission notes that SEC requirements may conflict

with CFTC requirements with respect to reporting past performance and

accordingly seeks comment below.26 In addition, the Commission is

proposing that, in lieu of the standard cautionary statement prescribed

by Sec. 4.24(a),27 the cover page of the registered investment

company’s prospectus may contain a statement that combines the language

required by both Sec. 4.24(a) and Rule 481(b)(1) under the Securities

Act of 1933.28 With respect to the break-even point29 required by

Sec. 4.24(d)(5),30 the Commission will consider the forepart of the

document to be the section immediately following all disclosures

required by SEC Form N-1A 31 to be included in the summary

prospectus, or otherwise, for registered investment companies using

Form N-2, in the forepart of the prospectus. Any other information

required to be presented in the forepart of the document by Sec.

4.24(d), but that is not included in the summary section of the

prospectus for open-ended registered investment companies, may also be

presented immediately following the summary section of the prospectus

for open-ended funds, or otherwise, for registered investment companies

using Form N-2, in the forepart of the prospectus. Finally, with

respect to disclosure of fees and expenses required by Sec. 4.24(i),

any such expenses that are not included in the fee table required by

Item 3 of Form N-1A or Item 3 of Form N-2 would be disclosed in the

prospectus, along with the tabular presentation of the calculation of

the pool’s break-even point required by Sec. 4.24(i)(6). The

Commission continues to believe that the inclusion of the tabular

presentation of the calculation of the break-even point consistent with

the Commission’s regulations is a necessary disclosure because, among

other requirements, it mandates a greater level of detail regarding

brokerage fees and does not assume a specific rate of return. The

Commission believes that this results in meaningful disclosure through

the break-even analysis and facilitates an investor’s assessment of a

registered investment company that uses derivatives.

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24 17 CFR 4.25(b).

25 17 CFR 4.25(c)(2)-(5).

26 The Commission has had preliminary discussions with SEC

staff on this issue. The SEC staff stated that it would consider

requests for no-action relief regarding the performance

presentations, if necessary and appropriate.

27 Section 4.24(a) of the Commission’s regulations requires

that each disclosure document prepared and distributed by registered

CPOs prominently display the following prescribed cautionary

statement on its cover: THE COMMODITY FUTURES TRADING COMMISSION HAS

NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE

COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE

DOCUMENT. 17 CFR 4.24(a).

28 17 CFR 230.481.

29 Section 4.10(j) of the Commission’s regulations defines the

“break-even point” as “the trading profit that a pool must

realize in the first year of a participant’s investment to equal all

fees and expenses such that such participant will recoup its initial

investment, as calculated pursuant to rules promulgated by a

registered futures association pursuant to section 17(j) of the

Act.” 17 CFR 4.10(j)(1). The break-even point must be expressed in

terms of dollars and as a percentage of the minimum unit of initial

investment. 17 CFR 4.10(j)(2). It must also assume the redemption of

the investment as of the close of the first year of investment. Id.

30 17 CFR 4.24(d)(5).

31 17 CFR 274.11a.

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Commenters noted that the CFTC’s and SEC’s timing requirements for

Disclosure Document updates were inconsistent. Section 4.26 of the

Commission’s regulations specifies that a Disclosure Document may be

used for nine months from the date of the document before a new

Disclosure Document must be prepared and filed. Conversely, provisions

of the securities laws effectively require an annual prospectus update.

Section 10(a)(3) of the Securities Act of 1933 specifies that “when a

prospectus is used more than nine months after the effective date of

the registration statement, the information contained therein shall be

as of a date not more than sixteen months prior to such use * * *.”

32 Because financial statements are prepared annually as of the end

of the investment company’s fiscal year, and information from the

financial statements is included in the prospectus, the operation of

Section 10(a)(3) results in an annual prospectus updating cycle. To

address this inconsistency, the Commission is proposing to require that

CPOs and CTAs file updates of all Disclosure Documents twelve months

from the date of the document.

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32 15 U.S.C. 77j.

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Some commenters, including NFA, raised an operational issue in

connection with Disclosure Document amendments filed pursuant to Sec.

4.26(c).33 NFA noted that CPOs filing amended Disclosure Documents

cannot distribute the document until NFA accepts the disclosure

document. NFA suggested that the Commission consider whether it may be

appropriate to allow CPOs of pools that provide for daily liquidity to

post the Disclosure Document with the highlighted changes on their

internet web sites for pool participants at the same time the CPO files

with NFA, with the final document posted upon completion of the NFA

review process. The Commission notes that Sec. 4.26(d)(2) currently

permits CPOs to provide Disclosure Document updates to participants at

the same time such updates are filed with NFA. Therefore, if the

proposed relief is adopted by the Commission, CPOs claiming such relief

may follow the procedure recommended by NFA with no additional action

by the Commission.

