Federal Register, Volume 83 Issue 202 (Thursday, October 18, 2018) 
[Federal Register Volume 83, Number 202 (Thursday, October 18, 2018)]
[Proposed Rules]
[Pages 52902-52929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22324]

 

 

[[Page 52901]]

 

Vol. 83

 

Thursday,

 

No. 202

 

October 18, 2018

 

Part III

 

 

 

 

 

 Commodity Futures Trading Commission

 

 

 

 

 

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17 CFR Part 4

 

 

 

 

 

Registration and Compliance Requirements for Commodity Pool Operators

and Commodity Trading Advisors; Proposed Rule

 

Federal Register / Vol. 83 , No. 202 / Thursday, October 18, 2018 /

Proposed Rules

 

[[Page 52902]]

 

 

———————————————————————–

 

COMMODITY FUTURES TRADING COMMISSION

 

17 CFR Part 4

 

RIN 3038-AE76

 

Registration and Compliance Requirements for Commodity Pool

Operators and Commodity Trading Advisors

 

AGENCY: Commodity Futures Trading Commission.

 

ACTION: Notice of proposed rulemaking.

 

———————————————————————–

 

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

is proposing amendments to its regulations to permit commodity pool

operators (CPOs) that only solicit and/or accept funds from non-U.S.

persons for participation in offshore commodity pools to claim an

exemption from CPO registration and compliance requirements with

respect to such pools, while permitting the maintenance of registration

with respect to commodity pools for which CPO registration is required.

The Commission also is proposing to allow U.S.-based CPOs of offshore

commodity pools with U.S. participants to maintain the commodity pool’s

original books and records in the offshore location of the pool, in

lieu of the CPO’s main U.S. business location. Additionally, the

Commission is proposing to prohibit a person that would be statutorily

disqualified from registering with the Commission as a CPO from

claiming or affirming an exemption from CPO registration. The

Commission also is proposing registration relief for the CPOs and CTAs

of entities qualifying as “family offices” and investment advisers of

“business development companies,” as defined in the proposed

regulations. The Commission is further proposing to permit qualifying

CPOs to engage in general solicitation in their pool offerings, as

contemplated by the Jumpstart Our Business Start-ups Act of 2012 (JOBS

Act). Finally, the Commission is proposing to relieve certain CPOs and

commodity trading advisors (CTAs) of the requirement to file Forms CPO-

PQR and CTA-PR.

 

DATES: Comments must be received on or before December 17, 2018.

 

ADDRESSES: You may submit comments, identified by RIN number 3038-AE76,

by any of the following methods:

     CFTC Comments Portal: https://comments.cftc.gov. Select

the “Submit Comments” link for this rulemaking and follow the

instructions on the Public Comment Form.

     Mail: Send to Christopher Kirkpatrick, Secretary of the

Commission, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street NW, Washington, DC 20581.

     Hand Delivery/Courier: Follow the same instructions as for

Mail, above.

    Please submit your comments using only one of these methods. To

avoid possible delays with mail or in-person deliveries, submissions

through the CFTC Comments Portal are encouraged.

    All comments must be submitted in English, or if not, accompanied

by an English translation. Comments will be posted as received to

https://comments.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 (FOIA), a petition for confidential

treatment of the exempt information may be submitted according to the

procedures established in Sec.  145.9 of the Commission’s

regulations.1

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    1 17 CFR 145.9.

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    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 https://comments.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 FOIA.

 

FOR FURTHER INFORMATION CONTACT: For any of the proposed amendments:

Amanda Olear, Associate Director, at 202-418-5283 or [email protected];

for the proposed amendments to Sec. Sec.  4.7 and 4.13: Elizabeth

Groover, Special Counsel, at 202-418-5985, [email protected]; for the

proposed amendments related to family offices: Peter Sanchez, Special

Counsel, at 202-418-5237, [email protected]; for the proposed

amendments to Sec.  4.27: Michael Ehrstein, Special Counsel, at 202-

418-5957, [email protected], Division of Swap Dealer and Intermediary

Oversight, Commodity Futures Trading Commission, Three Lafayette

Centre, 1151 21st Street NW, Washington, DC 20581.

 

SUPPLEMENTARY INFORMATION:

 

Table of Contents

 

I. Background

    A. Statutory and Regulatory Background

    B. Advisory 18-96

    1. Introduction

    2. The History of Advisory 18-96 and the Commission’s Rationale

for Proposing Superseding Part 4 Amendments

    3. Expanding the Prohibition on Statutory Disqualifications to

Exemptions Under Sec.  4.13 and Permitting Non-U.S. Person

Participants in De Minimis Commodity Pools

    C. Proposed CPO and CTA Registration Exemptions for Qualifying

Family Offices

    1. Defining Family Offices

    2. Family Offices as Commodity Pools and the Rescission of Sec. 

4.13(a)(4)

    3. The SEC’s Exclusion for Family Offices and CFTC Staff Letters

12-37 and 14-143

    D. Proposed Amendments Permitting General Solicitation by CPOs

Pursuant to the JOBS Act of 2012

    1. The JOBS Act of 2012, Regulation D, and Rule 144A

    2. Impact of JOBS Act Amendments on CPOs and DSIO’s 2014 JOBS

Act Relief Letter

    E. Proposed Exclusionary Relief for BDCs

    1. The CPO Exclusion in Sec.  4.5

    2. BDCs: Exempt Investment Companies Restricted in Their Use of

Commodity Interests

    3. CFTC Staff Letter 12-40 and the Proposed Amendments

    F. Relief From Sec.  4.27

    1. History

    2. Reporting Person Definition

    3. Current Commission Staff Letter Relief

    4. Proposing Amendments Consistent With Current Staff Letter

Relief

    5. Expanding Relief From Sec.  4.27 to Additional Categories of

CTAs

II. Proposed Regulations

    A. Providing CPOs of Offshore Pools With Registration and

Recordkeeping Relief Consistent With Advisory 18-96

    1. New Sec.  4.13(a)(4): The 18-96 Exemption

    2. New Sec.  4.13(a)(6): The Proposed Prohibition on Statutory

Disqualifications

    3. Amendments to Sec.  4.13: Claiming the Proposed 18-96

Exemption

    4. Making the 18-96 Exemption Available on a Pool-by-Pool Basis

    5. Other Amendments to Miscellaneous Provisions in Sec.  4.13

    6. Preserving Advisory 18-96’s Recordkeeping Location Relief

with Amendments to Sec.  4.23 and Certain Technical Amendments

    B. Proposed Family Office Exemptions

    C. Proposed Amendments Consistent With the JOBS Act Relief

Letter

    D. Proposed BDC Exclusion

    E. 4.27 Relief

III. Request for Comments

    A. Advisory 18-96 and the Proposed 18-96 Exemption

    B. Proposed Family Office Exemptions

    C. Proposed Amendments Consistent With the JOBS Act Relief

Letter

    D. Proposed Adoption and Expansion of Exemptive Letter Relief

From Sec.  4.27 Filings

IV. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

 

[[Page 52903]]

 

    1. Overview

    2. Revisions to the Collections of Information

    a. OMB Control Number 3038-0005

    b. OMB Control Number 3038-0023

    3. Request for Comments on Collection

    C. Cost-Benefit Considerations

    1. Consideration of the Costs and Benefits of the Commission’s

Action

    a. Summary of the Proposal

    b. Benefits

    i. Benefits Related to the Adoption of the 18-96 Exemption

    ii. Benefits Related to the Proposed Family Office Exemptions

From CPO and CTA Registration

    iii. Benefits Related to the Proposed JOBS Act Relief

    iv. Benefits Related to the Exclusion of IAs of BDCs From the

CPO Definition

    v. Benefits Related to Relief Under Sec.  4.27 for CPOs and CTAs

    c. Costs

    i. Costs Related to the Proposed 18-96 Exemption

    ii. Costs Related to the Proposed Family Office Exemptions From

CPO and CTA Registration

    iii. Costs Related to the Proposed Adoption of JOBS Act Relief

    iv. Costs Related to the Proposed Exclusion of IAs of BDCs From

the CPO Definition

    v. Costs Related to Relief Under Sec.  4.27 for CPOs and CTAs

    2. Section 15(a) Considerations

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness, and Financial Integrity of

Markets

    c. Price Discovery

    d. Sound Risk Management

    e. Other Public Interest Considerations

    f. Request for Comment

    D. Antitrust Laws

 

I. Background

 

A. Statutory and Regulatory Background

 

    As amended by the Dodd-Frank Wall Street Reform and Consumer

Protection Act (Dodd-Frank Act),2 section 1a(11) of the Commodity

Exchange Act (CEA or Act) defines the term “commodity pool operator,”

as any person 3 engaged in a business that is of the nature of a

commodity pool, investment trust, syndicate, or similar form of

enterprise, and who, with respect to that commodity pool, solicits,

accepts, or receives from others, funds, securities, or property,

either directly or through capital contributions, the sale of stock or

other forms of securities, or otherwise, for the purpose of trading in

commodity interests.4 CEA section 1a(12) defines a “commodity

trading advisor” as any person who for compensation or profit engages

in the business of advising others, either directly or through

publications, writings, or electronic media, as to the value of or the

advisability of trading in commodity interests.5 CEA section 4m(1)

generally requires each person who satisfies the CPO or CTA definitions

to register as such with the Commission.6 With respect to CPOs, the

CEA also authorizes the Commission, acting by rule or regulation, to

include within, or exclude from, the term “commodity pool operator”

any person engaged in the business of operating a commodity pool if the

Commission determines that the rule or regulation will effectuate the

purposes of the Act.7 CEA section 1a(12)(B) provides multiple

exclusions from the CTA definition, and similarly affords the

Commission the authority to exclude such other persons not within the

intent of that provision as the Commission may specify by rule,

regulation, or order.8

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    2 Public Law 111-203, H.R. 4173 (2010).

    3 Section 1.3 defines “person” as including individuals,

associations, partnerships, corporations, and trusts. 17 CFR 1.3.

    4 7 U.S.C. 1a(11). The CEA is found at 7 U.S.C. 1 et seq.

(2017). The Commission’s regulations are found at 17 CFR Ch. I

(2017). Both the Act and the Commission’s regulations are accessible

through the Commission’s website, http://www.cftc.gov.

    5 7 U.S.C. 1a(12)(A)(i). The CTA definition also includes any

person who for compensation or profit, and as part of a regular

business, issues or promulgates analyses or reports concerning the

value of or advisability of trading in commodity interests, and any

person that is registered with the Commission as a CTA. 7 U.S.C.

1a(12)(A)(ii)-(iii).

    6 7 U.S.C. 6m(1).

    7 7 U.S.C. 1a(11)(B).

    8 7 U.S.C. 1a(12)(B)(vii). The Commission recently utilized

the authority in this provision in issuing an Order excluding Farm

Credit System institutions from that definition, due to their

similarities to banks, a type of entity that is already excluded by

CEA section 1a(12)(B)(i). See Order Excluding Farm Credit System

Institutions From the Commodity Exchange Act’s Definition of

“Commodity Trading Advisor,” 81 FR 89447 (Dec. 12, 2016). CEA

section 1a(12)(C) requires that the exclusions in the preceding

paragraph only apply if the furnishing of such excluded CTA services

is solely incidental to the conduct of their business or profession.

7 U.S.C. 1a(12)(C).

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    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 purposes of

the CEA.9 Part 4 of the Commission’s regulations governs the

operations and activities of CPOs and CTAs.10 Those regulations

implement the statutory authority provided to the Commission by the CEA

and establish multiple registration exemptions and exclusions for CPOs

and CTAs. Part 4 also contains regulations that establish the ongoing

compliance requirements applicable to CPOs and CTAs registered or

required to be registered; these requirements pertain to the commodity

pools and separate accounts that the CPOs and CTAs operate and advise,

and provide customer protection, disclosure, and reporting to a

registrant’s commodity pool participants or advisory clients.

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    9 7 U.S.C. 12a(5).

    10 See 17 CFR part 4, generally.

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    In March of 2017, Commission staff initiated an agency-wide

internal review of CFTC regulations and practices to identify those

areas that could be simplified to make them less burdensome.11 The

Commission subsequently published in the Federal Register on May 9,

2017, a Request for Information soliciting suggestions from the public

regarding how the Commission’s existing rules, regulations, or

practices could be applied in a simpler, less burdensome manner.12

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    11 See Remarks of Acting Chairman J. Christopher Giancarlo

before the 42nd Annual International Futures Industry Conference in

Boca Raton, FL (Mar. 15, 2017), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20 (last retrieved July 31,

2018).

    12 Project KISS, 82 FR 21494 (May 9, 2017); amended by 82 FR

23765 (May 24, 2017). The Federal Register Request for Information

and the suggestion letters filed by the public are available at the

Commission’s website: https://comments.cftc.gov/KISS/KissInitiative.aspx (last retrieved July 31, 2018).

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    The Investment Advisers Association (IAA) submitted suggested

modifications for numerous rules in response to the Commission’s

Request for Information.13 One area identified by the IAA that could

result in the reduction of regulatory burden would be the incorporation

into the Commission’s regulations of registration and other types of

relief to members of the asset management industry that meet the

definitions of CPO and/or CTA that is currently provided in various

staff letters.

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    13 See Letter from Monique Botkin, Associate General Counsel,

Investment Advisers Association, (Sept. 29, 2017) (IAA Letter),

available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61480&SearchText (last retrieved July 31, 2018).

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    In response to the information received as part of the Project KISS

initiative, as well as CFTC staff’s internal review of the Commission’s

regulatory regime, the Commission has today determined to propose

several amendments to part 4 (the Proposal or NPRM). Specifically, the

CFTC is proposing to amend Sec.  4.13 to permit CPOs that solicit and/

or accept funds from only non-U.S. persons for participation in

offshore commodity pools to claim an exemption from CPO registration

requirements with respect to such pools, while permitting the

maintenance of registration with respect to commodity pools for which

CPO registration is required. This proposed amendment would have the

effect of expanding relief currently available

 

[[Page 52904]]

 

under Staff Advisory 18-96 (the Advisory or Advisory 18-96),14 and

incorporate it into the Commission’s existing regulatory framework in

17 CFR part 4. In conjunction with this NPRM, the Commission is also

proposing to adopt a prohibition on statutory disqualifications

applicable to most exemptions claimed under Sec.  4.13, and to amend

the de minimis exemption in Sec.  4.13(a)(3) to explicitly permit

persons located outside of the United States as exempt de minimis

commodity pool participants without consideration of their financial

sophistication. The Commission is further proposing to adopt under

Sec. Sec.  4.13 and 4.14 new CPO and CTA registration exemptions

consistent with existing Commission staff no-action letter relief

available to persons considered CPOs or CTAs in connection with the

operation and advising of qualifying family offices. Similarly, through

proposed revisions to the exclusion from the definition of CPO in Sec. 

4.5 applicable to registered investment companies (RICs), the

Commission is proposing to provide relief to the investment advisers of

business development companies (BDCs) in a manner also consistent with

existing no-action letter relief.

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    14 Advisory 18-96, “Offshore Commodity Pools–Relief for

Certain Registered CPOs From Rules 4.21, 4.22 and 4.23(a)(10) and

(a)(11) and From the Location of Books and Records Requirement of

Rule 4.23,” available at https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last retrieved July 31, 2018).

—————————————————————————

 

    Moreover, the Commission plans to continue its efforts to amend 17

CFR part 4 by proposing regulatory exemptions consistent with existing

CFTC staff exemptive relief letters available to qualifying CPOs. These

efforts include proposing to add exemptive relief consistent with that

provided by CFTC Staff Letter 14-116, which permits the use of general

solicitation by qualifying CPOs, as contemplated by the Jumpstart Our

Business Start-ups Act of 2012 (as defined above, the JOBS Act),

through targeted amendments to Sec. Sec.  4.7 and 4.13(a)(3) in a

manner consistent with that exemptive letter.15 Additionally, in its

Project KISS submission, the IAA recommended that the Commission adopt

regulatory amendments to incorporate in part 4 exemptive relief from

filing Form CPO-PQR, provided currently under CFTC Staff Letter 14-115

for CPOs that only operate commodity pools in accordance with

Sec. Sec.  4.5 and 4.13.16 The IAA also recommended that the

Commission amend part 4 to adopt the commensurate relief under CFTC

Staff Letter 15-47 for registered CTAs that do not direct trading of

any commodity interest accounts.17

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    15 CFTC Staff Letter 14-116, available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/14-116.pdf (last retrieved July 31, 2018).

    16 IAA Letter at 16.

    17 Id.

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    In response, the Commission is proposing to adopt amendments that

would provide relief from filing Form CPO-PQR to registered CPOs that

only operate commodity pools exempt or excluded under Sec. Sec.  4.5

and 4.13, consistent with CFTC Staff Letter 14-115,18 and from filing

Form CTA-PR to registered CTAs that do not direct trading of any

commodity interest accounts, consistent with CFTC Staff Letter 15-

47.19 Finally, the Commission further proposes to provide additional

relief from filing Form CTA-PR to registered CTAs that only advise

pools for which the CTA is also CPO. Although the Proposal includes

several potential regulatory amendments in a single notice, the CFTC

may, in the future, issue separate adopting releases for any aspect of

today’s proposed rulemaking that is finalized.20

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    18 CFTC Staff Letter 14-115, available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-115.pdf (last retrieved July 31, 2018).

    19 CFTC Staff Letter 15-47, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/15-47.pdf (last retrieved July 31, 2018).

    20 See Inv. Co. Institute v. CFTC, 720 F.3d 370, 379 (DC Cir.

2013) (“[A]s the Supreme Court has emphasized, `[n]othing prohibits

federal agencies from moving in an incremental manner.’ ”) (quoting

FCC v. Fox Television Stations, Inc., 556 U.S. 502, 522 (2009)).

—————————————————————————

 

B. Advisory 18-96

 

1. Introduction

    The Commission is aware that a number of CPOs only operate U.S.-

based commodity pools soliciting and accepting funds from persons

located in the U.S., whereas other CPOs solicit and accept funds from

participants, whether U.S. or non-U.S., for investment in commodity

pools in both domestic and international locales; still others solicit

and accept funds solely from persons located outside the United States

for investment in offshore pools. Based on communications with industry

and Commission registrants, the Commission preliminarily believes that

the variety of location in CPO business activities continues to grow,

and that CPOs today frequently participate in the markets of, solicit

and/or accept funds for investment from potential participants in, and

operate commodity pools simultaneously in multiple jurisdictions.

    In promulgating relief from registration, through the adoption of

Sec.  3.10(c)(3),21 for firms located outside the U.S. engaged in

intermediating commodity interest transactions on U.S. designated

contract markets only on behalf of persons located outside the U.S.,

the Commission cited its own historic statements regarding its

jurisdictional scope: “ `[G]iven this agency’s limited resources, it

is appropriate at this time to focus [the Commission’s] customer

protection activities upon domestic firms and upon firms soliciting or

accepting orders from domestic users of the futures markets and that

the protection of foreign customers of firms confining their activities

to areas outside this country, its territories, and possessions may

best be for local authorities in such [jurisdictions].’ ” 22 The

Commission preliminarily believes that this rationale continues to be

true with respect to CPOs and commodity pools, notwithstanding the

expansion of CFTC jurisdiction after the passage of the Dodd-Frank Act.

—————————————————————————

 

    21 17 CFR 3.10(c)(3).

    22 Exemption From Registration for Certain Foreign Persons,

Final Rule, 72 FR 63976, 63976-77 (Nov. 14, 2007) (citing 48 FR

35248, 35261 (Aug. 3, 1983)).

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    The Commission also preliminarily believes that the operation of

offshore pools by exempt CPOs, who may also register solely with

respect to the pools they operate that solicit and/or accept funds from

persons in the U.S., would pose limited risk to the participants in

those pools requiring registration due to the application of Sec. 

4.20. Section 4.20(c), in particular, prohibits a CPO from commingling

the property of any commodity pool that it operates, or that it intends

to operate, with the property of any other person.23 This provision

thereby limits the potential for trading activity or losses experienced

in exempt offshore pools to negatively impact U.S. customers invested

in pools for which a CPO is so registered.

—————————————————————————

 

    23 17 CFR 4.20(c).

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    Consequently, the Commission preliminarily believes that providing

CPO registration relief beyond that currently provided by Sec. 

3.10(c)(3)(i) and by the staff relief in Advisory 18-96 would be

beneficial and consistent with the Commission’s past prioritization of

agency resources for the regulation of intermediary activities

affecting U.S. participants. The Commission is, therefore, proposing to

adopt, among other amendments, an exemption from CPO registration in

Sec.  4.13 that would permit a CPO that solicits,24 and/or

 

[[Page 52905]]

 

accepts funds from, solely persons located outside the U.S. for

participation in an offshore commodity pool operated by it to claim a

registration exemption with respect to such pool.25 The proposed

amendments are largely based upon the requirements of Advisory 18-96,

the conditions of which are presented and explained below.

—————————————————————————

 

    24 In adopting Sec.  3.10(c)(3)(i), the Commission emphasized

the significance of solicitation as a CPO activity, stating “[a]ny

person seeking to act in accordance with any of the foregoing

exemptions from registration should note that the prohibition on

contact with U.S. customers applies to solicitation as well as

acceptance of orders. If a person located outside the U.S. were to

solicit prospective customers located in the U.S. as well as outside

of the U.S., these exemptions would not be available, even if the

only customers resulting from the efforts were located outside the

U.S.” Id. at 63977-78 (emphasis in original) (footnote omitted).

    25 The Commission intends by the proposed amendments to permit

CPOs to maintain registration with respect to the operation of

commodity pools soliciting, accepting, or managing assets sourced

from participants located in the U.S., while availing themselves of

an exemption from registration with respect to pools located

offshore for which participants located in the U.S. are solicited or

permitted as participants.

—————————————————————————

 

2. The History of Advisory 18-96 and the Commission’s Rationale for

Proposing Superseding Part 4 Amendments

    On April 11, 1996, staff from the Commission’s Division of Trading

and Markets (T&M), a predecessor of today’s Division of Swap Dealer and

Intermediary Oversight (DSIO or Division), issued Advisory 18-96,26

under which two types of relief are currently available. Qualifying,

registered CPOs operating offshore commodity pools may claim exemptive

relief from the disclosure, reporting, and recordkeeping requirements

of Sec. Sec.  4.21, 4.22, and 4.23(a)(10) and (a)(11) with regard to

their offshore commodity pools.27 Alternatively, Advisory 18-96 also

permits qualifying, registered onshore CPOs to claim exemptive relief

from solely the books and records location requirement in Sec. 

4.23,28 thereby allowing such CPOs to maintain their offshore pool’s

original books and records at the pool’s offshore location, rather than

at the CPO’s main business address in the U.S.

—————————————————————————

 

    26 Advisory 18-96, “Offshore Commodity Pools–Relief for

Certain Registered CPOs From Rules 4.21, 4.22 and 4.23(a)(10) and

(a)(11) and From the Location of Books and Records Requirement of

Rule 4.23,” at p. 1, available at https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last retrieved July 31, 2018).

