[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]
[Proposed Rules]
[Pages 11345-11352]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3388]



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

[[Page 11345]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4


Harmonization of Compliance Obligations for Registered Investment 
Companies Required To Register as Commodity Pool Operators

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission is proposing 
amendments to its regulations regarding requirements applicable to 
investment companies registered under the Investment Company Act of 
1940 (``registered investment companies'') whose advisors will be 
subject to registration as commodity pool operators due to changes that 
the Commission is adopting.

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

ADDRESSES: Comments may be submitted by any of the following methods:
     Agency Web site, via its Comments Online Process: Comments 
may be submitted to http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx. Follow the instructions for submitting 
comments on the Web site.
     Mail: David A. Stawick, Secretary, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW., 
Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     ``Regulation 4.5 Harmonization'' must be in the subject 
field of comments submitted electronically, and clearly indicated on 
written submissions. All comments must be submitted in English, or if 
not, accompanied by an English translation. Comments will be posted as 
received to www.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the CFTC to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the established procedures in 
CFTC Regulation 145.9 (17 CFR 145.9).
     The CFTC reserves the right, but shall have no obligation, 
to: review, prescreen, filter, redact, refuse, or remove any or all of 
your submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed which contain comments 
on the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Kevin P. Walek, Assistant Director, 
Telephone: (202) 418-5463, Email: kwalek@cftc.gov, Amanda Lesher Olear, 
Special Counsel, Telephone: (202) 418-5283, Email: aolear@cftc.gov, or 
Michael Ehrstein, Attorney-Advisor, Telephone: 202-418-5957, Email: 
mehrstein@cftc.gov, Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory and Regulatory Background

    The Commodity Exchange Act (``CEA'') \1\ provides the Commission 
with the authority to register Commodity Pool Operators (``CPOs'') and 
Commodity Trading Advisors (``CTAs''),\2\ to exclude any entity from 
registration as a CPO or CTA,\3\ and to require ``[e]very commodity 
trading advisor and commodity pool operator registered under [the CEA] 
to maintain books and records and file such reports in such form and 
manner as may be prescribed by the Commission.'' \4\ The Commission 
also has the power to ``make and promulgate such rules and regulations 
as, in the judgment of the Commission, are reasonably necessary to 
effectuate the provisions or to accomplish any of the purposes of [the 
CEA].''\5\ The Commission's discretionary power to exclude or exempt 
persons from registration was intended to be exercised ``to exempt from 
registration those persons who otherwise meet the criteria for 
registration * * * if, in the opinion of the Commission, there is no 
substantial public interest to be served by the registration.'' \6\ It 
is pursuant to this authority that the Commission has promulgated the 
exclusions from the definition of CPO that are delineated in Sec.  
4.5.\7\
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    \1\ 7 U.S.C. 1, et seq.
    \2\ 7 U.S.C. 6m.
    \3\ 7 U.S.C. 1a(11) and 1a(12).
    \4\ 7 U.S.C. 6n(3)(A). Under part 4 of the Commission's 
regulations, entities registered as CPOs have reporting obligations 
with respect to their operated pools. See 17 CFR 4.22.
    \5\ 7 U.S.C. 12a(5).
    \6\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. (1974), p. 20.
    \7\ 17 CFR 4.5. See 68 FR 47231 (Aug. 8, 2003).
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B. Reinstatement of Trading and Marketing Criteria in Sec.  4.5

    In February 2011, the Commission proposed to revise the 
requirements for determining which persons should be required to 
register as a CPO under Sec.  4.5.\8\ The Commission is adopting the 
proposed changes to Sec.  4.5, with some minor modifications, and is 
proposing certain provisions to facilitate compliance by registered 
investment companies with the Commission's disclosure, reporting, and 
recordkeeping requirements. The proposed amendments that follow are 
based on the consideration of the comments that were submitted on the 
previously proposed amendments to Sec.  4.5, information provided 
during a staff roundtable on July 16, 2011 (``Roundtable''),\9\ and 
meetings with interested parties.\10\
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    \8\ 76 FR 7976 (Feb. 12, 2011).
    \9\ See Notice of CFTC Staff Roundtable Discussion on Proposed 
Changes to Registration and Compliance Regime for Commodity Pool 
Operators and Commodity Trading Advisors, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff070611.
    \10\ See generally, http://comments.cftc.gov/PublicComments/CommentList.aspx?id=973.
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C. Proposed Harmonization Provisions

    Many commenters noted that sponsors of registered investment 
companies which also would be required to register as CPOs would be 
subject to duplicative, inconsistent, and possibly conflicting 
disclosure and reporting requirements. In comment letters, meetings, 
and at the Roundtable, a number of suggestions were made regarding the 
manner in which the Securities and Exchange Commission (``SEC'') and 
CFTC requirements could be harmonized. Specific areas identified by the 
commenters as needing harmonization include: the timing of delivery of 
Disclosure Documents to prospective participants; the signed 
acknowledgement requirement for receipt of Disclosure Documents; the 
cycle for updating Disclosure Documents; The timing of financial 
reporting to participants; the requirement that a CPO maintain its 
books and records on site; the required disclosure of fees; the 
required disclosure of past performance; the inclusion of mandatory 
certification language; and the SEC-permitted use of a summary 
prospectus of open-ended registered investment companies.