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33 17 CFR 4.26.

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4. Reports–Timing and Certification

Section 4.22(a) requires CPOs to provide periodic reports,

generally monthly, to participants in the pools that they operate. SEC

regulations require that registered investment companies provide

semiannual reports to shareholders. Regulations of both commissions

require provision of annual financial statements to commodity pool

participants and investment company shareholders, respectively.34

Some commenters noted that the requirement to prepare and provide

monthly account statements would be burdensome because registered

investment companies are not required to do so under SEC regulations,

and suggested that the Commission accept the reporting required under

securities laws. The Commission has carefully considered these comments

and determined not to propose relief regarding the content or timing of

the monthly account statement, as the information required to prepare

the account statement should be readily available to the operator of an

investment vehicle maintaining records of its trading activity and

other operations in accordance with recordkeeping requirements under

the CEA and applicable securities laws. Registered investment companies

will

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be able to satisfy the requirement to deliver account statements to

participants by making such statements available on their internet Web

sites, thereby substantially reducing any burden under Sec. 4.22(a).

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34 17 CFR 4.22 and 270.30e-1.

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One commenter noted that the language required by the CFTC and the

SEC in their respective periodic and annual report certifications is

not identical, and encouraged the Commission to work with the SEC

either to accept one language in lieu of the other or to develop agreed

upon language for these certifications. Section 4.22(h) requires the

individual making the oath or affirmation on behalf of the CPO to

affirm that, to the best of his or her knowledge and belief, the

information contained in the document is accurate and complete. The

first item in the certification required by SEC Form N-CSR is: “Based

on my knowledge, this report does not contain any untrue statement of a

material fact or omit to state a material fact necessary to make the

statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered

by this report.” The certification under Sec. 4.22(h) must be

included with the periodic and annual reports provided to participants

and with the annual report filed with NFA. The certification required

by SEC Form N-CSR is made available through EDGAR, but does not have to

be provided to shareholders. Because the Form N-CSR certification

includes language that is substantively consistent with the

certification required under Sec. 4.22(h), the Commission will accept

the SEC’s certification as meeting the requirement under Sec. 4.22(h),

as long as such certification is part of the Form N-CSR filed with the

SEC.

The Commission seeks comment on the proposed harmonization

provisions. In particular, do any provisions of part 4 in addition to

those identified in the proposal need to be harmonized? For instance,

as noted in the Commission’s final rulemaking, Commodity Pool Operators

and Commodity Trading Advisors: Amendments to Compliance

Obligations,35 the Commission is considering adopting a family

offices exemption from CPO registration akin to the exemption adopted

by the SEC.36 What are the factors that weigh in favor or against

such an exemption? Do the proposed harmonization provisions for break-

even analysis and performance disclosure strike the appropriate balance

between achieving the Commission’s objective of providing material

information to pool participants, and reducing duplicative or

conflicting disclosure? Should the Commission consider harmonizing its

account statement reporting requirement with the SEC’s semiannual

reporting requirement? Should the Commission consider harmonizing its

past performance reporting requirements with the SEC requirements? Are

there other approaches to harmonizing these requirements that the

Commission should consider? Should the Commission consider applying any

of the harmonization provisions to operators of pools that are not

registered investment companies?

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35 Published elsewhere in this issue of the Federal Register.

36 See 17 CFR 250.202(a)(11)(G)-1.

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II. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) 37 requires that agencies,

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

businesses. The Commission has previously established certain

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

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

the RFA.38

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37 See 5 U.S.C. 601, et seq.

38 47 FR 18618 (Apr. 30, 1982).

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CPOs: The Commission has previously determined that registered CPOs

are not small entities for the purpose of the RFA.39 With respect to

CPOs exempt from registration, the Commission has determined that a CPO

is a small entity if it meets the criteria for exemption from

registration under current Rule 4.13(a)(2).40 Based on the requisite

level of sophistication needed to comply with the SEC’s regulatory

regime for registered investment companies and the fact that registered

investment companies are generally intended to serve as retail

investment vehicles and do not qualify for exemption under Sec.