    27 Section 4.21, subject to certain conditions, requires each

CPO registered or required to be registered under the CEA to deliver

or cause to be delivered to a prospective participant in a pool that

it operates or intends to operate a Disclosure Document for the pool

that complies with Sec. Sec.  4.24 and 4.25 by no later than the

time it delivers to the prospective participant a subscription

agreement for the pool. 17 CFR 4.21; see also 17 CFR 4.24-4.25.

    Section 4.22 governs the periodic reporting required for

commodity pools and generally requires each CPO registered or

required to be registered to periodically distribute to each

participant in a pool it operates periodic Account Statements and

Annual Reports, which also must be filed with the Commission through

the National Futures Association. 17 CFR 4.22.

    Section 4.23 requires each CPO registered or required to be

registered to make and keep certain books and records concerning

both the commodity pool(s) it operates and the CPO itself;

paragraphs (a)(10) and (a)(11) particularly require a CPO to make

and keep with respect to a commodity pool it operates a Statement of

Financial Condition on a monthly or quarterly basis dependent on the

amount of the net assets of the commodity pool, as well as a

corresponding Statement of Income (Loss). 17 CFR 4.23(a)(10) and

(a)(11).

    At the time of its adoption in 1996, Advisory 18-96 provided

relief from the more robust compliance burdens then applicable to

CPOs, i.e., the disclosure and periodic reporting requirements.

    28 17 CFR 4.23.

—————————————————————————

 

    Generally, to qualify for the broadest relief available under

Advisory 18-96, a CPO must meet the following requirements:

    1. The CPO claiming the relief is registered as such with the

Commission;

    2. The commodity pool is, and will remain, organized and operated

outside of the United States;

    3. The commodity pool will not hold meetings or conduct

administrative activities within the United States;

    4. No shareholder of or other participant in the commodity pool is

or will be a United States person;

    5. The commodity pool will not receive, hold or invest any capital

directly or indirectly contributed from sources within the United

States; and

    6. The CPO, the commodity pool and any person affiliated therewith

will not undertake any marketing activity for the purpose, or that

could reasonably have the effect, of soliciting participation from

United States persons.29

—————————————————————————

 

    29 Advisory 18-96, at 1.

—————————————————————————

 

    To qualify for the recordkeeping location relief under the

Advisory, a registered CPO must represent the following:

    1. The CPO will maintain the original books and records of the

commodity pool at the main business office of the commodity pool

located outside the United States;

    2. The CPO desires to maintain such books and records outside the

United States in furtherance of compliance with the Internal Revenue

Service (IRS) requirements for relief from United States federal income

taxation;

    3. The CPO will maintain duplicate books and records of the

commodity pool at a designated office in the United States; and

    4. Within 72 hours after the request of a representative from the

Commission, the United States Department of Justice, or the National

Futures Association (NFA), the original books and records will be

provided to such representative at a place located in the United States

that is specified by the representative.30

—————————————————————————

 

    30 The Advisory states further, “[f]iling a notice of a claim

for exemption under [this section] of the Advisory, however, does

not eliminate the requirement to comply with the location of the

CPO’s own books and records under Rule 4.23(b) or, in the case of a

CPO of a Rule 4.7 exempt pool, the location requirement for the

CPO’s own books and records under Rule 4.7(a)(2)(iv).” Advisory 18-

96 at 2.

—————————————————————————

 

    The Advisory additionally requires all claimants of either type of

relief thereunder to represent that, “neither the CPO nor any of its

principals is subject to any statutory disqualification under CEA

section 8a(2) or 8a(3) unless such disqualification arises from a

matter which (a) was previously disclosed in connection with a previous

application for registration if such registration was granted, or (b)

was disclosed to the Commission or the NFA more than thirty days prior

to the filing of this notice.” 31 Notices claiming relief under

Advisory 18-96 were originally required to be submitted in writing and

filed with both Commission staff and NFA, to provide basic business

location and contact information for the CPO, to specify which type of

relief the CPO sought to claim for its commodity pool(s), and to be

signed by a representative duly authorized to bind the CPO (“if a sole

proprietorship, by the sole proprietor; if a partnership, by a general

partner; and if a corporation, by the chief executive officer or chief

financial officer”).32

—————————————————————————

 

    31 Advisory 18-96, at 2; see also 7 U.S.C. 12a(2) and 12a(3).

    32 Advisory 18-96, at 3. In 1997, the Commission authorized

the NFA to, among other things, accept and process Advisory 18-96

notices of claim for exemption from the part 4 requirements. See

Performance of Certain Functions by National Futures Association

with Respect to Commodity Pool Operators and Commodity Trading

Advisors, 62 FR 52088 (Nov. 1, 1997). Notably, “[n]otwithstanding

any notice of a claim of exemption filed under this Advisory,

persons claiming such relief remain subject to all other applicable

requirements contained in the Act and the Commission’s regulations

issued thereunder, including, without limitation, the antifraud

provisions of Sections 4b and 4o of the Act, the reporting

requirements for traders set forth in Parts 15, 18, and 19 of the

Commissions regulations, and all other provisions of [p]art 4.”

Advisory 18-96, at 3.

—————————————————————————

 

    Given the increase in the Commission’s jurisdiction resulting from

the passage of the Dodd-Frank Act,33 as well as the adoption of

 

[[Page 52906]]

 

additional compliance requirements for which Advisory 18-96 currently

provides no relief,34 the Commission preliminarily believes that the

adoption of a CPO registration exemption based on the conditions of

Advisory 18-96 (18-96 Exemption) would benefit industry participants,

prioritize the use of Commission resources on the customer protection

of actual and potential commodity pool participants located in the

U.S., and provide relief to persons with respect to their commodity

pool operations that have a limited nexus with markets or participants

within the Commission’s jurisdiction. Importantly, a CPO claiming the

18-96 Exemption, as proposed, would still be subject to the anti-

manipulation and anti-fraud provisions of the CEA, and by virtue of

Sec.  4.13(c), would be required to make and keep books and records for

the exempt pool, and to submit to such special calls as the Commission

may make to demonstrate eligibility for and compliance with the

criteria of the 18-96 Exemption.35

—————————————————————————

 

    33 For instance, the Dodd-Frank Act amended the CPO definition

in CEA section 1a(11) to include any person engaged in a business

that is of the nature of a commodity pool that trades in swap

transactions. See 7 U.S.C. 1a(11), as amended by the Dodd-Frank Act,

Public Law 111-203, sec. 721(a)(2).

    34 See, e.g., 17 CFR 4.27 (imposing obligations on certain

CPOs to periodically file detailed information regarding pools and

other funds that the CPOs operate on Form CPO-PQR).

    35 17 CFR 4.13(c).

—————————————————————————

 

    The amendments proposed today would incorporate both types of

relief provided by Advisory 18-96 in their entirety in the Commission’s

existing part 4 regulatory framework by providing registration and

compliance exemptions for qualifying persons operating offshore pools,

with respect to CPO registration and, in the case of those domestic,

registered CPOs operating offshore pools, with respect to the books and

records location requirement in Sec.  4.23.36 The Commission intends

that the 18-96 Exemption, if adopted as proposed, would replace the

exemptive relief currently provided to registered CPOs relying upon

Advisory 18-96 for their offshore pool operations. Similarly, the

Commission also intends that the proposed amendments to Sec.  4.23,

which would provide a qualifying, registered onshore CPO an exemption

from the requirement that the CPO maintain the original books and

records of its offshore commodity pool(s) at its main business office

in the U.S., would replace that aspect of the Advisory.37 The

Commission preliminarily believes that these proposed amendments, if

adopted, would ultimately provide more comprehensive relief from CPO

and pool regulation than the Advisory alone and more flexibility than

the terms of Sec.  3.10(c)(3)(i).

—————————————————————————

 

    36 In 2006-2007, based on a rulemaking petition from NFA, the

Commission previously considered and proposed to rescind Advisory

18-96, which was thought to be rendered superfluous or duplicative

by the 2003 adoption of the CPO registration exemptions in Sec. 

4.13(a)(3) and (4). See Electronic Filing of Notices of Exemption

and Exclusion Under Part 4 of the Commission’s Regulations, 71 FR

60454 (Oct. 13, 2006) (Proposing Release), and 72 FR 1658 (Jan. 16,

2007) (Adopting Release) (declining to supersede Advisory 18-96, in

light of the 2003 adoption of Sec.  4.13(a)(4)). Section 4.13(a)(4),

prior to its 2012 rescission, permitted a qualifying person to claim

an exemption from registration with the Commission as a CPO, where

the commodity pool it operates is exempt from registration under the

Securities Act of 1933 and the natural and non-natural person

participants meet certain levels of sophistication, e.g., qualified

eligible persons or accredited investors. Although Advisory 18-96

and Sec.  4.13(a)(4) overlapped significantly, the Commission

declined to alter Advisory 18-96, in an effort to preserve the

relief from the books and record location requirement in Sec.  4.23

for any registered, onshore CPOs utilizing the Advisory18-96 relief

with respect to their qualifying offshore commodity pools. See 72 FR

at 1661.

    37 The Commission simultaneously proposes certain structural

amendments to Sec.  4.23 to increase that regulation’s readability

and ease of application.

—————————————————————————

 

3. Expanding the Prohibition on Statutory Disqualifications to

Exemptions Under Sec.  4.13 and Permitting Non-U.S. Person Participants

in De Minimis Commodity Pools

    Currently, none of the CPO registration exemptions in Sec.  4.13

prohibits statutory disqualifications as a condition of relief. In

contrast, one of the requirements to obtain relief under Advisory 18-96

is that neither the registered CPO nor its principals is subject to any

statutory disqualification under sections 8a(2) or 8a(3) of the

Act,38 unless such disqualification arises from a matter which was

previously disclosed in connection with a previous application, if such

registration was granted, or which was disclosed more than thirty days

prior to the claim of this exemption. The Commission is considering,

therefore, whether there could be a substantial number of CPOs that

claimed a Sec.  4.13 exemption and are subject to statutory

disqualifications or that employ statutorily disqualified principals,

and whether those statutorily disqualified individuals should be

permitted to operate commodity pools as exempt CPOs.

—————————————————————————

 

    38 7 U.S.C. 12a(2) and 12(a)(3). Under CEA section 8a(2), for

instance, the Commission may refuse to register a person who has

been temporarily or permanently enjoined by order not to act as a

Commission registrant, or to refrain from engaging in financially

criminal activities, or who, within ten years preceding the

application for registration with the Commission, has been convicted

of a felony for criminal activities involving commodity interests or

securities, or been found by the Commission or another governmental

body or agency to have violated the CEA, Commission regulations, or

securities laws. 7 U.S.C. 12a(2).

—————————————————————————

 

    The Commission is concerned that it poses undue risk from a

customer protection standpoint for its regulations in their current

form to permit statutorily disqualified persons or entities to legally

operate exempt commodity pools, especially when those same persons

would not be permitted to register with the Commission.39 The

Commission preliminarily believes that preserving the prohibition on

statutory disqualifications from Advisory 18-96 and applying it to

exemptions under Sec.  4.13 would provide a substantial customer

protection benefit by prohibiting statutorily disqualified persons from

operating and soliciting participants for investment in exempt

commodity pools.

—————————————————————————

 

    39 Commission staff previously became aware of a number of

statutorily disqualified CPOs operating commodity pools pursuant to

the registration exemption available in former Sec.  4.13(a)(4).

Because that exemption was rescinded in 2012, those particular CPOs

would have been required to modify their operations to comply with

another exemption under Sec.  4.13 that did not bar statutorily

disqualified CPOs, to cease participating in the commodity interest

markets, or to receive relief from the Commission to register and

continue operating.

—————————————————————————

 

    Consequently, the Commission is proposing to require any person

claiming a registration exemption under Sec.  4.13(a)(1), (2), (3), or

(5), or proposed Sec.  4.13(a)(4),40 to represent that neither the

claimant nor any of its principals is subject to statutory

disqualifications under sections 8a(2) or 8a(3) of the CEA. However,

the Commission also proposes to incorporate certain limited exceptions

already present in Advisory 18-96 that would permit statutory

disqualifications that were previously disclosed in registration

applications that were granted, or that were disclosed more than 30

days prior to the claim of exemption. The Commission preliminarily

believes this approach addresses customer protection concerns regarding

statutory disqualifications, while preserving flexibility in Commission

regulations applicable to CPOs. As proposed, the prohibition would

apply to current claimants under Sec.  4.13 as they renew their claims

on an annual basis–i.e., existing claimants would be required to

represent that

 

[[Page 52907]]

 

neither they nor their principals are subject to statutory

disqualifications under CEA sections 8a(2) or 8a(3), when they annually

affirm their continued reliance on a Sec.  4.13 exemption next year.

CPOs filing new claims of a Sec.  4.13 exemption, however, would be

required to comply with this prohibition upon filing, if and when the

amendments are adopted as proposed, and become effective.

—————————————————————————

 

    40 The Commission is not proposing to extend the prohibition

to the proposed exemption for qualifying family offices, discussed

infra as proposed Sec.  4.13(a)(8). By the terms of that proposed

exemption, such CPOs would be prohibited from soliciting non-family

members/clients to participate in their pool(s), necessarily

limiting their contact with prospective participants drawn from the

general public, and as a result, reducing the Commission’s customer

protection concerns in that context.

—————————————————————————

 

    Additionally, the Commission is proposing to amend the de minimis

commodity pool exemption in Sec.  4.13(a)(3) to explicitly permit non-

U.S. person participants, regardless of their financial

sophistication.41 The Commission understands that, relying on CFTC

Staff Letter 04-13,42 for purposes of determining whether a person

qualifies for exemption from CPO registration under Sec.  4.13(a)(3),

market participants are generally not considering whether non-U.S.

person participants meet one of the investor sophistication criteria

listed in Sec.  4.13(a)(3)(iii).43

—————————————————————————

 

    41 17 CFR 4.13(a)(3). Section 4.13(a)(3) provides an exemption

from CPO registration for any person who offers a pool that: (1) Is

exempt from registration under the Securities Act of 1933 and

offered and sold without marketing to the public in the U.S., (2) at

all times, is traded subject to de minimis trading thresholds, (3)

is limited to certain types of investors that the person believes to

be, at the time of investment or conversion to an exempt pool,

accredited investors and/or qualified eligible persons, and (4) is

not marketed as or in a vehicle for trading in commodity interests.

Id.

    42 CFTC Staff Letter 04-13 (Apr. 14, 2004), available at

https://www.cftc.gov/sites/default/files/tm/letters/04letters/tm04-13.htm (last retrieved July 31, 2018).

    43 In April 2004, the Division of Clearing and Intermediary

Oversight (DCIO), the most recent predecessor to DSIO, responded to

a request for clarification or interpretation of the de minimis

exemption from CPO registration in Sec.  4.13(a)(3). The requester

asked DCIO staff for confirmation that “a [CPO] claiming exemption

from registration under new Rule 4.13(a)(3) may permit Non-United

States persons to participate in pools operated pursuant to such

exemptive relief, regardless of whether such Non-United States

persons meet the investor sophistication requirements of Rule

4.13(a)(3)(iii).” CFTC Staff Letter 04-13, at 1. DCIO staff

concluded that because the exemption in Sec.  4.13(a)(4) permitted

non-U.S. person participants in pools exempt thereunder, regardless

of their financial sophistication, by virtue of the “qualified

eligible person” definition in Sec.  4.7(a)(2), then it would be

“consistent with the intent and purpose of Rule 4.13(a)(3)” to

also generally permit non-U.S. person investors to participate in

Sec.  4.13(a)(3) pools. Id. at 2. In 2012, the Commission rescinded

the exemption originally provided by Sec.  4.13(a)(4), the features

of which comprise the legal underpinnings for the analysis in CFTC

Staff Letter 04-13. See Commodity Pool Operators and Commodity

Trading Advisors: Compliance Obligations, 77 FR 11252 (Feb. 24,

2012); correction notice published at 77 FR 17328 (Mar. 26, 2012)

(CPO CTA Final Rule).

—————————————————————————

 

    The Commission preliminarily believes that permitting non-U.S.

person participants, regardless of their financial sophistication, in

Sec.  4.13(a)(3) exempt pools would generally be consistent with the

Commission’s policy approach in proposing to add the 18-96 Exemption to

the 17 CFR part 4 regulatory framework. With limited participation in

U.S. commodity interest markets subject to Commission jurisdiction,

commodity pools exempt under Sec.  4.13(a)(3) do not trigger the same

level of regulatory interest for the Commission as commodity pools

requiring CPO registration and compliance with all or part of the

requirements in 17 CFR part 4. Additionally, Sec.  4.7 already permits

non-U.S. persons,44 regardless of their “qualified eligible person”

(QEP) status, to participate in commodity pools operated thereunder,

which are not subject to de minimis commodity interest trading

thresholds. The Commission also preliminarily believes that it would be

consistent with the Commission’s other part 4 regulations, including

those amendments proposed today, to generally permit non-U.S. person

participants in Sec.  4.13(a)(3) exempt pools. Therefore, the

Commission proposes today to also amend Sec.  4.13(a)(3)(iii) to

specifically permit non-U.S. person participants.45

—————————————————————————

 

    44 17 CFR 4.7(a)(1)(iv).

    45 If adopted, the proposed rule would supersede prior staff

positions on this subject, including CFTC Staff Letter 04-13.

—————————————————————————

 

C. Proposed CPO and CTA Registration Exemptions for Qualifying Family

Offices

 

    The Commission is also proposing today amendments consistent with

two Commission staff no-action letters that currently provide relief

from CPO 46 and CTA47 registration to qualifying family offices

(Family Offices) with respect to investment management and advisory

activities conducted on behalf of their family clients (Family

Clients).

—————————————————————————

 

    46 CFTC Staff Letter 12-37 (Nov. 29, 2012), available at

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/12-37.pdf (last retrieved July 31, 2018) (CPO Family Office

No-Action Letter).

    47 CFTC Staff Letter 14-143 (Nov. 5, 2014), available at

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-143.pdf (last retrieved July 31, 2018) (CTA Family Office

No-Action Letter).

—————————————————————————

 

1. Defining Family Offices

    A Family Office is generally understood to be a professional

organization that is wholly-owned by clients in a family, including

members of a family and/or entities controlled by a family or family

member, e.g., charitable trusts, and that is operated as a wealth

management tool for their benefit.48 In granting no-action relief

from CPO registration to qualifying Family Offices, Commission staff

has previously stated that, “[t]ypically, a family office structure is

employed when one or more direct members of a family create substantial

wealth, and share that wealth in whole or in part with other members of

that family, either through direct transfer, inheritance, or similar

means.” 49 The Division noted further that, “[t]he family office is

then used to provide personalized services to that family, including

advice regarding issues of tax, estate planning, investment, and

charitable giving.” 50 According to the Private Investors Coalition,

which frequently comments on regulatory efforts impacting Family

Offices and which requested the relief from CTA registration granted by

DSIO in 2014 via CFTC Staff Letter 14-143, “single family offices have

existed for over 100 years . . . [and] were formed to implement very

important and complex objectives, including investment management,

corporate succession, estate, gift, and income tax planning and

charitable giving issues that are important to members of the family.”

51

—————————————————————————

 

    48 See, e.g., Letter from the Vlasic Investments, L.L.C., an

entity formed to manage the wealth of the Vlasic Family, to the

Securities and Exchange Commission, at 1 (Nov. 17, 2010), available

at https://www.sec.gov/comments/s7-25-10/s72510-83.pdf (last

retrieved July 31, 2018), submitted as a comment to Family Offices,

Investment Advisers Act Release No. 3098, 75 FR 63753 (Oct. 18,

2010).

    49 CPO Family Office No-Action Letter, at 1.

    50 Id.

    51 Letter from the Private Investors Coalition to the SEC, at

2 (Nov. 11, 2010), available at https://www.sec.gov/comments/s7-25-10/s72510-11.pdf (last retrieved July 31, 2018), submitted as a

comment to Family Offices, Investment Advisers Act Release No. 3098,

75 FR 63753 (Oct. 18, 2010). The Private Investors Coalition also

emphasized that although Family Offices may be formed by a single

family member who created the wealth to be managed, they are also

commonly formed by one or more lineal descendants of such family

members. Id.

—————————————————————————

 

2. Family Offices as Commodity Pools and the Rescission of Sec. 

4.13(a)(4)

    As discussed above, the operations of a Family Office frequently

involve the collective management of pooled assets from a variety of

sources, notwithstanding that those sources may all be members of a

single family, or organizations, trusts, or foundations for the benefit

of those family members. If such pooled assets are invested in

commodity interests,52 then it is highly likely that the managing

member of the Family Office, or similarly situated persons providing

services to the Family Office, is engaging in activities that would

otherwise require registration with the Commission as a CPO or CTA.

Consequently, absent an exemption,

 

[[Page 52908]]

 

exclusion, or other Commission staff letter relief, registration and

compliance requirements under the CEA and Commission regulations would

be triggered, requiring such Family Offices or members of their staff

to register with the Commission as CPOs and/or CTAs with respect to

those activities.

—————————————————————————

 

    52 17 CFR 1.3.

—————————————————————————

 

    In the 1990s and early 2000s, Commission staff frequently responded

to individual requests from Family Offices for relief from CPO and CTA

regulation with one-off relief letters determining the Family Office

not to be a commodity pool or providing no-action relief from such

registration to certain family members or staff.53 In 2003, the

Commission adopted former Sec.  4.13(a)(4), which provided an exemption

from CPO registration for a person operating a commodity pool: (1)

Whose interests are exempt from registration under the Securities Act

of 1933,54 and are offered and sold without marketing to the public

in the U.S.; and (2) whose participants are reasonably believed, at the

time of investment or conversion of the pool to an exempt pool, to be

QEPs as defined in Sec.  4.7(a)(2) 55 if natural persons, or QEPs or

“accredited investors,” in the case of non-natural person

participants.56

—————————————————————————

 

    53 See, e.g., CFTC Staff Letter 00-100 (Nov. 1, 2000) (finding

that a limited partnership consisting of immediate family members

that invests family assets in commodity futures is not a pool),

available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/00-100.pdf (last retrieved July

31, 2018); CFTC Staff Letter 97-78 (Sept. 24, 1997) (finding that a

partnership consisting of family members, former family members, and

trusts for the benefit of family members is not a commodity pool

within the meaning and intent of Sec.  4.10(d)), available at

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/97-78.pdf (last retrieved July 31, 2018).

    54 15 U.S.C. 77a et seq.

    55 17 CFR 4.7(a)(2).

    56 17 CFR 4.13(a)(4) (2010).