[[Page 11346]]

    Several commenters suggested that the Commission make available 
relief, with respect to document and report distribution, similar to 
that which it has recently adopted with respect to exchange-traded 
funds (``ETFs'').\11\ Other commenters suggested that where 
requirements are inconsistent, the Commission should defer to SEC 
requirements. A few commenters made recommendations about the treatment 
of specific disclosures, such as presenting both SEC and CFTC-required 
fee information and presenting certain performance information required 
by the CFTC in the Statement of Additional Information (``SAI''). At 
least one commenter noted that registered investment companies should 
be required to comply with all disclosure and other requirements 
applicable to registered CPOs.
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    \11\ 76 FR 28641 (May 18, 2011).
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    The Commission has carefully considered the comments regarding 
harmonization and has determined to propose the following exemptive 
provisions that would be available to advisors of registered investment 
companies who are required to register as CPOs.
1. Delivery of Disclosure Documents and Periodic Reports
    Part 4 of the Commission's regulations impose certain risk 
disclosure, reporting, and recordkeeping obligations on registered 
CPOs. Section 4.21 \12\ of the Commission's regulations requires that 
each CPO registered or required to be registered with the Commission 
deliver a Disclosure Document prepared in accordance with Sec. Sec.  
4.24 and 4.25,\13\ which set forth the specific information required to 
be disclosed, including the past performance of the offered pool to 
each prospective participant in a pool that it operates or intends to 
operate. Section 4.21 further provides that the CPO may not accept or 
receive funds, securities, or other property from a prospective 
participant unless the CPO first receives from the prospective 
participant a signed and dated acknowledgment stating that the 
prospective participant received a Disclosure Document for the pool.
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    \12\ 17 CFR 4.21.
    \13\ 17 CFR 4.24 and 4.25.
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    With respect to a CPO's reporting obligations, Sec.  4.22 \14\ 
requires that each CPO registered or required to be registered 
periodically distribute to each participant in each pool that it 
operates an Account Statement presented in the form of a Statement of 
Income (Loss) and a Statement of Changes in Net Asset Value for the 
prescribed period. The Account Statement must be distributed monthly 
for pools with net assets of more than $500,000, and otherwise at least 
quarterly.\15\ The financial statements must be presented in accordance 
with generally accepted accounting principles, consistently 
applied.\16\ With respect to a CPO's recordkeeping obligations, Sec.  
4.23 \17\ of the Commission's regulations requires, in relevant part, 
that each CPO who is registered or required to be registered must make 
and keep the books and records specified in the regulation ``at its 
main business office.''
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    \14\ 17 CFR 4.22.
    \15\ 17 CFR 4.22(b).
    \16\ 17 CFR 4.22(a).
    \17\ 17 CFR 4.23.
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2. Comments Received Regarding Recently Adopted Exemptive Relief for 
Exchange Traded Funds
    In response to the Commission's proposal to amend Sec.  4.5, 
several commenters suggested that the Commission consider extending the 
exemptive relief that it recently adopted for CPO's operating ETFs 
under Sec.  4.12(c),\18\ which makes available to such CPOs specified 
relief from the Disclosure Document delivery and acknowledgment 
requirements of Sec.  4.21, the monthly Account Statement delivery 
requirement of Sec.  4.22, and the requirement to keep the CPO's books 
and records at its main business address in Sec.  4.23. The relief 
permits CPOs to comply with the Disclosure Document and account 
statement delivery requirements by making such documents available on 
their web sites, and to maintain their records with specified third 
parties, on the condition that certain information and representations 
are filed with the CPO's notice claiming relief.\19\ The criteria for 
claiming this relief are that: (1) The units of participation in the 
pool will be offered and sold pursuant to an effective registration 
statement under the Securities Act of 1933,\20\ and (2) the units will 
be listed for trading on a national securities exchange registered as 
such under the Securities Exchange Act of 1934.\21\ In its release 
proposing ETF relief, the Commission noted that historically, ETFs have 
been investment companies registered under the Investment Company Act 
of 1940 either as unit investment trusts or as open-end investment 
companies.\22\ The Commission did not, however, make such registration 
a condition of relief. Commenters noted that, like ETFs, the 
distribution and subscription mechanisms for registered investment 
companies would make it difficult for them to meet the Disclosure 
Document delivery and acknowledgment requirements under the 
Commission's regulations. Commenters and Roundtable panelists also 
noted that the records of registered investment companies often are 
maintained by third parties, such as administrators, making it 
difficult for registered investment companies to comply with the 
requirement of Sec.  4.23 that a pool's books and records be maintained 
at the CPO's main business office.\23\ To address these concerns, the 
Commission is proposing to add an alternative criterion under Sec.  
4.12(c) that will permit registered investment companies to claim the 
disclosure, reporting, and recordkeeping relief currently available to 
ETFs.
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    \18\ 17 CFR 4.12(c).
    \19\ Id.
    \20\ 15 U.S.C. 77a, et seq.
    \21\ 15 U.S.C. 78a, et seq.
    \22\ 75 FR 54794, 54795 (Sept. 9, 2010).
    \23\ 17 CFR 4.23.
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    Several commenters further requested that the Commission extend the 
same relief it made available to operators of ETFs for delivery of 
required disclosures and periodic reports to CPOs of publicly offered 
commodity pools, noting that such offerings are regulated by the CFTC, 
SEC, National Futures Association (``NFA''), Financial Industry 
Regulatory Authority (``FINRA''), and each state in which they are 
offered. The Commission agrees that for purposes of the exemption, 
there is no useful distinction between publicly offered pools whose 
units are listed for trading on a national securities exchange, and 
those which are not. Therefore, the Commission is proposing to amend 
Sec.  4.12(c) such that the CPO of any pool whose units of 
participation will be offered and sold pursuant to an effective 
registration statement under the Securities Act of 1933 may claim the 
relief from the delivery and acknowledgement requirements under Sec.  
4.21, certain periodic financial reporting obligations under Sec.  
4.22, and the requirement that records be maintained at the CPO's main 
office under Sec.  4.23, available under Sec.  4.12(c) with respect to 
that pool.
3. Content and Timing of Disclosure Documents
    Many of the disclosures required by part 4 of the Commission's 
regulations are consistent with SEC-required disclosures. Where CFTC 
requirements differ slightly, the Commission believes that CFTC-
required disclosures can be presented concomitant with SEC-required 
information in a registered investment company's prospectus. To

