Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors: Registered Investment Companies, Business Development Companies, and Definition of Reporting Person
| Published date | 10 December 2019 |
| Record Number | 2019-26161 |
| Section | Rules and Regulations |
| Court | Commodity Futures Trading Commission |
Federal Register, Volume 84 Issue 237 (Tuesday, December 10, 2019)
[Federal Register Volume 84, Number 237 (Tuesday, December 10, 2019)]
[Rules and Regulations]
[Pages 67343-67355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26161]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 84, No. 237 / Tuesday, December 10, 2019 /
Rules and Regulations
[[Page 67343]]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AE-76-P
Registration and Compliance Requirements for Commodity Pool
Operators and Commodity Trading Advisors: Registered Investment
Companies, Business Development Companies, and Definition of Reporting
Person
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
is adopting certain amendments containing the regulations applicable to
commodity pool operators (CPOs) and commodity trading advisors (CTAs).
The amendments (Final Rules) are consistent with and/or expand upon no-
action and exemptive letters issued by the Commission's Division of
Swap Dealer and Intermediary Oversight (DSIO). In particular, the
Commission intends to increase regulatory certainty by amending two
regulations. In the first, the Commission is providing clarification
that the exclusion from the CPO definition currently provided for a
registered investment company (RIC) should be claimed by the entity
most commonly understood to solicit for or ``operate'' the RIC, i.e.,
its investment adviser, and is adding an exclusion for the investment
advisers of business development companies (BDCs), which share many
operational similarities with RICs. In the second, the Commission is
adopting amendments to the ``Reporting Person'' definition that would
eliminate the filing requirements for Forms CPO-PQR and CTA-PR for
certain classes of CPOs and CTAs.
DATES:
Effective date: The effective date for this final rule is January
9, 2020.
Compliance date: Compliance with Regulation 4.5(c)(5) (17 CFR
4.5(c)(5)) by registered investment advisers with respect to RICs
affected by the amendment to Regulation 4.5(a)(1) (17 CFR 4.5(a)(1))
shall be required by March 1, 2021.
FOR FURTHER INFORMATION CONTACT: Joshua Sterling, Director, 202-418-
6056, [email protected], Amanda Olear, Associate Director, at 202-418-
5283 or [email protected]; Elizabeth Groover, Special Counsel, at 202-
418-5985 or [email protected]; Chang Jung, Special Counsel at 202-418-
5202 or [email protected], and Michael Ehrstein, Special Counsel, at 202-
418-5957 or [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:
I. Background
a. Statutory and Regulatory Background
i. Existing Statutory and Regulatory Authorities
ii. The October 2018 Proposal
b. Public Comments and Ex Parte Meetings
II. Final Rules
a. Regulation 4.5: Amendments to the CPO Exclusion
i. Background and Proposed Rules
ii. Comments Received
iii. Responding to Comments and the Final Rules
iv. The Effect of the Final Amendments on CFTC Staff Letter 12-
40: The BDC No-Action Letter
b. Regulation 4.27: Excluding Certain Classes of CPOs and CTAs
From the Definition of ``Reporting Person''
III. Related Matters
a. Regulatory Flexibility Act
b. Paperwork Reduction Act
i. Revisions to the Collections of Information
1. OMB Control Number 3038-0005
2. OMB Control Number 3038-0023
ii. Comments on the PRA Analysis
c. Cost-Benefit Considerations
i. General Costs and Benefits
ii. Summary of the Amendments
iii. Benefits
1. Benefits Related To Expanding the CPO Exclusion To Cover RIAs
of BDCs
2. Benefits Related to the Relief Under Regulation 4.27 for
Certain CPOs and CTAs
iv. Costs
1. Cost Related To Expanding the CPO Exclusion To Cover RIAs of
BDCs
2. Costs Related to the Relief Under Regulation 4.27 for Certain
CPOs and CTAs
v. Section 15(a) Considerations
1. Protection of Market Participants and the Public
2. Efficiency, Competitiveness, and Financial Integrity of
Markets
3. Price Discovery
4. Sound Risk Management
5. Other Public Interest Considerations
d. Anti-Trust Considerations
I. Background
a. Statutory and Regulatory Background
i. Existing Statutory and Regulatory Authorities
Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) \1\ established a statutory framework
to reduce risk, increase transparency, and promote market integrity
within the financial system by regulating the swaps market. As amended
by the Dodd-Frank Act, section 1a(11) of the Commodity Exchange Act
(CEA or the Act) defines the term ``commodity pool operator,'' as any
person \2\ 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.\3\ 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.\4\ CEA section
[[Page 67344]]
4m(1) generally requires each person who satisfies the CPO or CTA
definitions to register as such with the Commission.\5\ 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.\6\ 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.\7\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010), available at
https://www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf (last retrieved Jul. 17, 2019).
\2\ Regulation 1.3 defines ``person'' as including individuals,
associations, partnerships, corporations, and trusts. 17 CFR 1.3.
The Commission's regulations are found at 17 CFR Ch. I (2019).
\3\ 7 U.S.C. 1a(11). The CEA is found at 7 U.S.C. 1, et seq.
(2019). Both the Act and the Commission's regulations are accessible
through the Commission's website, https://www.cftc.gov.
\4\ 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).
\5\ 7 U.S.C. 6m(1).
\6\ 7 U.S.C. 1a(11)(B).
\7\ 7 U.S.C. 1a(12)(B)(vii). The Commission most recently relied
on 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 CEA section
1a(12)(B) only apply, if the furnishing of such excluded CTA
services by such persons is solely incidental to the conduct of
their business or profession. 7 U.S.C. 1a(12)(C).
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Part 4 of the Commission's regulations governs the operations and
activities of CPOs and CTAs.\8\ Those regulations implement the
statutory authority provided to the Commission by the CEA and establish
multiple registration exemptions and exclusions for CPOs and CTAs.\9\
Part 4 also contains regulations that establish the ongoing compliance
obligations 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 among
other things, provide customer protection, disclosure, and reporting to
a registrant's commodity pool participants or advisory clients.
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\8\ See 17 CFR part 4, generally.
\9\ See, e.g., 17 CFR 4.13 and 4.14 (providing multiple
registration exemptions to qualifying persons meeting the CPO and
CTA definitions, respectively).
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ii. The October 2018 Proposal
In response to information received from members of the public, as
well as CFTC staff's own internal review of the Commission's regulatory
regime, the Commission published for public comment in the Federal
Register on October 18, 2018, a Notice of Proposed Rulemaking (NPRM, or
the Proposal), proposing several amendments to the regulations
applicable to CPOs and CTAs.\10\ Specifically, the Commission proposed
regulatory amendments that would add to 17 CFR part 4:
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\10\ See Registration and Compliance Requirements for Commodity
Pool Operators and Commodity Trading Advisors, 83 FR 52902 (Oct. 18,
2018) (Proposal).
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(1) An exemption from registration in Regulation 4.13 for CPOs that
is generally consistent with the terms of Staff Advisory 18-96; \11\
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\11\ 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
Books and Records Requirement of Rule 4.23, Commodity Futures
Trading Commission, Division of Trading & Markets (Apr. 11, 1996),
available at https://www.cftc.gov/sites/default/files/tm/advisory18-96.htm (last retrieved Oct. 10, 2019) (Staff Advisory 18-96).
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(2) A requirement in Regulation 4.13 that any person claiming or
affirming an exemption from CPO registration pursuant to Regulations
4.13(a)(1)-(a)(5) certify that neither the claimant nor its principals
are statutorily disqualified pursuant to CEA Sections 8a(2) or 8a(3);
(3) An exemption from the recordkeeping requirements in Regulation
4.23 for U.S.-based CPOs of offshore commodity pools that permits the
CPO to maintain the pool's original books and records in the pool's
offshore location;
(4) An exemption from registration in Regulations 4.13 and 4.14 for
persons acting as CPOs or CTAs for family offices and/or their family
clients, as those terms are defined in regulations adopted by the
Securities and Exchange Commission (SEC);
(5) A clarification that the exclusion from the CPO definition
currently provided by Regulation 4.5(a)(1) for a RIC should be claimed
by the entity most commonly understood to solicit for or ``operate''
the RIC, i.e., the RIC's investment adviser;
(6) An exclusion in Regulation 4.5 from the CPO definition for the
investment advisers of BDCs;
(7) Relief permitting general solicitation in commodity pools
offered by CPOs pursuant to exemptions in Regulations 4.7 and
4.13(a)(3), consistent with the Jumpstart Our Business Start-ups Act of
2012 (JOBS Act); and
(8) Amendments to the ``Reporting Person'' definition in Regulation
4.27 that would eliminate the filing requirements for Forms CPO-PQR and
CTA-PR for certain classes of CPOs and CTAs.\12\
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\12\ Proposal, 83 FR 52903-04.