—————————————————————————

 

    Prior to the exemption’s rescission in 2012, many Family Offices

claimed former Sec.  4.13(a)(4) to legally operate their investment

vehicles, invest in commodity interests, and provide commodity trading

advice to Family Clients, without being required to register with the

Commission in any capacity.57 In 2011, the Commission proposed to

rescind Sec.  4.13(a)(4) 58 and the potential impact on Family

Offices was immediately noted; the Commission received comments

suggesting that the Commission allow Family Offices already in

existence and then relying on the exemption in Sec.  4.13(a)(4) to be

grandfathered, such that they could continue to operate without

registration even after the exemption’s rescission.59 In declining to

do so, the Commission stated in the 2012 Adopting Release:

—————————————————————————

 

    57 Further, as CPOs exempt pursuant to Sec.  4.13(a)(4), such

Family Offices also routinely relied upon the self-executing

exemption in Sec.  4.14(a)(5), which provides an exemption from CTA

registration to a person that is exempt from registration as a CPO

and the person’s commodity trading advice is directed solely to, and

for the sole use of, the pool or pools for which it is so exempt.

See 17 CFR 4.14(a)(5).

    58 Commodity Pool Operators and Commodity Trading Advisors:

Amendments to Compliance Obligations, 76 FR 7976 (Feb. 11, 2011).

    59 See comment letters from New York State Bar Association

(Apr. 12, 2011); Alternative Investment Management Association, Ltd.

(Apr. 12, 2011); Schulte Roth & Zabel LLP (Apr. 12, 2011); Fulbright

& Jaworski L.L.P. (Apr. 12, 2011); Securities Industry and Financial

Markets Association (Apr. 12, 2011); Seward & Kissel, LLP (Apr. 12,

2011); Katten, Muchin, Rosenman LLP (Apr. 12, 2011); all available

at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=973

(last retrieved July 31, 2018).

 

    The Commission does not believe that “grandfathering” is

appropriate in this context. As the Commission stated in its

Proposal, part of the purpose of rescinding Sec.  4.13(a)(4) is to

ensure that entities that are engaged in derivatives trading are

subject to substantively identical registration and compliance

obligations and oversight by the Commission. Grandfathering is not

consistent with the stated goals of the Commission’s rescission and

would result in disparate treatment of similarly situated entities.

Therefore, the Commission will implement the rescission of Sec. 

4.13(a)(4) for all entities currently claiming exemptive relief

thereunder.60

—————————————————————————

 

    60 See CPO CTA Final Rule, 77 FR at 11263.

 

Alternatively, other commenters requested that “the Commission adopt

an exemption from registration for family offices that is consistent

with the exemption adopted by the [Securities and Exchange Commission

(SEC)],” discussed infra.61 The Commission declined, however, to

adopt the SEC’s relief for Family Offices in 2012, because:

—————————————————————————

 

    61 Id. (citing the SEC’s Family Office exclusion from the

investment adviser definition at 17 CFR 250.202(a)(11)(G)-1).

 

    The Commission, therefore, believes that it is prudent to

withhold consideration of a family offices exemption until the

Commission has developed a comprehensive view regarding such firms

to enable the Commission to better assess the universe of firms that

may be appropriate to include within the exemption, should the

Commission decide to adopt one. Therefore, the Commission is

directing its staff to look into the possibility of adopting a

family offices exemption in the future.62

—————————————————————————

 

    62 Id. (citing 17 CFR 140.99(a)(3) and a variety of historic

Family Office relief letters).

—————————————————————————

 

    Finally, the Commission stated that Family Offices would “continue

to be permitted to write in on a firm by firm basis to request

interpretative relief from the registration and compliance obligations

under the Commission’s rules and to rely on those interpretative

letters already issued to the extent permissible under the Commission’s

regulations.” 63 Thus, pursuant to the amendments to 17 CFR part 4

adopted in 2012, among which was the rescission of Sec.  4.13(a)(4),

many Family Offices were required to register with the Commission as

CPOs, if they could not qualify for an alternative exemption or

otherwise obtain relief from Commission staff.64

—————————————————————————

 

    63 Id. (concluding that “an exemption for family offices is

not necessary at this time”).

    64 The Commission noted then that “family offices previously

relying on the exemption under Regulation Sec.  4.13(a)(3) will not

be affected by the rules adopted herein, as the Commission is not

rescinding the Sec.  4.13(a)(3) exemption and it will remain

available to entities meeting its criteria.” CPO CTA Final Rule, 77

FR at 11263.

—————————————————————————

 

3. The SEC’s Exclusion for Family Offices and CFTC Staff Letters 12-37

and 14-143

    In 2011, the SEC adopted an exclusion from the term “investment

adviser,” (IA) as defined by the Investment Advisers Act of 1940, as

amended (IA Act),65 for Family Offices (SEC Family Office Exclusion),

thus excluding Family Offices from regulation under the IA Act.66

Specifically, Sec.  275.202(a)(11)(G)-1(a) provides that a family

office, as defined in that section, shall not be considered to be an

investment adviser for purpose of the IA Act, and Sec. 

275.202(a)(11)(G)-1(b) defines “family office” as a company

(including its directors, partners, members, managers, trustees, and

employees acting within the scope of their position or employment)

that: Has no clients other than family clients, is wholly owned by

family clients and is exclusively controlled (directly or indirectly)

by one or more family members and/or family entities; and does not hold

itself out to the public as an investment adviser.67

—————————————————————————

 

    65 15 U.S.C. 80b-1, et seq.

    66 Family Offices; Final Rule, 76 FR 37983 (Jun. 29, 2011)

(SEC Family Office Final Rule).

    67 17 CFR 275.202(a)(11)(G)-1(a) and 275.202(a)(11)(G)-1(b).

—————————————————————————

 

    Because Family Offices, as such term is commonly understood, are

not intended to be marketed as an option for investing by the general

public, Family Offices are restricted, by definition and in practice,

to accepting assets for management from or providing services to solely

“family clients.” As a result, the SEC Family Office Exclusion

defines a Family Client as including family members, including non-

blood relatives such as spouses and adopted children, former family

members, key employees of the Family Office, former key employees

(under certain conditions), as

 

[[Page 52909]]

 

well as certain organizations, like non-profit organizations,

charitable foundations, charitable trusts or other charitable

organizations for which all the funding of such foundation, trust or

organization came exclusively from one or more other Family

Clients.68 Family Clients also may include the estate of a family

member, former family member, key employee, or subject to certain

conditions, former key employees.69 Additionally, investment and

estate planning vehicles, such as irrevocable trusts, in which one or

more other Family Clients are the only current beneficiaries, are also

permitted Family Clients.70

—————————————————————————

 

    68 17 CFR 275.202(a)(11)(G)-1(d)(4) (extensively defining

“Family Client”).

    69 Id.

    70 Id. See Staff Responses to Questions About the Family

Office Rule, available at https://www.sec.gov/divisions/investment/guidance/familyofficefaq.htm.

—————————————————————————

 

    Pursuant to the Commission’s instructions in the CPO CTA Final

Rule, many Family Offices sought relief from DSIO staff following the

2012 rescission of Sec.  4.13(a)(4). Certain representatives of the

Family Office industry requested relief that would be available to

Family Offices on a global basis and would be based upon the SEC Family

Office Exclusion. In the request for relief, industry representatives

asserted that Family Offices are not operations of the type and nature

that warrant regulatory oversight by the Commission, because, by

definition, a Family Office is not a vehicle in which non-Family

Clients would be solicited or permitted to invest. Because a Family

Office is comprised of participants with close relationships, and there

is a direct relationship between the clients and the CPO or advisor, it

was argued that such relationships greatly reduce the need for the

customer protections available pursuant to the regulations in 17 CFR

part 4.71

—————————————————————————

 

    71 CPO Family Office No-Action Letter, at 1-2. This rationale

is also noted in the adopting release of the SEC Family Office

Exclusion. See also SEC Family Office Final Rule, 76 FR at 37984.

—————————————————————————

 

    Having met with Family Office industry representatives and observed

the SEC’s experience after adopting the SEC Family Office Exclusion,

Commission staff thoroughly considered the issue and ultimately

determined to grant registration relief for Family Offices meeting the

requirements of the SEC Family Office Exclusion. On November 29, 2012,

DSIO issued CFTC Staff Letter 12-37, a no-action letter permitting

Family Offices complying with the SEC Family Office Exclusion to

operate and manage the assets of Family Clients without having to

register with the Commission as a CPO.72 Subsequently, in responding

to a request for relief from the Private Investors Coalition, DSIO

issued another no-action letter permitting Family Offices to provide

their Family Clients with commodity trading advice, without CTA

registration, provided that the Family Office did not hold itself out

to the public as a CTA and restricted any commodity trading advice

given to the Family Office itself and/or Family Clients.73

—————————————————————————

 

    72 CPO Family Office No-Action Letter.

    73 CTA Family Office No-Action Letter.

—————————————————————————

 

    In granting the no-action relief from CPO registration, DSIO staff

considered the requesters’ assertion that, “this issue has similarly

been addressed by the [SEC], which resulted in an exclusion for family

offices that would otherwise be required to register as an investment

adviser[,]” and that “SEC staff ha[d] devoted substantial time and

resources to addressing this issue.” 74 In determining to issue

relief, the Division reasoned that “the fundamental issue of the

appropriate application of investor protection standards as required by

each respective agency’s regulations is substantially similar.” 75

Further, the Division concluded that granting the relief would place

“both agencies on equal footing with respect to the application of

investor protections relevant to this issue [and] will facilitate

compliance with both regulatory regimes.” 76 Consequently, through

CFTC Staff Letters 12-37 and 14-143, the Division provided no-action

relief with respect to CPO registration for any person filing a claim

that operates a Family Office, as that term is defined in 17 CFR

275.202(a)(11)(G)-1(b), and with respect to CTA registration, for any

person filing a claim whose advisory services are limited to a Family

Office and/or Family Clients, as defined in 17 CFR 275.202(a)(11)(G)-

1(d)(4).77 Under each letter, the claimant is required to remain in

compliance with the SEC Family Office Exclusion, regardless of whether

the Family Office actually seeks such exclusion.78

—————————————————————————

 

    74 CPO Family Office No-Action Letter, at 2.

    75 CPO Family Office No-Action Letter, at 2.

    76 Id.

    77 CPO Family Office No-Action Letter, at 2; CTA Family Office

No-Action Letter, at 3.

    78 Id.

—————————————————————————

 

    In the six years since the rescission of Sec.  4.13(a)(4) and the

issuance of the CPO Family Office No-Action Letter, Commission staff

has gained additional familiarity with the Family Office industry. This

experience was gained through the continued availability of the CPO

Family Office No-Action Letter and the subsequent issuance and

utilization by industry of the CTA Family Office No-Action Letter, as

well as through the consideration of and response to the few additional

requests received by DSIO from Family Offices unable to meet the

criteria of either of the global no-action letters.79 The Commission

notes that DSIO has received a total of more than 500 claims of the no-

action relief provided by the CPO Family Office No-Action Letter and

the CTA Family Office No-Action Letter.

—————————————————————————

 

    79 See, e.g., CFTC Staff Letter 14-104 (Jun. 20, 2014),

available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-104.pdf (last retrieved July

31, 2018) (granting no-action relief to an entity providing advisory

services to two families with longstanding and extensive financial

and personal relationships).

—————————————————————————

 

    Based on this experience, and pursuant to the Commission’s

instructions to its staff in 2012 to consider the future adoption of

registration exemptions for Family Offices, the Commission is proposing

to adopt for qualifying Family Offices CPO and CTA registration

exemptions with terms similar to those in the CPO Family Office No-

Action Letter and the CTA Family Office No-Action Letter by amending

Sec. Sec.  4.13 and 4.14. The Commission preliminarily believes that

the familial relationships inherent in Family Offices provide a

reasonable mechanism for protecting the interests of Family Clients and

resolving disputes amongst them, and that the regulatory interest is

lower than in typical, arms-length transactions where the CPO and the

pool participants, or the CTA and its advisory clients, do not have

close relationships and/or long-standing family history between them.

The Commission also preliminarily believes that these characteristics

are a reasonable substitute for the benefits and protections afforded

by the Commission’s regulatory regime for CPOs and CTAs.

    Consistent with its statements in prior rulemakings impacting

Family Offices, the Commission notes that Family Offices unable to meet

the requirements of the exemptions proposed herein today may still

avail themselves of the relief provided in Sec.  4.13(a)(3), if they so

qualify, or they may continue to seek relief on an individual, firm-by-

firm basis through requests submitted to Commission staff.

 

D. Proposed Amendments Permitting General Solicitation by CPOs Pursuant

to the JOBS Act of 2012.

 

1. The JOBS Act of 2012, Regulation D, and Rule 144A

    On April 5, 2012, Congress enacted the JOBS Act for the stated

purpose of increasing American job creation and

 

[[Page 52910]]

 

economic growth by improving access to the public capital markets for

emerging growth companies.80 Among other things, the JOBS Act amended

various sections of the Securities Act of 1933 (“33 Act”) and

required the SEC to revise its regulations to implement certain of the

new JOBS Act provisions. Certain provisions of the JOBS Act expanded

the availability and marketability of privately offered securities by

loosening restrictions otherwise applicable to such offerings.

—————————————————————————

 

    80 Public Law 112-106, 126 Stat. 306 (Apr. 5, 2012).

—————————————————————————

 

    Section 5 of the 33 Act requires the registration of securities

offerings with the SEC and compliance with prospectus delivery

requirements, unless an exemption is available.81 Section 4(a)(2)

(formerly section 4(2)) of the 33 Act provides a statutory exemption

from these requirements for “transactions by an issuer not involving

any public offering.” 82 Rule 506 of the SEC’s Regulation D, “Rules

Governing the Limited Offer and Sale of Securities Without Registration

Under the Securities Act,” (Regulation D) was adopted to provide a

regulatory analog to the statutory exemption.83 Rule 506(b) of

Regulation D 84 was originally adopted by the SEC as a non-exclusive

safe harbor under the 33 Act section 4(a)(2) exemption for securities

offerings by an issuer, without regard to dollar amount, to an

unlimited number of “accredited investors,” as defined in Sec. 

230.501(a),85 and to no more than 35 non-accredited investors who

meet certain sophistication requirements.86 Offerings under Sec. 

230.506(b) are subject to the terms and conditions of Sec. Sec. 

230.501 and 230.502, including Sec.  230.502(c), which states that

neither the issuer nor any person acting on its behalf shall offer or

sell the securities by any form of general solicitation (General

Marketing Restriction).87

—————————————————————————

 

    81 15 U.S.C. 77e.

    82 15 U.S.C. 77d(a)(2).

    83 Proposed Revision of Certain Exemptions from the

Registration Provisions of the Securities Act of 1933 for

Transactions involving Limited Offers and Sales, 33 Act Rel. No.

6339 (Aug. 7, 1981).

    84 17 CFR 230.506(b).

    85 17 CFR 230.501(a).

    86 17 CFR 230.506(b).

    87 17 CFR 230.501, 230.502; 230.502(c).

—————————————————————————

 

    Through JOBS Act Section 201, Congress directed the SEC to amend 17

CFR 230.506 of Regulation D, to provide that the prohibition against

general solicitation or general advertising in section 230.502(c) of

title 17 shall not apply to offers and sales of securities made

pursuant to section 230.506, provided that all purchasers are

accredited investors.88 In 2012-2013, the SEC proposed and adopted

amendments to Sec.  230.506 consistent with the congressional

directives of the JOBS Act.89 By adding Sec.  230.506(c), the SEC

adopted an exemption that permits issuers to engage in general

solicitation or advertising to offer and sell securities under

Regulation D, provided that the issuer meets the terms and conditions

of Sec. Sec.  230.501 and 230.502(a) and (d), that all purchasers of

the offered securities are accredited investors, and that the issuer

takes reasonable steps to verify the accredited investor status of each

purchaser.90 In other words, the General Marketing Restriction in

Sec.  230.502(c) is not applicable to securities offerings made

pursuant to Sec.  230.506(c).

—————————————————————————

 

    88 JOBS Act, Public Law 112-206, sec. 201(a)(1), 126 Stat.

306, 313. Further, the JOBS Act amendments made clear that offers

and sales exempt under Rule 506 (as revised pursuant to JOBS Act

Section 201) shall not be deemed public offerings under the Federal

securities laws as a result of general advertising or solicitation.

Id. at 201(b) (adding 33 Act Section 4(b), 15 U.S.C. 77d(b)).

    89 Eliminating the Prohibition Against General Solicitation

and General Advertising in Rule 506 and Rule 144A Offerings, 77 FR

54464 (Sept. 5, 2012) and 78 FR 44771 (Jul. 24, 2013) (JOBS Act

Adopting Release).

    90 17 CFR 230.506(c)(1)-(2). In the JOBS Act Adopting Release,

the SEC stated that, “because the issuer has the burden of

demonstrating that its offering is entitled to an exemption from the

registration requirements of the [33 Act], it will be important for

issuers and their verification service providers to retain adequate

records regarding the steps taken to verify that a purchaser was an

accredited investor.” 78 FR at 44779.

—————————————————————————

 

    The SEC explained that it was retaining the exemption for

traditional Regulation D offerings in Sec.  230.506(b), “for those

issuers that either do not wish to engage in general solicitation in

their Rule 506 offerings . . . or wish to sell privately to non-

accredited investors who meet Rule 506(b)’s sophistication

requirements.” 91 Further, the SEC emphasized that the “mandate [in

JOBS Act Section 201(a)(1)] affects only [Sec.  230.506], and not

Section 4(a)(2) offerings in general, which means that . . . an issuer

relying on Section 4(a)(2) outside of the Rule 506(c) exemption will be

restricted in its ability to make public communications to solicit

investors for its offering because public advertising will continue to

be incompatible with a claim of exemption under Section 4(a)(2).” 92

The SEC also adopted substantively similar amendments to Rule 144A 93

eliminating offering and marketing restrictions in the resale of

certain securities sold to qualified institutional buyers (QIBs).94

—————————————————————————

 

    91 Id. at 44776.

    92 78 FR at 44774.

    93 17 CFR 230.144A.

    94 Rule 144A is a non-exclusive safe harbor exemption from the

registration and prospectus delivery requirements under the 33 Act

for resales of certain securities to QIBs, as defined in Sec. 

230.144A(a)(1), provided that certain conditions are met. Through

the JOBS Act, Congress directed the SEC to also adopt amendments to

Sec.  230.144A in order to permit general solicitation. JOBS Act,

Pub. L. 112-206, sec. 201(a)(2), 126 Stat. 306, 313. In the JOBS Act

Adopting Release, the SEC eliminated references to “offer” and

“offeree” in Rule 144A, such that, today, the provision only

requires that such resold securities “be sold to a QIB or to a

purchaser that the seller and any person acting on behalf of the

seller reasonably believe is a QIB.” 78 FR at 44786.

—————————————————————————

 

2. Impact of JOBS Act Amendments on CPOs and DSIO’s 2014 JOBS Act

Relief Letter

    Under certain circumstances, persons relying on the new exemption

in Sec.  230.506(c) (506(c) Issuers) or reselling securities pursuant

to Rule 144A (144A Resellers) may also be issuing interests in a

commodity pool, the CPOs of which are subject to Commission regulation.

Certain of the Commission’s regulations applicable to CPOs currently

contain restrictions on marketing and solicitation that conflict with

the statutory and regulatory amendments effected and prompted by the

passing of the JOBS Act. Specifically, certain persons who offer,

market, or sell securities from 506(c) Issuers or 144A Resellers may be

subject to Commission regulation under Sec. Sec.  4.7 or 4.13(a)(3),

both of which currently prohibit the general marketing and solicitation

that is now permitted by the JOBS Act.

    Section 4.7 provides relief from certain of the disclosure,

periodic and annual reporting, and recordkeeping requirements in Part 4

of the Commission’s regulations to registrants who file claims pursuant

to Sec.  4.7(d).95 The relief in Sec.  4.7(b) is available to: (1) A

registered CPO who offers or sells pool participations solely to QEPs

in an offering that qualifies for an exemption from the registration

requirements of the 33 Act pursuant to section 4(2) (now section

4(a)(2)) of that Act or pursuant to Regulation S, or (2) any bank

registered as a CPO in connection with a pool that is a collective

trust fund whose securities are exempt from registration under the 33

Act pursuant to section 3(a)(2) of that Act and are offered or sold,

without marketing to the public, solely to QEPs.96 Section 4.13(a)(3)

provides a registration exemption for CPOs that operate pools meeting

the conditions enumerated in that regulation. One of those conditions,

Sec.  4.13(a)(3)(i), requires that interests in

 

[[Page 52911]]

 

each pool for which the CPO claims the exemption be exempt from

registration under the 33 Act and “offered and sold without marketing

to the public.” 97 Additionally, Sec.  4.13(a)(3)(iii) requires that

the CPO reasonably believes, at the time of purchase, that each person

who participates in the exempt pool is, among other things, an

accredited investor or QEP.98

—————————————————————————

 

    95 17 CFR 4.7; 17 CFR 4.7(d).

    96 17 CFR 4.7(b).

    97 17 CFR 4.13(a)(3)(i).

    98 17 CFR 4.13(a)(3)(iii).

—————————————————————————

 

    Generally, all commodity pools relying on the exemption in 33 Act

section 4(a)(2), including pursuant to Sec.  230.506(b), remain subject

to prohibitions on general solicitation and general advertising, and

such pools’ CPOs may continue to claim relief under Sec. Sec.  4.7(b)

or 4.13(a)(3) in their current states. However, as noted above,

amendments to securities regulations prompted by the JOBS Act and the

requirements for exemptive relief under Sec. Sec.  4.7(b) or 4.13(a)(3)

are incompatible. In response to the SEC’s amendments, the Division

issued CFTC Staff Letter 14-116, an exemptive letter clarifying how

securities issuers and resellers, and their CPOs, could avail

themselves of relief both in the securities and commodity interest

sectors.99

—————————————————————————

 

    99 CFTC Staff Letter 14-116 (Sept. 9, 2014) (JOBS Act Relief

Letter), available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-116.pdf (last retrieved July

31, 2018) (JOBS Act Relief Letter).

—————————————————————————

 

    Subject to certain conditions, the JOBS Act Relief Letter provides

exemptive relief to claimants from the specific provisions of

Sec. Sec.  4.7(b) or 4.13(a)(3) outlined above, to make the relief

provided by those regulations compatible with amended Regulation D and

Rule 144A. Specifically, the CPOs of 506(c) Issuers and 144A Resellers

that filed a notice with DSIO staff received exemptive relief from the

requirements in Sec.  4.7(b) that an offering be exempt pursuant to

section 4(a)(2) of the 33 Act and offered solely to QEPs, and from the

requirement in Sec.  4.13(a)(3)(i) that the securities “be offered and

sold without marketing to the public.” 100

—————————————————————————

 

    100 JOBS Act Relief Letter, p. 6. The Commission notes that

Sec.  4.13(a)(3) requires only that interests in an exempt pool be

“exempt from registration” under the 33 Act, whereas Sec.  4.7(b)

has a more restrictive requirement that the pools qualify for

exemption specifically under 33 Act section 4(a)(2). As noted above,

the SEC emphasized, while amending Regulation D, that issuers

claiming a 33 Act section 4(a)(2) exemption or Sec.  230.506(b)

would still be restricted in marketing or advertising to the public,

based on the format of the congressional directive in the JOBS Act.