[[Page 11347]]

address the few instances where conflicts in disclosure have been 
identified, the Commission is proposing relief to harmonize these 
requirements. With respect to performance, Sec.  4.25(b) specifies that 
if the pool has traded commodity interests for three years or more, 
during which at least seventy-five percent of its contributions have 
been made by persons unaffiliated with the CPO, CTAs, or their 
principals, the only required performance is that of the offered 
pool.\24\ If a pool has not operated for at least three years, the CPO 
must present the performance of other pools and accounts enumerated in 
Sec. Sec.  4.25(c)(2)-(5).\25\ The Commission is proposing that the 
performance of other pools and accounts required to be disclosed by 
Sec. Sec.  4.25(c)(2)-(5) may be presented in the registered investment 
company's SAI. The Commission notes that SEC requirements may conflict 
with CFTC requirements with respect to reporting past performance and 
accordingly seeks comment below.\26\ In addition, the Commission is 
proposing that, in lieu of the standard cautionary statement prescribed 
by Sec.  4.24(a),\27\ the cover page of the registered investment 
company's prospectus may contain a statement that combines the language 
required by both Sec.  4.24(a) and Rule 481(b)(1) under the Securities 
Act of 1933.\28\ With respect to the break-even point\29\ required by 
Sec.  4.24(d)(5),\30\ the Commission will consider the forepart of the 
document to be the section immediately following all disclosures 
required by SEC Form N-1A \31\ to be included in the summary 
prospectus, or otherwise, for registered investment companies using 
Form N-2, in the forepart of the prospectus. Any other information 
required to be presented in the forepart of the document by Sec.  
4.24(d), but that is not included in the summary section of the 
prospectus for open-ended registered investment companies, may also be 
presented immediately following the summary section of the prospectus 
for open-ended funds, or otherwise, for registered investment companies 
using Form N-2, in the forepart of the prospectus. Finally, with 
respect to disclosure of fees and expenses required by Sec.  4.24(i), 
any such expenses that are not included in the fee table required by 
Item 3 of Form N-1A or Item 3 of Form N-2 would be disclosed in the 
prospectus, along with the tabular presentation of the calculation of 
the pool's break-even point required by Sec.  4.24(i)(6). The 
Commission continues to believe that the inclusion of the tabular 
presentation of the calculation of the break-even point consistent with 
the Commission's regulations is a necessary disclosure because, among 
other requirements, it mandates a greater level of detail regarding 
brokerage fees and does not assume a specific rate of return. The 
Commission believes that this results in meaningful disclosure through 
the break-even analysis and facilitates an investor's assessment of a 
registered investment company that uses derivatives.
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    \24\ 17 CFR 4.25(b).
    \25\ 17 CFR 4.25(c)(2)-(5).
    \26\ The Commission has had preliminary discussions with SEC 
staff on this issue. The SEC staff stated that it would consider 
requests for no-action relief regarding the performance 
presentations, if necessary and appropriate.
    \27\ Section 4.24(a) of the Commission's regulations requires 
that each disclosure document prepared and distributed by registered 
CPOs prominently display the following prescribed cautionary 
statement on its cover: THE COMMODITY FUTURES TRADING COMMISSION HAS 
NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE 
COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE 
DOCUMENT. 17 CFR 4.24(a).
    \28\ 17 CFR 230.481.
    \29\ Section 4.10(j) of the Commission's regulations defines the 
``break-even point'' as ``the trading profit that a pool must 
realize in the first year of a participant's investment to equal all 
fees and expenses such that such participant will recoup its initial 
investment, as calculated pursuant to rules promulgated by a 
registered futures association pursuant to section 17(j) of the 
Act.'' 17 CFR 4.10(j)(1). The break-even point must be expressed in 
terms of dollars and as a percentage of the minimum unit of initial 
investment. 17 CFR 4.10(j)(2). It must also assume the redemption of 
the investment as of the close of the first year of investment. Id.
    \30\ 17 CFR 4.24(d)(5).
    \31\ 17 CFR 274.11a.
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    Commenters noted that the CFTC's and SEC's timing requirements for 
Disclosure Document updates were inconsistent. Section 4.26 of the 
Commission's regulations specifies that a Disclosure Document may be 
used for nine months from the date of the document before a new 
Disclosure Document must be prepared and filed. Conversely, provisions 
of the securities laws effectively require an annual prospectus update. 
Section 10(a)(3) of the Securities Act of 1933 specifies that ``when a 
prospectus is used more than nine months after the effective date of 
the registration statement, the information contained therein shall be 
as of a date not more than sixteen months prior to such use * * *.'' 
\32\ Because financial statements are prepared annually as of the end 
of the investment company's fiscal year, and information from the 
financial statements is included in the prospectus, the operation of 
Section 10(a)(3) results in an annual prospectus updating cycle. To 
address this inconsistency, the Commission is proposing to require that 
CPOs and CTAs file updates of all Disclosure Documents twelve months 
from the date of the document.
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    \32\ 15 U.S.C. 77j.
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    Some commenters, including NFA, raised an operational issue in 
connection with Disclosure Document amendments filed pursuant to Sec.  
4.26(c).\33\ NFA noted that CPOs filing amended Disclosure Documents 
cannot distribute the document until NFA accepts the disclosure 
document. NFA suggested that the Commission consider whether it may be 
appropriate to allow CPOs of pools that provide for daily liquidity to 
post the Disclosure Document with the highlighted changes on their 
internet web sites for pool participants at the same time the CPO files 
with NFA, with the final document posted upon completion of the NFA 
review process. The Commission notes that Sec.  4.26(d)(2) currently 
permits CPOs to provide Disclosure Document updates to participants at 
the same time such updates are filed with NFA. Therefore, if the 
proposed relief is adopted by the Commission, CPOs claiming such relief 
may follow the procedure recommended by NFA with no additional action 
by the Commission.
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    \33\ 17 CFR 4.26.
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4. Reports--Timing and Certification
    Section 4.22(a) requires CPOs to provide periodic reports, 
generally monthly, to participants in the pools that they operate. SEC 
regulations require that registered investment companies provide 
semiannual reports to shareholders. Regulations of both commissions 
require provision of annual financial statements to commodity pool 
participants and investment company shareholders, respectively.\34\ 
Some commenters noted that the requirement to prepare and provide 
monthly account statements would be burdensome because registered 
investment companies are not required to do so under SEC regulations, 
and suggested that the Commission accept the reporting required under 
securities laws. The Commission has carefully considered these comments 
and determined not to propose relief regarding the content or timing of 
the monthly account statement, as the information required to prepare 
the account statement should be readily available to the operator of an 
investment vehicle maintaining records of its trading activity and 
other operations in accordance with recordkeeping requirements under 
the CEA and applicable securities laws. Registered investment companies 
will