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Several of the proposed amendments are consistent with, or
expansions of, relief that is currently available through a staff
advisory or through no-action and exemptive letters issued over the
years by staff of the Commission's DSIO and its predecessors. The
Commission proposed these amendments intending to simplify the
regulatory landscape for CPOs and CTAs without reducing the protections
or benefits provided by those regulations, to increase public awareness
about available relief by incorporating commonly relied upon no-action
or exemptive relief in Commission regulations, and to generally reduce
the regulatory burden without sacrificing the Commission's customer
protection and other regulatory interests.
b. Public Comments and Ex Parte Meetings
The Commission requested comment generally on all aspects of the
Proposal, and also solicited comment through targeted questions about
each of the proposed amendments. Overall, the Commission received 28
individual comment letters responsive to the NPRM: Six from legal and
market professional groups; 13 from law firms; seven from individual
family offices; one from a government-sponsored enterprise (GSE)
actively involved in the housing industry; and one from the National
Futures Association (NFA), a registered futures association,\13\ who
through delegation by the Commission, assists Commission staff in
administering the CPO and CTA regulatory program.\14\ Additionally,
Commission staff participated in
[[Page 67345]]
multiple ex parte meetings concerning the Proposal.\15\
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\13\ See CEA section 17, 7 U.S.C. 21.
\14\ Comments were submitted by the following entities: Alscott,
Inc.* (Dec. 7, 2018); Alternative Investment Management Association
(AIMA) (Letter 1: Dec. 17, 2018, and Letter 2: Oct. 7, 2019);
Buchanan, Ingersoll, and Rooney, PC* (Dec. 12, 2018); Commodore
Management Company* (Dec. 12, 2018); Dechert, LLP (Dechert) (Dec.
17, 2018); Freddie Mac (Dec. 17, 2018); Fried, Frank, Harris,
Shriver, & Jacobson, LLP (Fried Frank) (Dec. 17, 2018); Investment
Adviser Association (IAA) (Dec. 17, 2018); Kramer, Levin, Naftalis,
& Frankel, LLP* (Dec. 17, 2018); LBCW Investments* (Dec. 5, 2018);
Managed Funds Association (MFA) (Dec. 14, 2018); Marshall Street
Capital* (Dec. 13, 2018); McDermott, Will, & Emery, LLP* (Dec. 17,
2018); McLaughlin & Stern, LLP* (Dec. 5, 2018); Moreland Management
Company* (Dec. 13, 2018); Morgan, Lewis, & Bockius, LLP* (Dec. 18,
2018); NFA (Dec. 17, 2018); New York City Bar Association, the
Committee on Futures and Derivatives (NYC Bar Derivatives Committee)
(Jan. 4, 2019); Norton, Rose, Fulbright US, LLP* (Dec. 17, 2018);
Perkins Coie, LLP* (Dec. 17, 2018); the Private Investor Coalition,
Inc. (PIC) (Nov. 28, 2018); Ridama Capital * (Dec. 13, 2018); Schiff
Hardin, LLP (two offices)* (Dec. 13 and 17, 2018); the Securities
Industry and Financial Management Association Asset Management Group
(SIFMA AMG) (Letter 1: Dec. 17, 2018, and Letter 2: Sept. 13, 2019);
Vorpal, LLC* (Dec. 17, 2018); Willkie, Farr, and Gallagher, LLP
(Willkie) (Dec. 11, 2018); and Wilmer Hale, LLP (Wilmer Hale) (Dec.
7, 2018). Those entities marked with an ``*'' submitted
substantively identical, brief comments, specifically supporting the
detailed comments and suggested edits submitted to the Commission by
PIC.
\15\ See ``Comments for Proposed Rule 83 FR 52902,'' available
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2925
(last retrieved Oct. 15, 2019).
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This is the second of two Federal Register releases the Commission
is publishing, finalizing amendments from the Proposal. In particular,
this release adopts amendments seeking to add to 17 CFR part 4 items 5,
6, and 8 from the list of the Proposal initiatives above.\16\ For the
reasons stated in the Proposal, and in light of comments received, the
Commission is adopting these amendments with modifications and an
interpretation of the notice requirements in Regulations 4.5(c) and
(d).
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\16\ The Commission notes that items 4 and 7 in the Proposal
above are further discussed and addressed by the Commission in a
separate Federal Register release. Concurrent with the adoption of
these final rule amendments, the Commission adopted final amendments
completing those initiatives. See Registration and Compliance
Requirements for Commodity Pool Operators (CPOs) and Commodity
Trading Advisors: Family Offices and Exempt CPOs published elsewhere
in this issue of the Federal Register.
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II. Final Rules
a. Regulation 4.5: Amendments to the CPO Exclusion
i. Background and Proposed Rules
In the Proposal, the Commission proposed two specific amendments to
paragraphs (a)(1) and (b)(1) of Regulation 4.5, which, together,
provide an exclusion from the CPO definition for the operators of RICs.
First, the Commission proposed amendments clarifying that the
investment adviser, registered as such (RIA) under the Investment
Advisers Act of 1940, as amended (IA Act),\17\ would be the person
required to claim the CPO exclusion on behalf of a particular RIC.\18\
Even though the Commission previously determined that a RIC's RIA, as
the principal sponsor and entity managing the operations of a RIC, is
the appropriate person to serve as the CPO for regulatory purposes, the
RIC had been listed as both the excluded CPO and the ``qualifying
entity'' covered by the exclusion in Regulation 4.5.\19\
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\17\ 15 U.S.C. 80b-1, et seq.
\18\ The Commission notes that neither this proposed amendment
nor the final amendment adopted herein are intended to substantively
affect the CPO exclusion for RICs in Regulation 4.5.
\19\ 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 agrees that the [RIA] is the most
logical entity to serve as the [RIC]'s CPO. To require a member or
members of the [RIC]'s board of directors to register would raise
operational concerns for the [RIC] as it would result in piercing
the limitation on liability for actions undertaken in the capacity
of a director. Thus, the Commission concludes that the [RIA] for the
[RIC] is the entity required to register as the CPO.'').
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The second amendment proposed by the Commission was intended to
extend the exclusionary relief of Regulation 4.5 to also cover the RIAs
of BDCs, consistent with relief provided through a no-action letter
issued by DSIO staff in 2012.\20\ BDCs are a category of closed-end
investment company established by Congress for the purpose of making
capital more readily available to small, developing, and financially
troubled companies that do not have ready access to the public capital
markets or other forms of conventional financing.\21\ Due to their
limited purpose, BDCs generally use and trade commodity interests for
hedging or managing investment and commercial risks of the operating
companies in which they invest.\22\ Consequently, the types of
commodity interests BDCs use are typically limited to interest rate and
currency swaps, with some limited use of credit default swaps and other
commodity interests.\23\
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\20\ CFTC Letter No. 12-40, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/12-40.pdf (Dec. 4, 2012) (last retrieved Oct. 8, 2019) (BDC
No-Action Letter).
\21\ Securities Offering Reform for Closed-End Investment
Companies, 84 FR 14448, 14449 (Apr. 10, 2019).
\22\ BDC No-Action Letter, at 2.
\23\ BDC No-Action Letter, at 2. See also 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 (Dec. 2015) (last
retrieved Oct. 8, 2019) (Use of Derivatives by RICs). The SEC's
Division of Economic Risk and Analysis pulled a random sample of
RICs, including BDCs, to examine the use of derivatives by such
entities. Use of Derivatives by RICs, at 1. Within the sampled BDCs,
none had exposure to derivatives, which appears to be consistent
with assertions from industry members that BDCs' usage of
derivatives is generally very limited. Id. at 3.
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As the Commission emphasized in the Proposal, and as discussed by
DSIO staff in the BDC No-Action Letter, BDCs operate in a manner
similar to closed-end RICs, despite not being registered as such, and
are subject to many of the same provisions of the Investment Company
Act of 1940, as amended (ICA).\24\ In fact, the list of legal and
operational similarities between BDCs and RICs is quite long.\25\
Although BDCs meet the definition of an ``investment company'' under
section 3 of the ICA,\26\ they are exempt from registration as such by
virtue of filing, pursuant to ICA section 54, an election to be subject
to various ICA provisions.\27\ Prior to the issuance of the BDC No-
Action Letter, BDC operators were required to register with the
Commission as CPOs, due to their inability to claim or rely upon the
CPO exclusion for RICs, the original language of which did not
contemplate relief for entities similar to, but not registered as,
investment companies.\28\
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\24\ 15 U.S.C. 80a-1, et seq.; see, e.g., 15 U.S.C. 80a-18
(providing asset coverage requirements among others subject to
certain limitations) and 15 U.S.C. 80a-60 (making ICA section 18
applicable to BDCs with certain modifications).