4.13(a)(2), the Commission believes that registered investment

companies are generally not small entities for purposes of the RFA

analysis. Moreover, the proposals herein will reduce the burden of

complying with part 4 for CPOs of registered investment companies. The

Commission has determined that the proposed regulation will not create

a significant economic impact on a substantial number of small

entities.

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39 See 47 FR 18618, 18619 (Apr. 30, 1982).

40 See 47 FR at 18619-20.

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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.41 The sole aspect of the proposal

that affects CTAs would allow disclosure documents to be used for 12

months rather than nine months, thereby reducing the frequency with

which updates must be prepared. Therefore, the Commission has

determined that the proposal will not create a significant economic

impact on a substantial number of small entities. Accordingly, the

Chairman, on behalf of the Commission hereby certifies pursuant to 5

U.S.C. 605(b) that the proposed rules, will not have a significant

impact on a substantial number of small entities.

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41 See 47 FR at 18620.

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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.42 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”).

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42 See 44 U.S.C. 3501 et seq.

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The Commission is amending Collection 3038-0023 to allow for an

increase in response hours for the rulemaking resulting from the

amendments to Sec. 4.5 that the Commission adopted in a concurrent

release.43 In the context of that rulemaking, the Commission received

comments asserting that, absent harmonization of the Commission’s

compliance regime for CPOs with that of the SEC for registered

investment companies, entities operating registered investment

companies that would be required to register with the Commission would

not be able to comply with the Commission’s regulations and would have

to discontinue their activities involving commodity interests. Because

the Commission is proposing provisions to harmonize its compliance

regime for sponsors or advisors to registered investment companies

required to register as CPOs, the Commission believes that such

entities will be able to register with the Commission and comply with

the applicable compliance obligations.

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43 CITE to FR for Non-Joint Rulemaking.

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The Commission also is amending Collection 3038-0005 to allow for

an increase in response hours for the rulemaking associated with

modified

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compliance obligations under part 4 of the Commission’s regulations

resulting from these revisions. The titles for these collections are

“Part 3–Registration” (OMB Control number 3038-0023) and “Part 4–

Commodity Pool Operators and Commodity Trading Advisors” (OMB Control

number 3038-0005). Responses to this collection of information will be

mandatory.

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.” 44 The

Commission is also required to protect certain information contained in

a government system of records according to the Privacy Act of

1974.45

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44 See 7 U.S.C. 12.

45 See 5 U.S.C. 552a.

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In the Commission’s February proposal, the Commission estimated

that the burden of Sec. 4.5 compliance would be 16.68 hours for an

estimated 416 CPOs and CTAs that would be obligated to comply.46

There currently is no source of reliable information regarding the

general use of derivatives by registered investment companies. Because

of this lack of information, the Commission has derived the estimated

entities affected and the number of burden hours associated with this

proposal through the use of statistical analysis. According to the one

source of data available to the Commission, in 2010, there were 669

sponsors of 9,719 registered investment companies, including mutual

funds, closed end funds, exchange traded funds, and unit investment

trusts.47 In the comment letter submitted by the Investment Company

Institute (“ICI”) with respect to the Commission’s February proposal

the ICI stated that it surveyed its membership and 13 sponsors

responded representing 2,111 registered investment companies. Of those

2,111 registered investment companies, the 13 sponsors estimated that

485 would trigger registration and compliance obligations under Sec.

4.5 as amended. This constitutes approximately 23% of the reported

registered investment companies.

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46 The Commission notes that the PRA burden proposes that it

be considered in light of the costs entities may have incurred under

the part 4 regulations as proposed in the Commodity Pool Operators

and Commodity Trading Advisors: Amendments to Compliance Obligations

rulemaking. In that rulemaking, the Commission estimated that

entities would incur 9.58 burden hours in filing an annual report,

3.85 burden hours in compiling and distributing periodic account

statements, and 3.25 burden hours in compiling and distributing

disclosure documents; in sum, the Commission estimated that these

provisions would incur a burden in total of 16.68 hours. By

operation of this proposal, registered investment companies

regulated by the SEC will be able to use similar documents required

under SEC regulations to satisfy their CFTC registration and

compliance requirements under part 4 of the Commission’s

regulations.

47 See 2011 Investment Company Fact Book, Chap. 1 and Data

Tables, Investment Company Institute (2011), available at http://www.icifactbook.org/.