[[Page 11348]]

be able to satisfy the requirement to deliver account statements to 
participants by making such statements available on their internet Web 
sites, thereby substantially reducing any burden under Sec.  4.22(a).
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    \34\ 17 CFR 4.22 and 270.30e-1.
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    One commenter noted that the language required by the CFTC and the 
SEC in their respective periodic and annual report certifications is 
not identical, and encouraged the Commission to work with the SEC 
either to accept one language in lieu of the other or to develop agreed 
upon language for these certifications. Section 4.22(h) requires the 
individual making the oath or affirmation on behalf of the CPO to 
affirm that, to the best of his or her knowledge and belief, the 
information contained in the document is accurate and complete. The 
first item in the certification required by SEC Form N-CSR is: ``Based 
on my knowledge, this report does not contain any untrue statement of a 
material fact or omit to state a material fact necessary to make the 
statements made, in light of the circumstances under which such 
statements were made, not misleading with respect to the period covered 
by this report.'' The certification under Sec.  4.22(h) must be 
included with the periodic and annual reports provided to participants 
and with the annual report filed with NFA. The certification required 
by SEC Form N-CSR is made available through EDGAR, but does not have to 
be provided to shareholders. Because the Form N-CSR certification 
includes language that is substantively consistent with the 
certification required under Sec.  4.22(h), the Commission will accept 
the SEC's certification as meeting the requirement under Sec.  4.22(h), 
as long as such certification is part of the Form N-CSR filed with the 
SEC.
    The Commission seeks comment on the proposed harmonization 
provisions. In particular, do any provisions of part 4 in addition to 
those identified in the proposal need to be harmonized? For instance, 
as noted in the Commission's final rulemaking, Commodity Pool Operators 
and Commodity Trading Advisors: Amendments to Compliance 
Obligations,\35\ the Commission is considering adopting a family 
offices exemption from CPO registration akin to the exemption adopted 
by the SEC.\36\ What are the factors that weigh in favor or against 
such an exemption? Do the proposed harmonization provisions for break-
even analysis and performance disclosure strike the appropriate balance 
between achieving the Commission's objective of providing material 
information to pool participants, and reducing duplicative or 
conflicting disclosure? Should the Commission consider harmonizing its 
account statement reporting requirement with the SEC's semiannual 
reporting requirement? Should the Commission consider harmonizing its 
past performance reporting requirements with the SEC requirements? Are 
there other approaches to harmonizing these requirements that the 
Commission should consider? Should the Commission consider applying any 
of the harmonization provisions to operators of pools that are not 
registered investment companies?
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    \35\ Published elsewhere in this issue of the Federal Register.
    \36\ See 17 CFR 250.202(a)(11)(G)-1.
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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \37\ requires that agencies, 
in proposing rules, consider the impact of those rules on small 
businesses. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on such entities in accordance with 
the RFA.\38\
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    \37\ See 5 U.S.C. 601, et seq.
    \38\ 47 FR 18618 (Apr. 30, 1982).
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    CPOs: The Commission has previously determined that registered CPOs 
are not small entities for the purpose of the RFA.\39\ With respect to 
CPOs exempt from registration, the Commission has determined that a CPO 
is a small entity if it meets the criteria for exemption from 
registration under current Rule 4.13(a)(2).\40\ Based on the requisite 
level of sophistication needed to comply with the SEC's regulatory 
regime for registered investment companies and the fact that registered 
investment companies are generally intended to serve as retail 
investment vehicles and do not qualify for exemption under Sec.  
4.13(a)(2), the Commission believes that registered investment 
companies are generally not small entities for purposes of the RFA 
analysis. Moreover, the proposals herein will reduce the burden of 
complying with part 4 for CPOs of registered investment companies. The 
Commission has determined that the proposed regulation will not create 
a significant economic impact on a substantial number of small 
entities.
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    \39\ See 47 FR 18618, 18619 (Apr. 30, 1982).
    \40\ See 47 FR at 18619-20.
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    CTAs: The Commission has previously decided to evaluate, within the 
context of a particular rule proposal, whether all or some CTAs should 
be considered to be small entities, and if so, to analyze the economic 
impact on them of any such rule.\41\ The sole aspect of the proposal 
that affects CTAs would allow disclosure documents to be used for 12 
months rather than nine months, thereby reducing the frequency with 
which updates must be prepared. Therefore, the Commission has 
determined that the proposal will not create a significant economic 
impact on a substantial number of small entities. Accordingly, the 
Chairman, on behalf of the Commission hereby certifies pursuant to 5 
U.S.C. 605(b) that the proposed rules, will not have a significant 
impact on a substantial number of small entities.
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    \41\ See 47 FR at 18620.
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B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') imposes certain requirements 
on Federal agencies in connection with their conducting or sponsoring 
any collection of information as defined by the PRA.\42\ An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number from the Office of Management and Budget (``OMB'').
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    \42\ See 44 U.S.C. 3501 et seq.
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    The Commission is amending Collection 3038-0023 to allow for an 
increase in response hours for the rulemaking resulting from the 
amendments to Sec.  4.5 that the Commission adopted in a concurrent 
release.\43\ In the context of that rulemaking, the Commission received 
comments asserting that, absent harmonization of the Commission's 
compliance regime for CPOs with that of the SEC for registered 
investment companies, entities operating registered investment 
companies that would be required to register with the Commission would 
not be able to comply with the Commission's regulations and would have 
to discontinue their activities involving commodity interests. Because 
the Commission is proposing provisions to harmonize its compliance 
regime for sponsors or advisors to registered investment companies 
required to register as CPOs, the Commission believes that such 
entities will be able to register with the Commission and comply with 
the applicable compliance obligations.
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    \43\ CITE to FR for Non-Joint Rulemaking.
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    The Commission also is amending Collection 3038-0005 to allow for 
an increase in response hours for the rulemaking associated with 
modified

[[Page 11349]]