\25\ Most BDCs, like RICs, have external investment advisers,
which generally must be registered with the SEC under the IA Act.
BDCs are also subject to periodic examination by the SEC. 15 U.S.C.
80a-63. Further, BDCs must either have a class of equity securities
that is registered under, or have filed a registration statement for
a class of equity securities pursuant to, the Securities Exchange
Act of 1934, as amended, which, in turn, requires multiple regular
filings with the SEC: Annual reports on Form 10-K; quarterly reports
on Form 10-Q; current reports on Form 8-K; and proxy solicitation
statements in connection with annual stockholder meetings.
Additionally, many BDCs are listed for trading on national
securities exchanges, and thus, are subject to exchange rules
governing listed companies. See, e.g., NYSE Listed Company Manual,
available at https://nyseguide.srorules.com/listed-company-manual
(last retrieved Oct. 8, 2019). Finally, BDCs are also subject to
certain regulations and corporate governance guidelines under the
Sarbanes-Oxley Act of 2002. Public Law 107-204, 116 Stat. 745 (Jul.
30, 2002) (codified in U.S.C. Titles 15, 18, 28, and 29).
\26\ 15 U.S.C. 80a-3.
\27\ 15 U.S.C. 80a-53 and 80a-6(f).
\28\ See 17 CFR 4.5(a)(1) and (b)(1) (excluding from the CPO
definition ``an investment company registered as such under the
Investment Company act of 1940,'' with respect to ``an investment
company registered as such under the Investment Company Act of
1940''). For additional background and history on this regulation,
see Commodity Pool Operators; Exclusion for Certain Otherwise
Regulated Persons From the Definition of the Term ``Commodity Pool
Operator''; Other Regulatory Requirements, 50 FR 15868, 15871 (Apr.
23, 1985).
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Pursuant to the BDC No-Action Letter, operators of BDCs have
received no-action relief from CPO registration, provided that: (1) The
entity has elected to be treated as a BDC under ICA section 54 and will
remain regulated as such; (2) the operator has not marketed and will
not market participations in the BDC to the public as an investment in
a commodity pool, or otherwise as an investment in a vehicle for the
trading of commodity interests; (3) the operator represents that it
limits its use of commodity interests in the BDC, consistent with the
trading thresholds in Regulation 4.5(c)(2)(iii)(A)-(B); and (4) the
operator files an electronic notice with DSIO staff.\29\ Since its
issuance, DSIO staff has received 65 filings by operators of BDCs
claiming this no-action relief.\30\
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\29\ BDC No-Action Letter, at 3-4.
\30\ This figure is accurate, as of July 26, 2019.
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For the purpose of providing a regulatory exclusion for CPOs of
BDCs, the Commission proposed amending Regulation 4.5 in a manner
largely consistent with the legal analysis and conditions of the BDC
No-Action
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Letter.\31\ The Commission explained, ``because BDCs are subject to
oversight by the SEC that is comparable to the regulation of RICs . . .
the Commission has determined to exercise its authority to propose to
amend Sec. 4.5 to provide IAs of BDCs with comparable exclusionary
relief.'' \32\ Specifically, the proposed amendments would permit an
RIA of a BDC to claim the exclusion provided by Regulations 4.5(a)(1)
and (b)(1), with respect to the operation of that BDC. This was
proposed to be accomplished by, as discussed above, amending Regulation
4.5(a)(1) to provide an exclusion from the CPO definition to an RIA,
with respect to the operation of a ``qualifying entity,'' and amending
Regulation 4.5(b)(1) to specifically include BDCs as a ``qualifying
entity'' for which an exclusion may be claimed.\33\
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\31\ Proposal, 83 FR 52912.
\32\ Id.
\33\ Proposal, 83 FR 52925 (proposing to amend, among others,
Regulations 4.5(a)(1) and (b)(1)). The Commission also proposed
several conforming or technical changes to Regulation 4.5(c)(2) for
the purpose of accommodating this more substantive proposed
amendment and improving readability and/or clarity. Id.
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ii. Comments Received
The Commission requested comment on all aspects of the Proposal
generally and received two comments regarding the proposed amendments
to Regulation 4.5. NFA supported the proposed amendments, stating that
they, along with the other amendments in the Proposal ``will bring
greater transparency to the CPO registration framework by including all
registration exemptions (including those currently in staff no-action
letters and guidance) in the Commission's regulations.'' \34\ Although
NFA offered no objections to the amendments as proposed, it sought
``clarification regarding how this change impacts those entities that
have previously filed a notice of exclusion in the name of the
investment company.'' \35\ Furthermore, NFA requested that ``the
Commission provide NFA with sufficient time to make changes to its
Electronic Filing System,'' reflecting these amendments.\36\
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\34\ NFA Letter, at 3.
\35\ NFA Letter, at 3.
\36\ Id.
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Dechert also provided specific comments on the amendments to
Regulation 4.5(a)(1), i.e., the removal of the RIC as an excluded CPO
and its replacement with the RIA. Dechert stated that this proposed
amendment ``leads to a logical conclusion,'' but nonetheless, Dechert
pointed out the ``practical implications involved . . . and the cost of
compliance'' with this proposed amendment.\37\ Dechert stated that the
proposed amendment would require numerous exclusion claims to be
transferred from the RIC to the RIA,\38\ and according to Dechert,
there is no simple or streamlined process within NFA's Electronic
Filing System to accomplish this.\39\ Additionally, Dechert noted that
changing the excluded CPO from the RIC to the RIA could be considered a
material change that ``necessitates making an off-cycle amendment to
their registration statements,'' the costs of which would be ultimately
borne by the RIC and its participants.\40\ As a result, Dechert
suggested foregoing identifying the RIA as the excluded CPO in
Regulation 4.5(a)(1), or alternatively, requested that the Commission
work with ``NFA to help affected entities move their exclusion notices
. . . in an efficient manner.'' \41\
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\37\ Dechert Letter, at 15.
\38\ Dechert Letter, at 15. Dechert stated additionally that,
under existing Regulation 4.5, RICs ``tend to identify the excluded
CPO as the multi-series Delaware or Massachusetts business trust or
Maryland corporation in which each commodity pool is a series and
identify the individual series as the commodity pools for which the
CPO was excluded. Where funds are housed in a single-series trust
such as for example closed-end mutual funds, the fund is both the
excluded CPO and the commodity pool.'' Id.
\39\ Id. at 15. Dechert stated that, currently, each CPO
exclusion notice filing ``involves creating a co-CPO relationship
with the new CPO, and then emailing the NFA Exemptions Staff to
request that the previous relationship be terminated.'' Id.
\40\ Dechert Letter, at 16.
\41\ Dechert Letter, at 17.
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iii. Responding to Comments and the Final Rules
After considering the public comments, the Commission is adopting
the amendments to Regulation 4.5, generally as proposed,\42\ and a
Commission interpretation designed to address commenters' concerns.
Consistent with its prior statements concerning the person that should
claim the CPO exclusion in Regulation 4.5 with respect to the
operations of a RIC, and with the Commission's conclusion that the RIA
is the most appropriate person to register as a CPO of a RIC that
exceeds the trading thresholds in Regulation 4.5,\43\ the Commission
believes it appropriate to specify the RIA as that excluded person,
instead of the RIC.
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\42\ The Final Rule amendments remove the phrase ``as such'' in
Regulations 4.5(a)(1) and (b)(1).
\43\ See CPO CTA Final Rule, 77 FR 11259.
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Also, as stated in the Proposal, the Commission believes that
because BDCs are subject to SEC oversight comparable to that of RICs,
operators of BDCs, i.e., their RIAs, should be subject to the same
operational requirements as the operators of RICs.\44\ Because of their
similarities, the Commission believes further that RIAs of BDCs should
also be required to affirm their exclusion claims on an annual basis,
which is consistent with the existing requirements under Regulation
4.5(c)(5) applicable to persons excluded from the CPO definition with
respect to RICs.\45\ The Commission recognizes commenters' concerns
about the compliance issues resulting from amending Regulation
4.5(a)(1), especially for the 11,220 RICs that have claimed relief
under this exclusion.\46\
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\44\ Proposal, 83 FR 52912 and 52916.
