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2013-19894a

2013-19894a

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52308
Federal Register
/Vol. 78, No. 163/Thursday, August 22, 2013/Rules and Regulations
1
7 U.S.C. 1,
et seq.
2
7 U.S.C. 6m.
3
7 U.S.C. 1a(11) and 1a(12).
4
7 U.S.C. 6n(3)(A). Under part 4 of theCommission’s regulations, unless otherwiseprovided by the Commission, entities registered asCPOs have reporting obligations with respect totheir operated pools.
See
17 CFR 4.22.
5
7 U.S.C. 12a(5).
6
17 CFR 4.5.
See
77 FR 11252 (Feb. 24, 2012);correction 77 FR 17328 (March 26, 2012). Prior tothis Amendment, all RICs, and the principals andemployees thereof, were excluded from thedefinition of ‘‘commodity pool operator,’’ by virtueof the RICs registration under the InvestmentCompany Act of 1940. The 2012 amendment to§4.5 maintained this exclusion for those RICs thatengage in a de minimis amount of non-bona fidehedging commodity interest transactions.
See id.
Specifically, the amendment to §4.5 retained thisexclusion for RICs whose non-bona fide hedgingcommodity interest transactions require aggregateinitial margin and premiums that do not exceed fivepercent of the liquidation value of the qualifyingpool’s portfolio, or whose non-bona fide hedgingcommodity interest transactions’ aggregate netnotional value does not exceed 100 percent of theliquidation value of the pool’s portfolio.
7
15 U.S.C. 80a–1,
et seq.
‘‘SEC’’ as used hereinmeans the Securities and Exchange Commission orits staff, as the context requires.
8
17 CFR 1.3(yy).
9
Pursuant to the terms of §4.14(a)(4), CPOs arenot required to register as CTAs if the CPOs’commodity trading advice is directed solely to, andfor the sole use of, the pool or pools for which theyare registered as CPOs. 17 CFR 4.14(a)(4).
10
76 FR 7976 (Feb. 11, 2011).
11
See
Notice of CFTC Staff RoundtableDiscussion on Proposed Changes to Registrationand Compliance Regime for Commodity PoolOperators and Commodity Trading Advisors,available at
counterparty,’’ as such term is used in§50.50(b), and for purposes of §50.50(b)(1)(iii)(A), the reportingcounterparty, as determined pursuant to§45.8, shall report that an exemption is being elected in accordance with thissection.
Issued in Washington, DC, on August 13,2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Note:
The following appendix will notappear in the Code of Federal Regulations.
Appendix to Clearing Exemption forCertain Swaps Entered Into byCooperatives—Commission VotingSummary
Appendix 1—Commission Voting Summary
On this matter, Chairman Gensler andCommissioners Chilton, O’Malia, and Wetjenvoted in the affirmative.
[FR Doc. 2013–19945 Filed 8–21–13; 8:45 am]
BILLING CODE 6351–01–P
COMMODITY FUTURES TRADINGCOMMISSION17 CFR Part 4
RIN 3038–AD75
Harmonization of ComplianceObligations for Registered InvestmentCompanies Required To Register asCommodity Pool Operators
AGENCY
:
Commodity Futures TradingCommission.
ACTION
:
Final rule.
SUMMARY
:
The Commodity FuturesTrading Commission (‘‘Commission’’ or‘‘CFTC’’) is adopting final regulationswith respect to certain complianceobligations for commodity pooloperators (‘‘CPOs’’) of investmentcompanies registered under theInvestment Company Act of 1940(‘‘registered investment companies’’ or‘‘RICs’’) that are required to register dueto the recent amendments to itsregulations. The Commission is alsoadopting amendments to certainprovisions of part 4 of the Commission’sregulations that are applicable to allCPOs and Commodity Trading Advisors(‘‘CTAs’’).
DATES
:
Effective dates: 
This rule iseffective August 22, 2013, except theamendments to §§4.7(b)(4), 4.12(c)(3)(i),4.23, 4.26, and 4.36 which are effectiveSeptember 23, 2013.
Compliance dates: 
Registered CPOsseeking exemption under these rulesshall be required to comply with theconditions adopted in §4.12(c)(3)(i)when the associated registeredinvestment company updates itsprospectus as described in Section II.F., below, and files the prospectus with theSEC. Moreover, the publication of theserules trigger the conditional compliancedate that was established in theCommodity Pool Operators andCommodity Trading Advisors:Compliance Obligations rulemaking. 77FR 11252, 11252 (Feb. 24, 2012). Withthe publication of these rules, registeredCPOs of RICs must comply with §4.27on or before October 21, 2013.