compliance obligations under part 4 of the Commission's regulations 
resulting from these revisions. The titles for these collections are 
``Part 3--Registration'' (OMB Control number 3038-0023) and ``Part 4--
Commodity Pool Operators and Commodity Trading Advisors'' (OMB Control 
number 3038-0005). Responses to this collection of information will be 
mandatory.
    The Commission will protect proprietary information according to 
the Freedom of Information Act (``FOIA'') and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the CEA strictly prohibits the Commission, unless specifically 
authorized by the CEA, from making public ``data and information that 
would separately disclose the business transactions or market position 
of any person and trade secrets or names of customers.'' \44\ The 
Commission is also required to protect certain information contained in 
a government system of records according to the Privacy Act of 
1974.\45\
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    \44\ See 7 U.S.C. 12.
    \45\ See 5 U.S.C. 552a.
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    In the Commission's February proposal, the Commission estimated 
that the burden of Sec.  4.5 compliance would be 16.68 hours for an 
estimated 416 CPOs and CTAs that would be obligated to comply.\46\ 
There currently is no source of reliable information regarding the 
general use of derivatives by registered investment companies. Because 
of this lack of information, the Commission has derived the estimated 
entities affected and the number of burden hours associated with this 
proposal through the use of statistical analysis. According to the one 
source of data available to the Commission, in 2010, there were 669 
sponsors of 9,719 registered investment companies, including mutual 
funds, closed end funds, exchange traded funds, and unit investment 
trusts.\47\ In the comment letter submitted by the Investment Company 
Institute (``ICI'') with respect to the Commission's February proposal 
the ICI stated that it surveyed its membership and 13 sponsors 
responded representing 2,111 registered investment companies. Of those 
2,111 registered investment companies, the 13 sponsors estimated that 
485 would trigger registration and compliance obligations under Sec.  
4.5 as amended. This constitutes approximately 23% of the reported 
registered investment companies.
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    \46\ The Commission notes that the PRA burden proposes that it 
be considered in light of the costs entities may have incurred under 
the part 4 regulations as proposed in the Commodity Pool Operators 
and Commodity Trading Advisors: Amendments to Compliance Obligations 
rulemaking. In that rulemaking, the Commission estimated that 
entities would incur 9.58 burden hours in filing an annual report, 
3.85 burden hours in compiling and distributing periodic account 
statements, and 3.25 burden hours in compiling and distributing 
disclosure documents; in sum, the Commission estimated that these 
provisions would incur a burden in total of 16.68 hours. By 
operation of this proposal, registered investment companies 
regulated by the SEC will be able to use similar documents required 
under SEC regulations to satisfy their CFTC registration and 
compliance requirements under part 4 of the Commission's 
regulations.
    \47\ See 2011 Investment Company Fact Book, Chap. 1 and Data 
Tables, Investment Company Institute (2011), available at http://www.icifactbook.org/.
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    The Commission then deducted the 2,111 registered investment 
companies discussed in the ICI comment letter from the 9,719 entities 
comprising the universe of registered investment companies, and 
deducted the 13 sponsors surveyed by the ICI from the universe of 669 
fund sponsors to arrive at 656 fund sponsors operating 7,608 registered 
investment companies. This resulted in an average of 11.6 registered 
investment companies being offered per sponsor.
    The Commission then calculated 23% of the 7,608 registered 
investment companies not covered by the ICI survey, which equals 1,750 
registered investment companies that the Commission would expect to 
trigger registration under amended Sec.  4.5. Then, the Commission 
divided this number by the average number of registered investment 
companies operated per sponsor and added the 13 sponsors from the ICI 
survey to reach 164 sponsors expected to be required to register under 