78 FR at 44774.

—————————————————————————

 

    In an effort to harmonize the impact of the JOBS Act on, and to

provide legal certainty with respect to the transactions engaged in by,

dually-regulated CFTC and SEC entities, the Commission is proposing to

adopt tailored amendments to Sec. Sec.  4.7(b) and 4.13(a)(3) that

would generally be consistent with the JOBS Act Relief Letter, as

explained further below.

 

E. Proposed Exclusionary Relief for BDCs

 

1. The CPO Exclusion in Sec.  4.5

    Section 4.5 provides an exclusion for certain otherwise regulated

persons from the CPO definition with respect to the operation of a

“qualifying entity” specified in that regulation.101 Examples of

excluded persons include insurance companies regulated by any State

102 with respect to the offering of a separate account; 103 a bank

regulated by a State or the United States 104 with respect to the

assets of any trust, custodial account, or other separate unit of

investment for which it is acting as a fiduciary and for which it has

investment authority; 105 the trustee of a plan subject to title I of

the Employee Retirement Income Security Act of 1974 (ERISA) 106 with

respect to the operations of that plan; 107 and most relevant to the

discussion herein, the operator of an investment company registered as

such under the Investment Company Act of 1940, as amended (ICA),108

with respect to the operated RIC.109

—————————————————————————

 

    101 17 CFR 4.5(a) and (b).

    102 17 CFR 4.5(a)(2).

    103 17 CFR 4.5(b)(2).

    104 17 CFR 4.5(a)(3).

    105 17 CFR 4.5(b)(3).

    106 17 CFR 4.5(a)(4).

    107 17 CFR 4.5(b)(4).

    108 15 U.S.C. 80a-1, et seq.

    109 17 CFR 4.5(a)(1) and (b)(1). As discussed, infra, Sec. 

4.5 lists the RIC as both the excluded person and the qualifying

entity. Given that the Commission has previously determined that the

RIC’s investment adviser is the appropriate person to serve as the

CPO of a RIC for regulatory purposes, the Commission is proposing

herein to amend Sec.  4.5(a)(1) to designate the investment adviser

as the excluded entity. See CPO CTA Final Rule, 77 FR at 11259.

—————————————————————————

 

2. BDCs: Exempt Investment Companies Restricted in Their Use of

Commodity Interests

    BDCs are closed-end companies subject to regulation by the SEC

under the ICA. Although BDCs meet the definition of an “investment

company” under ICA section 3,110 they are exempt from investment

company registration by virtue of the filing of an election under

section 54 of the ICA to be subject to various provisions of that

act.111 Despite not being registered as such, BDCs do operate in a

manner similar to closed-end RICs and are subject to many of the same

operational requirements of the ICA.112 Most BDCs have external

advisers, which generally must be registered with the SEC as investment

advisers under the IA Act.113 BDCs, like RICs, are subject to

periodic examination by the SEC. Further, BDCs must either have a class

of equity securities that is registered under, or filed a registration

statement for a class of equity securities pursuant to, the Securities

Exchange Act of 1934, as amended,114 which, in turn, requires filing

with the SEC: Annual reports on Form 10-K,115 quarterly reports on

Form 10-Q,116 current reports on Form 8-K,117 and proxy

solicitation statements in connection with annual stockholder

meetings.118 Additionally, almost all BDCs are listed for trading on

national securities exchanges, and thus, are subject to exchange rules

governing listed companies.119 BDCs are also subject to certain

regulations and corporate governance guidelines under the Sarbanes-

Oxley Act of 2002.120

—————————————————————————

 

    110 15 U.S.C. 80a-3.

    111 Id. at 80a-53. See id. at 80a-6(f).

    112 See, e.g., 15 U.S.C. 80a-18 (providing asset coverage

requirements among others subject to certain limitations); 15 U.S.C.

80a-61 (making section 18 of the ICA applicable to BDCs with certain

modifications).

    113 15 U.S.C. 80b-1, et seq.

    114 15 U.S.C. 78a et seq.

    115 17 CFR 249.310.

    116 17 CFR 249.308a.

    117 17 CFR 249.308.

    118 17 CFR 240.14a-4.

    119 See, e.g., NYSE Listed Company Manual, available at http://wallstreet.cch.com/LCM/ (last retrieved Apr. 25, 2018).

    120 Public Law 107-204, 116 Stat. 745 (July 30, 2002)

(codified in U.S.C. Titles 15, 18, 28, and 29).

—————————————————————————

 

    BDCs are primarily engaged in investing in, and providing

managerial assistance to, operating companies.121 Specifically, BDCs

are required to invest at least 70% of their assets in “eligible

portfolio companies,” 122 which are generally defined as small- or

mid-sized U.S. companies that have no outstanding listed

securities.123 BDCs typically limit their use of commodity interests

to interest rate and currency swaps, with some limited use of credit

default swaps and other commodity interests.124 Because BDCs

primarily

 

[[Page 52912]]

 

invest in private companies to which they are required to offer

managerial assistance, BDCs generally use commodity interests for

purposes of hedging, reducing, or otherwise managing investment and

commercial risks of the operating companies in which they invest.

Section 61 of the ICA 125 applies, among other things, the

limitations on the issuance of “senior securities” of section 18 of

the ICA to BDCs,126 subject to certain modifications to the

limitation on multiple classes on senior security indebtedness and to

the asset coverage requirements. BDCs, like registered closed-end

funds, may issue senior securities that either represent indebtedness

or stock (e.g., preferred stock), subject to the limitations of ICA

section 61.127

—————————————————————————

 

    121 15 U.S.C. 80a-2(a)(48).

    122 Id. See also 15 U.S.C. 80a-54(a).

    123 15 U.S.C. 80a-2(a)(46) (defining “eligible portfolio

company”). See 17 CFR 270.2a-46 (providing additional criteria

regarding “eligible portfolio companies”).

    124 See Use of Derivatives by Registered Investment Companies,

U.S. Securities and Exchange Commission, Division of Economic Risk

and Analysis, available at https://www.sec.gov/files/derivatives12-2015.pdf (last retrieved July 31, 2018). Staff in the SEC’s Division

of Economic Risk and Analysis pulled a random sample of investment

companies, including BDCs, to examine the use of derivatives by such

companies. Within the sampled BDCs, none used derivatives, which

appears to be consistent with assertions from members of industry

that the usage of derivatives by BDCs is generally very limited. Id.

    125 15 U.S.C. 80a-60.

    126 Id. at 80a-18.

    127 Id. at 80a-18(a)(2), 80a-60.

—————————————————————————

 

3. CFTC Staff Letter 12-40 and the Proposed Amendments

    In 2012, DSIO staff received correspondence requesting

interpretative guidance from the Division regarding BDCs 128 and the

availability of the exclusion from the CPO definition in Sec. 

4.5.129 DSIO understood that the request was prompted generally by

the inclusion of swaps within the jurisdiction of the Commission

pursuant to the Dodd-Frank Act, as well as the specific addition of

“swaps” to the list of commodity interests referenced within the

CEA’s definitions of “commodity pool” and CPO.130

—————————————————————————

 

    128 BDCs are subject to regulation under the ICA, but are not

RICs.

    129 17 CFR 4.5.

    130 7 U.S.C. 1a(10) and 1a(11).

—————————————————————————

 

    Following internal deliberations and further discussions with the

requester, the Division determined to issue no-action relief, rather

than interpretative guidance, which was accomplished on December 4,

2012, through the publication of CFTC Staff Letter 12-40 (BDC No-Action

Letter).131 In the BDC No-Action Letter, DSIO recited numerous ways

in which BDCs are regulated in a manner similar to RICs under the

ICA.132 Pursuant to the terms of that letter, an entity claiming

relief thereunder is subject to the following criteria: (1) The entity

must have elected to be treated as a BDC under section 54 of the ICA

133 and will remain regulated as such, and (2) the entity has not

marketed and will not market participations in the BDC to the public as

investment in a commodity pool, or otherwise as an investment in a

vehicle for the trading of commodity interests.134 Additionally, the

claimant must represent that it limits its use of commodity interests

in the BDC consistent with the trading thresholds in Sec. 

4.5(c)(2)(iii)(A)-(B).135 Finally, to claim the relief provided, an

entity must file via email to DSIO the requisite notice, which is then

electronically forwarded by CFTC staff to the NFA for inclusion in its

public database, the Background Affiliation Status Information Center

(BASIC).136

—————————————————————————

 

    131 CFTC Staff Letter 12-40, available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/12-40.pdf (Dec. 4, 2012) (last retrieved July 31, 2018).

    132 Id.

    133 15 U.S.C. 80a-53.

    134 BDC No-Action Letter, at 3.

    135 Specifically, the BDC must represent that it uses

commodity interests solely for bona fide hedging purposes within the

meaning and intent of Sec. Sec.  1.3(z)(1) and 151.5 (17 CFR 1.3 and

151.5) (2012)); provided, however, that in addition, with respect to

positions in commodity futures or commodity option contracts, or

swaps which do not come within the meaning and intent of Sec. Sec. 

1.3(z)(1) and 151.5, as those provisions existed in 2012, the

aggregate initial margin and premiums required to establish such

positions does not exceed five percent of the liquidation value of

the BDC’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 may be

excluded in computing such five percent; or the aggregate net

notional value of commodity futures, commodity options contracts, or

swaps positions not used solely for bona fide hedging purposes

within the meaning and intent of Sec. Sec.  1.3 and 151.5 (17 CFR

1.3 and 151.5 (2012)), determined at the time the most recent

position was established, does not exceed 100 percent of the

liquidation value of the BDC’s portfolio, after taking into account

unrealized profits and losses on any such position it has entered

into.

    On September 28, 2012, the U.S. District Court for the District

of Columbia vacated Sec. Sec.  1.3(z)(1) and 151.5 as part of the

total vacation of the Commission’s position limits rule. See Int’l

Swaps & Derivatives Ass’n v. CFTC, 887 F.Supp.2d 259 (D.D.C. Sept.

28, 2012). This created some legal uncertainty as to the effect of

the incorporation of those regulations in the CFTC’s amendments to

Sec.  4.5. On October 12, 2012, DSIO issued interpretative guidance

providing that Sec.  4.5(c)(2)(iii)(A) and (B) continue to

incorporate the substance of vacated Sec. Sec.  1.3(z)(1) and 151.5

for purposes of those provisions only. See CFTC Staff Letter 12-19

(Oct. 12, 2012), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/12-19.pdf (last retrieved

July 31, 2018). The Commission is not proposing to remove the cross-

references to Sec. Sec.  1.3(z)(1) and 151.5 (2012) at this time,

but instead, intends to consider amendments to the “bona fide

hedging” definition in Sec.  4.5, when it adopts final rules

replacing the vacated regulatory provisions.

    136 NFA’s BASIC website can be accessed at https://www.nfa.futures.org/basicnet.

—————————————————————————

 

    Since the issuance of CFTC Staff Letter 12-40, the Commission has

received 55 claims of relief. Division staff issued the BDC No-Action

Letter because BDCs are subject to oversight by the SEC that is

comparable to the regulation of RICs, and because BDCs use commodity

interests primarily for bona fide hedging purposes. For these same

reasons, the Commission has determined to exercise its authority to

propose to amend Sec.  4.5 to provide IAs of BDCs with comparable

exclusionary relief.

 

F. Relief From Sec.  4.27

 

1. History

    The Commission adopted Sec.  4.27 on November 16, 2011,137 and

subsequently amended it to implement Forms CPO-PQR and CTA-PR on

February 24, 2012.138 Section 4.27 generally requires each CPO that

is registered or required to be registered as such to provide

information regarding its operations as a CPO and each commodity pool

that it operates.139 It also requires each CTA that is registered or

required to be registered as such to provide information, including

financial information, regarding its operations and the pool assets

that it directs.140 The data collected is intended to, among other

things, facilitate monitoring of systemically important impacts to the

financial markets, as required by the Commission’s obligations as part

of the Financial Stability Oversight Council (FSOC).141

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    137 Reporting by Investment Advisers to Private Funds and

Certain Commodity Pool Operators and Commodity Trading Advisors on

Form PF, 76 FR 71128 (Nov. 16, 2011).

    138 CPO CTA Final Rule, 77 FR at 11252.

    139 17 CFR part 4, appendix A.

    140 17 CFR part 4, appendix C.

    141 CPO CTA Final Rule, 77 FR at 11267.

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2. Reporting Person Definition

    The entities required to file a Form CPO-PQR for CPOs, or a Form

CTA-PR for CTAs, are identified by the “reporting person” definition

(Reporting Person) contained in Sec.  4.27(b).142 Pursuant to that

definition, Reporting Persons include CPOs and CTAs that are registered

or required to be registered under the CEA and the Commission’s

regulations thereunder.143 After several filing cycles for both

forms, the data revealed a substantial number of Reporting Persons that

were filing Forms CPO-PQR and CTA-PR, but that had no other obligations

under part 4 of the Commission’s regulations. Specifically, the CPOs

were operating pursuant to an exclusion or exemption from registration

for all pools and accounts that they operated and/or directed, and the

CTAs did not direct any client accounts, yet these CPOs and CTAs

elected to maintain an active

 

[[Page 52913]]

 

registration with the Commission. This registration was sufficient to

qualify the entity as a Reporting Person under Sec.  4.27(b), and

consequently, it required these entities to file either a Form CPO-PQR

or Form CTA-PR, as applicable. However, because these Reporting Persons

did not operate pools or direct any accounts, or operated only exempt

pools that are not subject to reporting requirements under Sec.  4.27,

their Form CPO-PQR and Form CTA-PR filings did not contain meaningful

information to assess systemic risk.

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    142 17 CFR 4.27(b).

    143 Id.

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3. Current Commission Staff Letter Relief

    To address this issue, DSIO issued several staff letters that

provided exemptive relief from the requirement to file either a Form

CPO-PQR or CTA-PR, for CPOs 144 and CTAs 145 that do not otherwise

have reporting obligations under part 4 of the Commission’s

regulations. In so doing, DSIO believed that the data eliminated from

the dataset “provide limited additional information . . . beyond that

already available to the Commission as part of the registration process

and the [person’s] ongoing obligations as a registrant.” 146

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    144 CFTC Staff Letter 14-115 (Sept. 8, 2014), available at

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-115.pdf (last retrieved July 31, 2018) (providing relief

from filing a Form CPO-PQR to CPOs that optionally registered as

such with the Commission, but operated only pools for which they

were excluded from the definition of “commodity pool operator,”

and/or pursuant to a claim of exemption for registration with

respect to the operated pools).

    145 CFTC Staff Letter 15-47 (July 21, 2015), available at

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/15-47.pdf (last retrieved July 31. 2018) (providing similar

relief from filing a Form CTA-PR to CTAs who are registered as such

with the Commission, but do not direct trading for any commodity

interest accounts).

    146 CFTC Staff Letter 14-115 at 2. See also CFTC Staff Letter

15-47 at 2 (“The same rationale applies in the instant scenario–

requiring a registered CTA that does not direct any trading of

commodity interest accounts to file a Form CTA-PR would similarly

provide limited additional information regarding that CTA.”).

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4. Proposing Amendments Consistent With Current Staff Letter Relief

    The Commission is proposing today to amend Sec.  4.27 in a manner

consistent with the exemptive relief currently made available in CFTC

Staff Letters 14-115 and 15-47, such that CPOs that operate only pools

for which they are otherwise excluded from the CPO definition or exempt

from CPO registration are not required to file a Form CPO-PQR, and CTAs

that do not direct client accounts are not required to file a Form CTA-

PR.147 As such, the Commission proposes to exclude these CPOs and

CTAs from the Reporting Person definition in Sec.  4.27(b).

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    147 It should be noted that similar to a discussion in CFTC

Staff Letter 14-115, where a CPO is registered, but operates no

pools, it is not required to file a Form CPO-PQR, as the terms of

that form only require completion if the CPO also operates at least

one pool. See CFTC Staff Letter 14-115, at 2.

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5. Expanding Relief From Sec.  4.27 to Additional Categories of CTAs

    Section 4.14(a)(4) provides that a person is exempt from

registering as a CTA, if that person is registered under the CEA and

the Commission’s regulations as a CPO, and the person’s commodity

trading advice is directed solely to the commodity pool or pools for

which it is registered as a CPO.148 Under Sec.  4.14(a)(4), the

person in question is registered as the CPO of a pool, and therefore,

already has an obligation to file a Form CPO-PQR with respect to that

pool, which requires the reporting of more information when compared to

Form CTA-PR.149 As such, the value of any data that would be

collected by requiring that same Reporting Person to also file a Form

CTA-PR is significantly outweighed by the burden to that entity of an

extra filing, as well as any inefficiency resulting from the collecting

and processing of duplicative data by NFA and Commission staff. As

such, the Commission today also proposes to exclude from the Reporting

Person definition under Sec.  4.27(b) those CTAs who comply with the

terms of the exemption from registration set forth in Sec.  4.14(a)(4),

and who limit their activities to those described by that exemption,

but nevertheless elect to register as CTAs.

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    148 17 CFR 4.14(a)(4).

    149 See 17 CFR part 4, appendix A and appendix C.

—————————————————————————

 

    Further, consistent with the foregoing, the Commission also

proposes to exclude from the Reporting Person definition any CTA that

directs only the accounts of a pool that it operates as an exempt CPO.

Specifically, Sec.  4.14(a)(5) exempts from CTA registration any person

that is exempt from CPO registration, if that person’s commodity

trading advice is directed solely to the pool for which it is exempt

from CPO registration.150 Consistent with the relief provided in CFTC

Staff Letter 14-115, the exempt CPO of the pool would not be required

to report on a Form CPO-PQR.151 It is therefore incongruent to

require the same person to report on Form CTA-PR with respect to the

operation of a pool for which it is not required to file a Form CPO-

PQR. Accordingly, the Commission proposes to remove the Sec.  4.27

filing obligation for such CTAs by excluding from the Reporting Person

definition any CTA that directs only the accounts of a pool for which

it is exempt from registration as a CPO, and for which the CTA complies

with the terms of a registration exemption under Sec.  4.14(a)(5), but

nevertheless elects to register as a CTA.

—————————————————————————

 

    150 17 CFR 4.14(a)(5).

    151 See CFTC Staff Letter 14-115 at 2.

—————————————————————————

 

II. Proposed Regulations

 

A. Providing CPOs of Offshore Pools With Registration and Recordkeeping

Relief Consistent With Advisory 18-96

 

1. New Sec.  4.13(a)(4): The 18-96 Exemption

    The Commission is proposing to amend Sec.  4.13 by adding a new

exemption from CPO registration in the currently reserved paragraph

(a)(4) for qualifying persons operating commodity pools outside of the

United States. The 18-96 Exemption would incorporate the vast majority

of the requirements in the Advisory (with the exception of requiring

CPO registration) and would be limited in application to each pool for

which the person claims exemption from registration under paragraph

(a)(4).

    Proposed Sec.  4.13(a)(4)(i) through (vi) explain the substantive

conditions that must be met to be eligible for the exemption. Because

the 18-96 Exemption is based on the location of the pool and/or its

participants, the exemption requirements, much like the Advisory, would

focus on the location or base of activities for the pool, including the

location and source of any capital invested in the exempt offshore

pool. The 18-96 Exemption would include the following parameters: (i)

The pool is, and will remain, organized and operated outside of the

United States; (ii) the pool will not hold meetings or conduct

administrative activities within the United States; (iii) no

shareholder of or other participant in the pool is or will be a U.S.

person; (iv) the pool will not receive, hold or invest any capital

directly or indirectly contributed from sources within the United

States; and (v) the person, the pool, and any person affiliated

therewith will not undertake any marketing activity for the purpose, or

that could reasonably be expected to have the effect, of soliciting

participation in the pool from U.S. persons.

    Consistent with its past prioritization of resources, the

Commission intends that the requirements of the 18-96 Exemption would

limit that exemption’s availability to those persons operating

commodity pools offshore, soliciting, accepting funds from, and

managing assets from solely persons located

 

[[Page 52914]]

 

outside the United States, and otherwise having a very limited nexus

with the Commission’s jurisdiction and regulated markets. By virtue of

providing a CPO registration exemption, the 18-96 Exemption, once

claimed by a qualifying CPO for its offshore pool(s),would result in

the claiming CPO receiving relief from the vast majority of significant

compliance requirements in part 4, including Sec.  4.27, which requires

the filing of Form CPO-PQR with respect to the directed assets of each

commodity pool under the advisement of any CPO that is registered or

required to be registered, including any CPO currently claiming

Advisory 18-96.

2. New Sec.  4.13(a)(6): The Proposed Prohibition on Statutory

Disqualifications

    The Commission also proposes to amend Sec.  4.13(a) by adding a new

paragraph (a)(6). Proposed Sec.  4.13(a)(6) would require any person

claiming an exemption under paragraphs (a)(1) through (a)(5) of Sec. 

4.13 to represent that neither the person nor any of its principals is

subject to any statutory disqualification under sections 8a(2) or 8a(3)

of the Act, unless such disqualification arises from a matter which was

previously disclosed in connection with a previous application, if such

registration was granted, or which was disclosed more than thirty days

prior to the claim of this exemption. As discussed above, the

Commission believes preliminarily that this proposed amendment would

provide additional customer protection because statutorily

disqualified, unregisterable persons would no longer be permitted to

claim the CPO exemptions under Sec.  4.13(a)(1) through (a)(5).

3. Amendments to Sec.  4.13: Claiming the Proposed 18-96 Exemption

    The Commission is proposing to amend Sec.  4.13(b) to incorporate

the 18-96 Exemption into the existing timing and claims process for

other CPO exemptions, which the Commission preliminarily believes

establishes a reasonable timing requirement for such claims. Once

adopted, this provision would apply to persons claiming the 18-96

Exemption for newly established offshore commodity pools. If this

rulemaking is adopted, the Commission intends to permit all existing

claimants under Advisory 18-96 to claim the 18-96 Exemption.

    As proposed, Sec.  4.13(b)(2)(i) would require a person claiming

the 18-96 Exemption to do so within 30 days of engaging in CPO

activities that would make relief under Sec.  3.10(c)(3)(i) unavailable

to that person. Until that point in time, the person could freely rely

on Sec.  3.10(c)(3)(i), which is self-executing; such reliance would no

longer be permitted, however, once the person is required to register

or claim a CPO exemption with respect to a commodity pool that is

marketed to U.S. persons, that contains funds belonging to U.S.

persons, or that is otherwise operated in the U.S., its territories, or

possessions. Therefore, proposed Sec.  4.13(b)(2)(i) would require a

person to claim the 18-96 Exemption within 30 days of such an

occurrence, which the Commission preliminarily believes is sufficient

time for a person to achieve compliance with the terms of the 18-96

Exemption.