\45\ Under the Final Rules, the person excluded from the
definition of CPO with respect to a RIC, or a BDC, will be its RIA.
\46\ As discussed above, the Commission further understands from
commenters that persons other than the RIC have also claimed the
exclusion with respect to a RIC. These include the RIA and, where
the RIC is a series, the umbrella entity. Dechert Letter, at 15.
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To address these initial compliance burdens identified in the
comments, the Commission has determined to provide the following
interpretation of Regulations 4.5(c) and 4.5(d), with respect to this
regulatory transition and future compliance with the notice filing
requirement in Regulation 4.5(c). Specifically, if a person other than
a RIC's RIA has claimed the CPO exclusion with respect to such RIC
through the required notice filing, the Commission interprets
Regulations 4.5(d)(1)-(d)(2) not to apply in such a manner that an
amended notice within 15 business days would be required to reflect
changing the excluded CPO entity to the RIC's RIA.\47\ Rather, the
Commission interprets Regulation 4.5(c)(5) to require that, when the
excluded CPO of such RIC is required to annually reaffirm its notice of
exclusion, (i.e., within 60 days of the calendar year-end),\48\ the
excluded CPO entity will simply allow the existing notice to expire,
and the RIA of such RIC will file a new notice pursuant to Regulation
4.5(c), prior to the expiration of the other existing notice. Where an
RIA has claimed the exclusion with respect to a RIC through a notice
filing, the RIA will simply continue to affirm the notice as usual.
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\47\ 17 CFR 4.5(d)(1)-(d)(2).
\48\ The Commission recognizes that Regulation 4.5(c)(5) has
typographical errors that reference the annual affirmation of the
notice of exclusion as being a ``notice of exemption,'' rather than
a ``notice of exclusion.'' The Commission intends to address this in
a future rulemaking, along with other technical changes.
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The Commission recognizes that it may be overly burdensome for RIAs
of RICs to file the revised annual notices pursuant to Regulation
4.5(c)(5) when
[[Page 67347]]
they are due in early 2020. Therefore, the Commission has determined
that compliance with Regulation 4.5(c)(5) by RIAs with respect to RICs
affected by the amendment to Regulation 4.5(a)(1) shall not be required
until within 60 days of the end of the calendar year 2020, i.e., March
1, 2021. The Commission believes this approach will minimize any
inconvenience or cost associated with the transition to designating the
RIA as the excluded CPO for the RIC.
Finally, the Commission also recognizes Dechert's concern that
changing the excluded CPO to the RIA could constitute a material change
necessitating an ``off-cycle amendment to [the RIC's] registration
statements.'' \49\ The Commission is not in a position to make a
determination as to whether this is, in fact, a material change; each
RIC must make that determination. The Commission notes, however, that
despite the change in regulatory text, the intent behind Regulation
4.5(a)(1) remains the same: No person acting as the CPO of a RIC is
required to register as a CPO with respect to the operation of such
RIC, provided that the requirements and conditions in the applicable
provisions of Regulation 4.5 are also satisfied.\50\ Therefore, from
the Commission's perspective, there is no substantive change with
respect to the RIC's legal posture under the Commission's regulations.
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\49\ Dechert Letter, at 16.
\50\ See 50 FR 15871.
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iv. The Effect of the Final Amendments on CFTC Staff Letter 12-40: The
BDC No-Action Letter
The Commission intends the Final Rules, which are effective 30 days
after publication in this Federal Register release, and which expand an
existing CPO exclusion to also exclude RIAs operating BDCs, to
supersede the staff no-action relief provided by the BDC No-Action
Letter. Therefore, RIAs of BDCs should file a notice to claim the
amended exclusion, pursuant to Regulation 4.5(c), as soon as
practicable after these amendments go into effect.
b. Regulation 4.27: Excluding Certain Classes of CPOs and CTAs From the
Definition of ``Reporting Person''
The Commission also proposed to revise the definition of
``Reporting Person,'' in Regulation 4.27, which defines what types,
classes, or categories of CPOs and CTAs are required to file Forms CPO-
PQR and CTA-PR, respectively.\51\ The proposed amendments would revise
the definition by excluding certain registered CPOs and CTAs from the
``Reporting Person'' definition in Regulation 4.27(b), consistent with
exemptive relief provided by DSIO through CFTC Letter Nos. 14-115 and
15-47.\52\ The proposed amendments were designed to further expand that
relief to additional categories of CTAs, whose Form CTA-PR filings have
limited utility for the Commission, as described below.\53\
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\51\ See 17 CFR 4.27(b).
\52\ CFTC Letter No. 14-115, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/14-115.pdf (last retrieved Oct. 10, 2019); CFTC Letter No.
15-47, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/15-47.pdf (last
retrieved Oct. 10, 2019).
\53\ Proposal, 83 FR 52913.
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Specifically, CFTC Letter No. 14-115 provides exemptive relief from
the obligation to file Form CPO-PQR to CPOs that operate only pools for
which the CPO has claimed either a definitional exclusion under
Regulation 4.5, or an exemption from CPO registration under Regulation
4.13.\54\ Similarly, CFTC Letter No. 15-47 provides exemptive relief
from the obligation to file Form CTA-PR to CTAs that are registered as
such, yet do not direct client accounts.\55\
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\54\ CFTC Letter No. 14-115, at 2.
\55\ CFTC Letter No. 15-47, at 2.
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In the Proposal, the Commission sought to also exclude CTAs that
comply with the terms of the registration exemptions contained in
Regulations 4.14(a)(4) or (a)(5), yet are nevertheless registered as
CTAs, from the definition of ``Reporting Person'' in Regulation
4.27(b). Under Regulation 4.14(a)(4), the CTA 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. As noted in the Proposal,
Form CPO-PQR requires the reporting of substantially similar
information when compared to Form CTA-PR.\56\ As such, the Commission
posited that there would be very little value in any data that would be
collected by requiring that same Reporting Person to also file a Form
CTA-PR, and that any value would be outweighed by the burden to that
entity of the extra filing.
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\56\ See 17 CFR part 4, App. A and App. C.
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Further, Regulation 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.\57\ Consistent with the relief provided in CFTC Staff Letter
14-115, such an exempt CPO would not be required to report on a Form
CPO-PQR.\58\ The Commission preliminarily concluded in the Proposal
that it would therefore be 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.
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\57\ 17 CFR 4.14(a)(5).
\58\ See CFTC Letter No 14-115, at 2.
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The Commission received two comments on this aspect of the
Proposal. The first was received from NFA, which supported all of the
proposed amendments to Regulation 4.27.\59\ In the second, Willkie
requested confirmation from the Commission that the CPO of an exempt
pool or CTA of an exempt account would not be required to report on
Forms CPO-PQR and CTA-PR with respect to the exempt pool or the exempt
account, in the event the CPO operates a non-exempt pool or the CTA
advises a non-exempt account.\60\ In support of that request, Willkie
states that such a conclusion would be consistent with the operation of
other Commission regulations, like Regulations 4.13(e) and 4.14(c).\61\
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\59\ NFA Letter, at 4.
\60\ Willkie Letter, at 8.
\61\ Willkie Letter, at 8.
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In response, the Commission notes that these questions have already
been addressed by Commission staff in FAQs related to Forms CPO-PQR and
CTA-PR.\62\ Specifically, FAQ 11 of the CPO Guidance provides that any
pools operated pursuant to an exemption under Regulation 4.13(a)(3) be
excluded from reporting on Form CPO-PQR.\63\ The FAQs also address the
Willkie question regarding CTA reporting. Specifically, FAQ 9 of the
CTA Guidance provides that a CTA should exclude the assets of the pool
operated pursuant to Regulation 4.13(a)(3) when reporting on Form CTA-
PR.\64\
[[Page 67348]]
Accordingly, the Commission adopts the amendments to the definition of
``Reporting Person'' in Regulation 4.27(b) as proposed.
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\62\ CFTC Division of Swap Dealer and Intermediary Oversight
Responds to Frequently Asked Questions Regarding Commission Form
CPO-PQR (CPO Guidance), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/faq_cpocta110515.pdf (last retrieved Oct. 11, 2019).