FOR FURTHER INFORMATION CONTACT
:
Amanda Lesher Olear, AssociateDirector, Telephone: (202) 418–5283,Email:
or MichaelEhrstein, Attorney-Advisor, Telephone:202–418–5957, Email:
Division of Swap Dealer andIntermediary Oversight, CommodityFutures Trading Commission, ThreeLafayette Centre, 1155 21st Street NW.,Washington, DC 20581.
SUPPLEMENTARY INFORMATION
:
I. Background
This rulemaking is related to the finalrule adopted under RIN 3038–AD30.
A. Recent Amendments to §4.5 asApplicable to RICs
The Commodity Exchange Act(‘‘CEA’’)
1
provides the Commissionwith the authority to require registrationof CPOs and CTAs,
2
to exclude anyentity from registration as a CPO orCTA,
3
and to require ‘‘[e]verycommodity trading advisor andcommodity pool operator registeredunder [the CEA] to maintain books andrecords and file such reports in suchform and manner as may be prescribed by the Commission.’’
4
The Commissionalso has the authority to ‘‘make andpromulgate such rules and regulationsas, in the judgment of the Commission,are reasonably necessary to effectuatethe provisions or to accomplish any of the purposes of [the CEA].’’
5
 In February 2012, the Commissionadopted modifications to the exclusionsfrom the definition of CPO that aredelineated in §4.5 (‘‘2012 Final Rule’’).
6
 Specifically, the Commission amended§4.5 to modify the exclusion from thedefinition of ‘‘commodity pooloperator’’ for those entities that areinvestment companies registered assuch with the Securities and ExchangeCommission (‘‘SEC’’) pursuant to theInvestment Company Act of 1940 (‘‘’40Act’’).
7
This modification amended theterms of the exclusion available to CPOsof RICs to include only those CPOs of RICs that commit no more than a deminimis portion of their assets to thetrading of commodity interests that donot fall within the definition of bonafide hedging and who do not marketthemselves as a commodity pool orother commodity investment.
8
Pursuantto this amendment, any such CPO of aRIC that exceeds this level, or marketsitself as such, will no longer beexcluded from the definition of CPO.Accordingly, except for those CPOs of RICs who commit no more than a deminimis portion of their assets to thetrading of commodity interests that donot fall within the definition of bonafide hedging and who do not marketthemselves as a commodity pool orother commodity investment, anoperator of a RIC that meets thedefinition of ‘‘commodity pooloperator’’ under §4.10(d) of theCommission’s regulations and §1a(11)of the CEA must register as such withthe Commission.
9
 
B. Harmonization Proposal 
In response to the Commission’sFebruary 2011 proposal to amend the§4.5 exclusion with respect to CPOs of RICs,
10
as well a staff roundtable heldon July 16, 2011 (‘‘Roundtable’’),
11
andmeetings with interested parties, theCommission received numerous
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52309
Federal Register
/Vol. 78, No. 163/Thursday, August 22, 2013/Rules and Regulations
12
15 U.S.C. 77a, et seq.
13
15 U.S.C. 78a, et seq.
14
The Commission understands that that SECprovides guidance in a variety of ways to marketparticipants, including interpretive guidance, noaction letters, frequently asked questions, and staff feedback in response to document submissions. TheCommission also notes that RICs may be subject toseparate requirements imposed by the FinancialIndustry Regulatory Authority.
15
See
76 FR 28641 (May 18, 2011). TheCommission adopted rules to relieve individualCPOs of publicly offered, ETFs of certainrequirements in part 4 of the Commission’sregulations. Specifically, the Commission adoptedamendments to §4.12 providing exemptive relief from §§4.21, 4.22, and 4.23 for operators of ETFs.Such relief includes providing disclosure andperiodic accounts statements to participantsthrough the Internet and permitting the use of third-party service providers for recordkeepingobligations. Previously, Commission staff hadissued relief to ETFs only on a case-by-case basis.ETFs that are also RICs may rely on the relief provided herein.
16
See,
e.g., Comment letter from the InvestmentCompany Institute (April 12, 2011) (ICI Letter).
17
See,
e.g., Comment letter from the NationalFutures Association (April 12, 2011) (NFA Letter).
18
See
Comment letter from Steben & Company,Inc. (April 25, 2012) (Steben letter).