4. Making the 18-96 Exemption Available on a Pool-by-Pool Basis

    It is crucial to the proper functioning of the 18-96 Exemption that

it be available on a pool-by-pool basis. This feature would permit

claiming CPOs to be exempt with respect to their qualifying offshore

commodity pools, while permitting them to maintain CPO registration for

any commodity pools engaged in activities requiring such registration,

i.e., the CPO has solicited or accepted funds from U.S. persons for

investment in the commodity pool. This characteristic would effectively

differentiate the 18-96 Exemption from the relief currently provided

under both Advisory 18-96 and Sec.  3.10(c)(3)(i). Therefore, the

Commission proposes to adopt in Sec.  4.13 a new paragraph (e)(3),

which would establish the 18-96 Exemption as clearly available on a

pool-by-pool basis. Specifically, the Commission proposes to add Sec. 

4.13(e)(3), which would permit a CPO to claim the 18-96 Exemption with

respect to qualifying offshore pools and to simultaneously register as

a CPO with respect to other pools that require registration or are

otherwise not exempt pools, and also to amend Sec.  4.13(e)(1) to note

the addition of new Sec.  4.13(e)(3).

5. Other Amendments to Miscellaneous Provisions in Sec.  4.13

    Without any additional amendment, current Sec.  4.13(a)(6)

(proposed to be renumbered as paragraph (a)(7)) contains a reference to

Sec.  4.13(a)(4), where the 18-96 Exemption is proposed to be housed.

That reference is a holdover from the original exemption in Sec. 

4.13(a)(4) rescinded by the Commission in 2012, and would require any

person claiming the 18-96 Exemption to furnish in written communication

physically delivered or delivered through electronic transmission to

each prospective participant in the pool: (A) A statement that the

person is exempt from registration with the Commission as a commodity

pool operator, and that therefore, unlike a registered commodity pool

operator, it is not required to deliver a Disclosure Document and a

certified annual report to participants in the pool; and (B) a

description of the criteria pursuant to which it qualifies for such

exemption from registration.152 Section 4.13(a)(6)(ii) (proposed

paragraph (a)(7)(ii)) would also require a person claiming any

exemption thereunder to make these disclosures by no later than the

time it delivers a subscription agreement for the pool to a prospective

participant in the pool.

—————————————————————————

 

    152 17 CFR 4.13(a)(6).

—————————————————————————

 

    Because disclosure documents and certified annual reports are two

of the most significant compliance burdens in part 4 of the

Commission’s regulations, it is critical that prospective participants

be informed as to which, if any, customer protections apply to them and

their investment, and as to what information they are entitled to

receive from the CPO of their pool. Nonetheless, the Commission

understands that currently, as proposed, only non-U.S. persons would be

the participants in qualifying pools operated by persons claiming the

18-96 Exemption. The Commission notes that such disclosures generally

would be more informative or helpful to U.S. person investors in exempt

pools, but inquires whether non-U.S. persons would expect or otherwise

benefit from such disclosures, such that the reference to Sec. 

4.13(a)(4) should be retained.153 The Commission specifically

requests comment on this issue below.

—————————————————————————

 

    153 Indeed, one of several comments received on the

Commission’s 2006 proposal to rescind Advisory 18-96 stated that,

“it is unnecessary and confusing to the non-U.S. domiciled

investors to explain why the sponsor is not registered with a U.S.

futures regulator, and recommended that Advisory 18-96 be retained

as an option for CPOs,” because of the required disclosures in

Sec.  4.13. See 72 FR at 1661.

—————————————————————————

 

    The Commission is also amending Sec.  4.13(a)(3)(iii)(E) to remove

a cross-reference to rescinded Sec.  4.13(a)(4) and replace it with

“non-U.S. persons.” This amendment would effectively adopt the

interpretation in CFTC Staff Letter 04-13, discussed supra, by

permitting non-U.S. person participants, regardless of their financial

sophistication, to invest in Sec.  4.13(a)(3) exempt pools.

 

[[Page 52915]]

 

6. Preserving Advisory 18-96’s Recordkeeping Location Relief With

Amendments to Sec.  4.23 and Certain Technical Amendments

    As discussed above, the Commission has also determined to preserve

Advisory 18-96’s relief from the generally applicable recordkeeping

location requirement in Sec.  4.23. Specifically, the Commission is

proposing to amend Sec.  4.23 by adding a new paragraph (c), such that

registered onshore CPOs operating offshore commodity pools may seek

relief from the requirement in that regulation that all books and

records concerning the pool and CPO be kept at the CPO’s main business

office, provided that the person meets the requirements thereunder

incorporated from the Advisory. Proposed Sec.  4.23(c) contains

exemptive relief for this specific type of CPO with regard to the

offshore commodity pool(s) it operates, and contains the vast majority

of the requirements for claiming the equivalent relief under Advisory

18-96. Because Sec.  4.23 applies to CPOs registered or required to be

registered, the Commission preliminarily believes it is not necessary

to incorporate the prohibition on statutory disqualifications in the

requirements for claiming this proposed exemptive relief.

    The Commission is also proposing a series of organizational, non-

substantive amendments to Sec.  4.23, which the Commission

preliminarily believes would clarify the existing recordkeeping

location requirement applicable to all CPOs registered or required to

be registered, would retain current exemptive relief provided by that

regulation, and overall, would make the regulation easier to read and

understand, even with the addition of the exemptive relief also being

proposed today. The Commission requests comment on whether these

proposed amendments effectively incorporate in Sec.  4.23 the

recordkeeping location requirement relief currently found in Advisory

18-96, and whether the proposed technical amendments improve or

otherwise alter that regulation or its application in any way.

 

B. Proposed Family Office Exemptions

 

    Consistent with the CPO Family Office No-Action Letter, the

Commission proposes to adopt for qualifying Family Offices a new

regulatory exemption in Sec.  4.13(a)(8). New Sec.  4.13(a)(8) would

provide relief from registration equivalent to the CPO Family Office

No-Action letter, and the exemption’s availability would be contingent

on the Family Office: (1) Meeting the requirements for being deemed a

Family Office pursuant to the SEC Family Office Exclusion in 17 CFR

275.202(a)(11)G-1; (2) restricting its investing and advisory

activities solely to Family Clients, as defined in the SEC Family

Office Exclusion; and (3) not engaging in the solicitation of persons

other than Family Clients permitted under the SEC Family Office

Exclusion. The prohibition against solicitation of non-Family Clients

ensures that the exempt CPO is limiting its activities to those

associated with the operation of a Family Office, as contemplated by

the SEC Family Office Exclusion, which the Commission preliminarily

believes would reduce its regulatory interest in such investment

vehicles, when compared to other commodity pools.

    As part of claiming exemptive relief under Sec.  4.13, each person

must file an annual notice under Sec.  4.13(b)(4) confirming that the

person remains exempt from registration. The Commission proposes to

maintain the annual notice filing for all persons claiming relief under

Sec.  4.13, including persons claiming the new proposed exemption for

Family Offices. The Commission believes that the notice requirement

should ensure at least an annual assessment of whether the CPO of the

Family Office remains eligible to rely upon the proposed exemption.

    With respect to the CTA Family Office No-Action Letter, the

Commission also proposes adding a new CTA registration exemption at

Sec.  4.14(a)(11) consistent with that relief. The Commission

preliminarily believes that Family Offices that are also claiming

relief from CPO registration under proposed Sec.  4.13(a)(8) would

already be eligible for relief from CTA registration by virtue of the

existing exemption in Sec.  4.14(a)(5), which provides an exemption

from CTA registration for persons exempt from CPO registration that

only advise a pool or pools for which the person is so exempt.154

Therefore, the Commission is proposing to limit the new exemption in

Sec.  4.14(a)(11) to the advice provided to individual Family Clients.

Consistent with most exemptions available under Sec.  4.14, the

Commission is also proposing that the new exemption for qualifying CTAs

of Family Offices and Family Clients be self-executing, and is,

therefore, not proposing to require a notice filing from claimants

thereunder.

—————————————————————————

 

    154 17 CFR 4.14(a)(5).

—————————————————————————

 

C. Proposed Amendments Consistent With the JOBS Act Relief Letter

 

    The Commission proposes today to add to part 4 regulatory

harmonization consistent with the JOBS Act Relief Letter, through

specific amendments to Sec. Sec.  4.7(b) and 4.13(a)(3). In Sec.  4.7,

the paragraph (b) introductory text currently sets forth the

eligibility requirements for CPOs claiming relief thereunder with

respect to certain pools they operate. The Commission proposes to

remove the reference to “section 4(2) of [the 33] Act,” to remove

references to the act of “offering” the Sec.  4.7 exempt pool, and to

delete the text, “without marketing to the public.” The Commission

intends that these amendments would permit CPOs claiming the exemptive

relief in Sec.  4.7(b) to engage in general solicitation or marketing,

if eligible to do so under their securities law exemptions.155

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    155 The Commission notes that the amendments effectively give

claiming CPOs the option to rely on the JOBS Act relief. CPOs

continuing to offer traditional Regulation D issuances will still be

able to rely on Sec.  4.7(b) for relief as well.

—————————————————————————

 

    Additionally, the Commission is proposing to break out the eligible

claimants of the relief in Sec.  4.7(b) into two new paragraphs,

paragraphs (b)(1)(i) and (b)(1)(ii), and to renumber the remaining

subparagraphs of Sec.  4.7(b). These changes are intended to improve

the readability and clarity of that regulation. With today’s proposed

amendments, the operative requirements remaining in Sec.  4.7(b) for

non-bank CPOs claiming relief thereunder are that: (1) The CPO must be

registered with respect to the exempt pool/offering; (2) participations

in the exempt pool must be exempt from the Securities Act and/or

offered and sold pursuant to Regulation D (under either Sec. 

230.506(b) or 230.506(c)) or resold pursuant to Rule 144A, 17 CFR

230.144A, or offered pursuant to Regulation S; 156 (3) the

participations must be sold solely to QEPs; and (4) the registered CPO

must file the required notice and otherwise comply with the

requirements in Sec.  4.7(d) 157 in operating the exempt pool. The

Commission preliminarily believes that the amendments, as proposed,

would achieve its goal of permitting commodity pools operated by CPOs

claiming relief under Sec.  4.7(b) to avail themselves of the JOBS Act

relief adopted by the SEC, while retaining the other requirements

currently set forth in that regulation.

—————————————————————————

 

    156 17 CFR 230.901-230.904.

    157 17 CFR 4.7(d).

—————————————————————————

 

    The Commission is also proposing similar amendments to the

registration exemption provided to eligible CPOs in Sec.  4.13(a)(3).

In Sec.  4.13(a)(3)(i), the Commission proposes to delete the language,

“such interests are offered and sold without marketing to the public

in the United States,” and to replace it with a conditional statement

 

[[Page 52916]]

 

incorporating Regulation D and Rule 144A by reference. Consequently,

the proposed amendments to Sec.  4.13(a)(3)(i) would require the

interests to be exempt from registration under the 33 Act, and to the

extent those interests are marketed and advertised in the U.S., the

amendments would also require those interests only be so marketed or

advertised in compliance with the provisions of Regulation D or of Rule

144A, as amended by the JOBS Act. Consistent with the proposed

amendments to Sec.  4.7(b) discussed above, the Commission

preliminarily believes that the amendments, as proposed, would achieve

its goal of permitting CPOs claiming relief under Sec.  4.13(a)(3) to

avail themselves of the JOBS Act relief adopted by the SEC with respect

to those exempt commodity pools, while retaining the other requirements

currently set forth under that section.

 

D. Proposed BDC Exclusion

 

    The Commission proposes to amend Sec.  4.5 to include investment

advisers (as defined above, IAs) of BDCs under paragraph (a) as a type

of entity that shall be excluded from the CPO definition with respect

to the operation of a “qualifying entity,” 158 and to include BDCs

as a type of “qualifying entity” under paragraph (b), for which an

exclusion may be so claimed.159 Because BDCs are similarly situated

to RICs, the Commission preliminarily believes that IAs of BDCs should

be subject to the same operational requirements as CPOs of RICs, an

approach consistent with that taken by Commission staff through the BDC

No-Action Letter. Because the CPOs of both RICs and BDCs would be their

IAs, the Commission also proposes revising Sec.  4.5(a)(1) 160 to

refer to the registered IA, rather than the investment company itself,

as the entity claiming the CPO exclusion. Because of the similarities

between BDCs and RICs, the Commission preliminarily believes IAs of

BDCs should be required to reaffirm their Sec.  4.5 exclusion claim on

an annual basis, which is consistent with the existing requirements for

IAs of RICs under Sec.  4.5(c)(5).161 Finally, the Commission

concludes that the existing language in Sec.  4.6 should be sufficient

to provide exclusionary relief for IAs of BDCs with respect to the CTA

definition without additional proposed amendments.162

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    158 17 CFR 4.5(a).

    159 17 CFR 4.5(b).

    160 17 CFR 4.5(a)(1).

    161 17 CFR 4.5(c)(5).

    162 17 CFR 4.6. Section 4.6 provides an exclusion from the CTA

definition to, among others, a person excluded from the CPO

definition by Sec.  4.5, whose commodity interest advisory

activities are solely incidental to its operation of those trading

vehicles for which Sec.  4.5 provides relief, i.e., in this case, an

IA of a BDC. Id.

—————————————————————————

 

E. Sec.  4.27 Relief

 

    The Commission proposes to amend Sec.  4.27 to exclude certain

registered CPOs and CTAs from the definition of “reporting person” in

Sec.  4.27(b). Specifically, the Commission proposes to place the

definition of “reporting person” in a new paragraph (b)(1) and to add

a new paragraph Sec.  4.27(b)(2) that would limit the application of

the “reporting person” definition, such that the registered CPOs and

CTAs discussed above would no longer be required to report on Forms

CPO-PQR and CTA-PR, as applicable. The Commission is also proposing to

revise the title of Sec.  4.27 to more accurately reflect the substance

of the section.

 

III. Request for Comments

 

    The Commission requests comment on all aspects of the Proposal.

Additionally, the Commission would appreciate consideration of the

following specific questions.

 

A. Advisory 18-96 and the Proposed 18-96 Exemption

 

    1. Should CPOs claiming the 18-96 Exemption be required to disclose

the exemption to participants in their offshore commodity pools? Would

such disclosure be meaningful to offshore investors? If the Commission

were to require such disclosure, what timing requirement should be

established? Should it be identical to, or different from, the timing

requirement proposed in the NPRM for claiming the 18-96 Exemption?

    2. Do the proposed amendments to Sec.  4.13(e) clearly establish

that the 18-96 Exemption is available to CPOs for each individual

commodity pool meeting the terms therein, without regard to the

claimant’s registration status? If not, how could the amendments be

improved?

    3. The Commission also requests comment on the prohibition on

statutory disqualifications proposed in Sec.  4.13 generally, the

impact of adopting this provision on industry participants and

currently exempt CPOs, and also, on what, if any, other statutory

disqualifications should be permissible for exempt CPOs and their

principals. In particular, comments should address any or all of the

following questions: What are the concerns and benefits associated with

the expansion of the prohibition on statutory disqualifications to the

CPO registration exemptions set forth in Sec.  4.13(a)(1), (a)(2),

(a)(3), and (a)(5), or proposed to be set forth in Sec.  4.13(a)(4)? Do

the limited exceptions that would permit certain statutory

disqualifications successfully address any unintended consequences of

adding the prohibition to Sec.  4.13, while still providing a base

level of customer protection by preventing statutorily disqualified

individuals from legally operating exempt commodity pools? Generally,

how should the Commission handle the implementation of the statutory

disqualification prohibition? Specifically, how should the prohibition

apply to current claimants under Sec.  4.13? How much time should the

Commission allow for filing updated exemption claims subject to the

prohibition? How much time should the Commission allow for an exempt

CPO to replace statutorily disqualified principals, in order to

maintain eligibility for a Sec.  4.13 exemption?

    4. When a qualifying CPO is transitioning from reliance upon Sec. 

3.10(c)(3)(i) to the 18-96 Exemption, is 30 days sufficient time in

which to claim the 18-96 Exemption for qualifying offshore pools?

Generally, please provide comment on whether the interaction between

Sec.  3.10(c)(3)(i) and the 18-96 Exemption, as proposed, is

understood.

    5. Is the language in proposed Sec.  4.13(e)(3) effective to make

the 18-96 Exemption available on a pool-by-pool basis, such that a

claim for the 18-96 Exemption would be able to co-exist with a

simultaneous CPO registration or even other exemption claims? If not,

why not?

    6. Should the Commission adopt all of the proposed requirements for

the relief under proposed Sec.  4.23(c)? Which requirements could be

dropped? Why? Are there additional or different conditions to this

relief that the Commission should consider adopting?

 

B. Proposed Family Office Exemptions

 

    7. Should CPOs of Family Offices organized as commodity pools be

required to annually recertify their eligibility for the proposed

exemption under Sec.  4.13(a)(8)? What are the costs and burdens that

an annual notice requirement would impose?

    8. Information on BASIC is provided to the public as a means of

ensuring that basic information regarding a person’s registration

status with the Commission is readily available. Given that the persons

claiming the proposed CPO exemption for the operation of Family Offices

are proposed to be prohibited from soliciting non-Family Client

participants, should notices filed by

 

[[Page 52917]]

 

Family Offices claiming the proposed CPO exemption in Sec.  4.13(a)(8)

be included in NFA’s public BASIC database?

    9. Does the proposed bifurcation of the CTA relief provided to (a)

CTAs of Family Offices organized as commodity pools, and (b) CTAs of

individual Family Clients clearly and effectively provide relief from

registration for CTAs that advise Family Offices in their capacity as

an exempt CPO and/or as a CTA to individual Family Clients? Is there a

clearer or more advantageous way to effectuate such relief?

    10. Should a notice be required in order to claim the proposed

exemption in Sec.  4.14(a)(11) for CTAs of Family Clients? If so,

should such CTAs be required to recertify eligibility for such

exemption on an annual, or longer term, basis? What are the costs and

burdens that such an annual notice requirement would impose on those

CTAs?

 

C. Proposed Amendments Consistent With the JOBS Act Relief Letter

 

    11. Do the amendments to Sec. Sec.  4.7(b) and 4.13(a)(3)

effectively incorporate in 17 CFR part 4 the general marketing and

solicitation permitted by the JOBS Act, consistent with the JOBS Act

Relief Letter? Are there additional amendments the Commission should

consider that would ensure this relief is completely added to the part

4 regulatory regime?

 

D. Proposed Adoption and Expansion of Exemptive Letter Relief From

Sec.  4.27 Filings

 

    12. Are there any additional classes of registered CPOs or CTAs

that should be excluded from the definition of “Reporting Person” in

Sec.  4.27(b)? If yes, please identify the class or classes, and

explain why they should be so excluded.

 

IV. Related Matters

 

A. Regulatory Flexibility Act

 

    The Regulatory Flexibility Act (RFA) requires Federal agencies, in

promulgating regulations, to consider whether the rules they propose

will have a significant economic impact on a substantial number of

small entities and, if so, to provide a regulatory flexibility analysis

regarding the economic impact on those entities. Each Federal agency is

required to conduct an initial and final regulatory flexibility

analysis for each rule of general applicability for which the agency

issues a general notice of proposed rulemaking.163

—————————————————————————

 

    163 5 U.S.C. 601 et seq.

—————————————————————————

 

    The regulatory amendments proposed by the Commission in this

release would affect only persons registered or required to be

registered as CPOs and CTAs, persons claiming exemptions from

registration as such, and certain persons excluded from the CPO

definition. 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 requirements of the RFA.164 With respect to CPOs, the Commission

previously has determined that a CPO is a small entity for purposes of

the RFA, if it meets the criteria for an exemption from registration

under Sec.  4.13(a)(2).165 Because these proposed regulations

generally apply to persons registered or required to be registered as

CPOs with the Commission, and/or provide relief to qualifying persons

from registration as such, as well as from related compliance burdens,

the RFA is not applicable to this Proposal with respect to CPOs.

—————————————————————————

 

    164 See, e.g., Policy Statement and Establishment of

Definitions of “Small Entities” for Purposes of the Regulatory

Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982).

    165 Id. at 18619-20. Section 4.13(a)(2) exempts a person from

registration as a CPO when: (1) None of the pools operated by that

person has more than 15 participants at any time, and (2) when

excluding certain sources of funding, the total gross capital

contributions the person receives for units of participation in all

of the pools it operates or intends to operate do not, in the

aggregate, exceed $400,000. See 17 CFR 4.13(a)(2).

—————————————————————————

 

    Regarding CTAs, the Commission has previously considered whether

such registrants should be deemed small entities for purposes of the

RFA on a case-by-case basis, in the context of the particular

Commission regulation at issue.166 As certain of these registrants

may be small entities for purposes of the RFA, the Commission

considered whether this rulemaking would have a significant economic

impact on such registrants.

—————————————————————————

 

    166 See id. at 18620.

—————————————————————————

 

    The portions of this Proposal directly impacting CTAs propose a

registration exemption consistent with DSIO’s CTA Family Office No-

Action Letter, as well as expanded exemptive relief from the Form CTA-

PR filing requirement in Sec.  4.27 for certain categories of CTAs.

These proposed amendments are not expected to impose any new burdens on

market participants or Commission registrants. Rather, to the extent

that this Proposal provides an exemption from the requirement to

register as a CTA or from the Form CTA-PR filing requirement in Sec. 

4.27, the Commission preliminarily believes it is reasonable to infer

that such exemptions would be much less burdensome to those persons

than either CTA registration or the preparation and filing of Form CTA-

PR. In fact, the Commission has not proposed herein to require a notice

filing for either the proposed exemption for CTAs of Family Offices and

Family Clients, or the expanded relief proposed for certain CTAs under

Sec.  4.27.167 Consequently, the Commission does not expect small

entities to incur any additional costs as a result of the Proposal, as

applicable to CTAs.

—————————————————————————

 

    167 The Commission notes that it requests comment on whether

the Commission should adopt regulations requiring CPOs of Family

Offices to file a notice to claim the proposed exemption under Sec. 

4.13(a)(8) and to annually affirm that claim, and/or requiring CTAs

of Family Offices to file a notice to claim the proposed exemption

in Sec.  4.14(a)(11). See supra pt. III, Request for Comments.

—————————————————————————

 

    Similarly, the Commission preliminarily does not believe that the

benefits associated with the exemption from CTA registration for CTAs

of Family Offices and Family Clients, or the expanded relief from the

requirement to prepare and file Form CTA-PR, will result in a

significant economic impact on small CTAs. The regulatory obligations

associated with CTA registration and compliance are not significantly

burdensome, being limited to the completion of a registration

application, the preparation and distribution of a disclosure document

(if required), the maintenance of certain books and records, and the

annual completion of Form CTA-PR, which consists of two questions with

several subparts. Although relief from these obligations is beneficial

to small CTAs, the Commission preliminarily believes that this does not

rise to the level of significant economic impact.

    Therefore, the Commission has preliminarily determined that, to the

extent that the Proposal affects CTAs, it 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 these proposed amendments, if adopted, will not

have a significant economic impact on a substantial number of small

entities.