\63\ Id. Similarly, Question 19 of the CPO Guidance asks, ``If a
CPO operates Pools pursuant to CFTC Regulation 4.7 and operates
Pools pursuant to CFTC Regulation 4.13(a)(3), should the CPO count
the Regulation 4.13(a)(3) exempt Pools in determining the CPOs
`Total Assets Under Management' [(Total AUM)]? Or should the CPO
exclude such Pools from the threshold calculation and only consider
the Total AUM of the CPO with respect to all other non-exempt/non-
excluded Pools?'' Commission staff responded: ``For purposes of
determining the reporting threshold and CPO and Pool reporting,
including the CPO's [Total AUM] . . . the CPO must exclude those
Pools for which it is not required to be registered (i.e., Pools
operated pursuant to an exclusion under CFTC Regulation 4.5 or an
exemption under CFTC Regulation 4.13(a)(3)). Under this scenario,
the CPO would only be required to count Pools operated pursuant to
CFTC Regulation 4.7.'' Id. at Question 19.
\64\ CFTC Division of Swap Dealer and Intermediary Oversight
Responds to Frequently Asked Questions Regarding Commission Form
CTA-PR (CTA Guidance), Available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/faq_cpocta110515.pdf (last retrieved Oct. 11, 2019) (stating that
``Pool assets should be included . . . for Pools that the CTA does
not operate as a CPO and for which the CPO must be registered'').
Therefore, ``[a] CTA should include the assets of [Pools] operated
pursuant to CFTC Regulation 4.7, but exclude the assets of [Pools]
operated pursuant to Regulation 4.13(a)(3).'' Id. at Question 9.
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III. Related Matters
a. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that Federal
agencies, in promulgating regulations, consider whether the regulations
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.\65\ 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. As noted in the Proposal, the regulations adopted herein
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. 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 Regulation 4.13(a)(2).\66\ Because the regulations
amended by the Final Rules generally apply to persons registered or
required to be registered as CPOs with the Commission, amend and
provide an exclusion from the CPO definition to qualifying persons, and
extend relief from related compliance burdens, the RFA is not
applicable with respect to CPOs impacted by these regulatory
amendments.
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\65\ 5 U.S.C. 601, et seq.
\66\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619-20 (Apr. 30, 1982). Regulation 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).
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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.\67\ 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.\68\ The only portion of the Final Rules adopted
herein directly impacting CTAs amends the definition of ``Reporting
Person,'' in Regulation 4.27(b) to effectively carve out specific
classes of CTAs from the Form CTA-PR filing requirement. These
amendments will not impose any new burdens on market participants or
Commission registrants. Rather, the Commission finds that these
amendments will make compliance and operational costs less burdensome
than the full costs of CTA registration and compliance for those
classes of CTAs. The amendment impacting CTAs not dually registered or
exempt as CPOs provides relief for CTAs that are registered, but do not
direct commodity interest accounts. As a result, the Commission
concludes that, given the limited nature of such Form CTA-PR filings,
while there is a reduction in costs, this amendment does not produce a
significant economic impact on a substantial number of small entities.
Additionally, the Commission received no comments on any aspects of the
Proposal's RFA discussion.
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\67\ See 47 FR 18620.
\68\ Proposal, 83 FR 52917.
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Therefore, the Commission concludes that, to the extent the
regulations adopted herein affect CTAs, the Final Rules 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 regulations
adopted by the Commission in the Final Rules will not have a
significant economic impact on a substantial number of small entities.
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.\69\ Under the PRA, 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).
The regulations adopted in the Final Rules would result in a collection
of information within the meaning of the PRA, as discussed below. The
Commission is therefore submitting the Final Rules to OMB for approval.
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\69\ See 44 U.S.C. 3501, et seq.
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As discussed in the Proposal, the Commission's proposed regulations
would have impacted or amended two collections of information for which
the Commission has previously received control numbers from OMB. The
first collection of information the Commission believed could be
impacted by the Proposal 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, exclusions from those definitions, and
available relief from compliance with certain regulatory requirements.
The Commission had proposed to amend this collection to reflect: (1)
The notices proposed to be required to claim certain of the CPO
registration exemptions and the CPO exclusion proposed therein; and (2)
an expected reduction in the number of registered CPOs and CTAs filing
Forms CPO-PQR and CTA-PR, pursuant to the proposed revisions to
Regulation 4.27.\70\
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\70\ Proposal, 83 FR 52918-19.
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The Commission also proposed to amend a second collection of
information 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 in the
Proposal. The responses to these collections of information are
mandatory.
The collections of information in the Proposal would have made
available to eligible persons: (1) An exemption from CPO registration
based upon Commission Staff Advisory 18-96; (2) recordkeeping location
relief for qualifying, registered CPOs, also based upon Commission
Staff Advisory 18-96; (3) exemptions from CPO and CTA registration for
qualifying Family Offices; (4) an expanded exclusion under Regulation
4.5 for RIAs of BDCs; and (5) exemptive relief made available through
amendments to the definition of ``Reporting Person,'' in Regulation
4.27(b), such that qualifying CPOs and
[[Page 67349]]
CTAs no longer have to file Forms CPO-PQR or CTA-PR.\71\ In the instant
Federal Register release, the Commission is adopting final amendments
expanding the exclusion under Regulation 4.5 to cover RIAs of BDCs, and
exempting from the Form CPO-PQR or CTA-PR filing requirements certain
classes of CPOs and CTAs, consistent with relief letters previously
issued by Commission staff.\72\
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\71\ The Proposal also included amendments to Regulations 4.7(b)
and 4.13(a)(3), expanding the availability of relief under those
provisions to include registered and exempt CPOs issuing, offering,
selling, or reselling securities with general solicitation, pursuant
to the JOBS Act. Those amendments, adopted in a companion Federal
Register release published elsewhere in this issue of the Federal
Register, do not impact or change the number of CPOs registered or
exempt from such registration, but rather affect their ability to
broadly solicit the public for investment.
\72\ The Commission also considered in the Proposal the impact
that an exemption based on Commission Staff Advisory 18-96, as well
as related proposed amendments to Regulation 4.23, might have on
these collections and the number of persons responding thereunder.
Proposal, 83 FR 52918. Because the Commission is not pursuing or
finalizing those proposed amendments, the Commission no longer
believes any modifications to these collections on those bases are
necessary.
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i. Revisions to the Collections of Information
1. 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.\73\ 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 Final
Rules, due to persons claiming the amended CPO exclusion and the
exemptive relief from part 4 filing requirements.\74\ For instance, the
Commission proposed an increase to the number of respondents under
Regulation 4.5, which it thought necessary to account for the number of
RIAs of BDCs that would seek to claim that exclusion from the CPO
definition expanded here by the Final Rules.\75\ With regard to the
Regulation 4.27 amendments, the Commission proposed reducing the number
of persons filing all schedules of Forms CPO-PQR and CTA-PR to reflect
the categories of registered CPOs and CTAs proposed to be excluded from
the ``Reporting Person'' definition in Regulation 4.27(b). Because
there was no notice filing associated with this compliance relief, the
Commission proposed no new burden associated with the actual claiming
of the relief provided by the revisions to Regulation 4.27(b).
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\73\ 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 Oct. 11,
2019).
\74\ The Proposal further discussed modifications to Collection
3038-0005 based on the proposed amendments to Regulations 4.7 and
4.13. Id. Each of those amendments is being finalized and adopted by
the Commission in a Federal Register release, published elsewhere in
this issue of the Federal Register, containing the pertinent
Preamble and administrative law discussions, as well as those final
amendments.
\75\ The Commission believes there is no increase in burden
resulting from transitioning the claiming entity under Regulation
4.5(a) to the RIA with respect to RICs, because this change does not
result in any filing requirement, beyond that which is already
required to operate pursuant to Regulation 4.5.
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The currently approved total burden associated with Collection
3038-0005, in the aggregate, is as follows:
Estimated number of responses: 45,270.
Annual responses for all respondents: 129,042.
Estimated average hours per response: 2.83.\76\
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\76\ The Commission rounded the average hours per response to
the second decimal place to reflect the lack of significant digits.
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Annual reporting burden: 365,764.
The Commission now estimates that the exclusion for RIAs of BDCs
under Regulation 4.5 will result in 65 additional notice filings under
Regulation 4.5.\77\ Therefore, the Commission is increasing the burden
associated with Regulation 4.5 to be as follows:
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\77\ At the time of the Proposal, the Commission had estimated
50 additional notice filings. Proposal, 83 FR 52919. It is hereby
increasing the number of BDCs expected to file a claim of exclusion
to reflect the number of BDC No-Action Letter claims DSIO staff has
received, as of July 26, 2019.