19
7 U.S.C. 6n(3) and (4).
20
See
2012 Final Rule,
supra
note 6, 77 FR at11252, 11255. The Commission exercised itsauthority under §§4 and 8a of the CEA, 7 U.S.C.6 and 12a, and §4.12(a) of its regulationsthereunder, which provides that the Commissionmay exempt any person or class of persons fromany or all of part 4 requirements if the Commissionfinds that the exemption is not contrary to thepublic interest or the purposes of the provisionfrom which the exemption is sought. 17 CFR4.12(a).
21
The Commission’s regulations also provide forexemptions from registration for CPOs of privatelyoffered pools that engage in a de minimis amountof commodities trading (17 CFR 4.13(a)(3)), CPOswhose total capital contributions for all operatedpools do not exceed $400,000 and whose totalparticipants do not exceed 15 (17 CFR 4.13(a)(2)),and CPOs that do not advertise and who do notreceive any incentive or management fees (17 CFR4.13(a)(1)).
22
See
2012 Final Rule,
supra
note 6, 77 FR at11260 (‘‘Entities required to register due to theamendments to §4.5 shall be subject to theCommission’s recordkeeping, reporting, anddisclosure requirements set forth in part 4 of theCommission’s regulations within 60 days followingthe effectiveness of a final rule implementing theCommission’s proposed harmonization effortpursuant to the concurrent proposed rulemaking.’’).
23
77 FR 11345 (Feb. 24, 2012).
24
The Commission issued its proposal under theauthority of §§4m, 4n, and 8a(5) of the CEA. 7U.S.C. 6m, 6n, and 12a(5).
comments expressing concern about therelationship between part 4 of theCommission’s regulations applicable toCPOs of RICs and the SEC rules andguidance under the ’40 Act, theSecurities Act of 1933 (‘‘SecuritiesAct’’),
12
and the Securities ExchangeAct of 1934
13
regarding disclosure,reporting and recordkeeping by RICs(collectively, ‘‘SEC RIC Rules’’).
14
 Commenters asserted variously that thetwo sets of requirements touched uponsimilar areas, imposed undue burdenson CPOs of RICs, or conflicted such thatCPOs of RICs could not comply with both. On this basis, some commentersargued that CPOs of RICs should not berequired to comply with the full set of requirements under part 4. Severalpreviously received comments, whichwere noted in the Proposal, suggestedthat the Commission make relief available, with respect to document andreport distribution, similar to that whichit has recently adopted with respect toexchange-traded funds (‘‘ETFs’’).
15
 Some commenters suggested ways inwhich the two agencies’ requirementscould be harmonized to eliminate theinconsistencies between the twocompliance regimes with respect tothose entities subject to dual registrationas a result of the recent amendments to§4.5. Specific areas of focus identified by the commenters include: The timingof delivery of Disclosure Documents toprospective participants; the signedacknowledgement requirement forreceipt of Disclosure Documents; thecycle for updating DisclosureDocuments; the timing of financialreporting to participants; therequirement that a CPO maintain its books and records on site; the requireddisclosure of fees; the requireddisclosure of past performance; theinclusion of mandatory certificationlanguage; and the SEC-permitted use of a summary prospectus for open-endedregistered investment companies.Commenters advocated differentapproaches to harmonization. Somesuggested that where requirements areinconsistent, the Commission shoulddefer to SEC requirements.
16
A fewcommenters made recommendationsabout the treatment of specificdisclosures, such as presenting bothSEC and CFTC-required fee informationand presenting certain performanceinformation required by the CFTC in theStatement of Additional Information(‘‘SAI’’).
17
One commenter noted thatCPOs of RICs should be required tocomply with all disclosure and otherrequirements applicable to registeredCPOs.
18
 Sections 4n(3) and (4) of the CEA
19
 authorize the Commission to adoptregulations requiring that CPOsmaintain books and records and filereports with the Commission in themanner and form it prescribes. Suchcompliance obligations for CPOs are setforth in part 4 of the Commission’sregulations and include a set of requirements that address disclosure,recordkeeping, and reportingobligations. The regulations aredesigned to promote market integrityand transparency, facilitate necessaryCommission oversight, and provideimportant information to prospectiveparticipants. The requirement to complywith the full panoply of obligations setforth in part 4 of the Commission’sregulations does not, however, followinexorably from registration under the2012 Final Rule requiring CPOs of RICsto register. The Commissiondetermined, after consideration of thecomments received, that furtherconsideration was warranted concerningwhether and to what extent CPOs of RICs ought to be subject to various part4 requirements, and in the 2012 FinalRule suspended the obligations of CPOsof RICs with respect to most of therequirements of part 4 until furtherrulemaking.