 

B. Paperwork Reduction Act

 

1. Overview

    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.168 Under the PRA, an

agency may not conduct or sponsor, and a person is not required to

respond to, a

 

[[Page 52918]]

 

collection of information unless it displays a currently valid control

number from the Office of Management and Budget (OMB). This Proposal,

if adopted, would result in a collection of information within the

meaning of the PRA, as discussed below. The Commission is therefore

submitting this NPRM to OMB for review.

—————————————————————————

 

    168 See 44 U.S.C. 3501 et seq.

—————————————————————————

 

    The Proposal amends two collections of information for which the

Commission has previously received control numbers from OMB. The first

collection of information is, “Rules Relating to the Operations and

Activities of Commodity Pool Operators and Commodity Trading Advisors

and to Monthly Reporting by Futures Commission Merchants, OMB control

number 3038-0005” (Collection 3038-0005). Collection 3038-0005

primarily accounts for the burden associated with part 4 of the

Commission’s regulations that concern compliance obligations generally

applicable to CPOs and CTAs, as well as certain enumerated exemptions

from registration as such and exclusions from those definitions, and

available relief from compliance with certain regulatory requirements.

The Commission is proposing to amend this collection to reflect the

notices proposed to be required to claim certain of the registration

exemptions and the CPO exclusion proposed herein, as well as the

expected reduction in the number of registered CPOs and CTAs filing

Forms CPO-PQR and CTA-PR, pursuant to the proposed revisions to Sec. 

4.27.

    The Commission also proposes to amend a second collection entitled,

“Part 3–Registration, OMB control number 3038-0023” (Collection

3038-0023), which pertains to the registration of intermediaries

generally, to reduce the number of persons registering as CPOs and CTAs

as a result of the regulatory amendments proposed herein. Therefore,

the Commission is proposing adjustments to each of these collections

accordingly. The responses to these collections of information are

mandatory.

    The collections of information in the Proposal would make available

to eligible persons: (1) The 18-96 Exemption in proposed Sec. 

4.13(a)(4), which incorporates the majority of the relief provided by

Advisory 18-96, and which would exempt from CPO registration qualifying

CPOs with regard to their offshore pools; (2) the Advisory 18-96

recordkeeping location relief for qualifying, registered CPOs, which is

proposed to be added to Sec.  4.23; (3) the exemptions from CPO and CTA

registration for qualifying Family Offices in proposed Sec. Sec. 

4.13(a)(8) and 4.14(a)(11); (4) the proposed expansion of the exclusion

in Sec.  4.5 for IAs of BDCs; and (5) the proposed exemptive relief

made available through amendments to the Reporting Person definition in

Sec.  4.27(b), such that qualifying CPOs and CTAs no longer have to

file Forms CPO-PQR or CTA-PR.

    In each instance, eligible persons have the option to elect the

proposed registration or compliance exemption or exclusion if they are

so qualified, but have no obligation to do so. For this reason, except

to the extent that the Commission is amending Collection 3038-0005 for

PRA purposes to reflect these alternatives, and Collection 3038-0023 to

reduce the number of persons registering as CPOs or CTAs, today’s

Proposal is not expected to impose any significant new burdens on CPOs

or CTAs. Rather, to the extent that the proposed amendments provide

registration exemptions or definitional exclusions, and/or alternatives

to comprehensive compliance with Commission regulations, through the

adoption of amendments consistent with existing exemptive and no-action

letter relief, it is reasonable for the Commission to infer that the

proposed amendments will generally prove to be less burdensome for

persons eligible to claim the proposed alternative relief.

2. Revisions to the Collections of Information

a. OMB Control Number 3038-0005

    Collection 3038-0005 is currently in force with its control number

having been provided by OMB, and it was renewed recently on March 14,

2017.169 As stated above, Collection 3038-0005 governs responses made

pursuant to part 4 of the Commission’s regulations, pertaining to the

operations of CPOs and CTAs. Generally, under Collection 3038-0005, the

estimated average time spent per response will not be altered; however,

the Commission has made adjustments, discussed below, to the collection

to account for new and/or lessened burdens expected under the NPRM due

to persons claiming the proposed registration exemptions or exclusion

and proposed relief.

—————————————————————————

 

    169 See Notice of Office of Management and Budget Action, OMB

Control No. 3038-0005, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201701-3038-005 (last retrieved July 31,

2018).

—————————————————————————

 

    For example, the Commission estimates that the number of persons

responding to the portion of the collection associated with Sec. 

4.13(b)(1) (the requirement to file a claim for an exemption under that

section) will increase by at least the number of persons currently

claiming the CPO Family Office No-Action Letter, i.e., 200 CPOs.170

The Commission also preliminarily believes that there may be increased

notice filings under Sec.  4.13(b)(1), if the 18-96 Exemption is

adopted as proposed. Due to the flexibility of the proposed 18-96

Exemption as compared to Sec.  3.10(c)(3)(i), its adoption may cause

more CPOs to claim relief from registration on a pool-by-pool basis

through the 18-96 Exemption with respect to their offshore pools,

rather than with respect to their operations as a whole.

—————————————————————————

 

    170 No adjustments are proposed to be made to account for the

CTA Family Office No-Action Letter claims (100 claims received)

because the Commission has not proposed a filing requirement for

that new exemption. Rather, like the majority of the exemptions in

Sec.  4.14, the Commission has proposed to add that relief as a

self-executing exemption in Sec.  4.14, though it has requested

comment on this feature of the Proposal.

—————————————————————————

 

    Conversely, no adjustments need to be made to Collection 3038-0005

to account for the proposed JOBS Act amendments because persons relying

on the exemptive relief therein are, as a condition of relief,

currently required to claim an exemption under Sec. Sec.  4.7 or 4.13,

as applicable to them, and therefore, are already counted in this

collection. The Commission further proposes an increase to the number

of respondents under Sec.  4.5, which will account for new claims the

Commission anticipates receiving from IAs of BDCs seeking to claim the

expanded exclusion from the CPO definition.

    With regard to Sec.  4.27, the Commission is proposing to reduce

the number of persons filing all schedules of Forms CPO-PQR and CTA-PR

to reflect the categories of registered CPOs and CTAs that are proposed

to be considered outside the Reporting Person definition in Sec. 

4.27(b). Because there is no notice filing required for this relief,

there is no new burden associated with the actual claiming of the

relief provided under the revisions to Sec.  4.27 proposed herein.

    The currently approved total burden associated with Collection

3038-0005, in the aggregate, is as follows:

    Estimated number of respondents: 45,270.

    Annual responses for all respondents: 129,042.

    Estimated average hours per response: 2.83.171

—————————————————————————

 

    171 The Commission rounded the average hours per response to

the second decimal place for ease of presentation.

—————————————————————————

 

    Annual reporting burden: 365,764.

    The Commission estimates that the proposed amendments to Sec.  4.23

will add the following burden:

    Estimated number of respondents: 50.

 

[[Page 52919]]

 

    Annual responses by each respondent: 3.

    Estimated average hours per response: 0.5.

    Annual reporting burden: 75.

    The Commission estimates that the proposed CPO registration

exemptions under Sec.  4.13(a)(4) and 4.13(a)(8) will result in 250

additional notice filings under Sec.  4.13(b)(1). Therefore, the

Commission proposes to increase the burden associated with Sec. 

4.13(b)(1) to be as follows:

    Estimated number of respondents: 3,872.

    Annual responses by each respondent: 3.

    Estimated average hours per response: 0.5.

    Annual reporting burden: 1,936.

    The Commission estimates that the proposed exclusion for IAs of

BDCs under Sec.  4.5 will result in 50 additional notice filings under

Sec.  4.5. Therefore, the Commission proposes to increase the burden

associated with Sec.  4.5 to be as follows:

    Estimated number of respondents: 7,940.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 0.5.

    Annual reporting burden: 3,970.

    With respect to the burden associated with the proposed amendments

to Sec.  4.27, the Commission is updating the number of respondents.

Specifically, the Commission is modifying the number of respondents to

better reflect the average number of CPOs registered with the

Commission, less those CPOs that will be eligible for the relief

provided by the proposed amendments to the Reporting Person definition

in Sec.  4.27. The Commission has historically averaged approximately

1,800 registered CPOs. Based on the number of exemptions filed by CPOs

pursuant to Sec. Sec.  4.5 and 4.13, and filed under Advisory 18-96,

the Commission estimates that approximately 100 of those CPOs would be

eligible for relief from filing Form CPO-PQR under the proposed

amendments to Sec.  4.27. Therefore, the Commission is proposing to set

the number of respondents filing Schedule A of Form CPO-PQR on an

annual basis at 1,700. The total respondents for this revised

collection is further broken out below into two categories, based on

the size of the CPO and whether the CPO files Form PF: 1,450

respondents on Schedule A of Form CPO-PQR for non-large CPOs and CPOs

filing Form PF, and 250 respondents on Schedule A of Form CPO-PQR for

Large CPOs not filing Form PF.

    The Commission is similarly considering the number of registered

CTAs with respect to the filing of Form CTA-PR, and then reducing the

number of filers by the number of CTAs the Commission anticipates will

be eligible for the relief proposed herein. Specifically, the

Commission has historically averaged approximately 1,600 registered

CTAs. Based on the information collected on Form CTA-PR, the Commission

estimates that 720 registered CTAs would be eligible for the relief

proposed herein, resulting in the difference of 880 CTAs being required

to file Form CTA-PR. Therefore, the Commission estimates that the total

burden associated with the proposed amendments to Sec.  4.27,

reflecting the revised average number of CPOs and CTAs registered with

the Commission, to be as follows:

    For Schedule A of Form CPO-PQR for non-Large CPOs and Large CPOs

filing Form PF:

    Estimated number of respondents: 1,450.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 6.

    Annual reporting burden: 8,700.

    For Schedule A of Form CPO-PQR for Large CPOs not filing Form PF:

    Estimated number of respondents: 250.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 6.

    Annual reporting burden: 6,000.

    For Schedule B of Form CPO-PQR for Mid-size CPOs:

    Estimated number of respondents: 400.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 4.

    Annual reporting burden: 1,600.

    For Schedule B of Form CPO-PQR for Large CPOs not filing Form PF:

    Estimated number of respondents: 250.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 4.

    Annual reporting burden: 4,000.

    For Schedule C of Form CPO-PQR for Large CPOs not filing Form PF:

    Estimated number of respondents: 250.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 18.

    Annual reporting burden: 18,000.

    For Form CTA-PR:

    Estimated number of respondents: 880.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 0.5.

    Annual reporting burden: 440.

    The total new burden associated with Collection 3038-0005, in the

aggregate, reflecting the reduction in burden associated with Sec. 

4.27 and the new burden associated with the other amendments proposed

by the NPRM, is as follows:

    Estimated number of respondents: 43,912.

    Annual responses for all respondents: 112,715.

    Estimated average hours per response: 3.13.

    Annual reporting burden: 352,279.

b. OMB Control Number 3038-0023

    The Commission expects that persons that are currently counted

among the estimates for Collection 3038-0023 with respect to CPO and

CTA registration with the Commission will deregister as such, due to

the availability of the additional registration exemptions and

exclusion proposed herein. Therefore, the Commission proposes to deduct

the expected claimants of that relief from the total number of persons

required to register with the Commission as CPOs and CTAs.

    The currently approved total burden associated with Collection

3038-0023, in the aggregate, excluding the burden associated with Sec. 

3.21(e), is as follows:

    Respondents/Affected Entities: 77,857.

    Estimated number of responses: 78,109.

    Estimated average hours per response: 0.09.

    Estimated total annual burden on respondents: 7,029.8.

    Frequency of collection: Periodically.

    The currently approved total burden associated with Sec.  3.21(e)

under Collection 3038-0023, which remains unchanged under the Proposal,

is as follows:

    Respondents/Affected Entities: 396.

    Estimated number of responses: 396.

    Estimated average hours per response: 1.25.

    Estimated total annual burden on respondents: 495.

    Frequency of collection: Annually.

    The Commission is proposing to reduce the number of registrants by

the estimated number of claimants with respect to each of the

registration exemptions and exclusion proposed today. Specifically, the

Commission estimates 50 persons will claim relief from CPO registration

under the 18-96

 

[[Page 52920]]

 

Exemption, 200 persons will claim relief from registration as the CPO

of a qualifying Family Office, 100 persons will claim relief from

registration as the CTA of a qualifying Family Office or Family

Clients, and 50 persons will claim relief from registration associated

with the operation of a BDC pursuant to the expanded exclusion in Sec. 

4.5. Therefore, the Commission proposes to reduce the burden associated

with Collection 3038-0023, such that the total burden associated with

the collection, excluding the burden associated with Sec.  3.21(e),

will be as follows:

    Respondents/Affected Entities: 77,457.

    Estimated number of responses: 77,689.

    Estimated average hours per response: 0.09.

    Estimated total annual burden on respondents: 6,992 hours.

3. Request for Comments on Collection

    The Commission invites the public and other Federal agencies to

comment on any aspect of the proposed information collection

requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the

Commission solicits comments in order to (i) evaluate whether the

proposed collections of information are 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 collections of

information; (iii) determine whether there are ways to enhance the

quality, utility, and clarity of the information proposed to be

collected; and (iv) minimize the burden of the proposed collections of

information on those who are to respond, including through the use of

appropriate automated collection techniques or other forms of

information technology.

    Those desiring to submit comments on the proposed information

collection requirements should submit them directly to the Office of

Information and Regulatory Affairs, OMB, by fax at (202) 395-6566, or

by email at [email protected]. Please provide the Commission

with a copy of submitted documents, so that all comments can be

summarized and addressed in the final rule preamble. Refer to the

ADDRESSES section of this NPRM 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 http://www.RegInfo.gov. OMB is required to make a decision concerning the

collections of information between 30 and 60 days after publication of

this document in the Federal Register. Therefore, a comment is best

assured of having its full effect if OMB receives it within 30 days of

publication.

 

C. Cost-Benefit Considerations

 

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

costs and benefits of its actions before promulgating a regulation

under the CEA.172 Section 15(a) further specifies that the costs and

benefits shall be evaluated in light of the following five broad areas

of market and public concern: (1) Protection of market participants and

the public; (2) efficiency, competitiveness, and financial integrity of

futures markets; (3) price discovery; (4) sound risk management

practices; and (5) other public interest considerations. The Commission

considers the costs and benefits resulting from its discretionary

determinations with respect to the CEA section 15(a) considerations.

—————————————————————————

 

    172 7 U.S.C. 19(a).

—————————————————————————

 

    The Commission notes that the consideration of costs and benefits

below is based on the understanding that the markets function

internationally, with many transactions involving U.S. firms taking

place across international boundaries; with some Commission registrants

being organized outside of the United States; with some leading

industry members typically conducting operations both within and

outside the United States; and with industry members commonly following

substantially similar business practices wherever located. Where the

Commission does not specifically refer to matters of location, the

discussion of costs and benefits below refers to the effects of this

NPRM on all activity subject to the proposed regulations, whether by

virtue of the activity’s physical location in the United States or by

virtue of the activity’s connection with or effect on U.S. commerce

under CEA section 2(i).173 In particular, the Commission notes that

some CPOs and CTAs are located outside of the United States.

—————————————————————————

 

    173 7 U.S.C. 2(i).

—————————————————————————

 

1. Consideration of the Costs and Benefits of the Commission’s Action

    The baseline for the Commission’s consideration of the costs and

benefits of the Proposal is the regulatory status quo, as determined by

the CEA and the Commission’s existing regulations in 17 CFR part 4. The

Commission recognizes, however, that to the extent that market

participants have relied on relevant Commission staff action, the

actual costs and benefits of the proposed rulemaking, as realized in

the market, may not be as significant. Because each proposed amendment

addresses a discrete issue, which may impact a unique subgroup within

the universe of entities captured by the CPO and CTA statutory

definitions, the Commission has determined to analyze the costs and

benefits associated with each proposed change separately, as presented

below. The Commission has endeavored to assess the expected costs and

benefits of the proposed amendments in quantitative terms wherever

possible. Where estimation or quantification is not feasible, however,

the Commission has provided its assessment in qualitative terms.

a. Summary of the Proposal

    As discussed in greater detail below, and in the foregoing

preamble, the Commission preliminarily believes that the amendments

proposed herein enable the Commission to discharge its regulatory

oversight function with respect to the commodity interest markets,

while reducing the potential burden on persons whose commodity interest

activities are subject to the Commission’s regulations applicable to

CPOs and CTAs. Specifically, the CFTC is proposing to amend Sec. Sec. 

4.13 and 4.23 by adopting new exemptions that would permit a CPO that

solicits and/or accepts funds from solely non-U.S. persons to

participate in offshore commodity pools it operates to claim a

registration exemption with respect to such pools, and to permit an

onshore, registered CPO of an offshore commodity pool to keep the

pool’s original books and records at the pool’s offshore location,

rather than with the onshore CPO.

    Importantly, a CPO claiming the 18-96 Exemption, as proposed in new

Sec.  4.13(a)(4), would still be subject to the anti-manipulation and

anti-fraud provisions of the CEA (just like Advisory 18-96 claimants

currently), and by virtue of Sec.  4.13(c), would be required to make

and keep books and records for an exempt pool, and to submit to such

special calls as the Commission may make to demonstrate eligibility for

and compliance with the criteria of the 18-96 Exemption. In conjunction

with the proposed 18-96 Exemption, the Commission is also proposing to

adopt a prohibition on statutory disqualifications applicable to any

exemption claimed under Sec.  4.13, and to amend the de minimis

exemption in Sec.  4.13(a)(3) to explicitly permit non-

 

[[Page 52921]]

 

U.S. persons as exempt commodity pool participants.

    The Commission is also proposing to amend existing 17 CFR part 4

regulations in a manner consistent with DSIO’s CPO Family Office Letter

and CTA Family Office Letter by adopting new CPO and CTA registration

exemptions under Sec. Sec.  4.13 and 4.14. The Commission further

proposes regulatory amendments consistent with current letter relief

available to BDCs, through certain revisions to the exclusion from the

definition of CPO for IAs of RICs in Sec.  4.5. Additionally, the

Commission is proposing to amend 17 CFR part 4 to incorporate the

relief in CFTC Staff Letter 14-115 174 from Sec.  4.27 filings

provided to CPOs that only operate commodity pools in accordance with

Sec. Sec.  4.5 and 4.13, as well as the relief provided under CFTC

Staff Letter 15-47 175 to CTAs that do not direct trading of any

commodity interest accounts. The Commission further proposes to extend

this relief to registered CTAs that only advise commodity pools for

which the CTA is also the commodity pool’s CPO.

—————————————————————————

 

    174 CFTC Staff Letter 14-115, available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/14-115.pdf (last retrieved July 31, 2018).

    175 CFTC Staff Letter 15-47, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/15-47.pdf (last retrieved July 31, 2018).

—————————————————————————

 

b. Benefits

i. Benefits Related to the Adoption of the 18-96 Exemption

    The Commission intends that the 18-96 Exemption, as proposed, will

ultimately provide more comprehensive relief from CPO and pool

regulation. As stated above, the Commission preliminarily believes that

providing CPO registration relief beyond that currently provided by

Sec.  3.10(c)(3)(i) or available in Advisory 18-96 would be beneficial

and consistent with the Commission’s past prioritization of agency

resources for the regulation of intermediary activities affecting U.S.

participants in commodity interest markets. Consequently, the

Commission also preliminarily believes that eligible persons will

receive several benefits from the adoption of the proposed 18-96

Exemption. Because the relief available under the proposed 18-96

Exemption would primarily be an exemption from CPO registration with

respect to the operated offshore pools, a claiming CPO would no longer

be required to include such offshore pools on Form CPO-PQR filings,

relief which is currently not provided by the terms of Advisory 18-96.

This will result in a meaningful, significant reduction in the burdens

imposed by the Commission’s regulations on CPOs of commodity pools,

whose only connections with the U.S. are the location of the CPO and

participation in the U.S. commodity interest markets.

    Moreover, by enabling the 18-96 exemption to be claimed on a pool-

by-pool basis, the Commission is providing additional flexibility to

CPOs that operate and offer to participants a mix of onshore and

offshore pools. Under Sec.  3.10(c)(3)(i), an offshore CPO that wished

to operate pools offered to U.S. persons would be required to choose

between the potentially more costly options of having such pools

operated by an affiliate registered with the Commission or otherwise

eligible for other relief, operating all pools (regardless of location)

consistent with another registration exemption, or registering as a CPO

and listing all operated pools with the Commission. In contrast, the

proposed 18-96 Exemption would enable the CPO to register, or claim an

alternative registration exemption such as Sec.  4.13(a)(3), with

respect to its commodity pools offered to U.S. persons, but remain

exempt from CPO registration, pursuant to proposed Sec.  4.13(a)(4),

with respect to its qualifying offshore pools. This would permit the

CPO to utilize the operational efficiencies inherent in being able to

deploy the same institutional resources across all pools it operates,

rather than bifurcating staff and assets across affiliates for purposes

of minimizing regulatory costs.

    The Commission is aware of some offshore CPOs that are currently

limiting their CPO activities solely to offshore pools with offshore

participants precisely to remain eligible for the exemption provided by

Sec.  3.10(c)(3)(i). By making proposed Sec.  4.13(a)(4) available on a

pool-by-pool basis, the Commission preliminarily believes it likely

that more offshore CPOs may choose to create pools available to U.S.

participants because such CPOs would no longer be required to bear the

costs of compliance for offshore pools qualifying for the proposed 18-

96 Exemption. Therefore, such CPOs may provide additional investment

choices to domestic participants and additional competition for CPOs

already operating onshore.

    Furthermore, by proposing new exemptions with respect to both the

CPO registration of an offshore pool’s operator, and the recordkeeping

location of an offshore pool’s books and records, the Commission

intends to confirm the continued availability of Advisory 18-96 relief

in the form of amendments to 17 CFR part 4. The Commission is hopeful

that the adoption of these new regulatory exemptions will eliminate the

need for persons to search for a Commission staff advisory that is over

20 years old, and which, even in 2018, may only be claimed by eligible

persons through a paper filing with the Commission. Rather, under the

Proposal, a person would now be able to utilize NFA’s Online

Registration System (ORS) to submit claims of relief electronically,

consistent with the mechanism used to claim all other regulatory

registration and compliance exemptions available to CPOs and CTAs. This

amendment would modernize the effort needed to effectuate such claims

and eliminate the costs and expenses to claimants associated with paper

filings, e.g., drafting, faxing and/or mailing the requisite notice to

both the Commission and NFA.

    The proposed amendments also would require persons claiming new

Sec.  4.13(a)(4) to annually affirm their claims of exemption for

qualifying exempt pools. The Commission preliminarily believes that

this requirement promotes transparency regarding the number of entities

that would be exempt from CPO registration pursuant to the 18-96

Exemption as proposed, and would also enable the Commission to reassess

the exemption’s efficacy over time by collecting data on its usage by

industry. Consistent with the annual notice requirement for the other

exemptions in Sec.  4.13, the Commission proposes to mandate the filing

of these notices within 60 days of the calendar year end; the

Commission preliminarily believes this to be the most operationally

efficient time for filing such an annual notice.