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Estimated number of respondents: 7,955.
Annual responses by each respondent: 1.
Estimated average hours per response: 0.5.
Annual reporting burden: 3,978.
In the Proposal, the Commission also sought to update the number of
respondents to this collection, in accordance with the proposed
amendments to Regulation 4.27. Specifically, the Commission proposed to
modify 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 amendments to the ``Reporting
Person'' definition in Regulation 4.27(b). The Commission estimated
that it has historically averaged 1,800 registered CPOs. Based on the
number of claims filed by CPOs pursuant to Regulations 4.5 and 4.13,
the Commission estimated further that approximately 100 of those CPOs
would be eligible for relief from filing Form CPO-PQR under the
proposed amendments. Therefore, the Commission proposed setting the
number of respondents filing Schedule A of Form CPO-PQR at 1,700. The
total respondents for this revised collection were further broken out
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 Large CPOs filing Form PF, and 250 respondents on
Schedule A of Form CPO-PQR for Large CPOs not filing Form PF. Given
that the proposed amendments to Regulation 4.27 are being adopted as
proposed, the Commission continues to believe these adjustments are
accurate and necessary.
The Commission similarly considered the number of registered CTAs
with respect to the filing of Form CTA-PR, and then reduced the number
of filers by the number of CTAs the Commission anticipated would be
eligible for the proposed relief.\78\ Specifically, the Commission
estimated that it has historically averaged approximately 1,600
registered CTAs. Based on the information collected on Form CTA-PR, the
Commission estimated that 720 registered CTAs would be eligible for
relief made available by the proposed amendments, resulting in a
difference of 880 CTAs still being required to file Form CTA-PR. Given
that the proposed amendments to Regulation 4.27 are being adopted as
proposed, the Commission continues to believe these adjustments are
accurate and necessary.
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\78\ Proposal, 83 FR 52919.
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Therefore, the Commission estimates that the total burden
associated with the amendments to Regulation 4.27 adopted by the Final
Rules, 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:
[[Page 67350]]
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.
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 regulatory amendments adopted herein,\79\ is
as follows:
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\79\ These burden totals include adjustments made to Collection
3038-0005 to reflect the Final Rule amendments contained in this
Federal Register release, as well as Final Rule amendments
concurrently adopted and published through a second release by the
Commission. See also Regulations and Compliance Requirements for
Commodity Pool Operators (CPOs) and Commodity Trading Advisors:
Family Offices and Exempt CPOs published elsewhere in this issue of
the Federal Register.
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Estimated number of respondents: 43,397.
Annual responses for all respondents: 112,024.
Estimated average hours per response: 3.16.
Annual reporting burden: 354,367.
2. OMB Control Number 3038-0023
In the Proposal, the Commission explained further its expectation
that persons that are currently counted among the estimates for
Collection 3038-0023 with respect to CPO and CTA registration will
deregister as such, due to the future availability of the proposed
registration exemptions and the proposed expansion of the CPO
exclusion. Therefore, the Commission proposed 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
Regulation 3.21(3), 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 Regulation
3.21(e) under Collection 3038-0023, which remains unchanged under the
Proposal and the amendments adopted herein, 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 proposed to reduce the number of registrants by the
estimated number of claimants with respect to each of the proposed CPO
and CTA registration exemptions, as well as the proposed expansion of
the CPO exclusion for RICs to include BDCs. The amendments adopted by
the Commission in the Final Rules include clarification that the RIA of
a RIC is the appropriate entity to claim the CPO exclusion, expansion
of that exclusion to also provide relief for RIAs of BDCs, and the
adoption of multiple carve-outs from the ``Reporting Person''
definition in Regulation 4.27(b).\80\ Given the amendments being
adopted by the Final Rules,\81\ the Commission continues to believe
that an adjustment to Collection 3038-0023, i.e., a reduction in the
amount of registrants, will be necessary to account for the 65 claims
under the BDC No-Action Letter that the Commission, through DSIO, has
received to date, each of which represents to the Commission a person
likely to claim the expanded CPO exclusion for RIAs of BDCs. Therefore,
the Commission is reducing the burden associated with Collection 3038-
0023, such that the total burden associated with the collection,
excluding the burden associated with Regulation 3.21(e), will be as
follows:
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\80\ In a companion Federal Register release published elsewhere
in this issue of the Federal Register, the Commission also
considered and adopted amendments to 17 CFR part 4 that add CPO and
CTA exemptions for family offices, permit the use of general
solicitation in certain pools by CPOs exempt under Regulations 4.7
or 4.13(a)(3), and explicitly permit non-U.S. person participants in
pools exempt under Regulation 4.13(a)(3). The Commission performed
and discussed the appropriate RFA, PRA, and cost-benefit
considerations for those amendments in that release.
\81\ As discussed above, these burden totals include adjustments
made to Collection 3038-0023 to reflect the Final Rule amendments
contained in this Federal Register release, as well as Final Rule
amendments concurrently adopted and published through a second
release by the Commission. See also Amendments to Regulations and
Compliance Requirements for Commodity Pool Operators (CPOs) and
Commodity Trading Advisors: Family Offices and Exempt CPOs published
elsewhere in this issue of the Federal Register.
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Respondents/Affected Entities: 77,492.
Estimated number of responses: 77,492.
Estimated average hours per response: 0.09.
Estimated total annual burden on respondents: 6,974.
ii. Comments on the PRA Analysis
In the Proposal, the Commission invited the public and other
Federal agencies to comment on any aspect of the information collection
requirements discussed therein.\82\ The Commission did not receive any
such comments.
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\82\ Proposal, 83 FR 52920.
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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.\83\ 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.
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\83\ 7 U.S.C. 19(a).
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i. General Costs and Benefits
The baseline for the Commission's consideration of the costs and
benefits
[[Page 67351]]
of the Final Rules 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 upon relevant Commission staff action, the
actual costs and benefits of the Final Rules, as realized in the
market, may not be as significant. Because each amendment addresses a
discrete issue, which impacts 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 amendment separately, as presented below. The Commission has
endeavored to assess the costs and benefits of the amendments adopted
by the Final Rules in quantitative terms wherever possible. Where
estimation or quantification is not feasible, however, the Commission
has provided its assessment in qualitative terms.
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 leading industry
members commonly following substantially similar business practices
wherever located. Where the Commission does not specifically refer to
matters of location, the below discussion of costs and benefits refers
to the effects of the Final Rules on all activity subject to the
amended 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). In particular,
the Commission notes that some entities affected by the Final Rules are
located outside of the United States.
ii. Summary of the Amendments
As discussed in greater detail below, and in the foregoing
preamble, the Commission believes that the amendments adopted by the
Final Rules enable the Commission to perform its regulatory oversight
function with respect to the commodity interest markets and
particularly, with respect to CPOs and CTAs, while reducing the
potential burden on persons whose commodity interest activities may
subject them to the Commission's jurisdiction for CPOs and CTAs. The
Commission is adopting regulatory amendments consistent with the BDC
No-Action Letter, through certain revisions to the exclusion from the
CPO definition for RIAs of RICs in Regulation 4.5. Additionally, the
Commission is incorporating relief provided by CFTC Letter Nos. 14-115
and 15-47 through amendments to the ``Reporting Person'' definition in
Regulation 4.27(b) that exclude: (1) CPOs that only operate pools in
accordance with Regulations 4.5 or 4.13, and (2) CTAs that do not
direct trading in any commodity interest accounts. The Commission has
further determined to extend this relief to registered CTAs that only
advise commodity pools, for which the CTA is also the commodity pool's
CPO.
iii. Benefits
1. Benefits Related To Expanding the CPO Exclusion To Cover RIAs of
BDCs
The Commission believes that there will be several benefits arising
from the amendments creating an exclusion from the CPO definition for
RIAs of BDCs in Regulation 4.5.\84\ First, the exclusion would enable
RIAs of BDCs to continue to use commodity interests, consistent with
the BDC No-Action Letter, as an economical option for reducing the
risks related to BDCs' investments in eligible portfolio companies. The
exclusion will permit this activity without subjecting BDCs to the
costs associated with having its RIA registered as a CPO, and without
requiring BDCs and their RIAs to comply with applicable provisions of
part 4 of the Commission's regulations. This should enable BDCs and
their RIAs 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 a
statutory goal of the ICA.