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The Commission then deducted the 2,111 registered investment

companies discussed in the ICI comment letter from the 9,719 entities

comprising the universe of registered investment companies, and

deducted the 13 sponsors surveyed by the ICI from the universe of 669

fund sponsors to arrive at 656 fund sponsors operating 7,608 registered

investment companies. This resulted in an average of 11.6 registered

investment companies being offered per sponsor.

The Commission then calculated 23% of the 7,608 registered

investment companies not covered by the ICI survey, which equals 1,750

registered investment companies that the Commission would expect to

trigger registration under amended Sec. 4.5. Then, the Commission

divided this number by the average number of registered investment

companies operated per sponsor and added the 13 sponsors from the ICI

survey to reach 164 sponsors expected to be required to register under

amended Sec. 4.5. Because the Commission cannot state with absolute

certainty that only 164 entities would be required to register, due to

the uncertainty inherent in the use of averages, the Commission

believes that the number of sponsors or advisors required to register

to be somewhere between 164 and 669 entities. For PRA purposes, the

Commission believes that it is appropriate to use the midpoint between

the outer bounds of the range, which is 416 entities. The Commission

estimates that there will still be some burden associated with Sec.

4.5 compliance under the proposed rule, as there are some

incompatibilities between SEC and Commission regulations (as discussed

above). The Commission estimated this burden at approximately 2 hours

annually. Thus, the Commission estimates that this new proposal will

reduce the information collection burden associated with Sec. 4.5

compliance for the estimated 416 entities by 14.68 hours per entity.

1. Additional Information Provided by CPOs and CTAs

a. OMB Control Number 3038-0023

Part 3 of the Commission’s regulations concern registration

requirements. The Commission is amending existing Collection 3038-0023

to reflect the obligations associated with the registration of new

entrants, i.e., CPOs that were previously exempt from registration

under Sec. 4.5 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: 75,841.

Annual responses by each respondent: 76,350.

Annual reporting burden: 6,871.6.

b. OMB Control Number 3038-0005

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

CTAs and CPOs, and the circumstances under which they may be exempted

or excluded from registration. Under existing Collection 3038-0005 the

estimated average time spent per response has not been altered;

however, adjustments have been made to the collection to account for

the new burden expected under the proposed rulemaking. The total burden

associated with Collection 3038-0005 is expected to be:

Estimated number of respondents: 44,142.

Annual responses by each respondent: 62,121.

Estimated average hours per response: 4.22.

Annual reporting burden: 262,347.8.

The proposed harmonization specifically will add the following

burden with respect to compliance obligations other than Form CPO-PQR:

Estimated number of respondents: 416.

Annual responses by each respondent: 5.

Estimated average hours per response: 2.

Annual reporting burden: 4160.

The proposed harmonization will add the following burden with

respect to the burden associated with Form CPO-PQR:

Schedule A:

Estimated number of respondents: 586.

Annual responses by each respondent: 4.

Estimated average hours per response: 6.

[[Page 11350]]

Annual reporting burden: 14,064.

Schedule B:

Estimated number of respondents: 586.

Annual responses by each respondent: 4.

Estimated average hours per response: 4.

Annual reporting burden: 9,376.

Schedule C:

Estimated number of respondents: 586.

Annual responses by each respondent: 4.

Estimated average hours per response: 18.

Annual reporting burden: 42,192.

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 required 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 email at

[email protected]. 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. Considerations of Costs and Benefits

Section 15(a) of the Act requires the Commission, before

promulgating a regulation under the Act or issuing an order, to

consider the costs and benefits of its action.48 Section 15(a)

specifies that costs and benefits shall be evaluated in light of the

following considerations: (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.49 The

Commission can, in its discretion, give greater weight to any of the

five considerations and determine that, notwithstanding its costs, a

particular regulation was necessary or appropriate to protect the

public interest, or to effectuate any of the provisions, or to

accomplish any of the purposes, of the Act.

—————————————————————————

48 7 U.S.C. 19(a).

49 7 U.S.C. 19(a).

—————————————————————————

In February 2011, the Commission proposed to revise the

requirements for determining which persons should be required to

register as a CPO under Sec. 4.5. The Commission received numerous

comments that sponsors of registered investment companies that also

would be required to register as CPOs would be subject to duplicative,

inconsistent, and possibly conflicting disclosure and reporting

requirements. The purpose of this proposal is to harmonize certain CFTC

and SEC registration requirements in an effort to reduce the costs to

dual registrants of complying with two regulatory regimes. To address

the commenters’ concerns about the content and timing of disclosure

documents, account statement delivery and certification, and

recordkeeping requirements, the Commission is proposing to harmonize

its regulatory requirements with those of the SEC to reduce the costs

for dual registrants. Each of these harmonizing provisions involves

recordkeeping and reporting obligations that would be a collection of

information under the PRA.