    Additionally, the Commission preliminarily believes that there are

significant benefits to adopting the prohibition on statutory

disqualifications from the terms of Advisory 18-96, as a criteria for

all exemptions under Sec.  4.13(a)(1) through (a)(5). The Commission

also preliminarily believes that currently, pool participants may be

exposed to risk posed by regulations permitting the operation of an

offered pool by a person who, generally, would not otherwise be

permitted to register with the Commission. Even if the activities of a

CPO do not rise to a level warranting Commission oversight through

registration, a prospective participant should be able to be confident

that a collective investment vehicle using commodity interests is not

operated by a person who, for example, is enjoined from engaging in

fraud or

 

[[Page 52922]]

 

embezzlement.176 As noted above,177 prior to the rescission of

Sec.  4.13(a)(4), Commission staff became aware that a number of

persons who were statutorily disqualified from CPO registration were

operating commodity pools pursuant to that exemption, and thereby, were

continuing to participate in the commodity interest markets with funds

solicited and accepted from members of the American public,

notwithstanding those disqualifications. The proposed adoption of this

prohibition should eliminate the unintended loophole that currently

exists, and would permit participants in commodity pools exempt under

Sec.  4.13(a)(1)-(a)(5) to be assured that the CPO managing their

assets is, at least not statutorily disqualified.

—————————————————————————

 

    176 7 U.S.C. 12a(2)(C)(ii).

    177 See, supra, section 1.B.3.

—————————————————————————

 

    Finally, consistent with prioritizing the application of 17 CFR

part 4 requirements to CPOs with respect to pools offered and operated

on behalf of U.S. person participants, the 18-96 Exemption, as

proposed, would permit a claiming CPO thereunder to remain registered

with respect to its operation of commodity pools onshore and/or on

behalf of U.S. persons. The Commission would retain all of its

authority associated with oversight of its registrants and could still

take corrective action, should the CPO engage in wrongdoing in the U.S.

commodity interest markets.

ii. Benefits Related to the Proposed Family Office Exemptions From CPO

and CTA Registration

    The Commission expects that the addition of CPO and CTA

registration exemptions for qualifying Family Offices will result in

two main benefits. First, qualifying Family Offices will not be subject

to the costs associated with registration, NFA membership, or

compliance with part 4 of the Commission’s regulations. The elimination

of these costs should result in a reduction of the costs associated

with the establishment and operation of a Family Office, which should

ultimately benefit the Family Clients.

    Second, because the proposed exemptions harmonize the Commission’s

treatment of Family Offices with that of the SEC, Family Offices will

generally only be required to comply with one standard to determine

their registration and compliance obligations with respect to both

their securities and commodity interest transactions. Although DSIO had

previously issued no-action relief letters for both CPO and CTA

registration, Family Offices wishing to avail themselves of this relief

were required to prepare a notice making specific representations and

to submit the document electronically to a specific email inbox. It is

anticipated that, upon finalization of the Proposal, Family Offices

would be able to claim the proposed exemption under new Sec. 

4.13(a)(8) through NFA’s ORS without having to create and submit their

own document to claim the exemption. Moreover, for Family Offices

claiming relief from CTA registration, the Commission is proposing to

make that exemption available without a notice filing, consistent with

the majority of the existing exemptions available to CTAs under Sec. 

4.14.

    Like the other exemptions available under Sec.  4.13, the

Commission is proposing to require Family Offices claiming relief from

CPO registration to file an annual notice affirming their eligibility.

The Commission preliminarily believes that this annual assessment of

eligibility would promote transparency regarding the number of entities

exempt from registration pursuant to the proposed Family Office

exemption and would enable the Commission to assess its efficacy over

time. Consistent with the notices required to annually affirm

compliance with other exemptions in Sec.  4.13, the notices would be

required to be filed within 60 days of the end of the calendar year.

The Commission preliminarily believes proposing a timeframe consistent

with that already required for annual notices of other existing CPO

registration exemptions would reduce complexity in the regulation, and

would employ a requirement to which claiming CPOs have already grown

accustomed.

iii. Benefits Related to the Proposed JOBS Act Relief

    The Commission preliminarily believes that the proposed alignment

of Sec. Sec.  4.7(b) and 4.13(a)(3) with the SEC’s JOBS Act amendments

to Regulation D and Rule 144A would result in several benefits. By

harmonizing Commission regulations that specifically reference the

statutory and regulatory provisions governing unregistered, exempt

securities offerings, the proposed amendments would facilitate full

implementation of the JOBS Act by making the relief from the

prohibition on general solicitation more widely available. Moreover,

the Proposal would eliminate the distinction between private offerings

of commodity pools and other privately offered collective investment

vehicles that do not transact in commodity interests, thereby treating

similarly situated offerors in a consistent manner.

    The Commission notes that persons complying with the terms of Rule

506(c) or Rule 144A and claiming relief under either Sec.  4.7 or Sec. 

4.13(a)(3), as proposed to be amended, would still generally be

required to limit participants in the offered pool to QEPs. As such,

the Commission preliminarily believes that adopting these proposed

amendments would neither result in an erosion of the customer

protections provided to non-sophisticated pool participants under 17

CFR part 4, nor would it cause an expansion of the relief available

under Sec. Sec.  4.7 and 4.13(a)(3), beyond the discrete issue of

solicitation with respect to an exempt securities offering. Thus, the

Commission preliminarily believes that there would be a substantial

benefit in aligning its regulations with those of its sister regulator,

in the interest of fostering cooperation and comity, especially where

there is limited customer protection risk for the retail public.

iv. Benefits Related to the Exclusion of IAs of BDCs From the CPO

Definition

    The Commission preliminarily believes that there would be several

benefits arising from the proposed exclusion of IAs of BDCs 178 from

the definition of CPO in Sec.  4.5. First, the proposed exclusion would

enable IAs of BDCs to continue to use commodity interests, consistent

with the no-action relief currently in place, as an economical option

for reducing the risks related to BDCs’ investments in eligible

portfolio companies. The proposed exclusion would permit this without

subjecting BDCs to the costs associated with having its IA registered

as a CPO, and without requiring BDCs and their IAs to comply with the

applicable provisions of part 4 of the Commission’s regulations. This

should enable BDCs and their IAs to deploy more of their resources in

furtherance of their statutory purpose, investing in and providing

managerial assistance to small- and mid-sized U.S. companies, which

would thereby also further one of the statutory goals of the Investment

 

[[Page 52923]]

 

Company Act of 1940 (as defined above, ICA).

—————————————————————————

 

    178 The Commission has previously determined that a RIC’s IA

is the appropriate person to serve as the CPO of a RIC for

regulatory purposes, and consequently, the Commission is proposing

herein to amend Sec.  4.5(a)(1) to designate the IA as the person

excluded from the CPO definition. See CPO CTA Final Rule, 77 FR at

11259. Due to the similarities between BDCs and RICs, the amendments

proposed by the Commission today are based on the conclusion that

the registered IA is also an appropriate selection as the excluded

entity in the BDC context.

—————————————————————————

 

    As described more fully above, BDCs are subject to oversight by the

SEC that is comparable to that agency’s regulation of RICs, and BDCs

use commodity interests primarily for bona fide hedging purposes.

Because of this similarity to a type of investment vehicle that is

already included within the universe of “qualifying entities” under

Sec.  4.5, the proposed amendments would treat substantively comparable

entities in a consistent manner, thereby enabling members of the public

and industry to better predict their regulatory obligations when

establishing new investment vehicles. Absent these amendments, IAs of

BDCs wishing to avail themselves of the no-action relief from CPO

registration are required to prepare a notice filing containing

specific representations and to submit the document electronically to a

specific email inbox. The Commission anticipates that, upon

finalization of this NPRM, registered IAs operating and advising BDCs

would be able to claim the proposed exclusion under Sec.  4.5 through

NFA’s ORS without having to create their own document to claim the

proposed exclusion.

v. Benefits Related to Relief Under Section 4.27 for CPOs and CTAs

    The Commission preliminarily believes that there would be several

benefits associated with providing relief from the filings required by

Sec.  4.27 to registered CPOs only operating pools pursuant to claimed

exclusions under Sec.  4.5 or exemptions under Sec.  4.13, and to

registered CTAs that, during the Reporting Period, either only advised

pools of which they were also the registered or exempt CPO, or did not

direct the trading of any commodity interest accounts whatsoever.

Removing the Sec.  4.27 reporting requirement for these persons would

eliminate the costs associated with the preparation and filing of Forms

CPO-PQR or CTA-PR. The Commission preliminarily believes that this

could provide a significant cost savings for these persons, and

ultimately, for their participants or clients.

c. Costs

i. Costs Related to the Proposed 18-96 Exemption

    The Commission preliminarily believes there would be some costs

associated with the 18-96 Exemption, as proposed. For instance, persons

claiming the proposed exemption under new Sec.  4.13(a)(4) would be

required to file an annual notice affirming their eligibility for the

exemption, consistent with the requirement applicable to persons

claiming all other exemptions available under Sec.  4.13. For purposes

of calculating costs of this proposed amendment, the Commission has

estimated that a CPO may require 0.5 hours per pool to complete and

electronically file the notice with NFA, at an average salary cost of

$57 per hour.179 The Commission further estimates that 50 CPOs may be

affected,180 each with an average of 3 pools subject to the notice

requirement. On this basis, the Commission anticipates an annual cost

per entity of approximately $86.181 Across all affected entities, the

Commission estimates a total annual cost of approximately $4,300.182

—————————————————————————

 

    179 The Commission notes that the salary estimates are based

upon the May 2017 Findings of National Occupational Employment and

Wage Estimates from the Bureau of Labor Statistics. See Occupational

Employment Statistics, Bureau of Labor Statistics, available at

https://www.bls.gov/oes/ (last visited July 23, 2018). The

Commission’s estimate incorporates the mean hourly wage of persons

employed in the “Securities, Commodity Contracts and Other

Financial Investments and Related Activities” Industry, under the

following occupation codes: Compliance Officers (13-1041) at $43.27,

Lawyers (23-1011) at $94.20, and Paralegals and Legal Assistants

(23-2011) at $33.53. The Commission chose these occupational

categories in recognition of the types of staff the Commission

preliminarily believes would most commonly be responsible for

evaluating eligibility and filing claims for the registration

exemptions and exclusion proposed herein. The $57 per hour wage

estimate is derived from a weighted average, rounded to the nearest

dollar, with the salaries attributable to each of the three

occupation codes given equal weight.

    180 This number is based on the number of claims filed under

Advisory 18-96 for the relief for offshore pools as of June 4, 2018.

    181 The Commission calculates this amount as follows: (3 pools

per CPO) x (0.5 hours per pool) x ($57 per hour) = $86.

    182 The Commission calculates this amount as follows: ($86 per

CPO) x (50 CPOs) = $4,300.

—————————————————————————

 

    With respect to the expansion of the statutory disqualification

prohibition to exemption claimants under Sec.  4.13(a)(1) through

(a)(5), the Commission lacks data sufficient to determine how many CPOs

might be required to cease operating commodity pools pursuant to the

exemptions available thereunder, due to the presence of statutorily

disqualified principals. There are certainly costs associated with

either divesting from commodity interests held within a collective

investment vehicle, or in completely winding up a commodity pool’s

operations, some of which may be experienced by pool participants as

opportunity costs and possibly realized losses. The Commission

preliminarily believes, however, that these costs would be limited to

the first year following adoption of the Proposal, and that, in

subsequent years, participants would benefit from the assurance that

any CPO that is soliciting them or accepting their funds for investment

in an exempt pool operated pursuant to Sec.  4.13(a)(1)-(a)(5) is, at a

minimum, registerable.

    With respect to the new exemption under Sec.  4.23, which proposes

relief consistent with Advisory 18-96 permitting a domestic, registered

CPO to keep its pool’s original books and records at the office of the

operated offshore pool, the Commission has estimated, for purposes of

calculating the costs of this proposed amendment, that a CPO may

require 0.5 hours per pool to complete and file the notice with NFA at

an average salary cost of $57 per hour. The Commission further

estimates that 50 CPOs may be affected,183 each with an average of 3

pools subject to the notice requirement. On this basis, the Commission

anticipates a one-time cost per entity of approximately $86.184

Across all affected entities, the Commission estimates a total annual

cost of approximately $4,300.185 The Commission preliminarily

believes that this would be the extent of the costs associated with the

proposed incorporation in 17 CFR part 4 of the recordkeeping relief in

Advisory 18-96.

—————————————————————————

 

    183 This number is based on the number of claims filed under

Advisory 18-96 for the relief for offshore pools as of June 4, 2018.

    184 The Commission calculates this amount as follows: (3 pools

per sponsor) x (0.5 hours per pool) x ($57 per hour) = $86.

    185 The Commission calculates this amount as follows: ($86 per

CPO) x (50 CPOs) = $4,300.

—————————————————————————

 

ii. Costs Related to the Proposed Family Office Exemptions From CPO and

CTA Registration

    The Commission preliminarily believes there would be some costs

associated with the proposed exemptions from CPO and CTA registration

for Family Offices. As proposed herein, persons claiming relief under

proposed Sec.  4.13(a)(8) would be required to file an annual notice

affirming their eligibility, consistent with the requirement applicable

to persons claiming most other exemptions available under Sec.  4.13.

For purposes of calculating costs of the Proposal, the Commission has

estimated that a CPO may require 0.5 hours per pool to complete and

electronically file the notice with NFA at an average salary cost of

$57 per hour. The Commission further estimates that 200 CPOs may be

affected,186 each with an average of 3 pools subject to the notice

requirement. On this basis, the Commission

 

[[Page 52924]]

 

anticipates an annual cost per entity of approximately $86.187 Across

all affected entities, the Commission estimates a total annual cost of

approximately $17,200.188 Family Offices would also be required to

incur expenses associated with the initial determination as to their

eligibility for the proposed exemptions. The Commission currently does

not have the necessary data to estimate the amount of this expense. The

Commission seeks comment as to the amount of such expenses and how this

expenditure compares to the costs associated with registration as a CPO

and compliance with 17 CFR part 4.

—————————————————————————

 

    186 This number is based on the number of claims received

pursuant to the CPO Family Office No-Action Letter, as of July 17,

2018.

    187 The Commission calculates this amount as follows: (3 pools

per CPO) x (0.5 hours per pool) x ($57 per hour) = $86.

    188 The Commission calculates this amount as follows: ($86 per

CPO) x (200 CPOs) = $17,200.

—————————————————————————

 

    With respect to persons claiming relief under proposed Sec. 

4.14(a)(11), because the Commission is not proposing to require a

notice filing to claim the relief, the Commission expects that the

costs associated with the exemption would be limited to the expenses

associated with making the determination as to the person’s initial and

ongoing eligibility for the proposed exemption. The Commission

currently does not have the necessary data to estimate the magnitude of

that expense, but would encourage commenters to submit information as

to the costs and benefits associated with the exemption from CTA

registration, and how such expenses would compare to those required to

register as a CTA and to generally comply with 17 CFR part 4.

iii. Costs Related to the Proposed Adoption of JOBS Act Relief

    The Commission does not anticipate any costs associated with this

proposed rulemaking beyond those already identified and analyzed by the

SEC when it finalized its amendments to Regulation D and Rule 144A

pursuant to the JOBS Act.

iv. Costs Related to the Proposed Exclusion of IAs of BDCs From the CPO

Definition

    The Commission preliminarily believes there would be some costs

associated with the exclusion from the definition of CPO for registered

IAs of BDCs proposed today. As proposed herein, persons claiming the

new exclusion from the definition of CPO with respect to the operation

of BDCs under Sec.  4.5 would be required to file an annual notice

affirming eligibility, consistent with that required of the registered

IAs of RICs. For purposes of calculating costs of the proposed

amendment, the Commission has estimated that a person may require 0.5

hours per pool to complete and electronically file the notice with NFA

at an average salary cost of $57 per hour. The Commission further

estimates that 50 persons may be affected,189 each with an average of

1 BDC subject to the notice requirement. On this basis, the Commission

anticipates an annual cost per entity of approximately $29.190 Across

all affected entities, the Commission estimates a total annual cost of

approximately $1,450.191

—————————————————————————

 

    189 This number is based on the number of claims received

pursuant to CFTC Staff Letter 12-40, as of July 17, 2018.

    190 The Commission calculates this amount as follows: (1 pool

per CPO) x (0.5 hours per pool) x ($57 per hour) = $29.

    191 The Commission calculates this amount as follows: ($29 per

CPO) x (50 CPOs) = $1,450.

—————————————————————————

 

    Registered IAs of BDCs that claim the proposed exclusion under

Sec.  4.5 would also have to expend resources to monitor compliance

with the applicable trading thresholds in proposed Sec. 

4.5(c)(2)(iii). The Commission preliminarily believes that the initial

year of compliance with those thresholds would likely be the most

costly, as the IAs would possibly need to increase compliance staff

and/or provide training for existing compliance staff to ensure

effective monitoring of ongoing compliance with the exclusion’s terms.

The Commission anticipates that certain aspects of this compliance

program might be automated to lower substantially the annual costs in

subsequent years.

v. Costs Related to Relief Under Section 4.27 for CPOs and CTAs

    The Commission does not anticipate any costs associated with this

proposed amendment, as it is not requiring any action to be taken by

CPOs and CTAs that qualify for the proposed exemptions from the

Reporting Person definition in Sec.  4.27 to claim that relief.

2. Section 15(a) Considerations

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

effects of its actions in light of the following five factors:

a. Protection of Market Participants and the Public

    The Commission preliminarily believes that the amendments proposed

in this release maintain the efficacy of the customer protections of

the Commission’s regulatory regime while reducing costs. Specifically,

with respect to the 18-96 Exemption, as proposed, the Commission would

maintain its oversight with respect to commodity pools with U.S. person

participants, while providing relief with respect to the operation of

offshore pools, the potential and actual participants of which are

generally located outside of the U.S. Moreover, by extending the

prohibition on statutory disqualifications to CPOs claiming exemptive

relief under Sec.  4.13(a)(1) through (a)(5), the Commission

preliminarily believes that it would be providing additional protection

to members of the public by reducing the possibility of fraud and other

illegal conduct in exempt pools offered by such persons.

    The Commission preliminarily believes that the proposed exemptions

for Family Offices would also have a limited impact on the protections

provided to market participants and the public–because Family Offices,

by definition, are not offered to persons other than Family Clients,

the general public would not be negatively affected by their failure to

register as CPOs and CTAs with the Commission. Moreover, as discussed

above, the Commission preliminarily believes that the familial

relationships inherent in Family Offices would provide a reasonable

alternative mechanism to protect the interests of Family Clients. The

Commission preliminarily believes that its regulatory interest in

Family Offices is distinct from and much lower than in the case of

arms-length transactions between CPOs and pool participants, or CTAs

and advisory clients.

    With respect to the proposed alignment with the SEC’s revisions to

Regulation D and Rule 144A pursuant to the JOBS Act, the Commission

does not believe that its proposed amendments to Sec. Sec.  4.7 and

4.13(a)(3) would alter the protections currently available to market

participants and the public. Pools offered pursuant to claims of relief

under either Sec.  4.7 or Sec.  4.13(a)(3) would still be limited in

their permitted participants to QEPs, and the relief provided by those

regulations would otherwise remain unchanged. As such, less

sophisticated members of the American public would not be able to

purchase interests in pools that would not be subject to the full

panoply of the compliance obligations under 17 CFR part 4. Therefore,

there would be no reduction in the protections in place now by virtue

of the proposed JOBS Act amendments.

    The Commission preliminarily believes that the proposed exclusion

for registered IAs of BDCs would not negatively impact the protection

of market participants or the public. BDCs, as well as their registered

IAs, continue to be regulated by the SEC under the

 

[[Page 52925]]

 

ICA, and pursuant to the terms of the proposed exclusion, BDCs operated

thereunder will be limited in the extent to which they can use

commodity interests by the trading thresholds discussed above.

    With respect to the relief provided to certain CPOs and CTAs from

the reporting requirements of Sec.  4.27, the Commission does not

believe, preliminarily, that eliminating reporting from those persons

described herein would have a deleterious impact on the Commission’s

protection of market participants and the public because of such

persons’ extremely limited activity in the commodity interest markets.

b. Efficiency, Competitiveness, and Financial Integrity of Markets

    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate

the costs and benefits of a proposed regulation in light of efficiency,

competitiveness, and financial integrity considerations. The Commission

has not identified a specific effect on the efficiency,

competitiveness, and financial integrity of markets as a result of the

proposed regulations.

c. Price Discovery

    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate

the costs and benefits of a proposed regulation in light of price

discovery considerations. The Commission preliminarily believes that

the proposed amendments will not have a significant impact on price

discovery.

d. Sound Risk Management

    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate

the costs and benefits of a proposed regulation in light of sound risk

management practices. The proposed amendments to the regulations

reflect the Commission’s preliminary determination that such amendments

should harmonize Commission regulations with other federal laws to

exempt and reduce the regulatory burden on certain entities.

e. Other Public Interest Considerations

    Section 15(a)(2)(E) of the CEA requires the Commission to evaluate

the costs and benefits of a proposed regulation in light of other

public interest considerations. The Commission has not identified other

public interest considerations relevant to the costs and benefits of

the proposed regulations.

f. Request for Comment

    The Commission invites comment on its preliminary consideration of

the costs and benefits associated with the various changes to 17 CFR

part 4 proposed herein, especially with respect to the five factors

that the Commission is required to consider under section 15(a) of the

CEA. In addressing these areas and any other aspect of the Commission’s

preliminary cost-benefit considerations, the Commission encourages

commenters to submit any data or other information they may have

quantifying and/or qualifying the costs and benefits of the Proposal.

The Commission specifically requests comment on the following

questions, in addition to those posed above:

    13. Has the Commission accurately identified the benefits of the

Proposal? Are there other benefits to market participants or the public

that may result from the adoption of this NPRM that the Commission

should consider? Please provide specific examples and explanations of

any such benefits.

    14. Has the Commission accurately identified the costs of the

Proposal? Are there additional costs to market participants or the

public that may result from the adoption of this NPRM that the

Commission should consider? Please provide specific examples and

explanations of any such costs.

    15. Does the Proposal impact the section 15(a) factors in any way

that is not described above? Please provide specific examples and

explanations of any such impact.

 

D. Antitrust Laws

 

    Section 15(b) of the CEA requires the Commission to take into

consideration the public interest to be protected by the antitrust laws

and endeavor to take the least anticompetitive means of achieving the

purposes of the CEA, in issuing any order or adopting any Commission

rule or regulation (including any exemption under CEA section 4(c) or

4c(b)), or in requiring or approving any bylaw, rule, or regulation of

a contract market or registered futures association established

pursuant to section 17 of the CEA.192

—————————————————————————

 

    192 7 U.S.C. 19(b).

—————————————————————————

 

    The Commission preliminarily believes that the public interest to

be protected by the antitrust laws is generally to protect competition.

The Commission requests comment on whether the Proposal implicates any

other specific public interest to be protected by the antitrust laws.