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\84\ As discussed above, the Commission has previously
determined that a RIC's RIA is the appropriate person to serve as
the CPO of a RIC for regulatory purposes, and consequently, the
Commission is also amending Regulation 4.5(a)(1) to designate the
RIA as the person excluded from the CPO definition. See CPO CTA
Final Rule, 77 FR 11259. Due to the similarities between BDCs and
RICs, the Commission believes that the RIA is also an appropriate
selection as the excluded entity in the BDC context. See supra pt.
II.a.iii for additional discussion.
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As discussed more fully above, BDCs are subject to oversight by the
SEC that is comparable to that agency's oversight and regulation of
RICs. Because of this similarity to a type of investment vehicle that
is already listed in the universe of ``qualifying entities,'' under
Regulation 4.5, the amendments adopted by the Final Rules 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, RIAs of BDCs wishing to avail themselves of
the BDC No-Action Letter 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 RIAs operating and advising BDCs will claim the expanded exclusion
under Regulation 4.5 through NFA's Online Registration System without
having to create their own document to claim that relief.
The Commission further believes that the amendment requiring the
RIA of the RIC to be the entity claiming the exclusion under Regulation
4.5(a) will provide an important benefit by aligning the terms of the
CPO exclusion with the Commission's understanding and public
statements, as to which entity is most appropriate to register as a CPO
with the Commission with respect to the operation of RICs.\85\ This
will enable the Commission to more easily determine which entity should
bear the registration and compliance obligations with respect to a RIC,
if the excluded CPO fails to reaffirm the claim of exclusion, or if the
RIC otherwise no longer satisfies the terms of Regulation 4.5.
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\85\ As stated above, the Commission has long understood this to
be a RIC's RIA, based on the RIA's typical operational,
solicitation, and trading responsibilities with respect to a RIC.
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2. Benefits Related to the Relief Under Regulation 4.27 for Certain
CPOs and CTAs
The Commission believes that there will be several benefits
associated with providing relief from the Form CPO-PQR and CTA-PR
filings required by Regulation 4.27 to: (1) Registered CPOs only
operating pools pursuant to claims under Regulations 4.5 or 4.13; and
(2) registered CTAs that, during the Reporting Period, either only
advised pools for which they are also the registered or exempt CPO, or
did not direct the trading of any commodity interest accounts
whatsoever. Removing the reporting requirement for these registrants
will eliminate the costs associated with the preparation and filing of
Forms CPO-PQR and CTA-PR. The Commission believes that this will
provide a significant cost savings for these persons, and ultimately,
for their pool participants or advisory clients.
iv. Costs
1. Cost Related To Expanding the CPO Exclusion To Cover RIAs of BDCs
The Commission believes that there will be some costs associated
with the
[[Page 67352]]
expansion of the CPO exclusion to cover RIAs of BDCs. Generally, CPOs
and CTAs are subject to comprehensive regulation under the Commission's
part 4 regulations, including disclosure, reporting, and recordkeeping
requirements. Although RIAs of BDCs are subject to SEC oversight (as
are RIAs of RICs), BDCs are not identical to RICs, and they could
differ in respects that are relevant to the CPO regulatory scheme. For
example, a required CPO disclosure might be more important when made by
an RIA of a BDC, as compared to the RIA of a RIC. In this way, the
expansion of the CPO exclusion to cover RIAs of BDCs could conceivably
be detrimental to persons who relied on CPO regulation of such RIAs for
some purpose. However, the Commission notes that, as explained above,
BDCs are very similar to RICs (for which RIAs may be excluded from the
CPO definition, and thus, not subject to registration), and their use
of commodity interests is generally very limited and designed typically
to manage the investment and commercial risks of a BDC's underlying
operating companies. Therefore, any detriment resulting from the
expansion of the CPO exclusion to cover RIAs of BDCs is expected to be
small.
Persons claiming the new exclusion from the CPO definition with
respect to the operation of BDCs under Regulation 4.5 will be required
to file an annual notice affirming eligibility, consistent with that
required of the RIAs of RICs. For purposes of calculating costs of the
amendment, the Commission estimates that a person may require 0.5 hours
per pool to complete and electronically file the notice with NFA at an
average cost of $57 per hour.\86\ The Commission further estimates that
at least 65 persons will be affected by this amendment,\87\ each with
an average of 1 BDC subject to the notice requirement, based on the
number of claims the Commission has received for relief provided by the
BDC No-Action Letter. On this basis, the Commission anticipates an
annual cost per entity of approximately $29.\88\ Across all affected
entities, the Commission therefore estimates a total annual cost of
approximately $1,885.\89\ Because the Commission received 65 claims
under the BDC No-Action Letter since its issuance in 2012, averaging
nearly ten claims annually, the Commission predicts that it may expect
to receive up to ten claims each year going forward from RIAs of BDCs
seeking to claim the expanded CPO exclusion; the Commission estimates
that, consequently, future claims of the exclusion for RIAs of BDCs
could cost up to an additional $290 annually.\90\
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\86\ The Commission notes that the salary estimates are based
upon the May 2017 National Occupational Employment and Wage
Estimates from the Bureau of Labor Statistics at the Department of
Labor. See Occupational Employment Statistics, Bureau of Labor
Statistics, available at https://www.bls.gov/oes/2017/may/oes_nat.htm (last retrieved Nov. 25, 2019). 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
(23-2011) 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 believes would most
commonly be responsible for evaluating eligibility and filing claims
for this CPO exclusion. 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.
\87\ This figure is based on the number of claims DSIO has
received pursuant to the BDC No-Action Letter, as of July 29, 2019,
and constitutes an increase from the cost estimates in the Proposal,
which were based on 50 previously received claims. See Proposal, 83
FR 52919.
\88\ The Commission calculates this amount as follows: (1 pool/
BDC per CPO/RIA) x (0.5 hours per pool/BDC) x ($57 per hour) = $29.
\89\ The Commission calculates this amount as follows: ($29 per
CPO/RIA) x (65 CPOs/RIAs) = $1,885.
\90\ The Commission calculates this amount as follows: ($29 per
CPO/RIA) x (10 CPOs/RIAs) = $290.
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In addition to the costs associated with completing and filing the
notice, RIAs of BDCs that claim the exclusion will also have to expend
resources to monitor compliance with the applicable trading thresholds
in Regulation 4.5(c)(2)(iii). The Commission believes that the initial
year of compliance with those thresholds will likely be the most
costly, as the RIAs may 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 the compliance program
might be automated to lower substantially the annual costs in
subsequent years.\91\ The Commission continues to believe the costs of
the filing and threshold monitoring discussed above are generally
substantially lower than the costs an RIA of a BDC would incur, as a
result of registering as a CPO and complying with all of the
Commission's regulations.
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\91\ Costs to BDCs in monitoring compliance with these
thresholds may also be lower, given the Commission's understanding
of their limited use of commodity interests for hedging purposes.
See also supra pt. II.a.i.
---------------------------------------------------------------------------
The Commission also believes that there may be some costs
associated with the amendment to Regulation 4.5(a)(1) establishing the
RIA as the claiming entity for the CPO exclusion for RICs. For
instance, the Commission believes that complex fund structures
involving multiple related RICs and multiple RIAs, or series structures
with multiple RICs under an umbrella entity, may incur some costs
associated with determining which exclusion claims need to be
corrected. As discussed in the Preamble above, the Commission is
issuing an interpretation designed to streamline this transition to the
RIA as the excluded CPO in an effort to reduce costs to RICs and their
participants.\92\ Also, to clarify that RICs and their RIAs will not be
expected to make this transition immediately, the compliance date for
this change will not be until within 60 days of the 2020 calendar year-
end, or by March 1, 2021. Thus, affected RICs and their excluded CPOs
will have more than one filing cycle to prepare for this change.
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\92\ Where the RIA is already the claiming excluded CPO for a
RIC, no change in filing or status is necessary. Where an entity
other than the RIA claims the exclusion for a RIC, the Commission is
interpreting the regulation to require that such RIC have its RIA
file a new claim and to let the prior claim expire, pursuant to the
annual affirmation requirements of Regulation 4.5(c)(5).
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The Commission considered whether RIAs of BDCs would incur any
costs in determining whether or how to claim the exclusion for a BDC.
The Commission believes that such costs would be minimal at most. The
RIA of a BDC has, by definition, already settled the regulatory status
of the BDC entity, and the Commission understands that BDCs use
commodity interests rarely, and for very limited purposes. In the case
where an RIA decides that a BDC should use commodity interests, the
ensuing determination to claim the exclusion should not represent any
significant additional cost.