20
The Commission’s 2012Final Rule imposed upon CPOs of RICsthat do not otherwise qualify for anexemption only the requirement toregister.
21
The Commission alsofinalized, but suspended compliancewith, pending the completion of furtherrulemaking, a requirement that CPOs of RICs file certain information on formCPO–PQR, pursuant to §4.27. At thesame time, consistent with theCommission’s authority under §4.12(a),the Commission commenced a newrulemaking to evaluate the necessityand reasonableness of additionalrequirements and, where possible, todevise ways in which the Commission’srequirements for CPOs of RICs could beharmonized with applicablerequirements of the SEC.
22
 The Commission therefore publishedfor comment in the
Federal Register
proposed amendments to part 4 of theCommission’s regulations designed toaddress potentially conflicting orduplicative compliance obligationsadministered by the Commission andthe SEC regarding disclosure, reportingand recordkeeping by CPOs of RICs (the‘‘Proposal’’).
23
The Commissionproposed changes to part 4 designed to better harmonize the Commission’scompliance obligations for CPOs withthose of the SEC for entities that aresubject to both regimes in such a waythat would allow the Commission tofulfill its regulatory mandate while, atthe same time, avoiding unnecessaryregulatory burdens on dually-regulatedCPOs of RICs with respect to disclosure,annual and periodic reporting toparticipants, and Commissionrecordkeeping requirements.
24
 The Proposal to harmonize theCommission’s regulatory regime withthat of the SEC as it applies to CPOs of RICs is grounded in the concept of substituted compliance. That is, insofaras the disclosure, reporting, andrecordkeeping regime administered by
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52310
Federal Register
/Vol. 78, No. 163/Thursday, August 22, 2013/Rules and Regulations
25
The Commission notesthat it received six duplicate comment letters; thus,the Commission received 60 unique comments. Of the comments received, many focused on theadvisability of an exemption for single-family pools(‘‘Family Offices’’). The Commission’s Division of Swap Dealer and Intermediary Oversight issued aletter on November 29, 2012, providing that itwould not recommend enforcement action againstthe operator of a ‘‘family office’’ as that term has been defined in the SEC’s regulations.
See,
CFTCStaff Letter, 12-37, available at
The Commission further notes thatit has considered additional comments, includingthose received at and following the Roundtable,
seesupra
note 11, regarding the harmonization of CFTCand SEC regulation applicable to operators of RICs.
26
See,
e.g., NFA Letter; Comment letter fromCampbell & Company, Inc. (April 24, 2012)(Campbell Letter).
27
See,
e.g., Comment letter from New York CityBar Association (May 30, 2012) (NYCBA Letter);Comment letter from Securities Industry andFinancial Markets Association Asset ManagementGroup (April 24, 2012) (SIFMA AMG Letter);Comment letter from Fidelity Management andResearch Company (April 24, 2012) (FidelityLetter).
28
NFA Letter; Campbell Letter; Comment letterfrom the Managed Funds Association (April 24,2012) (MFA Letter).
29
ICI Letter.
30
In five of the eleven areas of potentialredundancy, inconsistency, or conflict addressed inthe Proposal, the Commission proposed allowingsubstituted compliance by adherence to SECregulations. Under the proposal, CPOs of RICswould be exempt from disclosure requirementsunder §§4.21, 4.22, and 4.23.
See
Proposal,
supra
note 23, 77 FR at 11346. CPOs of RICs would also be exempt from more frequent disclosures required by §4.26, and the oath or affirmation required by§4.22(h).
Id.
For four other areas of potentialconflict, the Commission proposed allowing therequested information to be disclosed instead inSEC filings. Specifically, the proposal providesalternative methods of satisfying §§4.24(a),4.25(d)(5), 4.25(d), and 4.24(i), which ordinarilyrequire a cautionary statement, break-even points,and disclosure of fees and expenses, and requiresthat they be located in the forepart of the document.With respect to the last two areas—the frequency of the provision to customers of account statementsand the content of disclosures regarding pastperformance of commodity pools less than threeyears old—the Commission proposed maintainingits own standards, but also solicited comments onhow it could harmonize those last two areas.