amended Sec.  4.5. Because the Commission cannot state with absolute 
certainty that only 164 entities would be required to register, due to 
the uncertainty inherent in the use of averages, the Commission 
believes that the number of sponsors or advisors required to register 
to be somewhere between 164 and 669 entities. For PRA purposes, the 
Commission believes that it is appropriate to use the midpoint between 
the outer bounds of the range, which is 416 entities. The Commission 
estimates that there will still be some burden associated with Sec.  
4.5 compliance under the proposed rule, as there are some 
incompatibilities between SEC and Commission regulations (as discussed 
above). The Commission estimated this burden at approximately 2 hours 
annually. Thus, the Commission estimates that this new proposal will 
reduce the information collection burden associated with Sec.  4.5 
compliance for the estimated 416 entities by 14.68 hours per entity.
1. Additional Information Provided by CPOs and CTAs
a. OMB Control Number 3038-0023
    Part 3 of the Commission's regulations concern registration 
requirements. The Commission is amending existing Collection 3038-0023 
to reflect the obligations associated with the registration of new 
entrants, i.e., CPOs that were previously exempt from registration 
under Sec.  4.5 that had not previously been required to register. 
Because the registration requirements are in all respects the same as 
for current registrants, the collection has been amended only insofar 
as it concerns the increased estimated number of respondents and the 
corresponding estimated annual burden.
    Estimated number of respondents: 75,841.
    Annual responses by each respondent: 76,350.
    Annual reporting burden: 6,871.6.
b. OMB Control Number 3038-0005
    Part 4 of the Commission's regulations concerns the operations of 
CTAs and CPOs, and the circumstances under which they may be exempted 
or excluded from registration. Under existing Collection 3038-0005 the 
estimated average time spent per response has not been altered; 
however, adjustments have been made to the collection to account for 
the new burden expected under the proposed rulemaking. The total burden 
associated with Collection 3038-0005 is expected to be:
    Estimated number of respondents: 44,142.
    Annual responses by each respondent: 62,121.
    Estimated average hours per response: 4.22.
    Annual reporting burden: 262,347.8.
    The proposed harmonization specifically will add the following 
burden with respect to compliance obligations other than Form CPO-PQR:
    Estimated number of respondents: 416.
    Annual responses by each respondent: 5.
    Estimated average hours per response: 2.
    Annual reporting burden: 4160.
    The proposed harmonization will add the following burden with 
respect to the burden associated with Form CPO-PQR:
    Schedule A:
    Estimated number of respondents: 586.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 6.

[[Page 11350]]

    Annual reporting burden: 14,064.
    Schedule B:
    Estimated number of respondents: 586.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 4.
    Annual reporting burden: 9,376.
    Schedule C:
    Estimated number of respondents: 586.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 18.
    Annual reporting burden: 42,192.
2. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the reporting and recordkeeping burdens 
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission 
solicits comments in order to: (i) Evaluate whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collection of information; (ii) 
determine whether there are ways to enhance the quality, utility, and 
clarity of the information collected; and (iv) minimize the burden of 
the collection of information on those who are required to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by email at 
OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy 
of submitted comments so that they can be summarized and addressed in 
the final rule. Refer to the ADDRESSES section of this notice of 
proposed rulemaking for comment submission instructions to the 
Commission. A copy of the supporting statements for the collections of 
information discussed above may be obtained by visiting RegInfo.gov.
    OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is most assured of being fully effective 
if received by OMB (and the Commission) within 30 days after 
publication of this notice of proposed rulemaking.