The Commission is obligated to estimate the burden of and provide

supporting statements for any collections of information it seeks to

establish under considerations contained in the PRA,50 and to seek

approval of those requirements from the OMB. Therefore, the estimated

burden costs and support for the collections of information is provided

for in the PRA section of this notice of proposed rulemaking and the

information collection requests that will be filed with OMB

contemporaneously with this rulemaking as required by that statute.

—————————————————————————

50 44 U.S.C. 3501 et seq.

—————————————————————————

1. Section 15(a) Considerations

As stated above, section 15(a) of the CEA requires the CFTC to

consider the costs and benefits of its actions 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.

a. Protection of Market Participants and the Public

The Commission believes that these regulations protect market

participants and the public by achieving the same regulatory objectives

of its proposed part 4 registration and reporting requirements but at

reduced costs.

b. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

The Commission believes that harmonization and its concomitant

reduction in regulatory burden promotes the efficiency of futures

markets in an indirect way; by lessening the costs that entities must

bear to operate within markets, participants can pass along such

savings to their customers or devote more resources to serving those

customers. Moreover, as registered participants are relieved of some

burdens, the incentive to remain unregistered may diminish.

c. Price Discovery

The Commission has not identified a specific effect on price

discovery as a result of these harmonizing regulations.

d. Sound Risk Management

The Commission has not identified a specific effect on sound risk

management as a result of these harmonizing regulations.

e. Other Public Interest Considerations

The CFTC has not identified other public interest considerations

related to the costs and benefits of these regulations.

2. Conclusion

The Commission believes these regulations will lower burdens for

many market participants who are also registered with other regulatory

agencies as a result of doing business in multiple markets. The

Commission welcomes all public comments on its cost and benefit

considerations, including its analysis of the regulations in light of

the five factors enumerated in Sec. 15(a). Specifically, are

[[Page 11351]]

there potential costs associated with these harmonizing rules that the

Commission has not considered? Are there benefits to market

participants, the public, or futures markets that the Commission should

consider?

List of Subjects in 17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Consumer protection, Reporting and recordkeeping requirements.

Accordingly, the CFTC proposes to amend 17 CFR part 4 as follows:

PART 4–COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

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

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

and 23.

2. Amend Sec. 4.12 by revising paragraph (c) to read as follows:

Sec. 4.12 Exemption from provisions of part 4.

* * * * *

(c) Exemption from Subpart B for certain commodity pool operators

based on registration under the Securities Act of 1933 or the

Investment Company Act of 1940. (1) Eligibility. Subject to compliance

with the provisions of paragraph (d) of this section, any person who is

registered as a commodity pool operator, or has applied for such

registration, may claim any or all of the relief available under

paragraph (c)(2) of this section if, with respect to the pool for which

it makes such claim:

(i) The units of participation will be offered and sold pursuant to

an effective registration statement under the Securities Act of 1933;

or

(ii) The pool is registered under the Investment Company Act of

1940.

(2) Relief available to pool operator. The commodity pool operator

of a pool whose units of participation meet the criteria of paragraph

(c)(1) of this section may claim the following relief:

(i) In the case of Sec. 4.21, exemption from the Disclosure

Document delivery and acknowledgment requirements of that section,

Provided, however, that the pool operator:

(A) Causes the pool’s Disclosure Document to be readily accessible

on an Internet Web site maintained by the pool operator;

(B) Causes the Disclosure Document to be kept current in accordance

with the requirements of Sec. 4.26(a);

(C) Clearly informs prospective pool participants with whom it has

contact of the Internet address of such Web site and directs any

broker, dealer or other selling agent to whom the pool operator sells

units of participation in the pool to so inform prospective pool

participants; and

(D)(1) If claiming relief under paragraph (c)(1)(i) of this

section, comply with all other requirements applicable to pool

Disclosure Documents under part 4. The pool operator may satisfy the

requirement of Sec. 4.26(b) to attach to the Disclosure Document a

copy of the pool’s most current Account Statement and Annual Report if

the pool operator makes such Account Statement and Annual Report

readily accessible on an Internet Web site maintained by the pool

operator.