the SEC under SEC RIC Rules weredesigned to achieve substantiallysimilar goals to those of theCommission’s part 4 regulations, thenCPOs of RICs that maintain complianceunder the SEC regime would be deemedto fulfill their obligations under part 4of the Commission’s regulations. At thesame time, in the event that a CPO of a RIC fails to comply with the SECadministered regime, the CPO will be inviolation of its obligations under part 4of the Commission’s regulations andthus subject to enforcement action bythe Commission. As such, the Proposalcontemplated an alternative means for aCPO of a RIC to comply with itsobligations under part 4 of theCommission’s regulations by modifyingcertain of the requirements. Theseproposed modifications included: Thetiming of the delivery of DisclosureDocuments to prospective participants;the signed acknowledgementrequirement for receipt of DisclosureDocuments; the cycle for updatingDisclosure Documents; the timing of financial reporting to participants; therequirement that a CPO maintain its books and records on site; the requireddisclosure of fees; the requireddisclosure of past performance; theinclusion of mandatory certificationlanguage; and the SEC-permitted use of a summary prospectus for open-endedregistered investment companies.As stated in the 2012 Final Rule, thejustification for the amendments to §4.5was to enable the Commission toadequately discharge its duties tooversee the commodity interest markets.Therefore, the Commission determinedto require the CPOs of RICs thatexceeded a de minimis threshold of commodity interest trading, excluding bona fide hedging, or which marketedthemselves as a commodity pool orother commodity investment, to registerwith the Commission. The Commissionrecognizes, however, that itsunderstanding of RICs and their use of commodity interests continues to evolveas it gains experience regarding RICs,and their regulation and operation.Thus, at this time, the Commission believes that the prudent approach is toprovide a substituted complianceregime based largely upon adherence tothe regime administered by the SEC asit continues to expand its knowledge of RICs and their use of commodityinterests.Therefore, in this final rule, theCommission has determined to broadenthe approach set forth in the Proposal.The Commission is adopting asubstituted compliance regime for CPOsof RICs largely premised upon suchentities’ adherence to the complianceobligations under SEC RIC Rules,whereby the Commission will acceptcompliance by such entities with thedisclosure, reporting, and recordkeepingregime administered by the SEC assubstituted compliance with part 4 of the Commission’s regulations. TheCommission has concluded that this isappropriate because, as the Commissioncontinues to gain experience regulatingCPOs of RICs, it believes that generalreliance upon the SEC’s complianceregime, with minor additionaldisclosure, should provide marketparticipants and the general public withmeaningful disclosure, including forexample, with regard to risks and fees,provide the Commission withinformation necessary to its oversight of CPOs, and ensure that CPOs of RICsmaintain appropriate records regardingtheir operations. As noted, in the eventthat the operator of the RIC fails tocomply with the SEC administeredregime, the operator of the RIC will bein violation of its obligations under part4 of the Commission’s regulations andsubject to enforcement action by theCommission.
C. Comments on the Proposal 
The Commission received 66comment letters regarding the Proposalfrom a wide range of entities, includingtrade and public interest organizations,family offices, a registered futuresassociation, individuals, currentlyregistered CPOs, RICs, and law firms.
25
 Generally, commenters favored theCommission’s effort to harmonize forCPOs of RICs the Commission’s part 4regulations with SEC-administeredrules.
26
Commenters particularlyfocused on disclosure issues, includingthe ‘‘break-even’’ disclosure, requiredstatements of risk, cycle for updatingDisclosure Documents, financialreporting including periodic accountstatements, and books and recordsrequirements.
27
In addition, somecommenters advocated modifications topart 4 requirements that they believedwere necessary to maintain suitableregulatory requirements for all CPOs.
28
 Commenters also addressed potentialcosts and benefits of harmonizing CFTCand SEC rules applicable to RICs.
29
 Beginning in 2011, Commission staff has engaged in ongoing substantivediscussions with SEC staff regardingpossible areas of harmonization betweenthe compliance regimes of the twocommissions as applicable to RICs andtheir CPOs, including disclosure toprospective investors and financialreporting. Such consultations occurredthroughout the process culminating inthis final rule and have informed theCommission’s understanding of RICsand the SEC’s regulation thereof.
D. Significant Changes From theProposal 
In the Proposal, the Commissionstated its intent to facilitate compliance by CPOs of RICs with the Commission’sdisclosure, reporting, and recordkeepingrequirements. As a result, theCommission proposed variousalternative mechanisms to enable duallyregistered operators of RICs to complywith the Commission’s part 4requirements.
30
After consideration of the comments received and furtherdeliberation, the Commission isadopting rules that effectively
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