C. Considerations of Costs and Benefits

    Section 15(a) of the Act requires the Commission, before 
promulgating a regulation under the Act or issuing an order, to 
consider the costs and benefits of its action.\48\ Section 15(a) 
specifies that costs and benefits shall be evaluated in light of the 
following considerations: (1) Protection of market participants and the 
public; (2) efficiency, competitiveness and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations.\49\ The 
Commission can, in its discretion, give greater weight to any of the 
five considerations and determine that, notwithstanding its costs, a 
particular regulation was necessary or appropriate to protect the 
public interest, or to effectuate any of the provisions, or to 
accomplish any of the purposes, of the Act.
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    \48\ 7 U.S.C. 19(a).
    \49\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    In February 2011, the Commission proposed to revise the 
requirements for determining which persons should be required to 
register as a CPO under Sec.  4.5. The Commission received numerous 
comments that sponsors of registered investment companies that also 
would be required to register as CPOs would be subject to duplicative, 
inconsistent, and possibly conflicting disclosure and reporting 
requirements. The purpose of this proposal is to harmonize certain CFTC 
and SEC registration requirements in an effort to reduce the costs to 
dual registrants of complying with two regulatory regimes. To address 
the commenters' concerns about the content and timing of disclosure 
documents, account statement delivery and certification, and 
recordkeeping requirements, the Commission is proposing to harmonize 
its regulatory requirements with those of the SEC to reduce the costs 
for dual registrants. Each of these harmonizing provisions involves 
recordkeeping and reporting obligations that would be a collection of 
information under the PRA.
    The Commission is obligated to estimate the burden of and provide 
supporting statements for any collections of information it seeks to 
establish under considerations contained in the PRA,\50\ and to seek 
approval of those requirements from the OMB. Therefore, the estimated 
burden costs and support for the collections of information is provided 
for in the PRA section of this notice of proposed rulemaking and the 
information collection requests that will be filed with OMB 
contemporaneously with this rulemaking as required by that statute.
---------------------------------------------------------------------------

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

1. Section 15(a) Considerations
    As stated above, section 15(a) of the CEA requires the CFTC to 
consider the costs and benefits of its actions in light of five broad 
areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations.
a. Protection of Market Participants and the Public
    The Commission believes that these regulations protect market 
participants and the public by achieving the same regulatory objectives 
of its proposed part 4 registration and reporting requirements but at 
reduced costs.
b. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    The Commission believes that harmonization and its concomitant 
reduction in regulatory burden promotes the efficiency of futures 
markets in an indirect way; by lessening the costs that entities must 
bear to operate within markets, participants can pass along such 
savings to their customers or devote more resources to serving those 
customers. Moreover, as registered participants are relieved of some 
burdens, the incentive to remain unregistered may diminish.
c. Price Discovery
    The Commission has not identified a specific effect on price 
discovery as a result of these harmonizing regulations.
d. Sound Risk Management
    The Commission has not identified a specific effect on sound risk 
management as a result of these harmonizing regulations.
e. Other Public Interest Considerations
    The CFTC has not identified other public interest considerations 
related to the costs and benefits of these regulations.
2. Conclusion
    The Commission believes these regulations will lower burdens for 
many market participants who are also registered with other regulatory 
agencies as a result of doing business in multiple markets. The 
Commission welcomes all public comments on its cost and benefit 
considerations, including its analysis of the regulations in light of 
the five factors enumerated in Sec.  15(a). Specifically, are

[[Page 11351]]

there potential costs associated with these harmonizing rules that the 
Commission has not considered? Are there benefits to market 
participants, the public, or futures markets that the Commission should 
consider?

List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Consumer protection, Reporting and recordkeeping requirements.

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

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

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

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, 
and 23.

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


Sec.  4.12  Exemption from provisions of part 4.