(2) If claiming relief under paragraph (c)(1)(ii) of this section,

comply with all other requirements applicable to pool Disclosure

Documents under part 4, except that, with respect to the specific

requirements listed below, comply as follows:

(i) With respect to the legend required by Sec. 4.24(a), include a

legend that indicates that the Commodity Futures Trading Commission and

the Securities and Exchange Commission have not approved or disapproved

of the securities or passed upon the merits of participating in the

pool, nor has either agency passed upon the accuracy or adequacy of the

disclosure in the prospectus, and that any contrary representation is a

criminal offense. The legend may be in one of the following or other

clear and concise language:

Example A: The Securities and Exchange Commission and the

Commodity Futures Trading Commission have not approved or

disapproved these securities or this pool, or passed upon the

adequacy or accuracy of this prospectus. Any representation to the

contrary is a criminal offense.

Example B: The Securities and Exchange Commission and the

Commodity Futures Trading Commission have not approved or

disapproved these securities or this pool, or determined if this

prospectus is truthful or complete. Any representation to the

contrary is a criminal offense.

(ii) With respect to performance that is required under Sec.

4.25(c)(2), (3), (4) or (5), present such information in the Statement

of Additional Information.

(ii) In the case of Sec. 4.22, exemption from the Account

Statement distribution requirement of that section; Provided, however,

that the pool operator:

(A) Causes the pool’s Account Statements, including the

certification required by Sec. 4.22(h) to be readily accessible on an

Internet Web site maintained by the pool operator within 30 calendar

days after the last day of the applicable reporting period and

continuing for a period of not less than 30 calendar days. The

commodity pool operator may meet the requirement of Sec. 4.22(h) by

including the certification required by Rule 30e-1 under the Investment

Company Act of 1940 (17 CFR 270.30e-1) with its posting of the pool’s

Account Statements; and

(B) Causes the Disclosure Document for the pool to clearly

indicate:

(1) That the information required to be included in the Account

Statements will be readily accessible on an Internet Web site

maintained by the pool operator; and

(2) The Internet address of such Web site.

* * * * *

3. Amend Sec. 4.26 by revising paragraph (a)(2) to read as

follows:

Sec. 4.26 Use, amendment and filing of Disclosure Document.

(a) * * *

(2) No commodity pool operator may use a Disclosure Document or

profile document dated more than twelve months prior to the date of its

use.

* * * * *

4. Amend Sec. 4.36 by revising paragraph (b) to read as follows:

Sec. 4.36 Use, amendment and filing of Disclosure Document.

* * * * *

(b) No commodity trading advisor may use a Disclosure Document

dated more than twelve months prior to the date of its use.

* * * * *

Issued in Washington, DC, on February 8, 2012, by the

Commission.

David A. Stawick,

Secretary of the Commission.

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

Federal Regulations: Appendices to Harmonization of Compliance

Obligations for Registered Investment Companies Required to Register

as Commodity Pool Operators–Commission Voting Summary and

Statements of Commissioners.

Appendix 1–Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Sommers,

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

Commissioner voted in the negative.

Appendix 2–Statement of Chairman Gary Gensler

The Commodity Futures Trading Commission’s (CFTC) part 4 rules

require recordkeeping, reporting and disclosures from Commodity Pool

Operators. I support the proposed rule that would harmonize such

requirements with those of the Securities and Exchange Commission

(SEC) for investment companies registered with both the CFTC and

SEC. The Commission is committed to

[[Page 11352]]

ensuring that customers of registered investment companies receive

basic protections while also seeking to balance the compliance

requirements for the operators of these funds. I look forward to

comments from the public to further build on this harmonization

effort.

Appendix 3–Statement of Commissioner Jill E. Sommers

The final rules amending the Commission’s Part 4 regulations

adopted today will require, among other things, that investment

advisors of certain registered investment companies register as CPOs

and operate under a dual SEC/CFTC regulatory regime. As explained in

my dissent to the final rules, I could have supported a version of

the rules that would have achieved the regulatory objectives

outlined by the NFA in its August 18, 2010 petition to amend Rule

4.5. While I opposed the version of the rules the Commission

ultimately adopted, having finalized them I support the Commission’s

effort to harmonize the resulting compliance obligations. Dually

registered entities should not be subject to duplicative,

inconsistent, or conflicting requirements. The proposed rules, if

finalized in their current form, would not achieve true

harmonization. I urge those affected by the rules to submit detailed

comment letters, with a focus on the costs and benefits of the rules

as proposed and any suggested alternatives.

[FR Doc. 2012-3388 Filed 2-23-12; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: February 24, 2012