    The Commission has considered the Proposal to determine whether it

is anticompetitive and has preliminarily identified no anticompetitive

effects. The Commission requests comment on whether the Proposal is

anticompetitive and, if it is, what the anticompetitive effects are.

    Because the Commission has preliminarily determined that the

Proposal is not anticompetitive and has no anticompetitive effects, the

Commission has not identified any less anticompetitive means of

achieving the purposes of the Act. The Commission requests comment on

whether there are less anticompetitive means of achieving the relevant

purposes of the Act that would otherwise be served by adopting the

Proposal.

 

List of Subjects in 17 CFR Part 4

 

    Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Consumer protection, Reporting and

recordkeeping requirements.

 

    For the reasons stated in the preamble, the Commodity Futures

Trading Commission proposes to amend 17 CFR chapter I as follows:

 

PART 4–COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

 

0

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

 

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

and 23.

 

0

2. In Sec.  4.5, revise paragraphs (a)(1), (b)(1), introductory text of

paragraph (c)(2), (c)(2)(i), (c)(2)(ii), and introductory text of

paragraph (c)(2)(iii) to read as follows:

 

 

Sec.  4.5  Exclusion for certain otherwise regulated persons from the

definition of the term “commodity pool operator.”

 

    (a) * * *

    (1) An investment adviser registered as such under the Investment

Advisers Act of 1940, as amended;

* * * * *

    (b) * * *

    (1) With respect to any person specified in paragraph (a)(1) of

this section, an investment company registered as such, under the

Investment Company Act of 1940, as amended, or a business development

company that elected an exemption from registration as an investment

company under the Investment Company Act of 1940;

* * * * *

    (c) * * *

    (2) The notice of eligibility must contain representations that

such person will operate the qualifying entity specified therein in the

following ways, as applicable:

    (i) The person will disclose in writing to each participant,

whether existing or prospective, that the qualifying entity is

 

[[Page 52926]]

 

operated by a person who has claimed an exclusion from the definition

of the term “commodity pool operator” under the Act and, therefore,

who is not subject to registration or regulation as a pool operator

under the Act; Provided, that such disclosure is made in accordance

with the requirements of any other federal or state regulatory

authority to which the qualifying entity is subject. The qualifying

entity may make such disclosure by including the information in any

document that its other Federal or State regulator requires to be

furnished routinely to participants or, if no such document is

furnished routinely, the information may be disclosed in any instrument

establishing the entity’s investment policies and objectives that the

other regulator requires to be made available to the entity’s

participants; and

    (ii) The person will submit to such special calls as the Commission

may make to require the qualifying entity to demonstrate compliance

with the provisions of this paragraph (c); Provided, however, that the

making of such representations shall not be deemed a substitute for

compliance with any criteria applicable to commodity futures or

commodity options trading established by any regulator to which such

person or qualifying entity is subject; and

    (iii) If the person is an investment adviser claiming an exclusion

with respect to the operation of a qualifying entity under paragraph

(b)(1) of this section, then the notice of eligibility must also

contain representations that such person will operate that qualifying

entity in a manner such that the qualifying entity:

* * * * *

0

3. Amend Sec.  4.7 paragraph (b) by:

0

a. Revising introductory text of paragraph (b);

0

b. Renumbering paragraphs (b)(1) through (b)(5) as paragraphs (b)(2)

through (b)(6);

0

c. Adding a new paragraph (b)(1); and

0

d. Revising renumbered paragraph (b)(3).

    The addition and revisions 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.

 

* * * * *

    (b) Relief available to commodity pool operators–(1) Eligibility.

Relief from specific compliance obligations is available to certain

registered commodity pool operators with respect to the pool(s) they

operate, provided that the registered commodity pool operator files the

required notice under paragraph (d) of this section and otherwise

complies with the conditions of paragraph (d) of this section in

operating the exempt pool(s).

    (i) Regarding an offering that is exempt from registration under

section 4(a)(2) of the Securities Act of 1933 and/or offered and sold

pursuant to Regulation D, Sec. Sec.  230.500-230.508 of this title, or

resold pursuant to Rule 144A, Sec.  230.144A of this title, or an

offering that is offered and sold pursuant to Regulation S, Sec. Sec. 

230.901-230.905 of this title, any registered commodity pool operator

who sells participations in such a pool solely to qualified eligible

persons may claim any or all of the relief described in this paragraph

(b) with respect to such pool.

    (ii) Regarding the operation of a pool that is a collective trust

fund, the securities of which are exempt from registration pursuant to

section 3(a)(2) of the Securities Act of 1933 and sold solely to

qualified eligible persons, any bank registered as a commodity pool

operator may claim any or all of the relief described in this paragraph

(b) with respect to such pool.

* * * * *

    (3) Periodic reporting relief. (i) Exemption from the specific

requirements of Sec.  4.22(a) and (b); Provided, That a statement

signed and affirmed in accordance with Sec.  4.22(h) is prepared and

distributed to pool participants no less frequently than quarterly

within 30 calendar days after the end of the reporting period. This

statement must be presented and computed in accordance with generally

accepted accounting principles and indicate:

    (A) The net asset value of the exempt pool as of the end of the

reporting period;

    (B) The change in net asset value from the end of the previous

reporting period; and

    (C) Either the net asset value per outstanding participation unit

in the exempt pool as of the end of the reporting period, or the total

value of the participant’s interest or share in the exempt pool as of

the end of the reporting period.

    (ii) Where the pool is comprised of more than one ownership class

or series, the net asset value of the series or class on which the

account statement is reporting, and the net asset value per unit or

value of the participant’s share, also must be included in the

statement required by this paragraph (b)(3); except that, for a pool

that is a series fund structured with limitation on liability among the

different series, the account statement required by this paragraph

(b)(3) is not required to include the consolidated net asset value of

all series of the pool.

    (iii) A commodity pool operator that meets the conditions specified

in Sec.  4.22(d)(2)(i) to present and compute the commodity pool’s

financial statements contained in the Annual Report other than in

accordance with generally accepted accounting principles and has filed

notice pursuant to Sec.  4.22(d)(2)(iii) may also use the alternative

accounting principles, standards or practices identified in the notice

with respect to the computation and presentation of the account

statement.

* * * * *

0

4. Amend Sec.  4.13 by:

0

a. Revising paragraphs (a)(3)(i) and (a)(3)(iii)(E);

0

b. Adding paragraph (a)(4);

0

c. Renumbering paragraph (a)(6) as paragraph (a)(7);

0

d. Adding a new paragraph (a)(6) and paragraph (a)(8);

0

e. Revising paragraphs (b)(1)(ii), (b)(2), and (e)(1); and

0

f. Adding paragraph (e)(3).

    The revisions and additions read as follows:

 

 

Sec.  4.13   Exemption from registration as a commodity pool operator.

 

* * * * *

    (a) * * *

    (3) * * *

    (i) Interests in the pool are exempt from registration under the

Securities Act of 1933, and the interests are marketed and advertised

to the public in the United States solely, if at all, in compliance

with Regulation D, Sec. Sec.  230.500 through 230.508 of this title, or

with Rule 144A, Sec.  230.144A of this title;

* * * * *

    (iii) * * *

    (E) A non-U.S. person; and

* * * * *

    (4) For each pool for which the person claims exemption from

registration under this paragraph (a)(4):

    (i) The pool is, and will remain, organized and operated outside of

the United States;

    (ii) The pool will not hold meetings or conduct administrative

activities within the United States;

    (iii) No shareholder of or other participant in the pool is or will

be a U.S. person;

    (iv) The pool will not receive, hold or invest any capital directly

or indirectly contributed from sources within the United States; and

 

[[Page 52927]]

 

    (v) The person, the pool, and any person affiliated therewith will

not undertake any marketing activity for the purpose, or that could

reasonably be expected to have the effect, of soliciting participation

in the pool from U.S. persons.

* * * * *

    (6) Any person who desires to claim an exemption under paragraphs

(a)(1), (a)(2), (a)(3), (a)(4), or (a)(5) of this section must

represent that neither the person nor any of its principals is subject

to any statutory disqualification under section 8a(2) or 8a(3) of the

Act, unless such disqualification arises from a matter which was

previously disclosed in connection with a previous application, if such

registration was granted, or which was disclosed more than thirty days

prior to the claim of this exemption.

* * * * *

    (8) For each pool for which the person claims exemption from

registration under this paragraph (a)(8):

    (i) Interests in the pool are exempt from registration under the

Securities Act of 1933, and such interests are offered and sold only to

“family clients,” as defined in Sec.  275.202(a)(11)(G)-1 of this

title;

    (ii) The pool qualifies as a “family office,” as defined in Sec. 

275.202(a)(11)(G)-1 of this title; and

    (iii) The person reasonably believes, at the time of investment, or

in the case of an existing pool, at the time of conversion to a pool

meeting the criteria of paragraph (a)(8) of this section, that each

person who participates in the pool is a “family client” of a

“family office,” as defined in Sec.  275.202(a)(11)(G)-1 of this

title.

    (b)(1) * * *

    (ii) Contain the section number pursuant to which the operator is

filing the notice (i.e., Sec.  4.13(a)(1), (2), (3), (4), (5) or (8))

and represent that the pool will be operated in accordance with the

criteria of that paragraph; and

* * * * *

    (2)(i) The person must file the notice by no later than the time

that the pool operator delivers a subscription agreement for the pool

to a prospective participant in the pool; Provided, however that:

    (A) In the case of a claim for relief under Sec.  4.13(a)(4), the

person must file the notice within 30 days of registering as a

commodity pool operator, or claiming an exemption pursuant to this

section with respect to pools marketed to U.S. persons, containing

funds belonging to U.S. persons, or otherwise operated in the U.S., its

territories, or possessions.

    (B) In the case of a claim for relief under Sec.  4.13(a)(5), the

person must file the notice by the later of the effective date of the

pool’s registration statement under the Securities Act of 1933 or the

date on which the person first becomes a director or trustee; and

    (C) Where a person registered with the Commission as a commodity

pool operator intends to withdraw from registration in order to claim

exemption hereunder, the person must notify its pool’s participants in

written communication physically delivered or delivered through

electronic transmission that it intends to withdraw from registration

and claim the exemption, and it must provide each such participant with

a right to redeem its interest in the pool prior to the person filing a

notice of exemption from registration.

* * * * *

    (e)(1) Subject to the provisions of paragraphs (e)(2) and (e)(3) of

this section, if a person who is eligible for exemption from

registration as a commodity pool operator under this section

nonetheless registers as a commodity pool operator, the person must

comply with the provisions of this part with respect to each commodity

pool identified on its registration application or supplement thereto.

* * * * *

    (3) If a person operates one or more commodity pools described in

paragraph (a)(4) of this section, and one or more commodity pools for

which it must be, and is, registered as a commodity pool operator, the

person is exempt from the requirements applicable to a registered

commodity pool operator with respect to the pool or pools described in

paragraph (a)(4) of this section.

* * * * *

0

5. In Sec.  4.14, add paragraph (a)(11) to read as follows:

 

 

Sec.  4.14   Exemption from registration as a commodity trading

advisor.

 

* * * * *

    (a) * * *

    (11) The person’s commodity trading advice is solely directed to,

and is for the sole use of, “family clients,” as defined in Sec. 

275.202(a)(11)(G)-1 of this title.

* * * * *

0

6. Revise Sec.  4.23 to read as follows:

 

 

Sec.  4.23   Recordkeeping.

 

    (a) Each commodity pool operator registered or required to be

registered under the Act must make and keep the following books and

records concerning any commodity pool it operates, as well as the pool

operator itself, in an accurate, current and orderly manner, and

maintain such books and records in accordance with Sec.  1.31 of this

chapter.

    Unless otherwise noted, all books and records required to be kept

under this section shall be kept and maintained at the pool operator’s

main business office. Books and records that are not maintained at the

pool operator’s main business office shall be maintained by one or more

of the pool’s administrator, distributor, or custodian, or a bank or

registered broker or dealer acting in a similar capacity with respect

to the pool, pursuant to the relief provided in paragraphs (b) or (c)

of this section.

    (1) Concerning the commodity pool. (i) 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 commodity, 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.

    (ii) A journal of original entry or other equivalent record showing

all receipts and disbursements of money, securities and other property.

    (iii) The acknowledgment specified by Sec.  4.21(b) for each

participant in the pool.

    (iv) A subsidiary ledger or other equivalent record for each

participant in the pool showing the participant’s name and address and

all funds, securities and other property that the pool received from or

distributed to the participant. This requirement may be satisfied

through a transfer agent’s maintenance of records or through a list of

relevant intermediaries where shares are held in an omnibus account or

through intermediaries.

    (v) Adjusting entries and any other records of original entry or

their equivalent forming the basis of entries in any ledger.

    (vi) A general ledger or other equivalent record containing details

of all asset, liability, capital, income and expense accounts.

    (vii) 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

 

[[Page 52928]]

 

received from a futures commission merchant, retail foreign exchange

dealer or swap dealer.

    (viii) Cancelled checks, bank statements, journals, ledgers,

invoices, computer generated records, and all other records, data and

memoranda prepared or received in connection with the operation of the

pool.

    (ix) The original or a copy of each report, letter, circular,

memorandum, publication, writing, advertisement or other literature or

advice (including the texts of standardized oral presentations and of

radio, television, seminar or similar mass media presentations)

distributed or caused to be distributed by the commodity pool operator

to any existing or prospective pool participant or received by the pool

operator from any commodity trading advisor of the pool, showing the

first date of distribution or receipt if not otherwise shown on the

document.

    (x) A Statement of Financial Condition as of the close of:

    (A) Each regular monthly period if the pool had net assets of

$500,000 or more at the beginning of the pool’s fiscal year, or

    (B) Each regular quarterly period for all other pools. The

Statement must be completed within 30 days after the end of that

period.

    (xi) A Statement of Income (Loss) for the period between:

    (A) The later of: The date of the most recent Statement of

Financial Condition furnished to the Commission pursuant to Sec. 

4.22(c), April 1, 1979 or the formation of the pool, and

    (B) The date of the Statement of Financial Condition required by

paragraph (a)(1)(x) of this section. The Statement must be completed

within 30 days after the end of that period.

    (xii) A manually signed copy of each Account Statement and Annual

Report provided pursuant to Sec.  4.22, 4.7(b) or 4.12(b), and records

of the key financial balances submitted to the National Futures

Association for each commodity pool Annual Report, which records must

clearly demonstrate how the key financial balances were compiled from

the Annual Report.

    (2) Concerning the commodity pool operator. (i) 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 commodity,

swap type and counterparty, 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, as applicable.

    (ii) Each confirmation of a commodity interest transaction, each

purchase and sale statement and each monthly statement furnished by a

futures commission merchant or retail foreign exchange dealer to:

    (A) The commodity pool operator relating to a personal account of

the pool operator; and

    (B) Each principal of the pool operator relating to a personal

account of such principal.

    (iii) Books and records of all other transactions in all other

activities in which the pool operator engages. Those books and records

must include cancelled checks, bank statements, journals, ledgers,

invoices, computer generated records and all other records, data and

memoranda which have been prepared in the course of engaging in those

activities.

    (3) All books and records required to be kept by this section,

except those required by paragraphs (a)(1)(iii), (a)(1)(iv), (a)(2)(i),

(a)(2)(ii), and (a)(2)(iii), must be made available to participants for

inspection and copying during normal business hours. Upon request,

copies must be sent by mail to any participant within five business

days if reasonable reproduction and distribution costs are paid by the

pool participant.

    (4) If the books and records are maintained at the commodity pool

operator’s main business address that is outside the United States, its

territories or possessions, then upon the request of a Commission

representative, the pool operator must provide such books and records

as requested at the place in the United States, its territories or

possessions designated by the representative within 72 hours after the

pool operator receives the request.

    (b) If the pool operator does not maintain its books and records at

its main business office, the pool operator shall:

    (1) At the time it registers with the Commission or delegates its

recordkeeping obligations, whichever is later, file a statement that:

    (i) Identifies the name, main business address, and main business

telephone number of the person(s) who will be keeping required books

and records in lieu of the pool operator;

    (ii) Sets forth the name and telephone number of a contact for each

person who will be keeping required books and records in lieu of the

pool operator;

    (iii) Specifies, by reference to the respective paragraph of this

section, the books and records that such person will be keeping; and

    (iv) Contains representations from the pool operator that:

    (A) It will promptly amend the statement if the contact information

or location of any of the books and records required to be kept by this

section changes, by identifying in such amendment the new location and

any other information that has changed;

    (B) It remains responsible for ensuring that all books and records

required by this section are kept in accordance with Sec.  1.31;

    (C) Within 48 hours after a request by a representative of the

Commission, it will obtain the original books and records from the

location at which they are maintained, and provide them for inspection

at the pool operator’s main business office; Provided, however, that if

the original books and records are permitted to be, and are maintained,

at a location outside the United States, its territories or

possessions, the pool operator will obtain and provide such original

books and records for inspection at the pool operator’s main business

office within 72 hours of such a request; and

    (D) It will disclose in the pool’s Disclosure Document the location

of its books and records that are required under this section.

    (2) The pool operator shall also file electronically with the

National Futures Association a statement from each person who will be

keeping required books and records in lieu of the pool operator wherein

such person:

    (i) Acknowledges that the pool operator intends that the person

keep and maintain required pool books and records;

    (ii) Agrees to keep and maintain such records required in

accordance with Sec.  1.31 of this chapter; and

    (iii) Agrees to keep such required books and records open to

inspection by any representative of the Commission or the United States

Department of Justice in accordance with Sec.  1.31 of this chapter and

to make such required books and records available to pool participants

in accordance with this section.

    (c) Each registered commodity pool operator whose main business

office is located in the United States, its territories or possessions,

and who operates a commodity pool that has its main business office

outside of the United States, its territories or

 

[[Page 52929]]

 

possessions, may claim relief from the requirement in paragraph (a) of

this section that such books and records be kept at the pool operator’s

main business office, provided however, that the registered pool

operator files a claim for exemptive relief with the National Futures

Association representing that:

    (1) The pool operator will maintain the original books and records

of the commodity pool at the main office of the commodity pool located

outside the United States, its territories or possessions, and states

the name, title, full mailing address, telephone number, and

relationship to the commodity pool of the person who will have custody

of the pool’s original books and records and the location outside the

United States where those books and records will be kept;

    (2) The pool operator desires to maintain such books and records

outside the United States in furtherance of compliance with Internal

Revenue Service requirements for relief from U.S. federal income

taxation;

    (3) The pool operator will maintain duplicate books and records of

the commodity pool at a designated office in the United States, its

territories or possessions listed in the notice;

    (4) The claim is electronically signed by an individual duly

authorized to bind the pool operator; and

    (5) Within 72 hours after the request from the Commission, the

United States Department of Justice, or the National Futures

Association, the original books and records will be provided to such

representative at a place located in the United States that is

specified by the representative.

0

7. Amend Sec.  4.27 by revising the section heading and paragraph (b)

to read as follows:

 

 

Sec.  4.27   Additional reporting by commodity pool operators and

commodity trading advisors.

 

* * * * *

    (b) Persons required to report. (1) Except as provided in paragraph

(b)(2) of this section, a reporting person is:

    (i) Any commodity pool operator that is registered or required to

be registered under the Commodity Exchange Act and the Commission’s

regulations thereunder; or

    (ii) Any commodity trading advisor that is registered or required

to be registered under the Commodity Exchange Act and the Commission’s

regulations thereunder.

    (2) The following categories of persons shall not be considered

reporting persons, as that term is defined in paragraph (b)(1) of this

section:

    (i) A commodity pool operator that is registered, but operates only

pools for which it maintains an exclusion from the definition of the

term “commodity pool operator” in Sec.  4.5 and/or an exemption from

registration as a commodity pool operator in Sec.  4.13;

    (ii) A commodity trading advisor that is registered, but does not

direct, as that term is defined in Sec.  4.10(f), the trading of any

commodity interest accounts;

    (iii) A commodity trading advisor that is registered, but directs

only the accounts of commodity pools for which it is registered as a

commodity pool operator and, though registered, complies with Sec. 

4.14(a)(4); and

    (iv) A commodity trading advisor that is registered, but directs

only the accounts of commodity pools for which it is exempt from

registration as a commodity pool operator, and though registered,

complies with Sec.  4.14(a)(5).

* * * * *

 

    Issued in Washington, DC, on October 9, 2018, by the Commission.

Christopher Kirkpatrick,

Secretary of the Commission.

 

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

Federal Regulations.

 

Appendices to Registration and Compliance Requirements for Commodity

Pool Operators and Commodity Trading Advisors–Commission Voting

Summary and Chairman’s Statement

 

Appendix 1–Commission Voting Summary

 

    On this matter, Chairman Giancarlo and Commissioners Quintenz,

Behnam, Stump, and Berkovitz voted in the affirmative. No

Commissioner voted in the negative.

 

Appendix 2–Statement of Chairman J. Christopher Giancarlo

 

    In response to the Request for Information issued as part of

Project KISS, the Commission received a number of letters from

members of the asset management industry suggesting areas of

potential rulemaking that, in their view, would make the

Commission’s regulations more efficient and less burdensome. I

believe that today’s notice of proposed rulemaking furthers both of

those interests.

    This proposal would incorporate relief from registration and

compliance obligations for commodity pool operators (CPOs) and

commodity trading advisors (CTAs) consistent with relief currently

provided by staff letters and advisories. By integrating this relief

now into the Commission’s regulations, the Commission is eliminating

the need to search for a staff advisory that is over 20 years old

and is providing legal certainty to entities currently relying upon

the staff relief. This will make regulatory obligations clearer and

thereby facilitate compliance.

    Specifically, today’s notice of proposed rulemaking would reduce

burdens for CPOs that operate pools in multiple jurisdictions by

permitting them to register with respect to the pools that solicit

or accept U.S. domiciled participants. It would maintain an

exemption with respect to those offshore activities whose only nexus

to the U.S. is that the CPO also manages some U.S. derived assets.

It would also shore up our consumer protection provisions by

prohibiting statutorily disqualified persons from operating exempt

pools and soliciting and accepting funds, thereby giving such pool

participants more confidence in their pool’s operator. It would

ensure that the Commission’s regulations treat similarly situated

entities in a commensurate manner by excluding the investment

advisers of business development companies under terms identical to

those under which the investment advisers of registered investment

companies are already excluded. It would also eliminate the burden

of filing data collection forms for persons with no meaningful,

reportable information. Finally, it would provide appropriate relief

to the operators and advisors of asset management vehicles whose

clients are limited to a single family, consistent with the terms of

a comparable regulation adopted by the SEC, furthering our efforts

at harmonizing with our fellow regulators in how we treat market

participants in this space.

    In short, this proposal appropriately tailors regulation and

codifies decades-old no action relief in line with the goals of the

CFTC’s Project KISS. I expect this proposal to be the first in a

series of staff recommendations to streamline and simplify

regulation of commodity pool operators and commodity trading

advisors.

 

[FR Doc. 2018-22324 Filed 10-17-18; 8:45 am]

 BILLING CODE 6351-01-P