* * * * *
    (c) Exemption from Subpart B for certain commodity pool operators 
based on registration under the Securities Act of 1933 or the 
Investment Company Act of 1940. (1) Eligibility. Subject to compliance 
with the provisions of paragraph (d) of this section, any person who is 
registered as a commodity pool operator, or has applied for such 
registration, may claim any or all of the relief available under 
paragraph (c)(2) of this section if, with respect to the pool for which 
it makes such claim:
    (i) The units of participation will be offered and sold pursuant to 
an effective registration statement under the Securities Act of 1933; 
or
    (ii) The pool is registered under the Investment Company Act of 
1940.
    (2) Relief available to pool operator. The commodity pool operator 
of a pool whose units of participation meet the criteria of paragraph 
(c)(1) of this section may claim the following relief:
    (i) In the case of Sec.  4.21, exemption from the Disclosure 
Document delivery and acknowledgment requirements of that section, 
Provided, however, that the pool operator:
    (A) Causes the pool's Disclosure Document to be readily accessible 
on an Internet Web site maintained by the pool operator;
    (B) Causes the Disclosure Document to be kept current in accordance 
with the requirements of Sec.  4.26(a);
    (C) Clearly informs prospective pool participants with whom it has 
contact of the Internet address of such Web site and directs any 
broker, dealer or other selling agent to whom the pool operator sells 
units of participation in the pool to so inform prospective pool 
participants; and
    (D)(1) If claiming relief under paragraph (c)(1)(i) of this 
section, comply with all other requirements applicable to pool 
Disclosure Documents under part 4. The pool operator may satisfy the 
requirement of Sec.  4.26(b) to attach to the Disclosure Document a 
copy of the pool's most current Account Statement and Annual Report if 
the pool operator makes such Account Statement and Annual Report 
readily accessible on an Internet Web site maintained by the pool 
operator.
    (2) If claiming relief under paragraph (c)(1)(ii) of this section, 
comply with all other requirements applicable to pool Disclosure 
Documents under part 4, except that, with respect to the specific 
requirements listed below, comply as follows:
    (i) With respect to the legend required by Sec.  4.24(a), include a 
legend that indicates that the Commodity Futures Trading Commission and 
the Securities and Exchange Commission have not approved or disapproved 
of the securities or passed upon the merits of participating in the 
pool, nor has either agency passed upon the accuracy or adequacy of the 
disclosure in the prospectus, and that any contrary representation is a 
criminal offense. The legend may be in one of the following or other 
clear and concise language:

    Example A: The Securities and Exchange Commission and the 
Commodity Futures Trading Commission have not approved or 
disapproved these securities or this pool, or passed upon the 
adequacy or accuracy of this prospectus. Any representation to the 
contrary is a criminal offense.
    Example B: The Securities and Exchange Commission and the 
Commodity Futures Trading Commission have not approved or 
disapproved these securities or this pool, or determined if this 
prospectus is truthful or complete. Any representation to the 
contrary is a criminal offense.

    (ii) With respect to performance that is required under Sec.  
4.25(c)(2), (3), (4) or (5), present such information in the Statement 
of Additional Information.
    (ii) In the case of Sec.  4.22, exemption from the Account 
Statement distribution requirement of that section; Provided, however, 
that the pool operator:
    (A) Causes the pool's Account Statements, including the 
certification required by Sec.  4.22(h) to be readily accessible on an 
Internet Web site maintained by the pool operator within 30 calendar 
days after the last day of the applicable reporting period and 
continuing for a period of not less than 30 calendar days. The 
commodity pool operator may meet the requirement of Sec.  4.22(h) by 
including the certification required by Rule 30e-1 under the Investment 
Company Act of 1940 (17 CFR 270.30e-1) with its posting of the pool's 
Account Statements; and
    (B) Causes the Disclosure Document for the pool to clearly 
indicate:
    (1) That the information required to be included in the Account 
Statements will be readily accessible on an Internet Web site 
maintained by the pool operator; and
    (2) The Internet address of such Web site.
* * * * *
    3. Amend Sec.  4.26 by revising paragraph (a)(2) to read as 
follows:


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

    (a) * * *
    (2) No commodity pool operator may use a Disclosure Document or 
profile document dated more than twelve months prior to the date of its 
use.
* * * * *
    4. Amend Sec.  4.36 by revising paragraph (b) to read as follows:


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

* * * * *
    (b) No commodity trading advisor may use a Disclosure Document 
dated more than twelve months prior to the date of its use.
* * * * *

    Issued in Washington, DC, on February 8, 2012, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations: Appendices to Harmonization of Compliance 
Obligations for Registered Investment Companies Required to Register 
as Commodity Pool Operators--Commission Voting Summary and 
Statements of Commissioners.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, O'Malia and Wetjen voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    The Commodity Futures Trading Commission's (CFTC) part 4 rules 
require recordkeeping, reporting and disclosures from Commodity Pool 
Operators. I support the proposed rule that would harmonize such 
requirements with those of the Securities and Exchange Commission 
(SEC) for investment companies registered with both the CFTC and 
SEC. The Commission is committed to

[[Page 11352]]

ensuring that customers of registered investment companies receive 
basic protections while also seeking to balance the compliance 
requirements for the operators of these funds. I look forward to 
comments from the public to further build on this harmonization 
effort.

Appendix 3--Statement of Commissioner Jill E. Sommers

    The final rules amending the Commission's Part 4 regulations 
adopted today will require, among other things, that investment 
advisors of certain registered investment companies register as CPOs 
and operate under a dual SEC/CFTC regulatory regime. As explained in 
my dissent to the final rules, I could have supported a version of 
the rules that would have achieved the regulatory objectives 
outlined by the NFA in its August 18, 2010 petition to amend Rule 
4.5. While I opposed the version of the rules the Commission 
ultimately adopted, having finalized them I support the Commission's 
effort to harmonize the resulting compliance obligations. Dually 
registered entities should not be subject to duplicative, 
inconsistent, or conflicting requirements. The proposed rules, if 
finalized in their current form, would not achieve true 
harmonization. I urge those affected by the rules to submit detailed 
comment letters, with a focus on the costs and benefits of the rules 
as proposed and any suggested alternatives.

[FR Doc. 2012-3388 Filed 2-23-12; 8:45 am]
BILLING CODE 6351-01-P