2. Costs Related to the Relief Under Regulation 4.27 for Certain CPOs
and CTAs
The Form CPO-PQR and CTA-PR filings that will no longer be required
by virtue of the Final Rules may have had minimal utility in limited
situations. However, the Commission believes that, when viewed in the
context of all applicable regulatory requirements, these filings become
duplicative or unnecessary. Therefore, the Commission does not
anticipate any significant costs associated with the Final Rule
amendments to the ``Reporting Person'' definition in Regulation
4.27(b), which exempt CPOs and CTAs from the requirement to file those
forms in certain situations. CPOs and CTAs qualifying for the exemptive
relief added by the Final Rule will not have to take any action to
claim an exemption
[[Page 67353]]
from these filings, and therefore, will not experience costs as a
result of claiming that relief.
v. Section 15(a) Considerations
1. Protection of Market Participants and the Public
The Commission considered whether the amendments adopted in the
Final Rule will have any detrimental effect on the customer protections
of the Commission's regulatory regime. The Commission believes that the
expanded exclusion for RIAs of BDCs will not negatively impact the
protection of market participants or the public. BDCs, as well as their
RIAs, continue to be regulated by the SEC under the ICA, and pursuant
to the terms of the exclusion, BDCs operated thereunder will continue
to be limited in the extent to which they can use commodity interests
by the trading thresholds described above. Similarly, the Commission
does not believe that the transition of a RIC's excluded CPO from the
RIC to the RIA will negatively impact the protection of market
participants or the public. Such vehicles are already, and will
continue to be after this transition, operated by excluded CPOs, and
RICs and their RIAs will remain subject to oversight by the SEC under
the ICA and the IAA. As noted above, the relevant entities will
continue to operate and be regulated in substantially the same manner.
Regarding the relief provided to certain CPOs and CTAs by the Final
Rule amendments to Regulation 4.27, the Commission does not believe
that eliminating reporting from those persons 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.
2. 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 regulation in light of efficiency,
competitiveness, and financial integrity considerations. As noted
above, the Final Rules provide a CPO exclusion for a relatively small
number of BDCs, change the entity designated as the CPO for an excluded
RIC to its RIA, and relieve certain filing requirements for certain
classes of CPOs and CTAs. The Commission believes that these amendments
constitute minor changes to regulatory processes and filings that will
not have a significant impact on the efficiency, competitiveness, and
financial integrity of markets.
3. Price Discovery
Section 15(a)(2)(C) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of price discovery
considerations. For the reasons noted above, the Commission believes
that the Final Rules generally consist of minor changes to regulatory
processes and filings that will not have a significant impact on price
discovery.
4. Sound Risk Management
Section 15(a)(2)(D) of the CEA requires the Commission to evaluate
a regulation in light of sound risk management practices. The
Commission believes that the Final Rules will not have a significant
impact on the practice of sound risk management because the manner in
which various funds, operators, and advisors organize, register, or
claim exclusion from such regulation has only a small influence on how
market participants manage their risks overall.
5. Other Public Interest Considerations
Section 15(a)(2)(E) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of other public
interest considerations. The Final Rules adopted herein reflect the
Commission's determination that such amendments harmonize Commission
regulations with other federal laws, where appropriate, to reduce the
regulatory burden on certain entities. Additionally, the exclusion from
the CPO definition for RIAs of BDCs in Regulation 4.5 will not subject
BDCs to the costs associated with having its RIA registered as a CPO,
and the corresponding costs of complying with applicable provisions of
the Commission's part 4 regulations. This amendment should enable BDCs
and their RIAs 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, and thereby also
furthering a statutory goal of the ICA.
d. Anti-Trust Considerations
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.\93\ The Commission believes that the
public interest to be protected by the antitrust laws is generally to
protect competition. The Commission requested comment on whether the
Proposal implicated any other specific public interest to be protected
by the antitrust laws and received no comments addressing this issue.
---------------------------------------------------------------------------
\93\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission has considered the Final Rules to determine whether
they are anticompetitive and has identified no anticompetitive effects.
Because the Commission has determined the Final Rules are not
anticompetitive and have no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
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 amends 17 CFR part 4 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), (c)(2) introductory
text, (c)(2)(i) and (ii), and (c)(2)(iii) introductory text 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 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 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) * * *
[[Page 67354]]
(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 operated
by a person who has claimed an exclusion from the definition of the
term ``commodity pool operator'' under the Act and, therefore, 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. 4.27 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 November 27, 2019, by the
Commission.
Robert Sidman,
Deputy 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: Registered Investment
Companies, Business Development Companies, and Definition of Reporting
Person--Commission Voting Summary and Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Commissioner Dan M. Berkovitz
I am voting in favor of today's rule adopting three amendments
to Regulations 4.5 and 4.27, addressing certain exemptions for
commodity pool operators (CPOs) and filing requirements for CPOs and
commodity trading advisors (CTAs). These three amendments are in
largely identical form to those proposed last fall, which I voted
for because they codify no-action and exemptive letters and simplify
our registration framework, without compromising customer protection
or the integrity of our derivatives markets.
The first amendment is to Regulation 4.5(a)(1), which currently
excludes an investment company (RIC) registered under the Investment
Company Act of 1940 (1940 Act) from the definition of a CPO. Today's
amendment confirms the Commission's understanding that an investment
adviser registered under the Investment Advisers Act of 1940 is the
entity that operates the RIC and therefore is the appropriate person
to claim the CPO exclusion for the RIC. I note that this revision
neither broadens the category of persons currently claiming the RIC
exclusion, nor changes the current requirements that qualifying
entities claiming the exclusion must file annual notices with the
CFTC and make disclosures to pool participants.
Today's final rule also amends Regulation 4.5(b)(1) to include
business development companies (BDCs), defined in the 1940 Act, as
persons excluded from the CPO definition.\1\ BDCs are a type of
closed-end investment company, but are exempt from registering as a
RIC under the securities laws. A BDC therefore is not a ``qualified
entity'' under 4.5(a)(1). On this basis, in 2012 CFTC staff provided
no action relief to BDCs that meet the conditions of Regulation
4.5(c), which include significant caps on the BDC's use of
derivatives and require notice to the CFTC and disclosures to
investors.\2\ To date, 65 entities have claimed this relief. By
codifying the exclusion through this amendment, we also harmonize
our regulations relating to BDCs with those of the Securities and
Exchange Commission (SEC).
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\1\ CFTC Letter No. 12-40 (Dec. 4, 2012), available at https://www.cftc.gov/csl/12-40/download (``BDC No-Action Letter'').
\2\ BDC No-Action Letter at 3.
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Finally, today's rule amends the definition of ``Reporting
Person'' in Regulation 4.27 to exempt certain classes of CPOs and
CTAs, consistent with exemptive relief currently provided at the
request of the National Futures Association (NFA).\3\ Under these
amendments, certain CPOs and CTAs are not required to file Forms
CPO-PQR and CTA-PR, respectively, where such filing would provide
limited additional information about the reporting person beyond
what is already available to the Commission. Notice and filing
requirements are critical to performing effective market oversight,
but where the information received by the Commission is largely
duplicative, these requirements do not materially advance the
interests of the Commission or its registrants and are therefore
unnecessary.
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\3\ CFTC Letter No. 14-115 (Sept. 8, 2014), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/14-115.pdf; CFTC Letter No. 15-47
(July 21, 2015), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-47.pdf.
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It is good government to periodically asses our regulations and
make improvements where appropriate. In this context, improving the
clarity and transparency of our rules and harmonizing them with
those of the SEC are
[[Page 67355]]
worthy objectives, but without more, do not justify a change.\4\ The
primary objective in evaluating and considering amendments to our
regulations is whether and how they will improve the Commission's
ability to protect customers and police our markets.
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\4\ See, e.g., Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d
166, 177-78 (DC Cir. 2010) (``The SEC cannot justify the adoption of
a particular rule based solely on the assertion that the existence
of a rule provides greater clarity to an area that remained unclear
in the absence of any rule.'')
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Here, the NFA--the front-line self-regulatory organization
responsible for member registration--has noted that these amendments
will bring transparency to the CPO registration framework by
incorporating CPO and CTA no-action and exemptive relief into the
Commission's regulations. I agree with the NFA that today's proposed
amendments will benefit both the Commission and its registrants, and
in my view, they will not impact our mission to safeguard the
markets and its participants. I therefore support these narrow
revisions to Regulations 4.5 and 4.27 and thank the staff of the
Division of Swap Dealer and Intermediary Oversight for their work on
this rule.
[FR Doc. 2019-26161 Filed 12-9-19; 8:45 am]
BILLING CODE 6351-01-P
